August 25, 2023 • 28 mins
China’s economic slowdown is catching the attention of countries around the world as they brace for a possible hit to their own economies. Bloomberg’s Rebecca Choong Wilkins and Tom Hancock discuss why President Xi Jinping is avoiding a big stimulus package and instead allowing China’s economy to run “cold”—and how long it may take to turn things around.
Read more: Run It Cold: Why Xi Jinping Is Letting China’s Economy Flail
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Episode Transcript
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Speaker 1 (00:01):
You really need to be able to stum like the
volatility in China right Boomber's range.
Speaker 2 (00:05):
Bound, So it tells you just the level of uncertainty
that's in the market and the pessimism still around China's
economy and.
Speaker 3 (00:10):
No clear strategy out of that malaise either.
Speaker 4 (00:14):
Question, why is China letting the economy run cold? That
is the topic of.
Speaker 5 (00:18):
The Economists around the world are increasingly uneasy about what's
going on in China. The nation's eighteen trillion dollar economy
on's growing fast is decelerating, Exports have fallen off, young
people are having trouble finding good jobs. China's long real
estate crisis is deepening, with major property developers who borrowed
(00:42):
too much now facing default and home buyers stuck paying
mortgages on half built apartments. Meanwhile, local governments in China
are burdened with debt they can't afford. All This uncertainty
has led some foreign investors to pull their money out
of the country, and some fore casters have downgraded their
expectations for China's economic growth this year. They say it
(01:06):
won't reach the government's target of five percent.
Speaker 1 (01:09):
There is enough room, obviously, for stimulus in China as
the economy has been sputtering, But the problem, she says,
is that you need massive stimulus in the trillions.
Speaker 5 (01:20):
Of remenbe Some of these troubles can be traced to
President Ji Jimping's decision to try to break China's habit
of fueling growth with speculative construction and spending projects that
are often funded by local borrowing China.
Speaker 1 (01:33):
To prop up the economy. Investors are waiting for that
big stumulus, it ain't coming, and hence that is impacting sentiment.
Speaker 5 (01:42):
The idea is that the pain will be temporary and
China will emerge stronger for it, but concerns are growing
that the consequences may instead turn out to be severe
and long lasting, and not just for China but across
the global economy.
Speaker 4 (01:57):
What feels like a big change is this shift in
can census that China's growth miracle that has once fired
so many portfolios around the world is no longer a
given two.
Speaker 2 (02:08):
Large economies in the world, so going on opposite tracks,
both trying not to repeat the mistakes of the past
and maybe making new mistakes.
Speaker 5 (02:17):
That's Bloomberg's Rebecca Cheung Wilkins and Tom Hancock in Hong Kong.
They're here with me to explain what's happening and what
China's leaders are doing to try to turn things around.
I'm Wes Kasova today on The Big Take, China feels
the heat of a cooling economy. In a story out
(02:51):
this week, a team including Rebecca and Beijing based reporter
Colin Murphy, along with Tom and several other colleagues, dig
into this complex situation. I started by asking Rebecca and
Tom to paint us a picture of China's economy right now.
Speaker 4 (03:09):
Well, the fundamental issue or challenge is that the economy
is slowing, and everyone thought this was sort of going
to be the year that China's economy came roaring back
after it reopened after the pandemic. And actually what we've
seen is some of the policies that were rolled out
during the pandemic or just before are now an overhack
in the economy. And so essentially this move to try
(03:32):
and reduce risk in the property sector to tackle the
issue of oversupply is essentially continuing to really hurt growth.
And that's partly a confidence issue because people are seeing
their most valuable asset decline and price and decline and value,
and so people don't want to spend. People feel poorer,
(03:53):
and they're not investing in necessarily growing their businesses or
starting a new company. So we have these sort of
two big issues. Add to that that property for a
long time has been one of the really the main
or one of the main growth engines for China's economy,
previously contributing about estimated thirty sometimes people say forty percent
of the economy. That's really now paired back. And so meanwhile,
(04:17):
China is trying to look to alternative industries to try
and replace that as a driver of growth.
Speaker 5 (04:23):
And it's not just the property market that's ailing. Another
problem is the world just isn't buying as many products
from China as it once did.
Speaker 2 (04:32):
This year, Chinese exports are declining, and that's mostly about
the fact that there was a surge in demand for
Chinese goods during the pandemic coming from.
Speaker 3 (04:44):
Europe and the US as people.
Speaker 2 (04:46):
Stayed at home, and now that demand is normalizing, and
so you've got exports to those countries falling by double
digit rates. So if you add that up, you know,
you could say that's at least a third of the
economy that is experiencing quite a large decline. If you
imagine that the Chinese economy is like an aeroplane with
(05:10):
two engines, we could say that one engine is property
and exports, and then the other engine is all the rest. Well,
the property and exports part is currently sort of on
fire and it's really interfering and slowing down the entire plane.
On the other hand, for the rest of the economy,
so you're talking about high tech industries and also domestic
(05:33):
services for people traveling around the country, going to restaurants
and so on, that's really surging. So you've got the
other engine, it's actually going very well. So that means
that the plane is still going forward. Right, Chinese economy
is still growing. However, it's not growing as fast because
you've only got one engine working. And ultimately, the risk
(05:55):
is that that could have contagion on the other part
of the economy too.
Speaker 3 (06:00):
Currently that isn't happening. It's a risk that's worth thinking about, Rebecca.
Speaker 5 (06:05):
The other thing that's happening that you write about is
that people are worried about their jobs. Young people are
having trouble finding jobs that pay well. Costs are going up,
and they're feeling like they can't make ends meet.
