The Four Big Structural Forces Holding Back China's Economy

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, very weak economic data out of China lately.

Tracy Alloway (0:20)

Yeah, to put it mildly.

Joe Weisenthal (0:21)

I'm just starting very directly. No, the data has been very weak.

Tracy Alloway (0:24)

I have a collection of paraphrased headlines here. So we're recording this on August 16th, and we just saw an emergency rate cut from China. They also announced that they would stop publishing the urban youth unemployment rate, which is never a good sign.

Joe Weisenthal (0:43)

When you just announced that a certain data point that people have been tracking for years suddenly will not be published anymore.

Tracy Alloway (0:48)

Exactly, and a particularly politically sensitive data point too, retail sales are coming in extremely weak. So rising less than 3% a year. They used to be in double digits. We have deflation setting in, which is something we spoke about on the episode we did with Richard Koo.

Manufacturing is contracting, exports are falling. The UN is dropping against the dollar. Bank loans at a 14 year low last month.

Joe Weisenthal (1:14)

You really came prepared, Tracy.

Tracy Alloway (1:15)

I did. Yeah, I know it's surprising, but I did actually.

Joe Weisenthal (1:19)

I'm not surprised, I'm just surprised.

Tracy Alloway (1:20)

I did actually put together the data points because they're so startling. And again, if you compare it with all the excitement from earlier in the year about China reopening the end of COVID-0, there was this expectation that China was gonna end up being a positive catalyst for global growth this year. And instead we are potentially seeing the exact opposite.

Joe Weisenthal (1:40)

Yeah, you bring up a good point. I think one of the theories is that there would be this big inflationary impulse globally from the China reopening demand for steel, demand for various metals, obviously demand for oil and gasoline.

And that hasn't picked, you know, there has been this pretty mild sort of mediocre reopening. It hasn't had that global shockwaves, if anything. People are talking about exporting deflation or disinflation. And then on top of all of the sort of like economic weakness that you bring up, there's also the sort of like financial market weakness. So there was just a story today about one of the companies that sells some of these wealth management products, missing payments.

There's obviously, I think it's a country garden, the big developer running into a lot of trouble, similar to the weakness we've seen in China Evergrande. So to your point though, just this sort of slew of negative headlines.

Tracy Alloway (2:34)

Well, also, I think clearly there is concern that if you get real economic weakness in China, that could lead to something bad for the global economy, just in terms of real business activity. But I think there's also this financial channel that is probably the one that's likely to be the most problematic. So if you think about China as, in many ways, a giant hoarder of financial assets, the big question now is what are they gonna do with those financial assets? Do they have to, for instance, start selling off some FX reserves in order to support the UN? Are they maybe gonna buy fewer US treasuries? So I think that is definitely one aspect of this that is really worth exploring.

Joe Weisenthal (3:16)

So many interesting elements right now.

So we have to dive deeper into what is going on right now with the Chinese economy and what types of policy responses we might get or we might not get.

I always see there's a furious debate always on Twitter. It's like, why doesn't the government just give more money to households? Sort of like the Richard Koo conversation, the sort of, you know, gotta boost domestic demand. What's the reluctance to do that? Like all these sort of different questions. So I think we really need to dive into them further.

Tracy Alloway (3:47)

Let's do it.

Joe Weisenthal (3:48)

Well, I'm very excited because I think we have the perfect guest to discuss this. We are going to be speaking with Zongyuan Zoe Liu. She is the Maurice Greenberg Fellow for China Studies at the CFR.

And she is also the author of a new book, Sovereign Funds, How the Communist Party of China Finances Its Global Ambitions. Thank you so much for coming on Odd Lots.

Zongyuan Zoe Liu (4:08)

Thank you, Joe and Tracy for having me. And I'm a big fan of the Odd Lots.

Joe Weisenthal (4:12)

Very, very kind of you to say. You know, why don't we just start off like super simply. In your view, why hasn't China seen a more robust recovery since the lifting of the COVID restrictions?