You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain on global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. The drumbeat of pessimism coming out of China is growing faster and louder.
A property crisis, faltering economic growth, towering debt, and high youth unemployment have drowned out their cheers about China's growth juggernaut, leaving investors wringing their hands and wondering what's next.
A China's days as an economic powerhouse a thing of the past. Is it just navigating a rough patch? Or can it overcome formidable forces to achieve bolder growth in a brighter future.
I'm still not super barish about China's economy, but in the property sector, I think it will get worse before it gets better.
Let's bring in Louis Kousch, Asia Pacific chief economist at S and P Global Ratings.
Louis, welcome, Hey Louis, Thank you, Tom and John. Hi. How are you guys.
Louis. You've been a China observerer for two decades. You lived in Beijing for seven years, You're hearing about all the negative news. Is it time to worry about China?
I think it is legitimate to worry about China. It always is. It's a big economy. We rely on it internationally, so it's legitimate to worry. Now, you know, sometimes I feel maybe people worry a little bit too much, as in absolutely, we're going through a rough patch. There is a cyclical slowdown after the spurt, you know, the post COVID spurt. In addition, there are quite a few more structural headwinds. So definitely there are lots of things to
worry about. But if you ask me, are China's time over as a country, as an economy that will continue to grow quite a bit faster than the US? I would say no.
Louis to borrow a phrase from the global financial crisis of an earlier decade, Is China too big to fail?
Probably not if you look at that from the perspective of Beijing. It hasn't really changed, right, So China may play a different role in the global economy now then it did, say fifteen years ago. But I guess from the perspective of Beijing they would look at it in
a different way. Like I think for Beijing policy makers, things like growth have probably become a little bit less the one and only policy priority than they were fifteen years ago, compared to additional policy considerations like sustainability of growth, financial risk, and even things like national security issues. So the way that they are looking at economic growth is different now than they did fifteen years ago, and that has implications for the global economy.
Where did this all go wrong? China was supposed to really come out of COVID very strong, like a lot of western countries did, but obviously been a lot weaker than expected.
Well, if I look at our forecasts and how they have evolved over the last nine to months, yeah, we have recently downscaled the forecast a bit, like we bumped it up earlier on. So I would say absolutely during twenty twenty three, forecasts have been going down a bit. But it's not as if we're talking about a crash in the economy, right, We're still talking about you know, we used to have our forecasts a little bit above
five percent for this year. We may be coming out somewhere lower than five percent, but this we are still growing faster than pretty much all other large economies in the world. This year next year is a big challenge, and it's going to be key to see how the authorities are responding to this cyclical slow down. Do they still care quite a bit about growth as I would think, or is it as some other people say that they have stopped fully caring about growth. That matters a lot,
of course for how you look at that slowdown. But you know, I would still say in part, people are disappointed because perhaps some of the expectations were a little bit higher.
So, Louis, you talked about the sickly slow down, but what about the structural issues Country Garden, the country's largest private developers. Just mister coupon payment. You worried about the problems in the property sector.
Yeah, so the property side is absolutely you know, if you ask me what is the one reason why we have a slowdown in China at the moment, I would say it's the property sector. The weakness in the property sector has a lot of negative economic implications. In addition to that, it has lots of financial problems. Right, we have the defaults, we have all of the negative sentiment
that comes as a result of that. It is also affecting households if they want to buy a house or not, so a lot of implications what to make of that weakness in the property sector. To some extent, it is a little bit deliberate in the sense that the authorities in twenty twenty one did go in and basically force that sector to start to take on a smaller footprint in the overall economy. That was a major objective of
the initiative that they took in twenty twenty one. There was a bit of a u turn later in twenty twenty two when they realized, Okay, we don't want to overdo the impact on the economy. There's too much weakness, and maybe we should take a bit of a breather in terms of how much pain we want to inflict. But I don't think that fundamental project to lower the economic footprint of the property sector in the economy. I don't think that that has changed, and that unfortunately goes
along with quite a bit of short term pain. But it's a little bit something that we all, all of the external observers have been asking for for a long time. You know, everybody asked China, you need to lower the footprint of your property sector.