Speaker 4 (06:18):
Yeah, I mean, this has been a quite remarkable level
of youth unemployment. We've had that a record high north
of twenty percent. One in five young people in China's
urban hubs cannot find jobs. Some estimate that could be
quite significantly higher when we look at the nationwide figure.
(06:39):
And so other thing to consider here is the way
in which the social contract may be, if not changing
in China, but at least being scrutinized and for years
and people have sort of exchanged or accepted fewer freedoms
in exchange for the promise of a job, a home,
a family. But when you consider sort of some of
the demographic challenges as well as some of the challenges
(07:01):
around real estate no longer being a sort of reliable
asset to acquire, you can see that dynamic is changing too.
Speaker 2 (07:09):
What we're doing is talking generally in economics about year
on year growth.
Speaker 3 (07:13):
And the real.
Speaker 2 (07:15):
Stress test for China's economy was last year, when at
any given time a third of the country was in lockdown,
and it's quite amazing that the economy got through that
without any financial crisis and so on. So this year
we are talking about a growth picture, and we're talking
about growth of around the government's target of five percent.
(07:36):
Now some people think that that's going to be missed,
but not likely by a large margin.
Speaker 5 (07:41):
Why is this five percent growth target that the government
set causing so much unease?
Speaker 4 (07:49):
Well, to begin with, in the beginning of the year,
many investors and banks thought that it was quite a
conservative number and that China would have no issues really
in reaching that. Just in the last couple of weeks,
we've had at least six investment banks downgrading their forecast
for the year. Most of those are actually below the
(08:09):
five percent target. But what feels like a big change
is this shift in consensus that China's growth miracle that
has once fired so many portfolios around the world is
no longer a given and people are really changing. There's
a longer term and fundamental view of China, and so
that's sometimes why although perhaps on the ground, you know,
(08:32):
we're not seeing actually the sort of seismic change or
the kind of contagion risk chaos as Tom lays out,
but it feels like a really significant shift.
Speaker 2 (08:42):
We've got to remember that the Communist Party has really
committed to economic growth, said last year that that's basically
it's top task, and so we will see the government
stepping in to boost growth if things start going below
probably that four or five percent range next few years.
Speaker 4 (09:02):
The thing is a part though, we've seen that the
government has also demonstrated this quite extraordinary tolerance for pain.
You know, it's trying to roll out these policies ultimately
to make the economy more sustainable, more robust, to shift
its growth model, move away from a model of growth
that's fueled by debt that's not as productive longer term.
Speaker 2 (09:22):
A lot of things that people didn't expect to happen
in the past based on their experience of how China's
economy worked and how China's political system worked, have happened
in recent years.
Speaker 3 (09:33):
And I think that's left.
Speaker 2 (09:34):
A lot of people feeling quite confused about the future.
And obviously, if you're concerned and confused about the future,
you're not going to spend quite as much.
Speaker 3 (09:42):
You're going to save a bit more.
Speaker 2 (09:44):
And we're seeing that behavior playing out amongst households and
amongst companies. It's also an unprecedented situation we're in this year,
where China's economy is recovering, It's grown fast than it
did last year because of the end of lockdowns. But
the property sector is shrinking, and we've never had a
recovery like that in China that isn't driven by the
(10:06):
property sector in recent memory. So if you're looking around
you in China and you see that, maybe you're the
value of your house is declining. People aren't buying property,
but the economy is recovering.
Speaker 3 (10:19):
It's just a confusing situation. You've got to adjust to that.
Speaker 2 (10:22):
And I think we're seeing this adjustment of expectations.
Speaker 3 (10:25):
Playing out, and it's about feelings really.
Speaker 5 (10:30):
After the break why Joe Biden called China's economy a
ticking time bomb. Rebecca, you and Tom have described China's
economy and how it is slowing down. How much of
(10:50):
that is by design. One of the central themes of
your story is that Chinese President Ji Jinping is trying
to run the economy call as you put it.
Speaker 4 (11:02):
When we talk about China running its economy cold, what
we mean is holding back from any kind of jumbo
stimulus package, for example, fueled by raising a lot of
debt and building a lot of infrastructure. But the term
is also relative, so it's less than perhaps it may
have used in the past to deal with these type
(11:24):
of economic woes, but also comparatively to the US and
to other large piers, season Ping has laid out these
longer term priorities for the economy, so cutting down unproductive
or less productive debt fields, spending, trying to reduce the
risks in real estate, tackle the issue of oversupply, reduce
(11:48):
the risk of a market bubble appearing and then popping
and creating other sorts of disorder in the economy. And
so these are long term goals. But there was so
really the reason behind why some parts of China's economy
are slowing. This is a sort of crafted policy, for example,
(12:09):
to deliberately shrink the size and the debt carrying capacity
of the property sector in China. We have seen many
private property developers defaulting in China over the last three years,
and it's really by design, by this sort of principle
of the three Red Lines which came into force back
(12:32):
in twenty twenty. Now. The three Red Lines are these
guidelines around just how much debt or how much leverage
a property firm can carry if it wanted to continue borrowing.
And that was a big issue for many properly developers,
because this model is really built on the principle of
using debt to grow its business, to continue to buy land,
(12:55):
to then build more.
Speaker 3 (12:56):
Projects and so on.
Speaker 4 (12:57):
So it was a fundamental part of the business model,
but also somewhat worrying part of the business model, and
of course that then exposes some element of risk to
the rest of the financial system that supported this model.
So think about the local banks and the larger banks
that were lending to real estate companies, as well as
of course all the homeowners that were buying. And in
(13:19):
China it's quite normal to actually buy your property and
take out a mortgage on a property before it's been
delivered to you, And so we then were in this
quite curious state where homeowners were paying mortgages on properties
that they hadn't yet been delivered, but also that may
not be delivered because that particular firm had defailt on
(13:41):
its debt and was running into trouble.
