Welcome to Kobe Time, a podcast series on Markets and Economies from Devis Group Research. I'm BA chief economist. Welcoming you to our 104th episode today. It's all about China. While in the US, you have this whole story of resilient economic growth and still sticky inflation, which has combined to create this narrative of interest rates going higher for longer. The opposite is the case in China. Uh post pandemic
rebound has been underwhelming. Financial markets are listless and prove that inflation momentum is muted what to make of China's near and medium term outlook in the context of all that. Well, we have a seasoned expert with us to talk about all this. Santiago Milan is a member of Wellington Management's Global Macro strategy group. Wellington is one of the world's largest asset managers with over a trillion dollars of client assets under management.
Santiago leads their efforts in thematic analysis and sector based macro research for China and other Asian countries. He's an active participant in investment strategy groups focusing on both debt and equity markets. Santiago Milan, welcome to COVID
Time. Thank you. It's my pleasure to be here. Uh
So good to talk to you, Santiago, you and I met almost 15 years ago and uh we have met in multiple places in Asia. I was just thinking, I think we were on a trip to the Philippines once I met you in Hong Kong many times. Great to have you on the podcast.
Thank you. Yeah. No, it's great to see you. And it's been quite an adventure over the years.
Indeed. You are talking to me from Boston, but that has not been your address the past decade and a half. So reflect on what you have been doing the past decade and a half.
Sure, so well, it's been definitely an interesting decade. I would say that I've been observing uh from almost a front row seat, all of these changes and development that has been happening in China and in Asia more broadly.
And China has changed a lot in 15 years when I arrived in Hong Kong, China was at the tail end of a spectacular boom in the economy that had begun with China's accession to the WTO and uh lots of reform and opening the economy was booming, asset prices were booming everything the stock market had more than tripled in three years. And the world's leaders all came to Beijing for the 2008 Olympics, that vibe was one of pervasive optimism. And this carried through even through some of the doubts
of the global financial crisis. And indeed China did uh do a lot of the heavy lifting to get the world out of the GFC. The economy actually did deliver since then when I arrived in Hong Kong. Uh China's GDP was $3.5 trillion. It was the fourth or fifth largest economy in the world. Since then, China's GDP has grown fivefold. It's now $17 trillion plus. Um and China was supposed to grow a lot, it did
grow a lot, however, not everything was as expected. In particular, one would expect with this type of, of performance that I just described that. Well, asset prices would have done fantastic and guess what they didn't in part for, for uh structural reasons. But also because of uh this fact that I mentioned, which was that the asset prices were in a huge bubble in 2007, early 2008, the stock market in those 15 years has actually been flat or slightly up or down depending on how you measure it.
Hs CE I which is the index of China mainland listed companies in Hong Kong is actually down almost 40%. From the day I arrived in Hong Kong to the day I left in Hong Kong. So economy grew by five times stock market did nothing qualitative changes, however, have been huge and I think they're even bigger than the uh quantity changes. What are these qualitative changes? Well, first, the infrastructure stock has uh flourished in an unbelievable way when I
got to Hong Kong. Um The the first uh high speed rail line was just being inaugurated from Beijing to Tianjin. I remember I wrote it and it was really exciting now, uh the country has by far the largest high speed rail network in the world. Uh 50 or so, Chinese cities have subway systems and this connectivity infrastructure is massive and it has all been developed in the last 15 years. Education
has also changed dramatically. When I uh got to Hong Kong, there were around 2 million um graduates uh from higher education every year. This year, it will be 11 million. And finally, I'll mention one thing among many others that have changed dramatically, the development of the service economy. And I remember when I got uh to to Hong Kong and and started uh having discussions about what was the future of the Chinese economy.
There were many, many doubts about whether China would or could develop a uh really serious and successful service economy and indeed it has it's already there, there are challenges and we can talk about them. But those are my observations in the rear view mirror time to look forward.
Indeed, uh Santiago, I do wanna talk about some of the structural challenges with you in the latter part of this podcast, but let's stay with the near term for the time being. So what's your sense of China and macro at this point? So economic momentum for the second half of this year uh underwhelming worrisome. Where, where do you stand?
