Latest / Sharp China Podcast / Sharp China: Stabilization Measures and Export Questions; Taiwan Considers US Arms Purchase; TSMC Halts Advanced Chip Sales to China; Trump Tea Leaves and Cabinet Picks

Transcript

Sharp China: Stabilization Measures and Export Questions; Taiwan Considers US Arms Purchase; TSMC Halts Advanced Chip Sales to China; Trump Tea Leaves and Cabinet Picks · Sharp China Podcast

• 0:04
  SPEAKER_01: Hello and welcome to Sharp China.
• 0:06
  SPEAKER_01: I'm Andrew Sharp and you are listening to a free preview of today's episode.
• 0:12
  SPEAKER_01: Hello, and welcome back to another episode of Sharp China.
• 0:16
  SPEAKER_01: I'm Andrew Sharp, and on the other line, Bill Bishop.
• 0:20
  SPEAKER_01: Bill, how you doing?
• 0:22
  SPEAKER_01: I'm well, Andrew.
• 0:23
  SPEAKER_01: Hi, everybody.
• 0:23
  SPEAKER_01: Hope everyone's doing well.
• 0:25
  SPEAKER_01: Yeah, it's nice to be back.
• 0:27
  SPEAKER_01: It's another beautiful week in D.C.,
• 0:29
  SPEAKER_01: and honestly,
• 0:30
  SPEAKER_01: talking to you,
• 0:31
  SPEAKER_01: I ran into you on Monday,
• 0:32
  SPEAKER_01: and we thought things might be slow coming out of the holiday weekend,
• 0:36
  SPEAKER_01: but there's actually a bunch of different news to hit on this episode,
• 0:40
  SPEAKER_01: so...
• 0:40
  SPEAKER_00: Yeah.
• 0:41
  SPEAKER_00: Well, and the thing is, is sort of remembering back to Trump one, it's never slow.
• 0:46
  SPEAKER_00: And we are,
• 0:46
  SPEAKER_00: even though Biden is technically still the president,
• 0:49
  SPEAKER_00: you know,
• 0:49
  SPEAKER_00: all the air has been sucked out of that lame duck administration.
• 0:52
  SPEAKER_00: And so the focus, of course, is Trump, at least when we're talking about China.
• 0:55
  SPEAKER_00: So, um,
• 0:57
  SPEAKER_00: Yeah, that's part of the it's exhausting on a whole bunch of levels.
• 1:01
  SPEAKER_00: And it's only getting started.
• 1:03
  SPEAKER_01: Right.
• 1:03
  SPEAKER_01: I mean, fast and furious.
• 1:05
  SPEAKER_01: The last 24 hours, there have been new nominees and appointees to the administration.
• 1:11
  SPEAKER_01: There's speculation about what Trump might want to do.
• 1:15
  SPEAKER_01: And so we'll get to all of that with the second half of the episode.
• 1:19
  SPEAKER_01: We will start,
• 1:20
  SPEAKER_01: though,
• 1:21
  SPEAKER_01: with last Friday's announcements from the NPC Standing Committee,
• 1:25
  SPEAKER_01: and I'll read from Cynicism Monday.
• 1:28
  SPEAKER_01: Don't call it stimulus, you wrote.
• 1:30
  SPEAKER_01: The package announced Friday to help with hidden local government debts should help
• 1:35
  SPEAKER_01: stabilize local government finances,
• 1:37
  SPEAKER_01: but it is not the stimulus many were hoping for.
• 1:40
  SPEAKER_01: While this package, along with what the government calls a basket of incremental policies—
• 1:46
  SPEAKER_01: should stabilize the economy for now.
• 1:49
  SPEAKER_01: So far,
• 1:49
  SPEAKER_01: they have done little to address the growing deflationary pressure or the massive
• 1:54
  SPEAKER_01: trade pressure Trump may unleash next year.
• 1:58
  SPEAKER_01: So the announcements largely focused on relief for state governments,
• 2:03
  SPEAKER_01: the rumors of a more ambitious stimulus package once again proved unfounded,
• 2:10
  SPEAKER_01: at least for now.
