Kopi Time E093 - China Outlook with Bert Hofman

some expert views. Today's guest is a long standing supporter of Kobe Time, Bert Hoffman. Bert is the Director of the East Asian Studies Institute at National University of Singapore and professor in practice at the Lee Kuan Yew School. Before joining us, he worked at the World Bank for 27 years, 22 of which were in Asia and a dozen of those were in China where he was country director for the World Bank from 2014 to 2019, Bert Hoffman. Warm welcome back to Capitan.

You're our first three peat guest.

And now over the Chinese New Year, we see a further decline in at least the infections as far as we know what the data are far less strong than before because there's practically no more testing, but the government has incidentally reported on the infection rate and that now seems to come down quite dramatically. So, um I mean, just three months ago, we were thinking this was impossible and now we're almost through with the omicron wave.

Of course, there's been lots of suffering. There's been many people that because they were not vaccinated enough or simply because they were old that died because of Macron. But it seems to be that from now on, at least the economic recovery can really take, take hold.

to be protected. The elderly therefore, had the impression that maybe this was not such a great idea for them. And of course, elderly are also more vulnerable to any side effects of vaccination. But the vaccine themselves are pretty effective, not as effective as the M R N A s but, but pretty high effectiveness after three vaccines. The problem is that a lot of people got their third vaccine the third shot already quite a while ago. So maybe they were not under, under the most recent wave. At

the same time, Macron is far lighter. Uh the impact of O Macron, even if you're not vaccinated is far milder than say the delta, the delta variant, which caused a lot of deaths in the United States and in Europe. So um in that sense, it did, it did pay for China to wait. But of course, it came at considerable cost. And I think that in the end was a big factor for China to move out of COVID, 0 to

0 COVID policy relatively quickly. I mean, I would say too quickly uh in, in November, December last year and the other part of, of uh of the exit was of course the demonstrations that took place. I mean, the people were basically fed up. That was in early November, that was after the Party Congress. There was an announcement, ok. We're going to do the 20 point program and that basically was a gradual exit from zero co of it.

But the effect was that infections showed up and local governments still clamped down by means of lockdowns and that triggered then the protests, I think by then already the infections rates were so high that frankly, it was almost unstoppable. Again. I think a more phased exit would have been desirable. But as uh the great Donald Rumsfeld said it is

what it is. And now we are looking at a recovery to uh to this, to this uh three years really off COVID management that did have some that have results. There's no question about it, but China is now behind everybody else in, in the, in the recovery phase. Mind you none of the countries except maybe where I live, Singapore did it very well.

That exit Singapore went very carefully, very sort of two steps forward, one step back in the exit took in total about nine months to exit, to exit the zero COVID or not the zero COVID, but a very strict COVID management that, that Singapore had. And I think that was a very good way to go about. But nevertheless, they also experienced a wave. They also experienced more, more death in the in the exit of the, of the COVID management. So it was almost unavoidable.

I'm not even speaking about other countries in Europe or the United States, the United States never exited because they never really entered a COVID serious COVID management effort except for the vaccines. I

Because it seems to me a year ago, the narrative out of China was M RNA is a Western vaccine and that I think was very unfortunate. It should have been something seen as a global good.

And I think that whole system of incentives for innovation would for global public goods can be reconsidered. And if you want indeed go back 20 years. Uh it was governments around the world that invested in the research that made the M RNA vaccine possible, but it was also companies that invested for 10 years, say to commercialize the platform that made it in the end possible to, to produce, to produce the vaccine itself and to respond very quickly to the COVID 19, to the COVID 19 epidemic.