Speaker 5 (13:45):
And so they were paying mortgages on buildings that had
not even been built.
Speaker 4 (13:49):
All were sort of mid construction most likely, and we
did see at one point when there was a lot
of worries about whether or not projects would be delivered.
We did see these sort of sporadic protests, yes, where
people boycotted payments on their mortgages, precisely because of this reason.
Speaker 2 (14:05):
To give you an idea how important the property market
is to how people feel about their wealth. We estimate
that about seventy percent of Chinese household wealth is tied
up in property. So that's a big contrast to other
countries like the US, where people own more in the
form of the stocks and other financial assets. China wants
to move its wealth system more towards that kind of
(14:29):
US model.
Speaker 5 (14:31):
Tom US leaders have certainly taken notice of what's happening
in China's economy. Treasury Secretary Janet Yellen called China a
risk factor for the US, and President Joe Biden went
way further in saying that China's economy was a ticking
time bomb. What exactly do they mean by that?
Speaker 3 (14:50):
It used to be that China's economic growth was broadly
considered a good thing because China was driving global growth
and prosperity, and there was also some feeling that development
in China was good because it was previously a poor country.
And this has really shifted, I guess post Donald Trump
(15:12):
to a competition frame, and you've got politicians saying, isn't
it great now we're doing better than China, or isn't
it great that China's slowing? And you've also got Biden
administration rolling out restrictions on technology, micro chips and so
on investment in China, and those things slow China's growth.
(15:35):
It's not just words.
Speaker 2 (15:37):
I mean, there are also policies that the US is
implementing that actively slow down China's growth to some degree,
even though the White House says that's not the main
aim of those policies. And so that's why I think
it's really important for us to try and look a
bit more dispassionately at the data and trying not to
(15:57):
get into this political competition frame quite so much.
Speaker 4 (16:02):
I think there's sort of two elements to that. The
first is that the type of growth that we see
in China does impact the knock on effect through the
rest of the world. If we see just sort of
massive depth fields stimulus infratructure field stimulus, that's not necessarily
the type of growth. Even if it were to even,
for example, exceed that five percent target, it's not necessarily
(16:26):
the type of stimulus that would have sort of longer
term benefits for the rest of the world. But the
sort of obvious area where we do see sort of
trickle through impact is in commodities, and that's related to
China's property sector. Again, so if China isn't building as
much as it once was, it's importing less of those
(16:47):
commodities from elsewhere in the world, so that certainly sort
of affects that dynamic.
Speaker 5 (16:55):
Tom One interesting thing you write that if g and
China are running their economy cold, the US is running
the economy hot, with Joe Biden putting billions of dollars
into US manufacturing and jobs and trying to boost the economy,
and that there's this kind of what you say is
a clash of economic philosophies between the two largest economies
(17:18):
in the world.
Speaker 2 (17:19):
You can see that showing up in two places. So
firstly inflation because Bidenomics, so some people call it, it's
about growing the economy. Het you've seen inflation surge in
the US, where it's coming down a bit now, and
China has recently entered a period of deflation because domestic
demands relative to supply is very weak. And the second
place you can see that showing up is the labor market.
(17:42):
So we talked about China's very high used unemployment.
Speaker 3 (17:45):
Overall, the labor.
Speaker 2 (17:46):
Market is a bit better than it is for young people,
but it's still quite a poor labor market relative to
pre pandemic. And so we're seeing a big contrast there
with the US, where you've got record low unemployment and
you've got people changing jobs because the labor market is
tight and that's driving up wages. We're not seeing that
(18:08):
dynamic to the same extent in China. And what we
can say is in a way that both administrations in
China and the US are a bit haunted by the
past and they're trying not to repeat the mistakes of
the past. So in the US, the consensus amongst the
Biden administration was that Obama didn't do enough after the
(18:28):
financial crisis, and so you had a decade of disappointing growth,
and we don't want to do that again, whereas in China,
the lesson from the financial crisis is the complete opposite.
Cgmping and his advisors think that China did too much
and they ended up with too much housing and so on,
and that was the problem, and they don't want to
(18:48):
repeat that again. So it's really funny how you've got
these two economies, two large economies in the world, so
going on opposite tracks, both trying not to repeat the
mistakes of the past and maybe making new mistakes is
the issue. So obviously there's a debate about how sustainable
to pick up in US growth is. You know, it's
exceeded expectations this year, but will that continue? And then
(19:12):
in China, maybe you're running the economy too cold, right,
And so if you're running the economy too cold, people's
expectations start falling and once that begins, that process is
hard to stop.
Speaker 3 (19:23):
That's the risk there.
Speaker 2 (19:24):
So I think the thing about running the economy hert
versus running it cold. US stimulus has put growth in
the US economy on a faster trajectory than it was
pre pandemic, and China is now on a slower trajectory,
as we said, than it was on pre pandemic. Pre
pandemic grew six percent. Now we're looking in the future
more than something like four percent. Still, most economists expect
(19:49):
that China will grow faster than the US, and one
reason why that is is because China is just a
much porer country and it has bigger room for catch
up growth. Chinese per capital GDP is around one sixth
of the US level, So we're talking about a country
that has still a huge number of people who by
(20:11):
US standards, will be considered very poor. And if China,
especially in those poorer areas, just does the things that
it did in the richer areas.
Speaker 3 (20:20):
Will see catch up growth.
Speaker 2 (20:22):
And that is something that China's government is still very
keen on, unsupportive of.
Speaker 5 (20:29):
Rebecca earlier time talked about how one of the drivers
of China's economy, one of the bright spots, is the
tech industry, and yet the tech industry, despite its growth,
has not been able to make up for the shortcomings
in the property market in other areas.