Yeah, absolutely. I think that um um it, it's, it's very difficult to really calibrate uh a, a message that uh targets an audience uh accurately. And the reason is that the spectrum of beliefs about the Chinese economy is very, very wide. But I agree with uh I think what you um suggested, which is that there is a lot of pervasive pessimism. Um I think that pessimism is uh has a, a
grain of truth. Uh But I wouldn't really go overboard with uh a narrative that suggests that China will collapse or that China will face a Japan like scenario in the future. Most importantly, because
China is still not a developed economy. Um But one thing to keep in mind is that the policy and institutional objectives of the Chinese government have changed significantly and this goes to a burning question and a frustration I would say for the analy community and the investment community and some of the business community, which is, you know, why aren't the policy makers as worried as we are? Uh We read headlines about a
youth unemployment rate above 20%. Um We uh see the, the the economic activity indicators come in uh worse than expected uh month after month, what's going on? Why aren't they worried?
And I think there are two answers there. The first one is that the uh authorities actually frankly uh don't see the type of negativity that the markets see they are very focused on the medium term and in the medium term, uh they feel that uh that, that, that there needs to be a lot of patience and uh they, they are uncomfortable with the type of breakneck uh uh infrastructure driven growth that was there in the past, the one that I mentioned, for example, that allowed China to
do a lot of the heavy lifting for the world to get out of the global financial crisis. And uh you know, and I know that you wanted to stick to the short term, but I'll mention one long term issue because I think it is very relevant to the short term. And that is that I think China is right now in the process of uh shifting uh or making its third big shift or big change in the policy stance in the institutional priorities of uh the uh of uh of, of, of the government and of development.
And uh what, what is the third? Well, the first one was essentially the revolution itself, the establishment of communism from the revolution in 1949. All the way until reform and opening all of the economic activity in China was politically developed, determined that led China to a situation in the seventies where
its GDP per capita was lower than sub-saharan Africa. Its um uh industrial share of the economy was lower than North Korea and it was very clear that the uh some of the development objectives of uh the the policymakers were not going to be met. And this led to the second big period of uh or institutional framework which was reform and opening. And we know what that was all about. It was about letting market forces enter
the economy and unleash massive amounts of economic activity. It worked very well in achieving development itself and growth itself. But around 10 years ago, again, China found itself with a bunch of externalities to that model that its policymakers didn't particularly like. Um And what are those externalities? They are massive uh uh environmental damage. They are a big, big inequality by some measures. Uh Chinese income inequality and also wealth inequality are even
bigger than the United States. Uh And also uh one other externality was uh that the uh open markets and uh access to uh uh uh these types of opportunities created pockets of wealth that combined with pockets of power that uh created a degree of political uh uncomfortableness that the the that the leadership was not happy with. And so now we are in the third big era of uh in institutions, policy making and governance. And let's call it the era of common prosperity for lack of a better word.
And we don't really know what this era really means just like in the beginning of reform and opening, we didn't know what it would be like, right. Now we are crossing the river by feeling the stones if you will to determine what uh the new era of common prosperity means. But one thing we know for sure, the um emphasis on growth uh at any cost and the emphasis on material advancement is not there. And that answers a lot
of this frustrating question. Why aren't the policymakers as worried as the market?
Fascinating uh you know, characterization Santiago would I would assume that that lack of clarity runs beyond the analyst community and spills over into the day to day Chinese population.
Uh And would you say that uh sort of, you know, frustration or lack of clarity as to where things are going is one of the reasons why we haven't seen a big post pandemic bump uh because that, that uncertainty clouds people's animals, ferrets and exuberance and therefore, yeah, I can go out now, but I don't think I'm going to spend a lot of money or plan for a major, you know, expansion of my company.
Absolutely. I think that's a, that's, that's very much right. Obviously, the, the the whole picture is a mosaic that is complex and includes more than just this. But this ingredient I think is very, very important. Um You see that the uh on, on this uh area, the government is not exactly standing still.
