Surveillance Special: China's Economic Slowdown

it is by Elizabeth Economy. Of course she changed our dialogue with China where the river runs black? Uh, that was just a few years ago, Liz Economy with a Council on Foreign Relations. Professor Economy, Good morning, wonderful to have you with us. What is the Third Revolution right now? For President She? He's got some challenges. How's that Third

Revolution going? So? You know, the Third Revolution for Shijin Ping was really upending, uh, the period of reform and opening up that Dung Shao Ping had ushered in some thirty years earlier, and creating a China that was far more repressive and authoritaring at home, but more ambitious and expansive abroad. Right. It was his great rejuvenation of the Chinese nation. I think what we're seeing today is that, you know, over the past six years, this model has

produced its own set of fairly profound challenges for shijin Ping. Uh. You know, there's a great sense of political malaise in the country because of his grab for power. Uh, you know, his you know, elimination of the two term limit on the presidency. Uh. You know, a hundred and fifty shijin Ping you know, institutes institutes for shijin Ping. Thought. People feel as though there's been to some extent a return to that Maoist era cult of personnality, and they don't

want to go back to that. Right constraining the Internet, the intrusion of the Communist Party, you know, into private enterprises and in more deeply into people's lives. So I think he's he's created his own set of problems through this third Revolution. Within his third revolution, there has to be a Communist Party on one page. Is he goes to this People's Congress, is his four or whatever the body count is Paul Borough leaders. Are they all on

the same page or is there a huge descent? So this is the Commonist Party meeting the party Congress happens in the fall. This is the National People's Congress, so they're actually three thousand people feeding and aging right now for two weeks um. And I think there there are many dissenting views, uh, you know, and I think part of it has to do with the failure to move forward on structural economic reforms. So there's a lot of discontent over again chi Jin Pink's tightening up and his

preferencing of state owned enterprises over private enterprise. So a lot of descent around that. There's concern around Chijun King's anti corruption campaign, right, the lack of transparency in that and uh, you know, lack of rule of law. They had six over six hundred thousand officials were punished last year for corruption. That the hundred thousand more than the year before. Uh, there are many areas of unhappiness. But

does he go into this thing? Does he go into this three thousand member congress for everybody collapse at the same time. I know you monitor the clapping volume, But but beneath that is four D two hundred and six members of the Polar Bear and all the other subsets that there are, are they in support of their president. I think we've we've seen you know, over the last summer. UM, there was a lot of discussion about descent within the

Standing Committee of the Politburo. Right, as you said, this sort of the top, very top, uh, you know, seven person group, UM, that that Jinping was being sort of accused of overreach, that he had created all these problems with the United States, you know, facing this trade war, that there were problems you know through the Belt and Road project a lot of countries. Now are you know staying or even canceling projects the big infrastructure projects that

they had agreed to with China. Um. Obviously the Chinese economy was slowing and they didn't seem to have a game plan. He wasn't listening to the reform economists. Uh, and you know he kept wanting to double down on state control. So I think all throughout the system, Uh, there is sent and so so so what is the experience you've seen in their history of what's next? What's the process forward for a totalitarian regime given this descent?

So I think, um, if the economy continues to slow right now, what we're seeing is you know, some small move months towards economic reform. I think she Jumping was kind of pushed into a corner UH and forced to make a statement a few months back about the need to enhance the role of the market, which is not his inclination. UM. So we have to see whether or not they're actually some of these reform initiatives move forward.

If they do, if the economy begins to kick back in, then I think economic growth kicks back, and I think She jinping is okay. If it doesn't, UM, I don't expect that they would remove she Jumping, but I think you could see what happened to Mause Doong after the great leap forward in the early nineteen sixties, which is he was moved to the second line, right because and that says is she no longer first? If you if you equal doctor economy, have you identified the next Chowing Lay?

I mean, it's great to talk about Mao and and she, but who comes in to save the day. Well, Unfortunately, the sort of the three I think within the stand the committee are not particularly strong. There's yeah, Lee Ka Chong and Wang Yang and Han Jong. They're sort of the three that you know could potentially UH do something, but this would be more of a consensus decision. That we're going back to the dungest model of collective and

consensus based decision making. It's not necessarily interesting one leader moves into replace she in the way that she has grabbed onto the power, but that that they go back to the sense that no one person stands above the rest. If you're just joining us CV star fellow the Council on Foreign Relations, Elizabeth Economy, I can't say enough about her effort the Third Revolution. I read it cover to cover. You should too. One of the great theories that we