Speaker 4 (20:44):
Why is that, Well, partly because it's what China caused.
The New economy, and just to state the obvious, it
is a new thing, but we have seen quite a
significant pickup in that area. So for example in investments
in exports double digit and this industry of things like
electric vehicles, in green industries, in sort of high tech,
(21:07):
high growth industries that there's an increasing focus from Beijing
to build out and we are increasingly seeing that dominate,
and also, of course things like as Tom says, in
very visible ways seeing evs appear on the streets in Europe,
overtaking some of its sort of European competitors in certain
(21:30):
markets too.
Speaker 2 (21:32):
So the property sector, we're thinking around twenty percent of
GDP if you throw in the related industries.
Speaker 3 (21:38):
What China caused. The new economy is a bit smaller.
It's about seventeen percent of GDP, and new economy, according.
Speaker 2 (21:44):
To China's official statistics, grew about seven percent in the
first half of the year. Property investment trunk eight percent,
So you've got a drag there on demand.
Speaker 3 (21:55):
That is slightly larger.
Speaker 2 (21:56):
And that's just the reality that China is dealing with
at the moment.
Speaker 5 (22:01):
Rebecca, you said earlier that there is this social compact
in China that people will trade some personal freedom for
economic security and well being. Do you think that this
economic stress poses any kind of risk to Ji, that
people will become dissatisfied?
Speaker 4 (22:22):
Well, I think between people being dissatisfied and worried about
their personal wellbeing or their personal wealth and kind of
existential threat to seed Imping and the party is quite
a big gap, and I think no one is really
talking about the latter. But I do think that this
is really one of the biggest, if not the biggest
tests that seeds Imping has faced in his lifetime. For
(22:45):
a decade, he has overseen China with economic growth, and
so his vision of what he's called the China Dream
that he set out when he came into that top job,
the rejuvenation of the Chinese people, both at home and
broad was, in a sense, you could argue, an easier path.
(23:05):
We had growth rumbling on behind him. We also had
an easier international diplomatic landscape too, And now he's juggling
with these really thorny issues that he is trying to
tackle in the economy, albeit to create a more sustainable
type of growth, as well as this thorny issue of
(23:26):
increasing tension with the US, the perennial risk that's raised
over a Taiwan conflict, as well as this shifting balance
of power in the Indo Pacific. So this is a
very very different set of problems than the ones that
he faced a decade ago. And to Tom's point, I
(23:48):
think that the confidence issue in China and changing sentiment
is really one of the toughest things that a policymaker
can do. Because even as we've seen in this really
big sort of push, this positive messaging blitz that we've
had from various regulators authorities, with this drip stream of
(24:10):
positive news promising to support various parts of the economy
without much follow through, can only last for so long.
And that's partly when you look at markets, for example,
while you're seeing all these quite grim milestones being reached
across Chinese assets, it's so difficult to change that mood
music in.
Speaker 5 (24:29):
China when we come back, well, things get worse before
they get better. Tom, what are you looking for in
the months and even the years ahead.
Speaker 2 (24:48):
The big question I think hanging over China's economy is
how long does this downturn in the property sector last for?
And when do we reach a point where the government
and where residents in China, who ultimately drive this market
get back into buying again, and so this market stabilizes.
(25:10):
It doesn't have to grow again, but it has to
at least stabilize.
Speaker 3 (25:17):
It seems like we're still quite far away.
Speaker 2 (25:18):
From the end of this property shrinking era, and I
don't think anyone can really tell you how.
Speaker 3 (25:25):
Much longer that's going to go on. It's already gone.
Speaker 2 (25:28):
On for two and a half years, and that's much
longer than anyone expected.
Speaker 4 (25:32):
And for many months last year, for example, people were saying,
we're at the turn, just about to turn the road
when it comes to the distress property cycle in China,
and yet here we are again. And the other slightly
more worrying element is that we are seeing some of
that stress spread from China's private developers to its state
owned developers. Now they so far have been quite shielded
(25:56):
from this, but simply by the fact that people aren't
buying properties anymore and that prices are declining, we had
eighteen and thirty eight listed state builders reporting losses in
the first half of this year. That is highly unusual
for China, and it suggests that we have quite a
long road to go to stabilize this industry, and that
(26:18):
even the state sector of this industry, who were once
expected to sort of be the saviors to come in
to help consolidation in that industry to buy distress private
assets from other developers, now they are starting to run
into trouble too.
Speaker 2 (26:37):
So what we know is that Chinese property sales peaked
in twenty twenty one at about two point three trillion dollars,
and then last year they fell to about one point
nine trillion dollars, and people think they'll fall a bit
more this year. But we know that there is demand
in China for housing fundamentally because like everyone else, Chinese people,
(27:02):
because the rest of the economy is growing and their
wages are growing, they would like to live in bigger
and better houses. And also you've got an ongoing urbanization
process in China. People are moving still from the countryside
to cities where they can earn more money, and so
they buy houses when they do that. And the question
is when does this drop hit against.
Speaker 3 (27:22):
That fundamental demand, And.
Speaker 2 (27:24):
So this full can't last forever, but nobody can really
tell you how long it's going to last.
Speaker 5 (27:30):
Rebecca Tom, thanks so much for coming on the show.
Speaker 4 (27:33):
Thanks for having us. Wez pleasure to be here.
Speaker 5 (27:35):
Thank you, Ez, thanks for listening to us here at
the Big Take. It's a daily podcast from Bloomberg and iHeartRadio.
For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen, and we'd love to hear from you.