Uh Yes, there are changes and those changes create uncertainty, but you do see parts of the leadership, for example, the Premier Li Chang um frequently uh approaching the private sector and uh other uh constituents in the economy, trying to reassure them that the role of the private sector will still be uh well. Uh the the the almost the core of the Chinese uh development, producing the bulk of the employment, producing the bulk of the consumption and therefore the bulk of the momentum for
the uh Chinese economy. With that said um II I, you know, back to your point on, on the issue of confidence, it's important to remember that the three years of COVID and GEOPOLITICAL conflict and also political transition were quite traumatic uh for the Chinese consumer and business environment much more. So I would say than for the rest of the world, this is not just about the lockdowns, this is also about some of these
signals about changes in institutions. I would say one big one that the markets of course were very much affected by uh was the regulation uh of the uh uh uh uh I would say of uh certain areas of private services including uh platform uh internet companies. And of course, uh the uh private education sector and those two things among others uh got people very, very nervous about the overall direction of the Chinese economy. And now we are again, I would say in this process of discovery
of what the true environment is like. My assessment of this is that the true environment is definitely not as
it was in the era of reform and opening. So it certainly is different but it probably is not as negative as some of the more negative narratives that there are out there and probably not as negative or very likely not as negative as what some of the more depressed areas of the Chinese stock market are suggesting in particular, I would point to these Hong Kong listed Chinese stocks that are owned mostly by international investors which are trading at some of the lowest valuations depending on
how you measure it in 20 years, sometimes more than 20 years,
right? So what does that mean for the financial markets in the near term do is is a valuation attractive because it's low or the valuation is not attractive because the low evaluation is telling us something
you have to ask a difficult question, didn't you? Uh Yeah, I think, I think um uh well, you know, the first thing I would say is that if you look at equities, um uh there is a very, very big uh segmentation in the market offshore and onshore. Uh My view is that the offshore equities are simply too cheap even if we factor in uh uh the the the fact that the the the developments are actually concerning. Um I uh frequently describe uh the valuation for these
stocks as the inverse of a bubble. Why is that a useful concept? Well, a bubble on the upside typically forms because the market recognizes a fundamental, mentally structurally positive aspect of a market or an industry. The internet today, what we're doing today actually, right now in this conversation is probably 20 times better than what anyone imagined in the year 2000. And yet it was time to sell stocks. Um back to the China example, I think the market
did recognize that there are some reasons for concern. As I said there, this is a big change in institutions. This is a big change in the policy stance, lots of uncertainty is involved. But the way that these stocks are trading at uh you know, single digit uh trend pe s and valuations that are lower than they have been in a multiple decades suggests to me that this is overdone and that uh there is upside in uh the offshore stocks, the onshore stocks are much more complicated on the surface.
They look in my view basically fairly valued. But the problem is that once you open up the hood and you see uh you, you have a look at the stocks that uh investors actually like that bottom up analysts uh find quality in, you find that lots of these stocks are actually again in a segmented market trading at very very high valuations. And so it is a very difficult job to be a China stock picker,
right? I mean, like just this year, I mean, we've seen China bank stocks and telecom stocks rally uh something that they haven't done in a very long time. And the darlings of recent years, the tech stocks in particular
have done absolutely nothing. Uh onshore or offshore. Um Santiago earlier, you were talking about authorities have begun to make overtures to market participants saying that, you know, the tumult of recent years, you know, it's behind us, things are gonna be constructive, private sector has an important role. So go out innovate, invest, we're, we're behind you. So let's talk about the whole regulatory backlash of the last
couple of years. And is it indeed your sense that it is where reflection point that they are not gonna be as much backlash going forward? Um I sort of think you sort of touched upon the services sector, particularly education tach for me, gaming, crypto other things come to mind and of course, general data privacy issue a around which, you know, some tech companies have been uh really, really, you know, uh hurt by,
by the uh regulatory uh out. Uh I was gonna say overreach, but rather regulatory action. So where are we with respect to the whole regulatory framework?
Hm. Yeah. No, that's a great question. Um My view uh you know, as, as, as, as typical is that, you know, it's a, it's a, it's a mixed bag. I I would say that um the, the, the place I would start is that the regulation of these sectors was inevitable and it's not in just inevitable in China, it's inevitable pretty much everywhere else in the world. A lot of the regulatory steps that really got the market spooked were very similar types of data regulation and
anti monopoly regulation. Uh That for example, Europe has now with that said, the elephant in the room is that Europe has no world class internet companies and it is probably no coincidence that they have strong regulation and no world class internet companies.
The strong regulation in China, I think is unlikely to eliminate the internet companies altogether as it did in Europe or the big ones at least because uh China is essentially a protected market and it is very difficult for foreigners to compete in that market because of the obvious reasons.
Um But uh nevertheless, uh you know, it's, it's, it's important to uh to realize that these regulations are there and it's not, they're not going to go away with that said um within the bird cage if, if you will of these regulations, uh there is uh no reason why these companies cannot continue to grow and to grow a lot. It's going to be a more competitive landscape than it is in other places. Valuations definitely need to adjust for these, for this new reality, but they have already a adjusted.
