Derek Scissors on Beige Book Data (Radio)

the chief economists at the China Beije Book. Derek, you know, we have to talk a little bit about these comments from the outgoing Vice Premier Sun chun Lan, because these are some of the first comments that we've heard about changing policy as a result of of the virus being less dangerous than before. So it seems like that's the

cover here. They're talking about, Oh macron, as it becomes less severe, a change in policy is only natural, and she has been Sun, she has been synonymous with the ferociously tough stance that China has taken on this virus. So so interested in your thoughts whether or not this is something that sticks or you know, part of the policy that really does fluctuate a lot in China. Well, I do think if we think about COVID policy in December um it's going to be different than COVID policy

was in September. So I think that's fair and we're getting signals of that, and there are lots of reasons for it. The question is more hot, will it be different enough to help the economy the very early returns in November. The answer is no. The economy was quite weak in November. That's even compared to a week October or fairly week November of last year. Um. One of the reasons in our survey was given by firms that

they had rising COVID cases. So, you know, one of the questions is, well, maybe it's the restrictions that are the problem. But of course if people are sick, as we know in this country where we don't have the same restrictions, it affects, you know, economic activity. So is it COVID zero or is it COVID But either way, the economy was weak in November and consuming COVID cases are likely to rise. There's a risk of it being

weak in December and January as well. M of GDP orts next state of that GDP numbers coming out of China, yeah, those are going to be bad. In reality, I don't know. We had a lot of people, including in the Chinese government, saying the fourth quarter was going to be better because they didn't really like the third quarter for obvious reasons. Um, on the ground, we have two bad months in we have no no, no change in trend at the end of November. This includes the official pmys. It's not just us.

I think the fourth quarter is going to be poor. Maybe they can at that point say the first quarter of next year will be better. But the next set of GDP numbers, if they're accurate, are going to be quite weak. And how much is the housing crisis keeping people from getting out and spending? Yeah, I mean that that actually the the the the spending side from the government. The loosening of fiscal UH policy at least with regard

to housing and monetary policy generally, that might eventually help. Um, there's certainly different credit conditions now. Credit conditions have loosened right now, it hasn't hit yet. We you know, we're still in the in the in the situation of of everyone trying to recover from the damage in housing, both on the producers side and the consumer side. Uh. It may be that government action to boast of the market

will have an impact, maybe not in December, but in January, February. Yeah, you say you're seeing some signs of life and the credit markets. Can you tell us about what you're detecting, Well, you just you see. Uh, it's always worrisome when firms borrow more because you don't know whether they're borrowing because of opportunities or they're borrowing because they really need the money. Um, But you are seeing a pickup in borrowing, so either way,

there's there's more interest in that on that side. And and cost came down, so we had we had a period where firms did not want to borrow. We kept talking about stimulus, stimulo stimulus, and firms didn't want to borrow. It just didn't work, um. And one of the reasons was with high cost. So both both the quantity of borrowing and the cost of borrowing have have eased in November. That's not going to have an immediate effect. It wasn't dramatic, but it is a change in direction for credit markets.

How serious of a problem might deflation be going for word, Yeah, that's a that's a very good question. Um. You know, everyone's focused on while they're loosening COVID zero and there's a stock market rally and this will help the economy, and we don't see that yet, and you know at some point it will. But until then, we we have weakening prices across the board. That's producer prices, sales prices, wages,

et cetera, and our survey um. And it's getting to the point where there's the potential for not just disinflation but deflation. So there's kind of a race going on with economic weakening versus what we think is going to be improvement at some point next year, you know, which is that improvement going to hit before we get into a deflationary situation. You made a point earlier about it's all very well to exect COVID zero, but then people

call in sick and that fixed productivity as well. But you know, what are the implications for the rest of the world in terms of supply chains? Well, I think the long term implication of looser COVID zero. I remember a lot of people thought COVID zero was going to loosen after the party the National People of Congress next March, and so it was to happen in April or May or something like that. And the long term implication, you know, should be regained trust and supply chains, not immediately, um.

But you know, but but it will happen. The short term, I think you still have to worry about Chinese supply chains. COVID is unlikely to get better in China, whether COVID zero is still in place or not during the winter months, and so I think the next several months are going to see tough supply chain conditions, even as you can look forward to maybe, hey, the second half of next year. You know, we should have a better, better partners in China.

Derek is someone who's watched China for a long time. How surprised were you by the protests that erupted over the weekend? Uh? And I know they've gone away pretty quickly, that that's the nature of things sometimes in China, But it did send a strong message. Do you think that that message is in any part um the reason why we're seeing some modest tweaks to the COVID policy. I

definitely think it's part of it. I think you you kept not having, as you just said, we now have a senior official who is associated with COVID zero saying oh things are different. You kept not having that validation at the top end of the leadership um. You know, there was all this talk and rumors and and and people making comments with the top end of the leadership

did not weigh in. I think when you add some political stress here with we want these these protests to go away quickly, let's throw very standard for the Communist Party, throw protesters a bone. You're not giving them exactly what they want, but you're giving them something to pacify them. So I do think the protests added to the pressure such that you have senior leadership now saying we hear you, we don't need to keep this policy exactly the way

it's been in place. Yeah, it's quite interesting, So a lot to unfold here going forward. Derek, thanks very much for being with us. Derek Scissors, chief ugonomists at the China Beige Book