saw from the River runs black and onward. Uh, Liz Economy is a power of the cities. What is the relationship of President she and Beijing to the people that actually run Shanghai, run Hong Kong, Rung sheng Do and the others. So one of the really interesting things that's happened and over the past year year and a half is that we've seen repeated calls by Shijin Ping, by Lei Ka Chung for local officials to implement Beijing's policies. Uh. There seems to be an incredible reluctance on the part

of local officials to do what Beijing says. I think it's in part. It's because the mandates come down. There are so many different mandates and sometimes they conflict. Right. So first you have a mandate, you know, to stop lending. Right. Then you have a mandate no, actually start lending again. You have a mandate to protect the environment. Now, just in the past two months they said, actually, our targets are too ambitious. We're going to take a step back

and protecting the environment. And of course the anti corruption campaign which has caused many local officials really not to want to take risks. They don't want to be noticed by Beijing. Uh. And and then somehow, you know, draw attention to them and perhaps come under some kind of corruption claim. So I think right now the situation for Beijing is very don Uh. They have a lot of resistance at the local level to vamp off the not so new normal Chapter four of the Third Revolution. Right now,

what's the not so new normal for President Trump? What's the to do list for America? Is they address these uncertainties in China. I think this administration um is leaving no stone unturned. It's pretty extraordinary. I have to say. It's across the full range of issues, whether we're talking the security front or the trade front or even the political front right Chinese influence operations. What's going on in Xinjiang in terms of the repression of the you know,

weaker Muslim population there. The administration is is firing on all pistons. Um. We have to see what the end result is, Um, but I would say that they really are trying to hold the Chinese feet to the fire, so to speak, Um, and and get some movement and in a way that I think reflects American interests, Um, you know, more directly. It was my book of the

summer last year, the Third Revolution, Elizabeth Economy. My book of the summer this year's Ragarajan's Knew the Third Pillar, which I know Lizz will recover to cover as I will too. But do yourself a favor redo the Third Revolution. One year on, it is still an exceptional impression dissertation on the new China. And of course with these new announcements you heard, they're the urgency from Dr Economy, Liz Economy,

thank you so much. With the Council on Foreign Relations, we begin then with that soft story China low ring its goal for economic growth and announcing a major tax cuntess policy maker's seat to pull off a gradual deceleration with a grappling of a trade story and I debt legacy as well. I want to bring in Bloomberg's David inglets for more. He joins US Life from Beijing. So David,

they replaced the target with a growth range. Walk me through it right, six or six and a half percent the growth last year overall with six point six percent. The first top line is there is an acknowledgement among the top leadership that growth will slow this year. Investors who are fearing that growth mind slit below six percent. This obviously adds a little bit maybe a floor to growth. More importantly, though, it's the type of growth that they

want to pursue. When you look at the tax cuts that they mentioned, three hundred billion US all as it's worth of UH tax cuts and social security fees. And essentially what they're doing is there's there's been some challenges really in terms of lending money to the private sector. So in a lot of ways, what they're doing is they're leaving more money on the table in the pockets of the private sector, in people and hopefully turn around

the consumption story that was quite horrible last year. Just the range also just tell you how uncertain things are for the future of the Chinese economy. It certainly does, I think when you try and quantify what six to six and a half percent is in the difference there, it's the thirteen trillion dollar economy, so that's anywhere from a rough estimate, that's about ninety billion too, maybe three dollars worth of thought put that may or may not

be there. So essentially what they're trying to do, and really when it comes to the party, I had to look at the reports forty page of spont size twelve. It's a work report. It's the first time they mentioned explicitly that everything they're growing at the growth problem right now is really meant to protect jobs and employment. And when it comes to the party, it's really all about social stability. Well, there is a Communist Party and then

there's a National People's Congress. By my count, it's two thousand, nine hundred warm bodies in the room clapping on Q great. What percentage of those people support president? That's the big question. Um. In fact, a lot of the things that we heard today from the work report, and a lot of the things that essentially you'll hear the next ten days or so. Uh, tomorrow Wednesday is in time. You'll have the Economic Planner coming up with their own press conference. You're the Commerce