And the last thing that I would say is that the government seems to be kind of of two minds about the service sector and service driven GDP growth. On the one hand, uh lots of the leadership recognizes that the service sector is essentially the engine of job creation in China. In fact, manufacturing employment in China peaked around a decade ago, has been coming down ever since. Uh manufacturing output continues to rise because of automation and
other things. Um And uh you know, this role uh as an employment creator is very uh important and valued by the, the leadership. And they are uh are very unlikely, I would say to kill this goose that lays golden eggs in that sense. And the last thing that I would say is that there's also a recognition by the leadership that the service sector. And I would say this interconnected digital uh service uh sector, the world of platform,
platform economies and so on virtual worlds. Um uh It is very, very important to essentially uh do something very basic but critical for economic development, which is to enlarge the market. The market is much, much bigger when uh there is so much connectivity when uh each individual supplier has access to not just a handful of customers around their neighborhood,
but to a huge national market. And uh therefore, uh the the the the the service sector in general and digital interconnected services in particular are something that uh is unlikely to be crushed by the government. The heavy lifting of the regulation in my view is already done.
So, speaking of digital services uh that this year is all about large language models. And A I and we have seen amazing run up in still a group of stocks in the US around that narrative seem to be missing that in the context of China. Although like if I follow South China Morning Post, there are stories that are coming out about how companies from Alibaba or Baidu are sort of bringing in various layers of
A I capability. The authorities are engaging the private sector and setting up some degree of thinking and uniform standards about A I. Um but somehow or the other, it's not really catching the global investors interest.
Yeah, I think that's uh that's interesting. I mean, to your point, uh uh there are places where it is catching in interest and in particular in the shares when you look at certain comp companies that are geared towards this, some of which you mentioned, um uh they, they have performed quite well. Uh But uh but I, I definitely agree that overall there isn't that sense of hype?
Um I, I would say that uh that, that, that a lack of hype uh does not mean that there is an absence of uh the A I uh development in China. I think it's important to remember that the IP for A I uh is uh very much uh uh well, well, China is, is a, a very, very uh important player in generating the IP. If you look at, for example, the proportion of cited peer reviewed papers uh in the top 1%. Um China is uh I I think number one or close to number one.
And if you look at, as you said, uh the development of the A I, uh there are multiple companies that are doing this. Um One thing to keep in mind is that China as it was with other digital services is going to take a much more conservative attitude towards the regulation of this. And perhaps a lot of what is uh keeping uh the well the overall participants and the investors from reaching a stage of euphoria is the uncertainty about
what that regulation means. I understand that. And as you might guess, you know, my opinion lands somewhere in the middle, I don't think that a hype around A I in China is merited because there is uncertainty. But I also hear a lot of pessimism that China will fall far behind the rest of the world in A I because of some of these issues and also because of the
geopolitical issues having to do with semiconductors. And my view is that um uh in, in the medium term, uh China will continue to be at the forefront of these developments. Uh and we will see uh huge amounts of applications of A I. Uh One last thing um is that uh A I in China is also uh much more present than in other parts of the world in things like city management,
smart cities. Uh And uh this is probably under recognized uh how much efficiency uh gains there are from this, in particular, in a world that tends to look at these headlines through the uh dark, darker side of the narrative which uh relates to control of the population and so on.
Santiago, not now, but rather six years ago, I was using Ride hailing apps in Shanghai and they had simultaneous translation. Uh And uh I was sort of, you know, reading about the way uh the supply of ride hailing cars were managed through their A I framework uh calibrating toward, you know, rush hour versus not, I mean, these things, they have been all hats at
it for a while. Um So I fully agree with you that uh the, the layers of application, it's not like something that began or ending with Chad GP T they've been at it for a while.