So I think 11 you know, it's amidst a pandemic, you always say, well, they should give it away. But then the question is also what's the impact on the next pandemic and the incentives to, to do R N A? If it isn't it purely government financed R and D that leads to uh an outcome one can consider to say, okay, maybe one should give it away.

very effective around the world. I'm pretty sure that the Chinese foreign companies will also get certain strategic investments from the government of China preparation for the next rainy day. Um but Macro China, particularly the economic environment, so we in the last say, 23 months have begun to pick up a pro growth shift in economic policy. Uh Would you like to sort of, you know, express your take on what's been going on on the economic front?

the previously maligned platform companies. So I think there has been some realization that some of the previous policy directions Would not bring China where it wants to be. I continue to grow were relatively high with I mean the informal target for the next 15 years is this 4.75% that rolls out if you take Xi Jinping's

doubling of 2020 G D P by 2035. If you take that series, you would need a growth rate of 4.75 and you would probably need a higher growth within the early years given that there are factors such as demographics, such as other other factors that would sort of bring in the later years, bring a lower growth rate. So Um and and the previous policy stands with big emphasis

on controlling capital, I mean the in the 2021. So not the latest, but the 2021 Central Economic Work Conference that was controlling of the wild expansion of capital by means of a traffic light system. So that all sounded quite, quite scary. Now, the tone is different and some of the actions are quietly frankly different. Uh policymakers have said look, the rectification of the platform companies is now over doesn't mean it's not gonna be any regulation, but it's going to be a normal in a more

normal regulatory process. So it's not catching up on previously lacking regulation. D D do Jin was allowed to take on new users on their platform for two more than two years, they couldn't do that. So there's some, some positive signals there that, that, that promised a bit more in the, in the, in the, in the coming in the coming years. Uh You know, I'm careful there because tone does not

yet mean real policies. And I think it will take some time to see what is true, whether there is truly a new direction under the new team that Xi Jinping pass put in place and the transition will be completed by March. And then we will probably see some some more evidence of a change in direction at say the third planet which is traditionally about economic policy. So that would be somewhere in the fall. Um So

I'm a bit careful. I think a lot of investors are still a bit careful and, and that of course, brings you to this year's growth picture where a lot of people expect this the big rebound in consumption, the revenge consumption coming after COVID, I'd be I'd be a little bit modest in my expectations. Yes, there will be a bump in, in, in consumption, but there's still lots of uncertainties out there. So the savings rate of

household may remain quite big. Second, uh The part of the reason why the household saves so much is indeed as you mentioned, the property sector. So they couldn't invest in their traditional and favorite investment I E apartments. Uh that by itself was not a great idea anymore, but there's very few alternative investment vehicles for, for China, maybe stocks will get a bit more of a booster. And yes, they will allocate a bit more in if you want durable, durable goods such as cars and otherwise.

But whether that is going to be a major driver of draws, after all, Household consumption is only 38% of GDP by now. It's going, it has come down again from almost 40 a couple of years back. And, and so you still need that investment component to drive growth externally. It doesn't look very good. I may not be as pessimistic as as some including the I M F. Some see that some say that you know, the Europe and the U S for sure are going

to be in a recession. I frankly, I'm not so sure if I look at the numbers, but I'm not the expert there, irrespective external demand is not going to drive China's growth. I think we can agree on that. So that investment growth is still very, very important. Overall investment is still more than 40% of GDP. Another question is okay. So, so, so part of that of course, is is government investment, especially government investment in infrastructure.

Well, uh the ones that need to do that is local governments and then by now pretty tight, they don't have enough revenues and they have loaded up quite a bit of formal debt on the books and informal debt through the local government financing vehicles that are enjoying a second leash of life. They were supposed to have been phased out after 2015, but they're sort of back and thriving and yes, it's not formal government debt, but nevertheless, local governments

are probably going to be held responsible for it. So maybe not as much as before, maybe not as much impetus will come from infrastructure property. We've talked about maybe not as much impetus from property simply because the mass in the property sector still needs to be sorted out. And if I had A couple of $100,000 in China, I'm not sure whether this year would be the moment to buy an apartment that would be delivered to three years from now with a company that I'm not sure whether it will be

around 23 years from now. So I think there's still a lot of uncertainty there. It will probably stabilize at a much lower level but it won't be a major driver at all. So that then The remaining part is business investment, both public and private. It's a surprisingly low share of GDP by now. Government has stopped publishing the numbers unfortunately. So we can't really determine it. But some of the estimates that we have uh shows that it's only 12-14% of GDP is business investment.

