You've just been over to China. I know that you have invested in China
over the years. What did you learn from your trip?
I think I learned two things, David. On the plus side, I would say China's
back. Other than people wearing masks, you
would have no idea that ever been Covid. They're humming along.
The hard at work. We met up with a lot of startups and
entrepreneurs and venture capital kind of people and they're very focused on
building their businesses. The first quarter GDP number is four and
a half percent. And people say, OK, it's a slowdown from
7 percent, but it's a great number. I certainly compared to our one point
one percent for our first quarter. And so they're humming along.
The flip side of it is that clearly they're a bit off balance both by what
the America America has done to them and the state of the relationship with the
US. And also, frankly, it was she who came
in with a economy that had really moved heavily toward market based activity,
market reforms. And he dodged a lot of that back.
And now he's trying to walk it sort of back the other way a bit.
But they don't. The Chinese don't really know where
that's headed or what. There's not there's no transparency,
what to expect. We tend to focus on the geopolitics of
the relations with the United States and China.
But you make a really important point. If you're simply a businessman in China
trying to make decisions in China, you don't have the certainty that maybe you
thought you had before. And what does that do to their
willingness to make investments, to take risks?
Because you're not sure when the government may come crashing and as
frankly, they did in the tech area. Exactly.
And so the problem was that a couple of years ago, when she decided that the
tech industry had gotten too big for its britches, he also got onto this sort of
common prosperity theme, which is fine, you know, less income inequality.
But then he started randomly picking on sectors like online education, which he
more or less shut down in a day. And so it was very interesting for me to
watch this. And so then she gave some speeches and
kind of outline what what he thinks China ought to be focusing on, things
like renewable energy, new technology, stuff like that, hard tech, as we call
it. And so as we talk to our investment
managers, they suddenly pivoted and they're essentially listening to G.E.
and say, well, if he wants us to invest in A, B and C, then we better go invest
in A, B and C and not X, Y and Z. So there's a lot more follow up trying
to figure out what he wants and trying to follow it.
As you talk to investment managers, are there some areas they think are safer,
safer in the sense it's much less likely the governor will get involved in that?
Yeah, I think certainly industrial. I visited a company that makes gears
very high, precision gears. Their business is fine out there.
They're a leading manufacturers who doesn't care about who makes gears for
electric vehicles and things like that. So, sure.
And then there's a lot of activity in things like robotics and so on, where,
again, people feel very comfortable. This is where she wants them to go.
Everything related to battery technology.
Anything to do with energy and climate. All great.
Let's go. Let's go there.
But more careful about the so-called sensitive sectors involving anything
involving content. The media.
Things like that. You talked about growth in China, which
is not what it was, but still, as you say, enviable for much of the world at
this point. One of the things that we read about is
that the nature of their growth has shifted from essentially an export
driven growth to internal to build and evolve in their internal markets.
Does it change the sorts of companies, the sort of investment you look at?
It's a great question. Yes.
This is something that people sort of suddenly start talking about, but it's
been under way for a long time. China has been not just an export driven
economy, but but an investment driven economy.
Huge savings rate. And for a decade, everyone, including
the Chinese government, has been trying to get consumers to consume more and
create more of a domestic economy. And that is starting to happen.
The implication of that is as investors, is that you 10 there's a lot more focus
today on the domestic stock exchanges, the Shanghai Stock Exchange, the
so-called eight shares where domestic companies that make things for local
consumption tend to be listed, because that is what investors perceive to be
China's future growth engine. And less emphasis on, for example, the
New York Stock Exchange, where a lot of the Chinese tech companies are listed
because people are worried about where they're headed.
There was a time a few years ago when there was wild fluctuation in the
Shanghai exchange in the domestic issues, in part because, as I understand
it, a lot more of the shareholders really are retail.
It's not institutional. And so you could have retail investors
really move quickly. Is that still the case or is it becoming
more driven by institutional? It's somewhere in between.
Everything you said is exactly right. That's the way it was.
Institutional money is now coming in. So the market is getting
institutionalized. This is not a market in which I would
recommend individuals go out and buy the index for a couple of reasons.
First, the one you said. Secondly, there is still a lot of state
owned enterprises inside of that exchange.
And although they've actually done well lately, better in fact than non-state
owned companies in general, we don't perceive them to be the thought leaders
of the great engines of growth, the future.
So. So there's a market like Shanghai is one
where a good money, money, money. Trade can actually create a lot of
so-called alpha, outperform the index because there's so much volatility and
junk inside that index. So as an investor in China, how
concerned are you about leverage? We've heard a lot about really extreme
leverage in the Chinese economy. Well, certainly a company by company, we
would. We don't invest directly in companies
very often, but our managers hopefully are looking at leverage.
I think leverage across the Chinese economy is a little bit missing the
point. In a sense, in that people are looking
at the liability side of the balance sheet, but there's also an asset side of
the balance sheet, which is they own a lot of stuff, including over a trillion
dollars of our treasuries. And so they also I think if you really
try to create a balance sheet for China, you would find you'd be envious of that
balance sheet relative to our balance sheet in terms of the level of the
assets, because of all that saving that we talked about, the level of the asset
accumulation that's occurred along with the leverage leverage on the other side.
Steve, you mentioned the uncertainty. Maybe some would call you an anxiety
about the U.S. China relations, two largest economies
in the world. And there are a lot of hostile things
being said on Capitol Hill about China at this point.
How realistic is a not decoupling because Janet Yellen churches actually
said it's not going decouple, but a movement in that direction, what that
could do to the Chinese economy, but to ours as well?
Two things. First of all, I was really surprised for
the first time in my meetings with the Chinese, our investor managers, that in
addition, answer our questions. They had questions for me.
They wanted to know about the Chinese American relationship.
They wanted to know what to expect from the Biden administration in terms of
export controls. They are very off balance about the
state of the relationship with the US. I think I think Janet Yellen speech was
excellent. I read that whole speech.
That can never be a complete decoupling. We get all of our bicycle is from China.
We get all our toys from China. You're not going to you're not going to
be able to resource those from other places.
But, yes, it's like if you think of it as a spider web, the spider web is
starting to disentangle a bit. The Chinese are very focused on the
possibility or desirability of trying to make more of their stuff outside of
China. So it's not for Chinese anymore and
would come into the US more easily. So it's a bit of both.
But we also have to recognize there's a cost for both economies associated with
this decoupling. The coupling helped us have very little
inflation over the last 10 years until recently because of lower costs.
As you decouple by definition, you're sourcing stuff in a more expensive way.
And obviously the Chinese are losing business.
So it is really a lose lose. There's obviously a good national
security reasons to try to reduce our dependence on them, but nobody should
kid themselves. It is a lose lose.
One last one. China has been known for restrictions on
currency and capital flows outside the country less.
Last week on Wall Street week, Larry Summers said One of the reasons we don't
need to worry about they are and be displacing the dollar in reserve
currency is because nobody wants to put their capital in there.
Can't get it out as an investor. Do you take the new account?
Is that a problem for you? No, I don't think so we can get our
capital out, and I said yes. I mean, you can worry a little bit about
what they could do. But I don't I don't think that's a
significant worry. I but I would I thought, well, you can
ask me and I would agree with Larry that the army can't become a reserve
currency. You can't have a currency that is
managed and with capital controls become the world's reserve currency and with a
government that is so unpredictable. So the lack of I think probably the last
thing I worry about is the idea that the army is going to displace the dollar.