Yeah, that's right. Uh you know, image recognition is a huge part of A I. And uh you know, China was there from the beginning. Uh their uh companies uh and, and their institutes were um you know, at the, at the forefront of uh their competitions in image recognition, for example, which was uh you know, one of the first big steps in the development of A I and now I, I'll, I'll give you an example
um of something that I saw recently. Uh in, in China, which was um a, a uh, a service that allows for companies that uh do the maintenance and the checking of uh power lines uh to do this without people. It used to be that you had to have armies of thousands of people that would physically climb each utility pole and check to make sure everything is. All right now with uh computer vision and image recognition and artificial intelligence. This is done in a period of three days using
three people that manage drones uh remotely. Uh whereas it used to take thousands of people uh more than a month to do it in the past. So these are the types of things that can happen with the development of A I
um Santiago earlier at the very beginning of this conversation, when we were talking about you coming to Hong Kong 15 years ago and you mentioned that China played a very important counter cital role at that time with very large stimulus measures just as the world economy was struggling under the global financial crisis. But of course, the legacy of that big stimulus was uh you know, mother of all debt formation and that trend has just progressively gotten worse over the
past decade and a half. So let's talk a little bit about China's debt overhang. Um Looking at other countries, you used to work on Latin American countries, you've looked at other examples around the EM and DM space. What are the lessons from other countries with debt management that China can sort of embrace to, to deal with this, this debilitating problem.
Yeah. Yeah. No, that, that, that's a very uh good question. And it also begs the question, you know, is China different uh because of its size because of uh it, its, its policy. I would say there are two big lessons from other countries. The first one is, don't rely on the kindness of strangers to fund your financing gaps. And the second one is to ensure that you can coordinate the uh players uh that are engaged in the distribution of the uh of of the debt if it has to be uh restructured.
Uh China has those two factors. It, its debt is owned uh almost entirely domestically, very, very little exposure to uh foreign funding. Uh and China is an excess saver rather than an importer of savings. And that could be problematic in other areas, but it's definitely not a problematic when, when, when we think about it in terms of the debt angle. Um and um uh and, and, and I, I would, I
would say maybe I'll, I'll finish here. Um China definitely does have uh the these uh these factors that uh are, are lessons learned from other places, but that doesn't mean that the debt isn't a problem,
right? So I um normally, you know, this is my old IMF training that, you know, the the debt dynamic equation, which is a function of, you know, your real interest rate and real GDP growth rate. If you through financial repression, for example, keep interest rates very, very low. So it sort of turned negative in real terms, you can afford
a lot of debt. And I think China by virtue of having a somewhat of a closed capital account can have monetary policy that is, you know, attuned to financial repression while the rest of the world
is struggling with high interest rates and high inflation. Um But the, the bad thing out of all that is, of course, you know, you then end up having zombie companies like Japan or you stay with a slow burn uh as opposed to, you know, recognizing issues quickly uh clearly, those authorities don't have an appetite to remove the band aid, right? It would be a slow
burn. Um Yes. Uh I, I would say that the, the general answer to your question is uh yes. Uh I now, 11 thing though uh about the near term and uh uh you know, well, actually the present is that there is a recognition that perhaps perhaps given some of the factors that you are talking about, which is a relatively stable environment that is uh facilitated by financial repression uh that there could be steps taken
to uh tackle at least the local government. Uh and LGFB, local, local government, financial vehicle and provincial debt uh situation. Um That is a possibility in the near term. Uh It will be complex and full of uncertainty because the government needs to take action while reducing the risk of moral hazard. It needs to restructure things and promise that uh you know, they will never be restructured again. Um uh This will not be a quick or simple process.
It probably begins with uh centralized audit of all of the provinces and all of the debt. Uh and to figure out how to match the liabilities with assets to figure out what is the solvency of these provinces. And they probably know that already. But the reason why an audit would be necessary in the beginning is to make it all common information so that everybody knows how everybody else is doing
from there. Uh figure out what uh a portion of the debt problem can be resolved by simply uh matching assets with liabilities and selling assets to CRE to free up um uh cash flows and so on. And then, um uh you know, after that, uh having the diff more difficult steps of actually restructuring some of these debts and figuring out where the financing is going to be, where the funding is going to be uh
to do this. Um Despite that, uh however, I would say that the big picture remains that uh Chinese growth and this is somewhat unique to China. But there are a lot of Asian countries that share this future is very much debt driven and those issues that you mentioned are very real, not just zombie companies uh that essentially live beyond their
useful purpose, but also from an equity investor perspective. It's very important to remember that over the medium term, excessive reliance on debt will eat into the cash flows to equity. And that I think is one of the reasons for this lackluster long term economic uh market performance that I discussed earlier.
Very, very interesting. Um Let's talk a little bit more in the context of China's consolidated balance sheet if you will. So the country has large debt domestically well known. And to your point, there are ways to address it, nothing simple but can be addressed um with some degree of sort of, you know, brave policy making. Uh but we talk separately but we don't combine it with the other issue which is that China is a very large creditor internationally.
So net net, does it all work out to China's favor?