Ministry that day after that the PBO. See what has all these ministries? A lot of the things that you'll hear, we're decided back in October during the plenum. It is the Communist Party, of course, and what they say essentially is likely what will what what? What will likely happen. The other piece really to that story as well, is really then moving the economy from one that is centrally planned, state owned into one of course where you have more

private enterprise. And the tricky part, and the reason I bring that up is when they talk about, oh, we need to get capital through to the private enterprises, Well, guess what a lot of the people that we talked to say, you look at the structure of the Chinese banking system, it's not really designed yet the service the private sectors. So really that's one area to watch and how they actually manage to to to to to gradually

moderate the economy to where they wanted to be. Blimberg's DVID English joining US Life from Beijing as we get a new growth range from the Chinese government. Let's talk to someone from Britain who only thinks in centigrade. Actually she went to the University of Maine, where it's colder

than cold a good part of the year. Good morning, up in or no listening, Mary and Schneider Petsinger joins us right now, and this is to get briefed on China is economy to join us later on, Marianne, what what struck me about the Chinese announcement was the all in sense of it. Is it a point of crisis for the leadership of the Communist Party or is this an evolutionary path that they're on to some new policy.

I think we're certainly seeing an evolutionary phase for a lot will go, will happen, and certainly also with vacations for what it means for the US economy. Um. Also, you know, on the US China front, there are sources that say we're close to a potential trade deal, that we're in the final stages. But again, you know, even if we're at the finishing line, the finishing line of a one beter hurdle rays or is there really much

more about marathon? And I think it's about those long term issues you absolutely nail the immediacy of the trade deal. Was this document written for the trade deal discussion or do they look at as China, as Beijing look at the trade deals separate from the seven eight nine menu items that came out with for the National People's Congress. Well, I think, um, you know, the discussions they're much much longer than just having this as part of the trade

discussions with Trump. But again, because this is also about much more long term strategic decisions, it will feature in that as. Oh again, this trait is few than the traite where as you're team right now, it's really not so much about trade. It is about much larger structural issues and perhaps a global big power valory. What does the vet Tex dynamic mean They're going to reduce the

VT tax for manufacturing in China? Well, I think you know, it's certainly meant to um improve economic process that China is entering this period of showing signs of weakness UM and you know, the Trump administration is very well aware of that and things are part of um them being in a much stronger negotiating position. Yeah, and this is really important because you know, you know Heathrow. They've got the line there for the vet tax checkout for Americans.

The whole that tax thing is like wicked foreign In our collective memory is in Canada they try to do a vat tax and literally brought down the government at one point, were very destructive. That tax is a very dis active for the poorest in society typically. That's what really struck me in the Chinese announcement. Yeah, but it's

for manufacturing. It's for a sector specific sector. Marianne, just in terms of what is happening in China, how much of it is engineered by the Chinese, the domestic slowdown, and how much of it is engineered by the US administration. Well, I think so far it is mostly about the domestic issues in China, primarily because the tariffs and the retaliatory tears they are significant, but really overall, in the scheme

of things, it's it's minor UM. And so even though obviously for the prospects of economic growth, this delay of UM cariffs and UM, you know, also normal long we're talking about additional tariffs of two hundred sixties seven UM. That is certainly positive, but I wouldn't overestimate the impact that has had Marianne has been really interesting over the

last couple of weeks. This narrative that is built up, fueled by events in the Oval Office, that there seems to be a spread between the deal the President of the United States wants and the deal that some of his China hawks would ultimately like. Is that just the narrative, Is that just the false perception of what is happening,

or do you think there's something to that? Well, I think there's something to this because there's various m priorities that the Trump administration has raised when it comes to trade with China. For the President, it seems to be mostly about forcing China to be boost the bilateral trade surplus with the United States. And here it's important to keep in mind that China accounts for about of the

US's global trade deficit. But various concerns about you know this, this focus on the billateral data trade deficit, it is isly misguided. Um Whereas others in the administration, particular Robert Leheiser, the United States Trade Representative, and his concern is much more about the structural issues, so tackling unfair trade practices.

When it comes to force technology transfer key staffs, and I think on that point um the Trump administration has much much more legitimate concern but the methods to address those are wrong, so pears aren't really going to do

much about it. Much more importantly would be to build a global alliance, to put the United States to work together with you and Japan to um jointly for China to change their practices, and to some extent, we're seeing that DSDU and Japan have had trilateral talks and have issued a number of statements over the last years that

there is potential opportunity for collaboration. Mariana. Often hear this that tariffs aren't the right way forward, But what's interesting to me is that the status quo what we had before, the traditional approach of getting the Chinese to do whatever one thought the Chinese should do, wasn't working either. What it's pretty interesting is the Chinese are actually at the table now, so quite clearly tarriffs to some degree are working. Marianne.

It's got the Chinese to come to the table and consider doing things that they have talked about I haven't done for a long time. Again, it's a negotiating tactic, and yes, you're absolutely right that that has worked in from of bringing the Chinese to the table A. The key question is what will come after this? Are we just going to see a quick deal that leaves many of those issues that are structural UM, you know, just in limbo and kind of add to this lingering uncertainty.