• 2:11
  SPEAKER_01: How are the animal spirits after this announcement?
• 2:14
  SPEAKER_01: The
• 2:14
  SPEAKER_00: I think the animal spirits have been a bit exercised by this whole process.
• 2:18
  SPEAKER_00: What was interesting is in the press conference on Friday.
• 2:21
  SPEAKER_00: So actually it turned out,
• 2:23
  SPEAKER_00: you know,
• 2:23
  SPEAKER_00: I had written about it and there had been talked in a previous version.
• 2:26
  SPEAKER_00: You didn't hear about it until late on the evening of the close of that NPC standing committee session.
• 2:32
  SPEAKER_00: And it was announced on the state television, on the CCTV news.
• 2:37
  SPEAKER_00: This time they actually held a press conference.
• 2:38
  SPEAKER_00: They're trying to be more communicative.
• 2:41
  SPEAKER_00: What was interesting in that press conference was the revelation,
• 2:44
  SPEAKER_00: among other things,
• 2:44
  SPEAKER_00: that the package had been approved back in September by the Politburo Standing Committee,
• 2:48
  SPEAKER_00: which then had met,
• 2:50
  SPEAKER_00: I think,
• 2:50
  SPEAKER_00: the day or the two days before the actual Politburo,
• 2:53
  SPEAKER_00: where we got that Politburo,
• 2:54
  SPEAKER_00: this sort of out-of-cycle Politburo meeting that had us an agenda economy.
• 2:59
  SPEAKER_00: And so again, this has been a done deal.
• 3:02
  SPEAKER_00: They went through the process.
• 3:03
  SPEAKER_00: But it's just one of those things where I think some of the frustrations about the
• 3:09
  SPEAKER_00: system is they raised a whole bunch of expectations.
• 3:12
  SPEAKER_00: Then, oh, we have to go through this process.
• 3:14
  SPEAKER_00: They had one particularly bad press conference soon after the October holiday,
• 3:19
  SPEAKER_00: which deflated things a bit.
• 3:21
  SPEAKER_00: And then you sort of had various leaks and speculations.
• 3:23
  SPEAKER_00: I think Chai Xin back in mid-October had probably the closest to accurate first
• 3:28
  SPEAKER_00: report on what this would be.
• 3:30
  SPEAKER_00: And it's just like,
• 3:31
  SPEAKER_00: you know,
• 3:31
  SPEAKER_00: they could have just set it then and set expectations and moved on instead of
• 3:36
  SPEAKER_00: building up this five plus week set of expectations and allowing rumors to fly that,
• 3:42
  SPEAKER_00: oh,
• 3:42
  SPEAKER_00: maybe it'll be even more.
• 3:43
  SPEAKER_00: Maybe it'll be more for, you know, a couple trillion for consumption, you know, yada, yada, yada.
• 3:48
  SPEAKER_00: And then inevitably what comes out then is disappointing.
• 3:51
  SPEAKER_01: Mm-hmm.
• 3:52
  SPEAKER_01: It's interesting because this sort of took on a life of its own in full view of the party.
• 3:57
  SPEAKER_01: And there was never any intervention to manage expectations.
• 4:02
  SPEAKER_00: Well, they did.
• 4:02
  SPEAKER_00: I mean, I think they did because they kept talking about how this is a basket of incremental policies.
• 4:07
  SPEAKER_00: And,
• 4:08
  SPEAKER_00: you know,
• 4:08
  SPEAKER_00: they're trying to,
• 4:09
  SPEAKER_00: you know,
• 4:09
  SPEAKER_00: they've been talking about how it's not just,
• 4:11
  SPEAKER_00: you know,
• 4:11
  SPEAKER_00: this long waited NPC standing committee meeting,
• 4:14
  SPEAKER_00: but all these other things they've done from the People's Bank of China.
• 4:18
  SPEAKER_00: And it's just very, you know, dealing, cutting mortgage rates, cutting down payment rates.