Yeah. Yeah, that's a, that's, that's another great question. Um I would say net net, it's, it's uh it's very difficult to, to really think about anybody's favor. Um The fact that there are uh large uh foreign assets I think is very important in the sense that uh as well as you very well know from uh the, the the story of what drives financial instability and what drives financial crisis.
There is almost always a big, big link between international pressure on the currency and assets and uh domestic financial instability. And so China is actually similar to Japan in this sense, in the sense that uh uh investors might be looking at a huge, huge stock of liabilities, but they also are looking at a huge, huge stock of future foreign exchange to match those liabilities. And that makes it much more difficult for a run on the currency to become a trigger for massive financial
instability. And this is true both in terms of the stock. Therefore, you know, the the the the assets themselves and also the flow China continues to be a net saver with a significant current account surplus in absolute terms, even if it's not as big as it used to be relative to GDP.
So I would say that this uh external credit or status of China is something that is definitely significant and important doesn't get us all the way out of the woods, but it does signify a much more stable uh likely dynamics uh than uh if it were the case that China did not have this
right. So the country is a major creditor nation has large stocks of reserves. And I've been reading certain threads in and on Twitter lately about how there could be almost equal amount of sort of missing reserves or unreported reserves on the balance sheet of multilateral uh agencies uh run by the Chinese authorities. Um But at the same time, we do have quite a few large Chinese corporations who have issued substantial amount of foreign currency debt in recent years and decades.
And they have huge wall of financing coming up. And this is happening at a time when international interest rates have gone up a lot dollar liquidity, although not as tight as we would have feared a year ago because of QT and higher interest rates, but still not as ample as they used to be and going forward would get tighter. Um So us monetary policy tightening, it will have an impact on Chinese companies who want to refinance their debt.
Absolutely. And um you know what I would say is that the offshore corporate or the dollar corporate uh market for Chinese companies is very, very distorted. And so I it definitely affects the overall macro, it definitely affects these companies in a negative way. But again, I wouldn't really be uh uh quick to say that this will be a source of massive overall macro instability. A few things are worth noting about that
offshore uh dollar denominated corporate market. The first one is that it is almost entirely dominated by real estate firms. And that is peculiar if we think about it because real estate firms are not natural borrowers in international markets because they don't have revenue in US dollars. So this actually adds uh you know, to the, to, to, to the concerns that you meant that you mentioned uh in particular, if we think about the fact that Renminbi is now depreciating as well as
uh having higher us interest rates. So why are the these real estate developers out there in the uh dollar corporate market? Well, the reason has to do with some of the repression issues that you mentioned earlier, uh the Chinese government as part of its policy uh has been trying to uh move away from what it sees as a dependence on real estate development for its economic growth. And therefore, has made it very difficult historically
for these firms to borrow in the onshore market. And their solution to that problem has in many cases been to go uh abroad. Um So the the there there is that issue there. And then finally, I think to complete the picture, we need an idea of whether this problem which is a real problem. I I agree. Uh III I is is big enough to,
to make us concerned about systemic instability. And there I would say the answer is that it is unlikely because even though it is big by global standards, because China is huge, it's the second biggest economy in the world in nominal terms. Um it is very, very small relative to the stock of liabilities or the stock of interest payments uh in
the overall system. And again, it is also very much segmented, uh there are capital controls and uh that this point that you mentioned earlier about China being a net creditor and a net saver is also important when we think about these factors. So I wouldn't be too concerned.
Right. Right. This is not a dollar deficient economy by any stretch of imagination. Um, bit of a jump, not necessarily related to what we've been talking about, but this is something that you and I have spoken about in the past and I would really want you to weigh in. Um, we talk a lot about China sort of running out of engines of growth. Uh But we also recognize is that there is one area of structural shift where China has massive scope for investment and growth and innovation
and they're added already, which is climate change. So give me a little sense of your assessment on what is China doing with respect to climate change?
That is a great question. Um And I think that China is very much misunderstood for good reason, it's very difficult to understand China in terms of climate change. On the one hand, if you look at a snapshot of China, what you see is by far, the world's biggest emitter of carbon emitting almost as much more than at the, the, the US and Europe put together and you see a country where emissions have not yet peaked, whereas in most of the developed world, they have already peaked.