So it's less than a third of total investment, but they're somewhat more optimism coming from the more positive tone that the central economic work conference and other major policy actions provide for Investors in, in public and private businesses that might give a bit of a boost. But overall, the picture is not that this is going to be a massive rebound and we're gonna be in, up in the, in, in,

in the 7, 8% rate. It sounds we don't do any formal projections, but 5-6, it's probably a good sort of a good number to focus the mind on.

three red lines a couple of years ago. It seems like right now there's a bit of a step back from the three red lines direction of reforms because it is a big mess and it has to be sorted out. Otherwise it'll just become a big albatross around the neck of the economy.

reform of of that fiscal sector. I think China is ready for another wave of reforms there on the property sector. So yes, the government basically saved the number of companies that got into trouble by very the three red line policy, the very tight policy on leverage in property sector and on indebtedness. But it caused part of the problem because because the property sector developing company developer companies were not able to borrow as much as before they rely even more on pre sales.

So pre sales became the vehicle by which they financed the construction of companies of of of property. Technically there is some sort of a guarantee on that, but in reality, it doesn't really work. So you had this no moment where property companies started to basically default on their payments and they simply didn't have money to finish their existing existing projects. That part, I think the government has more or less fixed, But it has not yet fixed is to think about. Well,

what kind of property sector do we want? And how should that look? Like there's been some policy pronouncements on that and I think they're going in the right direction. I think everybody sort of agrees that it shouldn't go back to the old days and the property sector shouldn't be 18% of GDP, something even more, but we calculated something in the order of 18% of GDP it should probably be less and it should also be

a very different kinds of sector. So it shouldn't be all the high end apartments that would be good for the wealthier part of Chinese population. But there should be a lot of the next wave. If you want a big demand will be for rental housing, it will be for low income housing. It will be for the migrants who want to move out of their dorms and want to start building their existence for their families without having such high incomes as uh some of these apartments are built for.

So that that is still a decent property sector and demand is not is not gone. Also increasingly coming on, the market is sort of replacement demand of a lot of the apartments built in the 80s and the 90s. And the Even the 2000, you say, well, maybe people want to live a little bigger but also the quality of the buildings in those days was not that good. So that's quite a bit of replacement demand coming, coming on stream

as well. But in terms of new demands, I believe it's the migrants and the migrant workers that are in the cities and that should, they don't have, but that should be able to Seattle have urban who co have access to financing for their apartments. That would be the next wave of demand. There will be a different kind of demand and it will require different kinds of buildings. It would even require different kinds of longer term finance.

Probably the banks may not even be the greatest vehicle for that kind of find, especially not in social housing, but there's other sources of finance including the National Social Security Fund. It doesn't need massive returns, it doesn't need to return and the positive one. But but in other countries,

that is often a source for social housing finance. So so a lot of piece of the puzzle need to come together then if you no longer built, only for these high end expensive apartments, local governments will get less for their land, they probably shouldn't sell as much land as they did anyway. But they do have a lot of burdens of social services and and that burden will only increase as the

population ages and as new migrants come in. So they need new sources of revenues and and again, so going back to this property developer game promoted by local governments that need the revenues to build the infrastructure and provide the services. That would be, that would not be the direction that that China should go.

I don't expect that to happen. I don't expect that to happen anytime soon, but China already has a carbon tax and one that is pretty close to that 75, they raise about 60-65 dollars on fuel. So uh transport fuel. So cars when you go to, when you go and fill up, you actually pay about $60 a ton, implicitly a ton of uh CO2 emissions through that tax on it. Well, that can be expanded to industrial applications that can even be expanded to uh energy uh and power production. Given that the current

system that has been introduced on an experimental basis. I E the cap and trade frankly brings about such a low price for carbon that is hardly worth, it's about 6 to $7 on the on the market right now. And it's very little trade. Um It seems that that China is making the mistakes that Europe made 25 years ago. So I don't see much of an incentive coming from that cap and trade market. Therefore, there is a lot of

scope for carbon pricing. The other one look, China, China has said they want to do more common prosperity and I also rich people would give more, give back more to society. China for now seems to think that that will be sort of donation based the tertiary distribution as China calls it met a more logical step is to simply tax richer people more currently, that hardly happens. And there's a reason because capital gains are not taxed in China, except on housing.

