We are hearing a lot coming out of China right now.
We had numbers this week which were not very encouraging.
Perhaps some deflation going on. Certainly their trade is down.
What is your sense of what's happening? What are the important things we should
be looking at in China right now? Well, so nice to see you again, David.
And definitely Xi Jinping has a lot on his plate.
The world has really been very focused, I think, on how to deal with a strong
China. And now we haven't really thought
through some of the implications of a weak China.
When we look at what is happening in the real estate market, there are still
major challenges ahead. And this is critically important because
it's one of the main sources of investment for most Chinese.
And so if the market is not doing well there, it has a significant impact on
growth and investment opportunities to local debt.
This is something that policymakers have been tracking for a long time, and COVID
just made it worse. A lot of this debt and this is what's
really concerning, is off the books. And so it's very hard to even track and
be aware of. And it relates to how the center is
dealing with and forcing a lot of these local governments to take on unfunded
mandates. And their main source of revenue
previously was from the real estate market.
And so if they haven't had access to revenues coming from the sales of real
estate, they have to look for other sources.
It's a big concern enough for Xi Jinping to be sending down policy enforcement
teams, which you would think after all this time in office, he wouldn't have to
do any more. But it shows the concern that they have
with local officials and their willingness to actually follow mandates
coming from Beijing. And then to top that, you have weakness
in the local banks, which again, are lending to the local governments and to
the local real estate market. Top that with youth unemployment.
For many in China, this is the source of their retirement plan.
The fact that their children are going to be working and supporting the parents
and the grandparents and that the numbers are over 20%.
The unofficial numbers are believed to be significantly higher than that, and
it creates a real lack of confidence domestically in China and in Xi
Jinping's economic policies. Top this with the fact that there's a
slowing global economy, meaning that China's export opportunities continue to
be hit and they're down 15%. And changing geopolitics, making it more
complicated for companies to be doing business in China.
And Xi Jinping really has some rough waters ahead.
Is President Xi at this point solving this problem for the economics of it, or
is he solving it for the ideology of it? Because some of his rhetoric has
indicated he actually may care more about the party and the party rigor in
the private sector than he cares about the economics of it.
Well, that's an excellent question. He certainly has been very focused on
using the party as the means to govern, whether it's through the government
itself, whether it's through the military, whether it's through the
judiciary. It's the party that supreme.
And he has tried to create an ideology and a unity through that.
We see in the new structuring of the government that it's all the party
committees who were actually setting economic policy.
And the government more and more is just an implementer.
So as we see these difficulties in the government, these weaknesses in the
ability to create jobs for the youth, in the challenges in attracting, attracting
direct foreign investment or venture capital or private equity, The big
question will be whether Xi Jinping pivots and focuses more on market
opening and creating the confidence and the conditions to continue to attract
foreign business, which is necessary if he's going to continue to grow his
economy. He can't do it without foreign business
being present. We've seen him pivot before.
We saw how quickly he was willing to pivot at the end of Covid in opening up
to the rest of the world. And we're starting to see signs that
he's beginning to reconsider some of his economic policies to be more open and
change that emphasis from such a focus on the party.
Not that it's ever going to go away, but to really be focused more on providing
opportunities. Look at what he's been doing in
technology and the opportunities now in encouraging platform companies and the
tech executives to be innovative, where it wasn't that long ago when they were
one of the top targets. President Xi may decide that he wants to
be more open the rest of the world as the rest of the world open to President
Xi. At this point.
Certainly the United States and the West seems to be taking some actions,
including this week with restrictions on outbound investment into China.
We see various actions being taken. To what extent does that hamper what
President Xi can do? As you know so well, Deborah, foreign
direct investment is down rather substantially into China.
It is. And I think one of the biggest questions
is around confidence, confidence in China and its leadership.
Obviously, the United States has to stay very focused on its national security.
And these outbound investment regulations are limited to areas that
it's concerned that we might be creating competitors to our own national security
interests. The I think it's going to be important
to watch if other countries do the same. There definitely is a reconsideration in
Western economies in looking at what their relationship is economically with
China. It's not to say that companies aren't
investing there and continuing to do business there.
But more and more, we hear they're looking at China for China and then
they're looking at the rest of the world.
Some of China's own policies, including its national security law, are really
emphasizing that fact because it's a very murky area, particularly when it
comes to issues like data. And more and more companies are looking
at how they can create an island in China for data and not have it linked in
to the rest of the world. And those issues, even though they may
sound small right now, start to have a ripple effect and how CEOs and others
are making their investment decisions. And this is one of the reasons it's not
just these geopolitical restrictions that we're seeing that are limiting
direct foreign investment in China. It's some of China's own policies that
are causing a concern within, I think, the foreign business community.