And so there is room uh to ask for more from China if you look at that snapshot. But if
you look underneath the surface again. Or if you look at the other side, China is also the world's biggest investor uh in renewable technologies and in uh renewable capacity again, more than the US and Europe put together uh A a and if you look at what China is doing in terms of the energy transition in general, I would say that China is positioning itself and has already positioned itself as what I call the Saudi Arabia of renewables.
Um China, I I uh uh if you look at different renewable technology segments, uh accounts for anywhere between more than half to sometimes 95% of the production or the capacity. Uh it the 95% would be for things like poly silicon. Um and this uh puts China in a really important position as the world itself engages in the energy transition. I think the energy transition is the single biggest uh macroeconomic structural change that is happening in the next
few decades. And China is there to be uh uh a, a near monopoly or a provider of a lot of those technologies. Now, of course, this uh does not mix well with the geopolitical tension and friction that we're seeing across the world. Uh But China is definitely uh uh AAA very important player in climate and global decarbonization and will remain so for a very long time.
Yeah. Um I think, you know, some of our mutual acquaintances who have worked in Hong Kong financial sector and have gone on to the government of China. I mean, they sort of tell us that uh in terms of driver of growth, whether it is investment or innovation in the private sector and this is one area, the authorities have absolutely no qualms about holding them back. They're sort of unleashing all the talent that they can and it is very, very encouraging.
Well, finally question on the role of Chinese capital. Uh I mean, every time I travel around the world meet clients counterparts, it's all about China plus one corporate strategy and who's strategizing and reducing their presence in China and building in ASEAN? And I, I think that's an interesting narrative and there's a lot to talk about it, but a lot of the times what is absent in that conversation is what are the Chinese companies doing in the middle of all these
uh shifts? Uh So talk to me a little bit about the role of Chinese capital. I mean, are the Chinese companies just sitting around and watching the whole world reshape or they're actually part of this uh reshaping that is going on?
Yeah, another great question. I'm uh and I think that this is also very much underappreciated. I think it's a huge development. Uh And, and uh the reality of what the Chinese companies are doing is much more complex than is commonly described. The common narrative is that China has become expensive and firms are choosing to manufacture elsewhere. And that the geopolitical tension is driving investment away from China. And both of those factors have a grain of truth, of course. But
the dynamics are much, much more complicated. Um a little fact to set the the the landscape here uh a few years ago, uh on a huge proportion of China's outward foreign direct investment was directed towards securing natural resources. It was basically in mining Chinese companies were going out there to find oil resources, coal resources, lots of other resources and some of that is still going on. Of course, including with critical minerals for the energy transition. But the largest area of
Chinese outward FD I now is in manufacturing. Chinese companies have reached the point in the global development where they're taking the the the outsourcing steps that developed world companies took a few decades ago. Importantly here and probably under recognized in many parts of the world is that the global appeal of Chinese electronics, certain kinds of industrial goods and especially as I mentioned earlier, the energy transition technologies is huge. Last year, China became
the second largest exporter of automobiles in the world. It overtook Germany this year. It is set to overtake Japan and become number one now just like in the developed country. Uh companies and the the developed world, Chinese companies are starting to follow their new customers and build facilities that cater to local markets. So you see all of these Chinese companies producing vehicles, industrial goods, uh energy transition technology set up shop, not only in Southeast Asia, but also
in parts of Europe in the Americas. And even despite the geopolitical headwinds, lots of Chinese companies are trying marginal amounts successfully to actually invest in the United States uh itself. And so uh China is an active participant uh in uh the global reshuffling of supply chains in the regionalization of supply chains is also very important here. I think that much more than decoupling. We should talk about regionalization and the world
uh shifting to different blocks. And of course, the Asian block of, of which China is the central participant is uh already and likely to uh increase in importance as the most important uh part of, of, of the, of the, of the world's uh supply chains. So um maybe I'll, I'll leave it there. I think that uh these developments are, are very, very important, they will determine what the global production landscape looks like in the future. And it's important to understand that uh China is not
uh a, a uh a bystander there. They are an active participant in this process.
Uh Santiago, the common refrain in this conversation that Jovan and I have just had is the sort of the urge to, for people to sort of appreciate the complexities of a country that is as large as China, I think uh brushing it with, you know, one broad stroke is a, you know, is a mistake, but it's also a dangerous mistake. So I hope that, you know, the listeners who are, you know, fortunate enough to hear your wisdom today would at least take that key insight away. Uh I
thank you so much for your time and insights. This has been a fascinating conversation.
Thank you timer. Thank you for having me.
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