Interestingly enough, the various sources of income are taxed differently. So it's a, it's a schedule er income tax and then also the exemption of the income tax is very high. So in China, you're exempt up to the level of four times the average wage. Whereas if you look at the O E C D countries, they, they give you an exemption until about a quarter to half of the

average wage. So if you were to gradually put more people into the personal income tax, by simply not by simply not increasing that personal exemption, you would gradually get more from the personal income tax. Right now. China gets 1% of GDP out of the personal income tax. The average O E C D country gets 8% of GDP out of the Breslin income tax. True. Xi Jinping says we don't want to have a, well, for a stage, we don't have a text and spent.

But if you look at Korea or Japan, that are not necessarily Nordic welfare states, there's still tax to about 4-5% of GDP and personal income tax. It's simply a good tax. China has a good tax and that's the value added tax, very productive, very efficient. Unfortunately, it's also regressive because poorer people, they spend more of their income on consumption than richer people do. And therefore the tax burden coming from V

A T is simply higher on low income strata. So China should keep the V A T but then compensate for the distributional effects through the personal income tax.

being somewhat regressive. What is your reading? I mean, is there a alignment by the within the government that they need to go in the right direction on these things?

That sounds good. But it also means that you basically empty the coffers of the National Social Security Fund that we're already not enough to sustain the current pension system in the medium term. So a lot, a lot needs to happen and I think the sustainability issue will then drive it. But once you, once you want to address the sustainability issue, you need to bring in a lot of elements that

common prosperity theme that is very dear. It wasn't in the central economic work conference document, but it clearly hasn't gone away. And frankly, it, it makes sense for China to now aim for something which is a more shared phase of still growth but more shared growth and, and that can be done without, without chasing away the entrepreneurs, without without controlling capital. It can be done by fairly sensible policies that would improve

the sustainability of uh of fiscal policies. Over time, it's not yet being debated that much as in fact, the East Asian Institute, we just had a conference on fiscal policy for the new era and we were well, we were honored by the presence of former Finance Minister Lo G Way. He's one of the key thinkers on

fiscal policies over the past 2025 years. And um he was also, I mean, he did express a lot of areas where he said reforms would be possible but was also less confident in stating that indeed, those reforms are already on the books. I think there's time for this and you know, this requires a good academic debates. Then the policy makers in the ministries need to put the pen to paper and see what they can, what what can be done politically. Uh and, and technically, and then you know, the overtime

that needs to, that needs to happen. It doesn't need to happen overnight. It doesn't need to happen this year. But the fiscal sustainability issue expressing the commitment by the government to say, yes, we want in the medium we want that fiscal sustainability achieve and we want fiscal instruments to play a role in common prosperity. And I would let me add a third. I would also say I want fiscal policies on budget fiscal policies to play a

role in macroeconomic stabilization. So the classic factors, The classic goals, objectives of fiscal policy, then then that would give a lot of confidence that indeed those issues will be solved in the next 5 to 10 years.

So your hand out and in this case a lot, normally you would say, well, you hand out as many as you think is sustainable is necessary and that would mean a reduction of emissions compared to before starting a cap and trade. But basically the caps were put at existing emissions. One reason that's one reason why that price is very low. There's a second effect of that cap and trade that

economists haven't really thought about yet. But it also actually makes entry much more difficult, entry into any sector, much more difficult because then you have to go out and buy those emissions. So your competitors got a handout from government on the permits, but you have to go and buy that. So it distorts competition to some extent. A text would not do that. A text would not do that. The

taxes other downsides. But the upside of a cap and trade are theoretically are theoretically that there would be smart people that invent new things to reduce emissions and then sell it or sell permits on the basis of that invention. That's the theory. I think if you look back on the experience over the past 25 years, that actually it takes different instruments to get that done. Take solar solar was not suddenly profitable because there was a cap

and trade in Europe. Solar was suddenly profitable because it was a feed in tariff, a feed in tariff on electricity production. And that worked wonderfully well. Similarly now with electric vehicles, um they become profitable because there's still heavy subsidies, it's getting less, but it's still heavy subsidies on adopting an electric vehicle. And that then brings the production to scale and that drives down costs. So I think that, that we know that that is a very efficient way of doing it.