Email us questions or comments to Big Take at bloomberg
dot Net. The supervising producer of The Big Take is
(27:56):
Vicky Bergolina. Our senior producer is Catherine Fink. Rebecca Chasson
is our producer. Our associate producer is Sam Gebauer. Raphael
mcili is our engineer. Our original music was composed by
Leo Sidron. I'm West Kasova. We'll be back on Monday
with another Big Take. Have a great weekend.
You really need to be able to stum like the
volatility in China right Boomber's range.
Speaker 2 (00:05):
Bound, So it tells you just the level of uncertainty
that's in the market and the pessimism still around China's
economy and.
Speaker 3 (00:10):
No clear strategy out of that malaise either.
Speaker 4 (00:14):
Question, why is China letting the economy run cold? That
is the topic of.
Speaker 5 (00:18):
The Economists around the world are increasingly uneasy about what's
going on in China. The nation's eighteen trillion dollar economy
on's growing fast is decelerating, Exports have fallen off, young
people are having trouble finding good jobs. China's long real
estate crisis is deepening, with major property developers who borrowed
(00:42):
too much now facing default and home buyers stuck paying
mortgages on half built apartments. Meanwhile, local governments in China
are burdened with debt they can't afford. All This uncertainty
has led some foreign investors to pull their money out
of the country, and some fore casters have downgraded their
expectations for China's economic growth this year. They say it
(01:06):
won't reach the government's target of five percent.
Speaker 1 (01:09):
There is enough room, obviously, for stimulus in China as
the economy has been sputtering, But the problem, she says,
is that you need massive stimulus in the trillions.
Speaker 5 (01:20):
Of remenbe Some of these troubles can be traced to
President Ji Jimping's decision to try to break China's habit
of fueling growth with speculative construction and spending projects that
are often funded by local borrowing China.
Speaker 1 (01:33):
To prop up the economy. Investors are waiting for that
big stumulus, it ain't coming, and hence that is impacting sentiment.
Speaker 5 (01:42):
The idea is that the pain will be temporary and
China will emerge stronger for it, but concerns are growing
that the consequences may instead turn out to be severe
and long lasting, and not just for China but across
the global economy.
Speaker 4 (01:57):
What feels like a big change is this shift in
can census that China's growth miracle that has once fired
so many portfolios around the world is no longer a
given two.
Speaker 2 (02:08):
Large economies in the world, so going on opposite tracks,
both trying not to repeat the mistakes of the past
and maybe making new mistakes.
Speaker 5 (02:17):
That's Bloomberg's Rebecca Cheung Wilkins and Tom Hancock in Hong Kong.
They're here with me to explain what's happening and what
China's leaders are doing to try to turn things around.
I'm Wes Kasova today on The Big Take, China feels
the heat of a cooling economy. In a story out
(02:51):
this week, a team including Rebecca and Beijing based reporter
Colin Murphy, along with Tom and several other colleagues, dig
into this complex situation. I started by asking Rebecca and
Tom to paint us a picture of China's economy right now.
Speaker 4 (03:09):
Well, the fundamental issue or challenge is that the economy
is slowing, and everyone thought this was sort of going
to be the year that China's economy came roaring back
after it reopened after the pandemic. And actually what we've
seen is some of the policies that were rolled out
during the pandemic or just before are now an overhack
in the economy. And so essentially this move to try
(03:32):
and reduce risk in the property sector to tackle the
issue of oversupply is essentially continuing to really hurt growth.
And that's partly a confidence issue because people are seeing
their most valuable asset decline and price and decline and value,
and so people don't want to spend. People feel poorer,
(03:53):
and they're not investing in necessarily growing their businesses or
starting a new company. So we have these sort of
two big issues. Add to that that property for a
long time has been one of the really the main
or one of the main growth engines for China's economy,
previously contributing about estimated thirty sometimes people say forty percent
of the economy. That's really now paired back. And so meanwhile,
(04:17):
China is trying to look to alternative industries to try
and replace that as a driver of growth.
Speaker 5 (04:23):
And it's not just the property market that's ailing. Another
problem is the world just isn't buying as many products
from China as it once did.
Speaker 2 (04:32):
This year, Chinese exports are declining, and that's mostly about
the fact that there was a surge in demand for
Chinese goods during the pandemic coming from.
Speaker 3 (04:44):
Europe and the US as people.
Speaker 2 (04:46):
Stayed at home, and now that demand is normalizing, and
so you've got exports to those countries falling by double
digit rates. So if you add that up, you know,
you could say that's at least a third of the
economy that is experiencing quite a large decline. If you
imagine that the Chinese economy is like an aeroplane with
(05:10):
two engines, we could say that one engine is property
and exports, and then the other engine is all the rest. Well,
the property and exports part is currently sort of on
fire and it's really interfering and slowing down the entire plane.
On the other hand, for the rest of the economy,
so you're talking about high tech industries and also domestic
(05:33):
services for people traveling around the country, going to restaurants
and so on, that's really surging. So you've got the
other engine, it's actually going very well. So that means
that the plane is still going forward. Right, Chinese economy
is still growing. However, it's not growing as fast because
you've only got one engine working. And ultimately, the risk
(05:55):
is that that could have contagion on the other part
of the economy too.
Speaker 3 (06:00):
Currently that isn't happening. It's a risk that's worth thinking about, Rebecca.
Speaker 5 (06:05):
The other thing that's happening that you write about is
that people are worried about their jobs. Young people are
having trouble finding jobs that pay well. Costs are going up,
and they're feeling like they can't make ends meet.
Speaker 4 (06:18):
Yeah, I mean, this has been a quite remarkable level
of youth unemployment. We've had that a record high north
of twenty percent. One in five young people in China's
urban hubs cannot find jobs. Some estimate that could be
quite significantly higher when we look at the nationwide figure.