And the other question is of will it be tough enough to actually have UM an enforcement mechanism move that has keeth and that I think UM is not yet quite clear. Marian, Thank you so much, Marian Schneider Petsinger UH with Chatham House this morning. We greatly appreciate her. Tennis Daniel Katsa with us with being p Parry, but this is an important conversation on foreign exchange. Daniel, with all the news on China, give us an up date

on Renminbi dynamics. What do we need to know about the president all upset about Chinese manipulation, give us a b MP Perry Bob brief on that with BMP berry bas legacy in China. Well, I think you know, from the US perspective, there's been a longstanding press to get UH dollar China moving in a more market driven way.

UH Lately, though, the message that we're getting from press reports at least, is that there may be some room for UH an agreement with with China to kind of UH allow the currency to be stable around the current range as part of the trade talks that are happening. So it's a man, it's a managed currency. It's still a man. It's not a floating currency. I mean, it's increasingly more market determined for sure, um and it moves much more than it did UH ten years ago or so,

but it has still aspects of a managed currency. To Daniel with you your great experience, I want to get the dollar ambiguity right now. What is a BMP Perry BA call on the US dollar structurally seker over the next year or two, we think as the FED you know, continues to be on hold and the markets start to prepare for FED easing at some point, the dollar is going to be very vulnerable. For now, though, we're in a very pro carry environment across markets. Volatility has fallen

across markets. Investors are looking for carry type strategies and within the G ten the dollar benefits as a higher yielding currency. It's called doing a Kansas jargon or carry on my wayward son, What does cary, what does carry well? Simply the strategies that look for higher yielding asset at a time when market volatility is low and volatility is low, it's a good strategy to look for for yield and

and investors like those types of strategies. The danger is that at some point volatility picks up very quickly and you see a rush to exit from positions like that. Any reason we think pick up anytime soon down well, you know, we can think of any number of things that could be disturbing for markets. Uh seems you know, sometimes strange that volatile these are so low, given all the uncertainties we see in trade policy, geopolitics, the economic outlook, etcetera.

So it wouldn't be hard to make a list of things that could jar the market out of their current

level of low volatility. Fascinating to see cross asset vault drive lower tom of the way it has done at the Federal Reserved Retreat, not just in foreign exchange, but in treasuries as well, And it leads me to an important question that a lot of people are now are asking down we've actually been very range bound in the effects market, in the treasury market as well, do you think we stay in that range down or are you thinking about other things? What't me through you thinking right now?

So for now, all the G ten central banks have signaled patients and and and a desire to be on hold. And that's broad volatility down across these asset markets, and it's very hard to see UM those ranges in g t FX breaking over the more medium term, maybe beyond a month or two. We think the dollar is at very elevated levels, so there is scope for a big move lower, which would mean these ranges break on the

dollar weak side. I me think that will happen probably in the second half of the year and market, but it could happen very quickly when it once it starts, that could happen very quickly. Could President Rock stand in the way of that? Um, Yeah, there's not a lot of ammunition on the E C B side. They've already effectively gone on hold and they're signaling they could reinforce that a bit. But you know, the CB is in a situation where policy never really normalized, so it's very accommodative.

It's hard to signal additional easing at this point, and they don't have the ability to say, oh, you know, um, we we're gonna tighten less because markets already pricing very little tightening, so it doesn't have a lot of immunition. Daniel, what is your optimal play right now? There's a jumble and I was really taken by the set of Chinese announcements today. But do you recalibrate here or do you

have a trade that you've got a real belief in. Well, I think we have to respect the push for carry that we're seeing across markets, and so we want to participate in that dynamic, but we want to do it in a way that we're not taking big valuation risk, because there's a kind of this, uh, this contradiction between wanting to be long the dollar because it's a high yielder and being scared that the dollar is going to

fall back to more longer term equilibrium. We think dollar Swiss is one pair where there is carry and where you don't have the valuation risk that you have another dollar pairs. So we think being exposed to dollar Swiss upside makes sense in the current environment of the that we're going to see over the next quarter down, all of these trades that you're describing make me believe that what you see as an economy that re accelerates in the months to come, is that your base case down?