You know, the next the next area is that that kind of policy can work is one carbon capture. And again, China can play a big role and two would be hydrogen and hydrogen is, I mean, it's nothing new and we know how to produce it, we know how to produce it in a clean way, the green hydrogen, but we don't really have a market yet and it costs too much at the moment. So putting up a feed in tariff would be a very good idea and

it would really make renewable energy tradable right now. One of the big downsides of renewables is that you can have your windmill in your backyard, but transporting it over fast, vast lengths of space is very expensive because you lose a lot in the process. China has done a lot with high voltage transmission. So within the country, they're pretty efficient. The losses are pretty limited. But you really want, you know, you really want to make use of the sun in, in Saudi Arabia, in

Australia and in Algeria. And that's probably all you need to get all the energy in the world, but they need to get it out there. Hydrogen is a fantastic way to get from A to B actually where you first make ammonia. But that's, that's a technical detail because hydrogen is a bit explosive. So you don't want to have ships exploding. So you turn it into ammonia and then you turn it back into hydrogen on the point of destination. All those processes are known. There's nothing that needs to

be invented. You just need to bring it to a scale where the costs are less than the alternatives that was done miraculously well with solar pretty well with wind, not yet with other alternatives. So, so so and cap and

trade frankly, is almost completely disconnected from that. The the only mechanism that was in place was the clean development mechanism I E and the World Bank where I used to work, they played a role in that I E they, they basically transferred money from the Eu to China and other countries to reduce their carbon emission, sort of a means of. And that was then based on the trading in the policies, the Kyoto Protocol policies that were implemented in Europe.

I think those days may simply be gone simply because it requires a level of international cooperation that may no longer be available, giving subsidies to China to become less polluting may not be the most popular political proposition at this point in time, even though it might economically be the right thing to do.

and the rest of the world because China has two advantages. One, they have a very big scale two, they have enormous manufacturing capacity and and go back to the story of solar. It was not Chinese I P, it was Australian I P and European I P and China took that used the German policy tool. German invented policy to feed in tariff. I made that a success. They were a little bit naughty because they didn't allow others to come in and there was real issues. So so frankly, there was distortion

in trade. Their same now is happening with batteries for instance, where China is conducting an industrial policy that impedes trade and it would be it would be a case that you could bring to the W T O Western countries never brought China to the W T O on except for the solar panel issue. But that was a fairly targeted issue. So there's issues with China's policy.

But at the same time, if you suppose you time or in the rest of the afternoon, you would invent the miracle, the miracle to do carbon capture in the most efficient way. Well, where would you go? You wouldn't do it in Singapore. You wouldn't probably not even in Europe because Europe is yes, it's united, but it's not really because there's still lots of countries China and bring it to scale. So that scale and the manufacturing capability to bring things to scale is enormously important.

And if you were to sort of do your own thing, you would lose that complementarity. I don't think it will be a total loss because I think some of the competition is good, some of the competition, it will also be good for other countries, for third countries that might benefit from competition between say a Western solution and a Chinese solution. But, but there would be losses as well,

the quantity that could be traded within the exchange. All of that has to come from the regulator or the government or whatever. And from that perspective, China, I suppose is even if it goes on its own and it's just being a source of competition as opposed to complementarity might, you know, work out. Um But moving from the green agenda, I want to talk a bit about tech, the tech sector regulation, of course, was a huge team for China in the last couple of years. Uh In fact,

it's not just a China thing. I mean, the rest of the world as well, their regulators and governments grappling with data privacy and oligopoly or monopoly nature of large tech firms. So what do you make of the seismic actions of the last few years? And now that we're seeing some easing of those actions? I mean, what did the employee imply for China's tech entrepreneurs and also the future of innovation in China?