You just spoke about the Chinese property sector and the influencer was having on consumer confidence. What could do more damage? Is it just the debt, the defaults, the deflation, or could the crisis of confidence actually be causing more damage than the former three.
Your question is a good one in the sense that the confidence aspect of all of these developments is really weighing over the sentiment sentiment of potential buyers, and people have become reluctant to buy right because they worry that the company that they're buying from and that they have to advance money to may not even be able to deliver the home, let alone what it will do to the housing price. So absolutely, I think confidence is a really important part over here, and we are definitely not
out of the woods. Broadly speaking. I'm still not super bearish about China's economy, but in the property sector, I think it will get worse before it gets better, given how damaged confidence has been.
Louis Kaus, You've been studying China for decades, you lived there for many years. How does this confluence of pessimism, if you will, this parade of economic doom and gloom, so to speak, how does it stack up against the broader challenges of the past have century in China. Is this the worst the country has faced?
You know, I think in terms of how downbeat everybody is about the prospects, both internationally but also within China, I think, you know, this would stand out is probably among the less optimistic phases.
Absolutely, And is there a way out of it? What would you say would be China's roadmap to steering out of it? And is that going to be a long term or a short term solution?
I think tom so many people are wondering how much short term stimulus is the government going to give, right and I think.
They've been reluctant to give stimulus.
They've been very reluctant, and that may not even be such a bad thing, but it would actually be quite helpful for them to be a bit more explicit and clear about that. What do you have in mind? Or you know, it could well be that the argumentation is, look, we said we were going to grow by about five percent, maybe four point eight percent is about five percent, So that is why we are not piling on with stimulus. Would be good to be a bit more explicit and
clear about that. And of course, secondly, it would be really helpful to attack those pressure points that the private sector worries about, that households worry about the role of
the private sector. What do you have in mind with regard to that, the role of reforms to boost productivity and to unleash market forces, but also the kind of reforms that are needed to boost household spending, because to increase household confidence would be really helpful to see more steps to really address these issues in a structural manner.
Well, what type of stimulus do you think the government could do. Are you talking about monetary stimulus or is it more fiscal stimulus.
I think at the moment we will have to look more at physical stimulus. On the monetary side, they're a bit constrained, actually, especially with regard to interest rates. We know the authorities are quite keen to keep the interest margin for the banks at a certain level, so that is a constraint for them. On top of that, US rates we all follow the news that they are not going to come down anytime soon. So on the monetary side,
it's not easy. On the fiscal side, I wouldn't say it's easy in terms of the traditional mode of fiscal stimulus, Traditionally the government has always relied a lot on local government stimulus. The local governments are highly stretched at the moment, so that's not going to be easy. But there's no reason in principle why the central government couldn't borrow more and increase its deficit. It's not used to doing that, but there's no obvious reason why it wouldn't take that course.
But it wouldn't be the typical, say, infrastructure spending that we saw in previous cycles with it.
It wouldn't be the local government led infrastructure spending. You know, if the national government wanted to, it could chip in more, it could increase its share that has traditionally been relatively low over there, or it could take other fiscal measures.
Louis, do you have any thoughts about why the Chinese government has been so reluctant to say, give stimulus directly to how holds. They've been particularly recalcitured about that. Can you talk a little bit about why.
Yeah, this is a good question because we have seen many other governments taking such measures right to boost household income. The United States, other economies in this region, Australia did a lot as well, and there have been some others. I think traditionally this is not something that China has relied on. Even before we get into anything like traditional philosophy or anything like that, I think China has had a recipe for stimulus that the authorities know has always worked.
