This Is Why The China Bubble Never Seems To Pop

Joe Weisenthal (0:10)

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

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, there's been some interesting data out of China lately regarding the recovery from the coronavirus crisis.

Tracy Alloway (0:27)

You're gonna have to narrow that down quite a bit.

Are you talking about some of the data that sort of supports the notion that they're seeing something of a recovery, although it's mostly driven on the supply side rather than the demand side? Is that what you're talking about?

Joe Weisenthal (0:42)

Yeah, sorry, I was being super cryptic, but yes, this idea that we have seen this sort of what some people might characterize as kind of a V-shaped recovery on the industrial side, sort of an impressively fast and resilient restart of the factories and so forth, but not so much on the demand side yet, at least from the data, and maybe you have a better sense of this from the Hong Kong perspective, but it still seems like consumption, shopping, going out to eat still kind of tame.

Tracy Alloway (1:13)

Yeah, I think that's exactly right. Although I have to say in Hong Kong, we are starting to see a little bit of a pickup, mostly because everyone is stuck in the city. They can't actually leave. When they have to come back, they have to go into two weeks quarantine. So everyone is taking staycations and going out quite a bit lately.

But with that exception made, yes, we are seeing a stronger supply driven recovery than we are on the demand side. And one thing that I find interesting about that is that it sort of speaks to the very nature of China's economic model. I guess one of the benefits of having a command economy is that when times are bad, you can kind of command everyone to go back to work and you can tell companies to maintain jobs and start making products again. But of course, the downside of a command economy is that you might not necessarily get as strong a consumer as you want.

Joe Weisenthal (2:09)

Right. So the industrial side, the corporate side is very much an extension of policy, much more so than consumption.

And so this sort of dual speed recovery that we're seeing in China, it may be a cue right now, but it speaks to something much broader. And I'm thinking also we had a recent discussion with Matt Klein, just this sort of general idea that the Chinese economy has never really been as sort of consumption-focused, household-focused as it is investment and production-focused.

Tracy Alloway (2:43)

Yeah, that's exactly right. And of course, the other big theme that's cropping up at the moment is what China is doing to support its financial system. So we know that the authorities are trying to walk this fine line between propping up the banks, but also avoiding moral hazard and trying not to accumulate even more debt.

So that's something else that's going on at the moment.

Joe Weisenthal (3:07)

So all these things are kind of like microcosms or cute versions of stories that, I mean, you and I haven't covered, talked about the world economy for years now. Literally since I think the first day that I've been covering the news, you just hear forever about the China bubble. And there's the most obvious bubble, and there was all this debt, supposedly, and all this bad debt.

And it's sort of taken for granted that it must come to an end, that there must be a reckoning. And we know people have been shorting China forever and talking about how dysfunctional the system is. But it's been years and years since we've been talking about this and the great sort of Chinese, I don't know, reset bubble popping. It never quite seems to happen.

Tracy Alloway (3:55)

Yeah, China is forever a debt crisis sort of on the brink. And yep, it never seems to happen.

Joe Weisenthal (4:03)

There's always these starts, like you'll see something that's like, oh, some apartment developer couldn't sell their units. And everyone's like, this is it. This is the moment we've all been waiting for. The Chinese real estate bubble is popping. And then six months later, it's like apartment prices hit new all time highs and that goes away.

Tracy Alloway (4:21)

Yeah, I mean, I would say in recent years, you've had some bigger ones. So you had Baosheng Bank, which actually failed, which was very unusual. And now what's really interesting is you're starting to get some losses on wealth management products that a lot of banks sold to retail investors. That's another thing that lots of people thought was going to tip over the financial system into some sort of crisis because people weren't gonna buy the products anymore and they would pull funding for the banks essentially. So yeah, you have a lot of things that could go wrong, but the consequences never seem as dire as people originally predicted.