• 4:23
  SPEAKER_00: relaxing housing purchase restrictions, et cetera.
• 4:25
  SPEAKER_00: There's a long list of consumption upgrade stuff or consumption swapping, I guess.
• 4:33
  SPEAKER_00: Basically, you can trade in your old stuff for new things.
• 4:36
  SPEAKER_00: They talk about this basket of incremental policies and...
• 4:40
  SPEAKER_00: The problem is the market could really run because these animal spirits have been unleashed,
• 4:45
  SPEAKER_00: but they needed more than incrementalism.
• 4:47
  SPEAKER_00: And so I think now it's kind of back to reality,
• 4:51
  SPEAKER_00: which is...
• 4:52
  SPEAKER_00: And it's interesting because especially the way Pangongsheng talked about the
• 4:57
  SPEAKER_00: facilities for the $500 billion that qualified firms could borrow to buy stock,
• 5:03
  SPEAKER_00: and then if that's not enough,
• 5:04
  SPEAKER_00: we'll do more,
• 5:05
  SPEAKER_00: and that's not do more.
• 5:07
  SPEAKER_00: It feels like there were some...
• 5:08
  SPEAKER_00: a little bit of cross purposes in the bureaucracy because that messaging was really
• 5:13
  SPEAKER_00: more of a,
• 5:13
  SPEAKER_00: you know,
• 5:14
  SPEAKER_00: at least it was taken by the investors,
• 5:16
  SPEAKER_00: by investors in the market to let's get,
• 5:18
  SPEAKER_00: you know,
• 5:18
  SPEAKER_00: we're going to get the market up and things are going to really move.
• 5:20
  SPEAKER_00: Now though, we're back to, okay, it's just, they're just going to grind away.
• 5:23
  SPEAKER_00: And, and so I think that,
• 5:25
  SPEAKER_00: It's certainly from...
• 5:28
  SPEAKER_00: I go back to my point in a few podcasts ago where I think it's still very possible
• 5:33
  SPEAKER_00: you'll have a significant difference between what happens on the A-share onshore
• 5:36
  SPEAKER_00: markets in Hong Kong or the overseas list of Chinese shares,
• 5:39
  SPEAKER_00: where I think there still is...
• 5:43
  SPEAKER_00: still the possibility that you'll see more of a quote unquote bull market on the A shares.
• 5:47
  SPEAKER_00: I think though,
• 5:47
  SPEAKER_00: when you look at Hong Kong,
• 5:49
  SPEAKER_00: we look at the Chinese shares overseas between this,
• 5:53
  SPEAKER_00: I think some communication issues and this incrementalism and the fact that it
• 5:56
  SPEAKER_00: really is focused on stabilization versus stimulus,
• 6:00
  SPEAKER_00: as well as now what's coming,
• 6:02
  SPEAKER_00: what's likely coming with Trump and the pressures that are going to be put upon the
• 6:05
  SPEAKER_00: Chinese economy by the high probability of some pretty significant tariffs.
• 6:10
  SPEAKER_00: and all sorts of other decoupling pressures from the US government,
• 6:14
  SPEAKER_00: I think that that makes it even harder now for foreign investors to really want to
• 6:21
  SPEAKER_00: start putting more money back into Chinese equities.
• 6:24
  SPEAKER_01: Right.
• 6:25
  SPEAKER_01: Well, and you mentioned the reporting from Saishin earlier this fall.
• 6:29
  SPEAKER_01: There was also a Saishin story this week that said a growing consensus is emerging
• 6:34
  SPEAKER_01: around strengthening demand side management with macroeconomic policies shifting
• 6:39
  SPEAKER_01: from an investment led focused.
• 6:41
  SPEAKER_01: to a balanced approach that gives equal priority to consumption and investment with
• 6:46
  SPEAKER_01: greater emphasis on consumption,
• 6:49
  SPEAKER_01: said an expert close to the PBOC.
• 6:51
  SPEAKER_01: Going forward,
• 6:52
  SPEAKER_01: as more supportive policies are rolled out,
• 6:55
  SPEAKER_01: deepening reforms will be essential to significantly expand domestic demand.