If you look at some of the upsides, China, some of the concerns that have been debated for by now decades in the United States in Europe, Europe is a bit different because they never managed to basically bring about sort of a tech company at scale at the level of Google or, or Facebook or, or otherwise China has in part by keeping them out by keeping the Googles and uh Facebooks and the Amazons out.

That part was a distortion of competition or quite a question about it, but it did, it did deliver them a viable alternative. So they have, they've done well in that sense in the first two decades, when they started to result into monopolistic behavior of those platforms, China intervened, China has the political system to behave, that is a lot more complex in

the West. I recognize that, but I actually did it and they did it also with the purpose of, of indeed rectifying some of the monopolistic behaviors of uh of the Alibaba's and the J D the 10 cents of the world. So that, that seems very reasonable. Then beyond that there is something that is much more political control oriented um um like

censorship games um and, and others. And then there is the common prosperity, reducing the burden on, on the, on the middle, the middle income households by banning online tutoring. I don't know how that helps, but that was at least the stated motivation. No, because the tutoring it's not gonna go away. It's not gonna be online, it's going to be in person and then only the rich can afford the in person. So it frankly, I think that was wrong headed but but it was, that

was the stated motivation. So, so one can understand that that was a policy action. I think it was the wrong policy action but leaving that aside. So, so, so so China is now as per statement in the Central Economic Work conference. Uh you also said a number of things in Davos. And so, so they're in common water in the regulation, the regulation is not going to go away.

It will be, it will be the market will be, you know, regulated by the government so that the optimal outcome for society results not the optimal outcome for the owners of the company. And, and you know, that is, that sounds for some, that sounds for Americans, maybe that sounds scary. But, but frankly, it is the way most Europeans would think about the company. So you regulate the market and such as you get the optimal outcome. And in fact, it's

Adam Smith's first book was all about that. People would like to read people like to read the wealth of nations, but the first book was all about the moral sentiments and the, yeah, the moral cultural setting in which the market takes place. So nothing new under the sun in that sense and that will look different in China, then it will look in Europe that which is different from how it looks in the United States or how it looks in Japan. That market is not one thing, it is, it's a

social construct if you want. I think as a result and I'm sure I'm not going to make your investors happy. But as a result, the, you know, the valuation of those companies will be less, will be less than previous expectations. Okay. Previous expectation was like, oh my goodness, the sky's the limit because even if you count Alibaba and JD and others, if you add them all up, they still only have whatever 30% of the retail market and could

go to 60 or 90%. So, so I think some of that, that sort of infinite possibilities has gone second and that there are of two minds, but I think we'll find we'll find it relatively soon. And that is on the financial side because the one thing that where I think that the government in a way,

got the wrong motivation was with the fintech. Now, the fintech has built on the back of the e commerce transactions by, by Alibaba buy tents and by others was actually a very efficient way of getting money to small companies and it was a big competition of course for the banks and the banks, I think were the big beneficiaries of the crackdown on the, on the and finance and others. I think that also had real economic cost. So right now we have back return to these, promoting the policies

for credit to small and medium enterprises. Well, it wasn't an issue when and finance could provide the credits on the basis of the payment behavior of companies. They could approve your credit in, uh what was it? It was in three seconds.

I think they said that they claimed that they could do so, I think, I think they're, the government should reconsider what did they want to keep their and, and, and indeed, you know, the proof of the pudding is will and finance be able to go back to I P O. It will probably, again, we had an evaluation much less Than before before. I think the plans were to issue something that would lead to evaluation almost $300 billion. I think that's history. But still, there's still lots of value

in the evening, the regulated and finance model. So the government should go ahead. They're going to go ahead and allow that competition for the traditional banks who haven't been doing, who haven't been doing that job. It's also competition two ways yesterday may have been anticompetitive behavior in the, in the online sphere. There's also anticompetitive behavior in the traditional and the traditional industries in China. So they should address that as well.

will not be 300 billion. So a budding entrepreneur growing up in China, would they want to go down the rather challenging route of being an entrepreneur and deal with all the pain and risk of failure when the upside is going to be fundamentally lower.