We pump money into the economy by infrastructure and in the past also the household sector. We want to see investment growth, and ideally we want to be the entities that do this spending rather than relying on say, household because we are never sure whether they will actually spend that money if we give them more money. And actually there has unfortunately been a not so positive precedent a
few years ago. I think that was perhaps what a twenty twenty where the authorities did take a more western type of physical expansion. They gave text cuts to both businesses and households. It didn't really work at that time, and that I think has further reduced, in the eyes of Maaging the attractiveness of such a measure. Even though most external experts would say you're going to have to try this out at some point.
You're listening to Asia Centric from Bloomberg Intelligence. By the way, if you like what you hear, and we hope you do. Please rate us on Apple Podcasts, Spotify, Google Podcasts, or wherever you may be listening to us. Of course, more stars are better. Your feedback matters, and we love hearing from our listeners. A step that China has taken recently that attracted a lot of attention a lot of reaction in the West, has been its decision to stop releasing
youth unemployment figures. This is on the heels of recent figures that showed youth unemployment exceeding twenty twenty one percent in China. You know, sometimes the reaction to bad news can be worse than the bad news itself. Do you think this great quote unquote walling off is a sign that conditions in China are worse than we're seeing or do you sense a kind of retrenchment? What do you think is at work in that decision?
Yeah, you know, probably if China were booming, we may have seen a different type of a response, right, Sure, But I agree with you sometimes the medicine can be more problematic than the disease. Personally, I think that the increase in youth employment in July is likely not to have been as problematic as the bad reputational consequences of this decision that everybody, including my uncle in the Netherlands now knows about that China is withholding this data. I
think it was a mistake. There could well be reasons, and I think youth unemployment is not an easy concept to get right. We know from the European experience where we've had you know, when I was young, we had something like forty percent youth unemployment in Italy and Greece. It's a funny concept. So I would accept some technical qualifications and nuances, but stopping the publication of such data is much less productive than flanking the existing one with
an additional one. Right, So it is definitely, in my view not in the benefit of China to continue on this road.
For the Western investor, it raises questions about transparency.
For sure, it's a little bit like an on goal. It was not necessary, I think definitely. Sometimes our economic indicators have issues, have problems. I think the best way to respond to that is to explain what is wrong with them, rather than to withhold them.
So we had the consumer prices fall in July for the first time in many years, and it's created this narrative that China is almost turning into a Japan of the nineteen nineties with low growth japanification exactly do you think this comparison is really apt?
I wouldn't want to argue that there is absolutely zero comparison, absolutely zero shared characteristic between China now and Japan. Before you know, there are some similarities, right, Both are highly manufacturing led lots of supply, not always a lot of demand, So there are some similarities. I would say if you look at say the stage of development, also the policy response, I would say there's still a lot of differences. So
China's headline inflation was negative in July. How worried some is that I would I wouldn't worry too much about it. China's core inflation is still quite solidly positive. It mainly the headline number fell because of food and fuel price declines. Those declines will not be with us for a long time, so I would expect China to be in positive territory later this year. Again, I think China will always be a low inflation country, given that China's economy is very
good in creating supply. We said that before, less good in creating demand, So low inflation is probably the norm, But I wouldn't worry too much about.
Deflation, and you don't think they can experience a similar sort of lost decade like Japan, so to speak.
I think it's a bit too early for that, given where China is. You know, if you look at where Japan was in terms of its stage of development, at something like almost seventy percent of the US in terms of productivity and income levels, China is at less than
half of that. So even with all of the challenges that China faces, it's going to be a bit easier to get underlying growth of something I don't know, four four and a half five percent or so, and that makes it a bit less likely to get jependification already.
Luis Couch, how much of this, what we're seeing, this narrative coming out of China right now, reaches back to COVID zero. We all remember the lockdowns, the restrictions, the blow it took on retail manufacturing supply chains. It almost seems too easy to blame COVID zero. But does it go beyond that or is that really the culprit?