(06:39):
And so other thing to consider here is the way
in which the social contract may be, if not changing
in China, but at least being scrutinized and for years
and people have sort of exchanged or accepted fewer freedoms
in exchange for the promise of a job, a home,
a family. But when you consider sort of some of
the demographic challenges as well as some of the challenges
(07:01):
around real estate no longer being a sort of reliable
asset to acquire, you can see that dynamic is changing too.
Speaker 2 (07:09):
What we're doing is talking generally in economics about year
on year growth.
Speaker 3 (07:13):
And the real.
Speaker 2 (07:15):
Stress test for China's economy was last year, when at
any given time a third of the country was in lockdown,
and it's quite amazing that the economy got through that
without any financial crisis and so on. So this year
we are talking about a growth picture, and we're talking
about growth of around the government's target of five percent.
(07:36):
Now some people think that that's going to be missed,
but not likely by a large margin.
Speaker 5 (07:41):
Why is this five percent growth target that the government
set causing so much unease?
Speaker 4 (07:49):
Well, to begin with, in the beginning of the year,
many investors and banks thought that it was quite a
conservative number and that China would have no issues really
in reaching that. Just in the last couple of weeks,
we've had at least six investment banks downgrading their forecast
for the year. Most of those are actually below the
(08:09):
five percent target. But what feels like a big change
is this shift in consensus that China's growth miracle that
has once fired so many portfolios around the world is
no longer a given and people are really changing. There's
a longer term and fundamental view of China, and so
that's sometimes why although perhaps on the ground, you know,
(08:32):
we're not seeing actually the sort of seismic change or
the kind of contagion risk chaos as Tom lays out,
but it feels like a really significant shift.
Speaker 2 (08:42):
We've got to remember that the Communist Party has really
committed to economic growth, said last year that that's basically
it's top task, and so we will see the government
stepping in to boost growth if things start going below
probably that four or five percent range next few years.
Speaker 4 (09:02):
The thing is a part though, we've seen that the
government has also demonstrated this quite extraordinary tolerance for pain.
You know, it's trying to roll out these policies ultimately
to make the economy more sustainable, more robust, to shift
its growth model, move away from a model of growth
that's fueled by debt that's not as productive longer term.
Speaker 2 (09:22):
A lot of things that people didn't expect to happen
in the past based on their experience of how China's
economy worked and how China's political system worked, have happened
in recent years.
Speaker 3 (09:33):
And I think that's left.
Speaker 2 (09:34):
A lot of people feeling quite confused about the future.
And obviously, if you're concerned and confused about the future,
you're not going to spend quite as much.
Speaker 3 (09:42):
You're going to save a bit more.
Speaker 2 (09:44):
And we're seeing that behavior playing out amongst households and
amongst companies. It's also an unprecedented situation we're in this year,
where China's economy is recovering, It's grown fast than it
did last year because of the end of lockdowns. But
the property sector is shrinking, and we've never had a
recovery like that in China that isn't driven by the
(10:06):
property sector in recent memory. So if you're looking around
you in China and you see that, maybe you're the
value of your house is declining. People aren't buying property,
but the economy is recovering.
Speaker 3 (10:19):
It's just a confusing situation. You've got to adjust to that.
Speaker 2 (10:22):
And I think we're seeing this adjustment of expectations.
Speaker 3 (10:25):
Playing out, and it's about feelings really.
Speaker 5 (10:30):
After the break why Joe Biden called China's economy a
ticking time bomb. Rebecca, you and Tom have described China's
economy and how it is slowing down. How much of
(10:50):
that is by design. One of the central themes of
your story is that Chinese President Ji Jinping is trying
to run the economy call as you put it.
Speaker 4 (11:02):
When we talk about China running its economy cold, what
we mean is holding back from any kind of jumbo
stimulus package, for example, fueled by raising a lot of
debt and building a lot of infrastructure. But the term
is also relative, so it's less than perhaps it may
have used in the past to deal with these type
(11:24):
of economic woes, but also comparatively to the US and
to other large piers, season Ping has laid out these
longer term priorities for the economy, so cutting down unproductive
or less productive debt fields, spending, trying to reduce the
risks in real estate, tackle the issue of oversupply, reduce
(11:48):
the risk of a market bubble appearing and then popping
and creating other sorts of disorder in the economy. And
so these are long term goals. But there was so
really the reason behind why some parts of China's economy
are slowing. This is a sort of crafted policy, for example,
(12:09):
to deliberately shrink the size and the debt carrying capacity
of the property sector in China. We have seen many
private property developers defaulting in China over the last three years,
and it's really by design, by this sort of principle
of the three Red Lines which came into force back
(12:32):
in twenty twenty. Now. The three Red Lines are these
guidelines around just how much debt or how much leverage
a property firm can carry if it wanted to continue borrowing.
And that was a big issue for many properly developers,
because this model is really built on the principle of
using debt to grow its business, to continue to buy land,
(12:55):
to then build more.
Speaker 3 (12:56):
Projects and so on.
Speaker 4 (12:57):
So it was a fundamental part of the business model,
but also somewhat worrying part of the business model, and
of course that then exposes some element of risk to
the rest of the financial system that supported this model.
So think about the local banks and the larger banks
that were lending to real estate companies, as well as
of course all the homeowners that were buying. And in
(13:19):
China it's quite normal to actually buy your property and
take out a mortgage on a property before it's been
delivered to you, And so we then were in this
quite curious state where homeowners were paying mortgages on properties
that they hadn't yet been delivered, but also that may
not be delivered because that particular firm had defailt on
(13:41):
its debt and was running into trouble.
Speaker 5 (13:45):
And so they were paying mortgages on buildings that had
not even been built.
Speaker 4 (13:49):
All were sort of mid construction most likely, and we
did see at one point when there was a lot
of worries about whether or not projects would be delivered.