And that is in the short term may be an opportunity for places such as Singapore. But but there's a risk where that people opt out earlier. So I think uncertainty on that regulatory environment, it I don't think it will stop entrepreneurial activity but it would change your entrepreneurial activity. I e you want to make money and then set up your family office in Singapore and live off the

live off the proceeds from that. That's a very different kind of entrepreneurship that brings about the very big innovation that brings that brings about the M RNA is where you need a 10 year, 15 year horizon. So with regulatory uncertainty, you shorten the horizon for entrepreneurs and they do different things. I don't think that is healthy for China and I think China would do well in really very deliberately restoring some of that regulatory certainty and regulatory certainty doesn't need.

It's almost irrespective of the political system. I mean, you know that it's this predictability in in the process is it's the fair hearings. It's the uh yeah, floating first ideas and white papers on regulations in particular areas, giving people an opportunity to talk about that. That's not all too radical and not too dissimilar from what China is already doing had been doing. So I think some of that we need to come back to restore some of the confidence.

a lot needed at home. A lot of fiscal resources were needed at home. So uh some of the overseas investment simply fell by the wayside. Second. Yes, there have been issues and some countries I won't name them accuse China of pursuing a debt trap. Diplomacy. Frankly, that is that is not in China's interest in China doesn't do that. What China does do is take more risk. And that is not always, that doesn't always pan out. But the counterfactual of that is that they have actually been

a lot more flexible in rescheduling debt. If you look at China's record on rescheduling debt, they've been really quite good at it and bringing solutions such as a debt equity swap which is maligned in international circles. But what happened with the famous humbling Total Total report was that China took an equity stake and there simply to wipe out the debt, it shouldn't have been debt financed, so probably shouldn't have been financed.

But the president of the damn president of Sri Lanka really wanted to have that report, then it should have been financed with so much debt. So the debt equity swap was actually a solution and, and the contract that Chinese contractor did to run it for 100 years was a solution for the project. People failed to see that. But there was a lot of, there was a lot of engineering, a lot of financial engineering to make the best of it still never going

to be great or not for a long time. But at least now there's a fighting chance China has done a number of other investment, just like others. You know, the World Bank had a success rate of its investments of about 70%,, 70% not 100% 70%. So it's pretty good bank. I think they've been around for a long time. So it's

not that every development finance becomes a success. The World Bank maybe does more difficult stuff like building health systems and you know, conditional cash transfers, maybe that's more difficult than infrastructure but not every, not every project became a success.

Same if China, not every project becomes a success, some of the incentives in the system as it is I e quite a decentralized mobilization of projects, it's probably less desirable if you want to make a good initiative of global connectivity, which by itself is a good idea. So long story short, I think there's a bit of a pause. China needs some of those more resources at home but it's not gone. It is key initiative of Xi Jinping,

it won't go away. Um uh It's morphing a little bit into something broader even as a global development initiative. And part of it, if you want the Belt and Road is part of the global development initiative. But as you say, it's also not just about infrastructure, it's about diplomacy, it's about policy coordination, it's about financial integration i alternatives to the dollar based system. So it's a lot more than just a bit of

infrastructure around the world. So it's not gone, it will be back and actually a lot, a big part of the investments are quite, quite okay,

Um and uh the idea that, you know, TSMC produces right next door to China, but its frontier products will not be accessible to China seems to me rather dangerous. Uh As far as the, you know, China's sense of security is concerned. Um where do you see this, this whole rivalry going?

to limit the experts of of that technology. I don't know how serious that is but clearly China might be looking for some retaliation. And of course, you want to, you want to hit those sectors that are very high priority to the country that is trying to restrict you.