So we talked about the property issue, right and the property weakness, the property all drums are to a little extent related to COVID, to a large extent related to both policy and some kind of correction after previous accesses. Right, more generally, especially looking at the consumer, I think that we are still facing hangovers from the COVID period. If you talk to Chinese people and policy makers in Beijing, they would point out a few ways in which people's
behavior is still affected by COVID. People continue to be quite comfortable at home sometimes and be less keen to go out.
Also true as much of the world as well.
Yeah, also probably where China is a bit different. I think in the West we've seen quite a bit of revenge spending. I'm not saying that we haven't seen any revenge spending in China, but perhaps it was a little bit disappointing on that front.
Louis, you're an economist. You have been for over thirty years. Your profession has had a really bad run at predicting the global economy. Firstly, you look, economists overestimated the impact of COVID and the world actually rebounded a lot faster. And then economists we're talking about inflation being transitory. Now
that's obviously, you know, being wrong. It's lasted a lot longer than expectations, And we just talked about how China was expected to rebound out of COVID much faster than expected. What's been so difficult in forecasting these global trends? And could economists be wrong about China this time?
Yeah, so, I'm not going to defend the whole profession, and because there are a lot of people involved and there are lots of mistakes that we make. One thing, of course, is that it's not that difficult to forecast if all the rules of the game remain unchanged. And there are a few things that happened during and after COVID which kind of implied that the rules of the game had changed. Right. If you look at the policy stimulus during COVID, it is just, i mean, mind boggling.
If you look the amount of money that was pumped into the economy, not just in the US, also in many other economies. We're still dealing with the aftermath of that. It's spectacular, and of course that was not expected by economists. You know. I was just on the way here listening to how people in the US are not sending their kids back to school in the way that we had expected. Labor, the relation to the labor market is different, so the
relation to employers. Quite a few things that are still coming out of the COVID period affecting our behavior and economists are particularly bad at those types of times.
Louis Beijing is usually sensitive to its media image in the West, and it's usually quick to refute any negative news that may make its way into the Western media narrative. Lately, it's been surprisingly silent, even as this drumbeat of negativity beats around us. Is there anything we should read into that? You know?
I think China is probably a actually sensitive as it regards things like politics, geopolitics, things like that. It's also clearly more sensitive, you know, the domestic Mandarin speaking narrative than you know, in comparison to what's happening outside. I cannot be certain, but I wouldn't be surprised if one of the things that Beijing is kind of telling us that some people are getting really hung up about the slowdown.
I do also think tom that when foreigners worries so much about what is going wrong in China at the moment, it could well be because the shape of China's recovery is just not benefiting them as much. Right, if we look at all of the strength in consumer spending, especially in the service area, all that you know, people are traveling,
they are visiting, they are going to restaurants. That is not spilling over very much into the global economy, and perhaps that is why internationally people are a bit disappointed. Even though I have to say, I know economists don't do a good job in many ways, but we have always since November last year, explained that this is going to be a service and consumer led recovery.
It's the old joke. Economists have forecast three of the last nine recessions, or nine of the last three recessions, any of those, Louis, do you think what China is going through right now is just a temporary rough patch it's fleeting, it will pass, or could it be that we're on the cusp of some more fundamental change emerging.
I do think that there are two things going on. We talked about the cyclical slowdown. We are also, as we have been already for quite a number of years and as we will be for decades, we are undergoing a cooling of China's trend growth that is going to
be relentless it will continue. We will never go back to the six or let alone eight percent growth of the past, and so we all need to get used to that cooling, not of the actual number of GDP growth, but of the trend beneath that, the potential growth rate. That's something that we have been expecting. It's something that has gotten a bit worse because of things like the
technology restrictions by the US and things like that. But so we are facing that long term slow down, and yeah, we all have to incorporate that in our views.
And the applications for global growth.