We did see these sort of sporadic protests, yes, where
people boycotted payments on their mortgages, precisely because of this reason.
Speaker 2 (14:05):
To give you an idea how important the property market
is to how people feel about their wealth. We estimate
that about seventy percent of Chinese household wealth is tied
up in property. So that's a big contrast to other
countries like the US, where people own more in the
form of the stocks and other financial assets. China wants
to move its wealth system more towards that kind of
(14:29):
US model.
Speaker 5 (14:31):
Tom US leaders have certainly taken notice of what's happening
in China's economy. Treasury Secretary Janet Yellen called China a
risk factor for the US, and President Joe Biden went
way further in saying that China's economy was a ticking
time bomb. What exactly do they mean by that?
Speaker 3 (14:50):
It used to be that China's economic growth was broadly
considered a good thing because China was driving global growth
and prosperity, and there was also some feeling that development
in China was good because it was previously a poor country.
And this has really shifted, I guess post Donald Trump
(15:12):
to a competition frame, and you've got politicians saying, isn't
it great now we're doing better than China, or isn't
it great that China's slowing? And you've also got Biden
administration rolling out restrictions on technology, micro chips and so
on investment in China, and those things slow China's growth.
(15:35):
It's not just words.
Speaker 2 (15:37):
I mean, there are also policies that the US is
implementing that actively slow down China's growth to some degree,
even though the White House says that's not the main
aim of those policies. And so that's why I think
it's really important for us to try and look a
bit more dispassionately at the data and trying not to
(15:57):
get into this political competition frame quite so much.
Speaker 4 (16:02):
I think there's sort of two elements to that. The
first is that the type of growth that we see
in China does impact the knock on effect through the
rest of the world. If we see just sort of
massive depth fields stimulus infratructure field stimulus, that's not necessarily
the type of growth. Even if it were to even,
for example, exceed that five percent target, it's not necessarily
(16:26):
the type of stimulus that would have sort of longer
term benefits for the rest of the world. But the
sort of obvious area where we do see sort of
trickle through impact is in commodities, and that's related to
China's property sector. Again, so if China isn't building as
much as it once was, it's importing less of those
(16:47):
commodities from elsewhere in the world, so that certainly sort
of affects that dynamic.
Speaker 5 (16:55):
Tom One interesting thing you write that if g and
China are running their economy cold, the US is running
the economy hot, with Joe Biden putting billions of dollars
into US manufacturing and jobs and trying to boost the economy,
and that there's this kind of what you say is
a clash of economic philosophies between the two largest economies
(17:18):
in the world.
Speaker 2 (17:19):
You can see that showing up in two places. So
firstly inflation because Bidenomics, so some people call it, it's
about growing the economy. Het you've seen inflation surge in
the US, where it's coming down a bit now, and
China has recently entered a period of deflation because domestic
demands relative to supply is very weak. And the second
place you can see that showing up is the labor market.
(17:42):
So we talked about China's very high used unemployment.
Speaker 3 (17:45):
Overall, the labor.
Speaker 2 (17:46):
Market is a bit better than it is for young people,
but it's still quite a poor labor market relative to
pre pandemic. And so we're seeing a big contrast there
with the US, where you've got record low unemployment and
you've got people changing jobs because the labor market is
tight and that's driving up wages. We're not seeing that
(18:08):
dynamic to the same extent in China. And what we
can say is in a way that both administrations in
China and the US are a bit haunted by the
past and they're trying not to repeat the mistakes of
the past. So in the US, the consensus amongst the
Biden administration was that Obama didn't do enough after the
(18:28):
financial crisis, and so you had a decade of disappointing growth,
and we don't want to do that again, whereas in China,
the lesson from the financial crisis is the complete opposite.
Cgmping and his advisors think that China did too much
and they ended up with too much housing and so on,
and that was the problem, and they don't want to
(18:48):
repeat that again. So it's really funny how you've got
these two economies, two large economies in the world, so
going on opposite tracks, both trying not to repeat the
mistakes of the past and maybe making new mistakes is
the issue. So obviously there's a debate about how sustainable
to pick up in US growth is. You know, it's
exceeded expectations this year, but will that continue? And then
(19:12):
in China, maybe you're running the economy too cold, right,
And so if you're running the economy too cold, people's
expectations start falling and once that begins, that process is
hard to stop.
Speaker 3 (19:23):
That's the risk there.
Speaker 2 (19:24):
So I think the thing about running the economy hert
versus running it cold. US stimulus has put growth in
the US economy on a faster trajectory than it was
pre pandemic, and China is now on a slower trajectory,
as we said, than it was on pre pandemic. Pre
pandemic grew six percent. Now we're looking in the future
more than something like four percent. Still, most economists expect
(19:49):
that China will grow faster than the US, and one
reason why that is is because China is just a
much porer country and it has bigger room for catch
up growth. Chinese per capital GDP is around one sixth
of the US level, So we're talking about a country
that has still a huge number of people who by
(20:11):
US standards, will be considered very poor. And if China,
especially in those poorer areas, just does the things that
it did in the richer areas.
Speaker 3 (20:20):
Will see catch up growth.
Speaker 2 (20:22):
And that is something that China's government is still very
keen on, unsupportive of.
Speaker 5 (20:29):
Rebecca earlier time talked about how one of the drivers
of China's economy, one of the bright spots, is the
tech industry, and yet the tech industry, despite its growth,
has not been able to make up for the shortcomings
in the property market in other areas.
Speaker 4 (20:44):
Why is that, Well, partly because it's what China caused.