And why well, it's not really. I don't think re acceleration is is what we're looking for. It's more stabilization at below trend radio growth in the US. So it's uh not um uh fast enough for the Fed to resume hikes. At the same time, it's not slow enough to get the market's really concerned about crash risk and and and pricing policy easing. It sets in the ground in the in the Gtah, what is the bet now

on dollar? You've got some great charge showing belief in long dollar, short dollar or dollar stronger, I should say dollar weaker? What what? What's the belief of the street right now? I think if you look across the consensus the most forecasters, it's that the dollar will be weaker over time. Uh. And that's I think of reflection of the relatively high valuation that we have on most of

the dollar pairs. And we think that makes sense. You just think for now, don't be surprised the dollar continues to hold stable and does better than the forwards that imply. In other words, you can you can make money being long USD because of the yield differential. Just as I mentioned, dollar Swiss is a safer way to do that than you're a dollar for example, Updated, it is good to check in with Stephen Whiting of City Private Bank with a real tour of duty in economics and in a

strategy their chief investment strategist. What does then, is Stephen Whiting's strategy, Steve Well, it's too uh prepare for a US outlook where the Federal Reserve switches from trying to restrain the strength of the expansion to protect the expansion. We're in uh and right now, particularly in Asia, what's relevant is China is moving fairly strongly regardless of how these trade negotiations work out, but fairly strongly to reinvigorate

its economy. It's stopped tightening policy about a year ago and has been at a while reinvigorating the strength of the expansion right now, so that combination of lower policy rates in the United States are at least planned where where they would be and China stylists really changes a lot of asset movements potentially around the world over the coming year. Buried, didn't you and we were just talking about this with John Tucker, who what what are you in?

Like the eighties seven percent marginal bracket? Is that is like Rockefeller in or something like that. You've got Steve Whiting an important phrase in your city bank report, the absence of tax cuts. Right, did we have tax cuts? Well?

We did last year, and it depends on you know, how you feel about them in this tax filing season, because you know, we have a little bit of uncertainty as to how large the effective tax cut was for different people, especially folks in UH states that have high personal income tax rates and property tax rates that have a dog named Biscuit. Yeah, well you just take a rip. You know, we put a figure in there. You know,

you're really great with with Charles Tom. But if you look that sort of overall personal income last year, you know, we were continued at a decent clip, but the personal tax liability overall grew very very little, and they usually moved together. And that again, and is the tax cut. And we know that the corporate tax cut, for example, was pretty powerful, and I do believe that there are some lasting benefits of the corporate tax cut, but the immediate boost to income that that had is just simply

not repeated this year. So you've got to look back at the U. S. Economy's performance with about a three percent growth rate last year and say, probably the single largest spur to that growth rate was to and we don't have another one. You hear that, John, We don't have another one, which means you're you're so Stephen. You know you mentioned China and boy, they've been pretty aggressive with the fiscal stimulus of late. Is it any sense of whether it's working or it will work? What your

thoughts there? It's all new, that's sort of you know, financial implications looking forward those things. We can measure a few things. For example, in January, we had the largest increase uh in c n Y loans in the history of China. This that tacks that they just announced near three billion US dollar equivalent. That is all perspective. Uh there are some things that are still going to slow

in China's economy. Export growth, for example, uh we we was pulled forward by the threat of tariffs, so the desire to order from China ahead of paying tariffs was very strong and a boosted trade activity in two thousand eighteen. And there's still some slowing there. But things that did slow internally in China are sometimes meet even more important.

And credit restraint was very severe in two thousand seventeen into early two thousand eighteen, and so things that underperformed were very domestic, like infrastructure spending in the early part of two thousand eighteen, and that is gradually going to

be coming back now. So Stephen, it's interesting Tom and I just earlier today, we're just talking about the dollar and the strength of the dollar, and we're having a very hard time coming up with a bear case for the dollar, or at least even a less bullish case for the dollar. What is your on the dollar right here? Well, look, we thought this year would be a little bit like last year in terms of it being relatively range bound.

But the history here is that between two thousand eleven and early two seventeen we had the third largest U S Dollar and bull market on record. The dollar is up at a fairly high level. We have had nine rate hikes out of the United States and the rest of the world. Anyone who hiked didn't really want to. And we're at the point now where the Federal Reserve

had some real warnings about activity. Last year, we saw housing activity, construction and sales fall for a year now, not a lot, not a level sort of that says it's impossible for us to come back from this. But remember we also had a tax cut, and we saw banks tightening lemming standards in the Fourth Courter. So it's all sorts of signs that we couldn't stay on the same tightening trajectory in the United States. And so when it turns there's a very good chance here that we

take out of a dollar. Now. One little complication is you know dollar euro or are we talking dollar China in a very very different story. See why do you think of so much? For the update was City Private Bank as well. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.