[MUSIC]
The most important thing there is to know your partner.
You really be,
need to be confident and business strategy of those with whom you're investing.
It's very difficult to invest all alone in China so,
very important to have a reliable partner.
Part of that is relationship with the central government of China, and
the local governments, and part of it is, trust.
It's difficult to work out disagreements in China's courts.
So you really need to trust with whom you're working in.
Be confident that their business plan is a good shot.
Of course there's risk everywhere.
But I think those are the keys that we've been told about.
[MUSIC]
Well first of all, capital markets are to a large extent, closed.
You can't simply inject capital into China's economy right now without
permission from the government.
So, that's the first hurdle that you need to get over
is to get permission to invest.
And then once you're, you get through that you know,
their, the, the key concerns are the ones that I mentioned earlier,
investing with a trusted partner and a business plan that makes a lot of sense.
Of course having a business plan that doesn't run counter to
the interests of the government is very important in China,
because it's not a completely open free market like it is in the United States.
The Chinese use the expression state directed capitalism,
which means that the state does play a significant role in the economy.
And if you should run cross-purposes with the intentions of
the government, you may find yourself in difficulty.
[MUSIC]
I'll give you one example.
In the United States when when a firm borrows money in debt capital markets,
investors are very aware that if the firm is risky that either you
don't lend it money or if you do you lend it at a very high interest rate.
And the result of that is that capital gets allocated to the firms with the best
business plans.
In China that hasn't been working so well.
For two reasons.
Number one for, for what ever reason default is considered
an extremely adverse result in China relative to the U.S.
and when a corporation gets into trouble either it's local government, or
the central government is very prone to bail it out.
Which means that if I'm an investor in corporate bonds, I don't really care all
that much about which bonds I invest in, most of them are gonna pay off anyway and
that means that companies with the best business plans have not a very big, big
advantage relative to companies that don't really have a good business plan at all.
The second reason I'm interested in it is that China has a,
only a very nascent bond market.
In the United States,
roughly two-thirds of corporate credit is provided through securities markets.
In China, it's just a tiny, tiny fraction.
Shockingly, China has as much corporate debt as the United States, but
only a tiny, tiny fraction of it is obtained through bond work and it,
that means that it's not gonna be possible for China to continue to grow at the rate
it has been or anything close unless it develops a very effective bond market,
because as corporations get larger and larger, they can't rely only on bank
loans, they need access to bond markets as well to get cheap enough capital.
[MUSIC]
In China, there are four large banks.
They're kind of analogous to our JP Morgan,
Citibank, Bank of America Goldman Sachs and Wells Fargo.
Except at these large,
these four largest banks in China are more than half owned by the central government.
And if, in order to be a CEO of one of these four largest banks,
you need to be selected by the Chinese communist party and
you end up having a sub ministerial or rank or vice ministerial or
rank in the Chinese government, you're actually a member of the government.
So that when time comes to decide to whom you're gonna lend money,
a phone call from a government official might be very, very influential, and
I think you might have you'd be surprised if you heard that Jamie Dimon or
Lloyd Blankfein would simply pick up the phone and make a loan to,
to someone that at the suggestion of someone in,
in the United States administration, it doesn't work that way in this country.
So that, that's that's another example of when you, when you look at the bank,
and you know it has a CEO, it has a board of directors, it has equity,
it has debt, it operates as a corporation with public shareholders and yet
it's as much a part of the government as it is part of financial markets as a,
as a private actor.
[MUSIC]
A former senior partner at Goldman Sachs was interviewed in by Bloomberg.
And recalled that in 1990 he suggested that Japan,
which was the rising economic super power would not
succeed it would, it's growth would stop, and it would have difficulties,
perhaps financial crisis, and he turned out to be right.
Now he's saying the same thing about China and questioning whether
this would be super power will cont, be able to continue to grow and
will be able to avoid a significant financial crisis.
He didn't put any hard facts on that,
he said it was a hunch he was very humble about it, but if you
don't try to look at the facts, examine the numbers,
understand by talking to people what's actually going on you would be
significantly influenced by by in those kinds of suggestions that China is,
is heading for serious difficulty.
I have a, a kind of moderate view on that.
I think China will be able to have a soft landing at a sustainable growth rate.
Of you know, somewhere between 5 and 7%,
it'll be able to pivot towards its consumption sector.
Hopefully it'll be able to reduce the terrible air pollution
that its major cities has, and it'll be able to open up its capital markets, and
eventually American investors or European investors will be able to go into China,
just as Chinese investors will be able to freely invest elsewhere.
That vision has been on everyone's mind for,
everyone that watches developments in a the global financial system.
That vision has been on their minds for,
a decade and it, it still seems just over the horizon.
Will we ever, actually get to that point?
I dont know.
I think that's a big question mark, but
I'm, I'm somewhat optimistic that it's a question of time.
And a question of, success for
this kind of gradualist policy of trying one thing after another and hoping that
enough of these things work that that this sort of progress can be made.
[MUSIC]