The implications for global growth, interestingly enough, are not significant as you would expect because China's economy continues to expand you know, if you look at the pronouncement by the IMF, the IMF, I would say it's a little bit more negative on China's growth in the coming decade than I am. But even on their numbers, they find that as the economy keeps on expanding, and as they continue to grow almost double the rate of the US, China's contribution to
global rate will continue to be quite large. Even in that a little bit less optimistic scenario of the IMF, the long term.
One Luis Couch. How worried should China be should the wider world be about its debts?
So, China's grows debt. If you look at all the debt that there is in China is a very significant share of its economy. It's three times as much. That is quite high in comparison to rich economies. It's especially high in comparison to other emerging markets. You know, there are some benign reasons that one could point to. China doesn't need Wall Street or other foreign investors to service
all that that we know all these things. I would say that China should watch out because the amount of new credit creation in China every year is actually quite large. There's no other major economy that gets anywhere close, not even India, in terms of the new debt that we are releasing into the economy every year. And so it challenges the financial sector. It challenges all these entities like local governments and companies that need to repay those debt.
It also challenges policymakers who have to avoid when things go bad, you know with some property developers or from companies, they have to avoid that then spilling over and becoming a systemic issue. And the higher that leverage will creep up, the harder it will get. To mitigate those systemic spillover implications, I think so far, because China doesn't rely on the rest of the world, and because the government is quite present in the economy, especially in the financial sector, they
haven't yet lost control of this. But they really have to watch out because, as I said, the amount of new money pumped into the economy like this every year is quite impressive.
And are you referring to the local government debt or what's commonly referred to as the lgfs, or you referring to say, household dead or corporate debt.
I was referring to the overall picture. So all of these I still remember twelve years ago, say twelve fifteen years ago, we all said, okay, China's local governments were already quite leveraged up at that time, the corporate sector as well. But ten twelve years ago we said, oh, the household sector is not very leveraged. That's different now even household leverage is quite hard. So if you look at the overall amount of debt in China's economy, it's about three hundred percent of GDP.
Do you see a country giving China a run for its money or emerging as a serious competitor.
Definitely. If you look at growth rates, India is going to be there. Even some of the other Asian economies I think, say in the coming ten years, I would expect Indonesia and the Philippines and also Vietnam of course,
to all grow faster than China. Now how much does that impact the global economy is another matter, right, because the Indian economy is I think something like five times as small as China is in market exchange, right, so it's going to not off If you think there is a slowdown in China to what extent can other economies off set that? That is going to be a little bit harder because the size is still so much smaller.
But in terms of growth rates, definitely, these other Asian economies are quite well placed.
Based on your economic growth assumptions, do you think China would catch up to the US in terms of GDP in the next say, ten twenty years, you.
Mean, well, China's overall level of the economy exceed that of the US. Yes, yeah, yeah, it will not as early as we expected, say five six years ago, but I would still expect that to happen definitely in the coming decade. And sometimes people say, wow, that means you're
very optimistic about China's pattern of growth. But actually that's not very optimistic at all, because China has more than four times as many people, right, so we're still talking about an economy that is much less rich and much less productive than the US.
So Louis summing it up, are you optimistic about China or downbeat about China?
You know, I think optimism and pessimism are all relative, right, I think compared to many other observers of China's economy, I'm probably still cautiously optimistic. But my cautious optimism looks different than what it did six years ago because of those structural headwinds that we have been talking about, and also at the moment, because of that cyclical weakness and the weak confidence that we are all witnessing.
Our guest has been Louis Couch, Asia Pacific chief economist at S and P Global Ratings. It's been a wide ranging conversation about all things China, its growth, its challenges, and its prospects for the future. Louis, it's been a pleasure having you here, hearing your insights and we look forward to staying in touch.
Thank you very much, gentlemen, what's a pleasure.
I'm Tom mccorbett in Hong Kong.
And I'm John Lee. This podcast was edited by Clara Chen and you've been listening to the Asia Centric podcast