There's other areas where China has an uncomfortable hold over over the U S. The U S may not may not yet be aware but more more on the more positive side of positive side on on a different take, China will of course now double down on on developing its own technology and it's hard and they have failed in the past, but in the past, they could fail because there was always an alternative right now, there is no alternative. And so it will bring a very different kind of dynamic

to the next phase of semiconductor development. And and take, take the A S M L the, you know, the extreme ultraviolet lithography that's incredibly hard to pull together with, you know, thousands of components coming from hundreds of companies. But but in the end, if you, if you take your time, you would probably be able to do it. I mean, SML didn't start with that machine. It took them 20 years to build that machine and importing lots

of technologies. So, so building a supply chain that can make an ultra field at lithography, extreme lithography that may take some time, but it's now absolutely necessary for China. So that, that's the irony. So you, you gave a very strong incentive where China failed before now you get the strongest incentive to China to succeed. So there probably would have been alternative pathways where you say, well, you know, we're going to continue to deliver you chips

for a whole range of things. So just not for areas that are linked directly to military. Uh So I think this the measures happened too broad, brushed and um second and, and that is probably more fundamental. I mean, it's, it's it's very hard to go back if the U S would not say oh no, no, but you know, we didn't mean it and you know, we're gonna be okay, the trust is gone.

So China would basically continue that that course of action, I think to, to develop alternatives and then over time it will be of a different of you need a different different ecosystem that could potentially still be narrow, say too limited to things such as semiconductors. But it could also be much border. I mean, in, in the National Security Adviser speech that announced the preview the measures that were put in place a month later by commerce.

Uh there were a number of other sectors mentioned and so China things, well, you know what sector is going to be next. So they will take a very different take on technology development. They would want to now put it to very serious use to reduce the reliance. It will be it will be difficult and it will be costly, costly for China in the short run, but it will also be costly for others because China will probably also not share some of the new technology

that they develop with other countries. The I M F has made some guesstimates because it's very hard to make estimates on what is actually cost. They said a sort of a total decoupling and technology sphere would cost about half a percent 0.6% of growth to China, but it was also cost the West quite a bit of growth. So, so it's uh

it's very unfortunate that that we are where we are. Look, it's way beyond economics, it's national security, it is politics, it is uh perceptions on what the other side wants in this world. So that's a very big conversation that we can't have on, on podcast but so complex, not going in the right direction at this, at this point. And it will have

been like, like SML uh being a Dutch person. I know that that a lot of my friends are quite unhappy because it simply caused SML market and they are the best in the world and they're proud of it. And now they can't sell to all the clients that they want to and it happens to be a very big client, China.

China plus one discussion and so on. You're seeing Korean Japanese companies, you know, trying to create multiple supply chains and so on. But what about Chinese companies themselves? With Chinese capital become very strategic around the China plus one. And by that, I mean, would we see Chinese companies trying to do M and A or acquisitions in Vietnam and Malaysia, etcetera so that they can use Vietnam Stamp.

by Chinese companies. I cannot imagine that they would, you know, put a lot of tech, tech money into, into Vietnam or Singapore and otherwise that, that they want to have on shore, that's part of their objectives. Of course, a lot of the money that will move and still, I think we're still largely talking about moving rather than actually moving

the only, you know, the very concrete case. And everybody knows that the Foxconn case where you know, they open up facilities in India that might potentially be down the road, be be uh an alternative. There's some carmakers looking at Indonesia, more beefing up of Thailand. But a lot of it is still a lot of talk because also people still like the Chinese market for European companies far more than for us companies. Frankly, they're more deeply embedded into, into,

into the Chinese economy. I mean, yes, all the apples are made in, in China, but none of them are actually made by an American company made by Taiwanese company. So the it's a very different kind of embedding than say, having a wholly owned subsidiary like B S F S that opens a $10 billion facility in Guangdong, that's bricks and mortar right there with all the risks that you can,

that you can, that you can imagine. So, so there's a lot of talk and if you look at the service of foreign investors, a lot of talk that they are now seriously looking at the way I sort of said it, look at it went from the, from the white board of the strategy department to the boardroom. So nowadays, boardroom stuff and and big investments, additional investments

in China. Now before they were almost sort of automatically approved, now they're being screened on supply chain risk, but especially vulnerability to geopolitical risk because that's the most difficult one to handle for any company because you know, you get these, these unpleasant surprises like Russia's invasion of the Ukraine who would,

who had expected that and suddenly we're there. So, so that's I think very difficult risk risk to manage and that will influence investment flows around the world, some of them from China. But China has different reasons for investing abroad in part because they become too expensive.

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