The New economy, and just to state the obvious, it
is a new thing, but we have seen quite a
significant pickup in that area. So for example in investments
in exports double digit and this industry of things like
electric vehicles, in green industries, in sort of high tech,
(21:07):
high growth industries that there's an increasing focus from Beijing
to build out and we are increasingly seeing that dominate,
and also, of course things like as Tom says, in
very visible ways seeing evs appear on the streets in Europe,
overtaking some of its sort of European competitors in certain
(21:30):
markets too.
Speaker 2 (21:32):
So the property sector, we're thinking around twenty percent of
GDP if you throw in the related industries.
Speaker 3 (21:38):
What China caused. The new economy is a bit smaller.
It's about seventeen percent of GDP, and new economy, according.
Speaker 2 (21:44):
To China's official statistics, grew about seven percent in the
first half of the year. Property investment trunk eight percent,
So you've got a drag there on demand.
Speaker 3 (21:55):
That is slightly larger.
Speaker 2 (21:56):
And that's just the reality that China is dealing with
at the moment.
Speaker 5 (22:01):
Rebecca, you said earlier that there is this social compact
in China that people will trade some personal freedom for
economic security and well being. Do you think that this
economic stress poses any kind of risk to Ji, that
people will become dissatisfied?
Speaker 4 (22:22):
Well, I think between people being dissatisfied and worried about
their personal wellbeing or their personal wealth and kind of
existential threat to seed Imping and the party is quite
a big gap, and I think no one is really
talking about the latter. But I do think that this
is really one of the biggest, if not the biggest
tests that seeds Imping has faced in his lifetime. For
(22:45):
a decade, he has overseen China with economic growth, and
so his vision of what he's called the China Dream
that he set out when he came into that top job,
the rejuvenation of the Chinese people, both at home and
broad was, in a sense, you could argue, an easier path.
(23:05):
We had growth rumbling on behind him. We also had
an easier international diplomatic landscape too, And now he's juggling
with these really thorny issues that he is trying to
tackle in the economy, albeit to create a more sustainable
type of growth, as well as this thorny issue of
(23:26):
increasing tension with the US, the perennial risk that's raised
over a Taiwan conflict, as well as this shifting balance
of power in the Indo Pacific. So this is a
very very different set of problems than the ones that
he faced a decade ago. And to Tom's point, I
(23:48):
think that the confidence issue in China and changing sentiment
is really one of the toughest things that a policymaker
can do. Because even as we've seen in this really
big sort of push, this positive messaging blitz that we've
had from various regulators authorities, with this drip stream of
(24:10):
positive news promising to support various parts of the economy
without much follow through, can only last for so long.
And that's partly when you look at markets, for example,
while you're seeing all these quite grim milestones being reached
across Chinese assets, it's so difficult to change that mood
music in.
Speaker 5 (24:29):
China when we come back, well, things get worse before
they get better. Tom, what are you looking for in
the months and even the years ahead.
Speaker 2 (24:48):
The big question I think hanging over China's economy is
how long does this downturn in the property sector last for?
And when do we reach a point where the government
and where residents in China, who ultimately drive this market
get back into buying again, and so this market stabilizes.
(25:10):
It doesn't have to grow again, but it has to
at least stabilize.
Speaker 3 (25:17):
It seems like we're still quite far away.
Speaker 2 (25:18):
From the end of this property shrinking era, and I
don't think anyone can really tell you how.
Speaker 3 (25:25):
Much longer that's going to go on. It's already gone.
Speaker 2 (25:28):
On for two and a half years, and that's much
longer than anyone expected.
Speaker 4 (25:32):
And for many months last year, for example, people were saying,
we're at the turn, just about to turn the road
when it comes to the distress property cycle in China,
and yet here we are again. And the other slightly
more worrying element is that we are seeing some of
that stress spread from China's private developers to its state
owned developers. Now they so far have been quite shielded
(25:56):
from this, but simply by the fact that people aren't
buying properties anymore and that prices are declining, we had
eighteen and thirty eight listed state builders reporting losses in
the first half of this year. That is highly unusual
for China, and it suggests that we have quite a
long road to go to stabilize this industry, and that
(26:18):
even the state sector of this industry, who were once
expected to sort of be the saviors to come in
to help consolidation in that industry to buy distress private
assets from other developers, now they are starting to run
into trouble too.
Speaker 2 (26:37):
So what we know is that Chinese property sales peaked
in twenty twenty one at about two point three trillion dollars,
and then last year they fell to about one point
nine trillion dollars, and people think they'll fall a bit
more this year. But we know that there is demand
in China for housing fundamentally because like everyone else, Chinese people,
(27:02):
because the rest of the economy is growing and their
wages are growing, they would like to live in bigger
and better houses. And also you've got an ongoing urbanization
process in China. People are moving still from the countryside
to cities where they can earn more money, and so
they buy houses when they do that. And the question
is when does this drop hit against.
Speaker 3 (27:22):
That fundamental demand, And.
Speaker 2 (27:24):
So this full can't last forever, but nobody can really
tell you how long it's going to last.
Speaker 5 (27:30):
Rebecca Tom, thanks so much for coming on the show.
Speaker 4 (27:33):
Thanks for having us. Wez pleasure to be here.
Speaker 5 (27:35):
Thank you, Ez, thanks for listening to us here at
the Big Take. It's a daily podcast from Bloomberg and iHeartRadio.
For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts,
or wherever you listen, and we'd love to hear from you.
Email us questions or comments to Big Take at bloomberg
dot Net. The supervising producer of The Big Take is
(27:56):
Vicky Bergolina. Our senior producer is Catherine Fink. Rebecca Chasson
is our producer. Our associate producer is Sam Gebauer. Raphael
mcili is our engineer. Our original music was composed by
Leo Sidron. I'm West Kasova. We'll be back on Monday
with another Big Take. Have a great weekend.
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