• 7:00
  SPEAKER_01: So what did you make of that report?
• 7:02
  SPEAKER_01: Because one of the things we were talking about earlier in the fall is,
• 7:06
  SPEAKER_01: all right,
• 7:06
  SPEAKER_01: maybe the other shoe will drop after the National People's Congress Standing
• 7:11
  SPEAKER_01: Committee meets and there will be more done on the consumption side.
• 7:15
  SPEAKER_01: It sounds like there may be more done in the next several months to stimulate
• 7:20
  SPEAKER_01: domestic consumption,
• 7:22
  SPEAKER_01: but I don't know.
• 7:23
  SPEAKER_00: So two things.
• 7:25
  SPEAKER_00: One is I think that fits with the incrementalism
• 7:30
  SPEAKER_00: Three things, actually.
• 7:31
  SPEAKER_00: Second,
• 7:33
  SPEAKER_00: again,
• 7:34
  SPEAKER_00: it's leaking to Taishi and something's coming without specificity,
• 7:38
  SPEAKER_00: which,
• 7:38
  SPEAKER_00: again,
• 7:38
  SPEAKER_00: I think is a...
• 7:41
  SPEAKER_00: Maybe they think they're managing expectations to give confidence.
• 7:44
  SPEAKER_01: That's what I was referring to earlier because they keep doing these sort of vague promises.
• 7:49
  SPEAKER_01: And it's clear that markets are reading a lot into what's being promised.
• 7:54
  SPEAKER_01: And there thus far has not been any sort of material...
• 7:58
  SPEAKER_00: Well,
• 7:58
  SPEAKER_00: I think now,
• 7:59
  SPEAKER_00: though,
• 7:59
  SPEAKER_00: the problem is I think more and more people feel burned by what happened at the end
• 8:02
  SPEAKER_00: of September and October.
• 8:05
  SPEAKER_00: And then the third point is just that when they talk about things like deepening
• 8:10
  SPEAKER_00: reforms will be essential to significantly expand the massive demand,
• 8:13
  SPEAKER_00: that goes back to the third plenum at the end of July.
• 8:16
  SPEAKER_00: And I think they must be talking about reforms around basically to deal with things
• 8:21
  SPEAKER_00: like hukou,
• 8:23
  SPEAKER_00: medical insurance,
• 8:24
  SPEAKER_00: retirement,
• 8:27
  SPEAKER_00: education-related expenses,
• 8:29
  SPEAKER_00: so that people feel like they maybe don't have to save as much so they can start
• 8:33
  SPEAKER_00: spending more money.
• 8:34
  SPEAKER_00: Right.
• 8:35
  SPEAKER_00: But again,
• 8:36
  SPEAKER_00: and that was the list of reforms from the third plenum could be really interesting
• 8:43
  SPEAKER_00: if they're implemented.
• 8:45
  SPEAKER_00: And I think they put a timeline on it.
• 8:47
  SPEAKER_00: So we should expect implementation.
• 8:49
  SPEAKER_00: I guess it's more about sort of an expectations management and how the way that
• 8:57
  SPEAKER_00: some of the talk at the end of September,
• 8:59
  SPEAKER_00: I think specifically from the PBOC,
• 9:01
  SPEAKER_00: from Pangongsheng,
• 9:02
  SPEAKER_00: was viewed in the market versus what's really happening in terms of this more of a
• 9:08
  SPEAKER_00: focus on stabilization and incrementalism.
• 9:11
  SPEAKER_00: The state media,
• 9:13
  SPEAKER_00: the People's Daily has last Monday and Tuesday had front page pieces basically
• 9:18
  SPEAKER_00: talking up the sort of why you should be confident in the Chinese economy,
• 9:22
  SPEAKER_00: making it clear that they now think they're going to hit their 5% year on year
• 9:26
  SPEAKER_00: growth rate for 2024.
• 9:29
  SPEAKER_00: So on the one hand,
• 9:32
  SPEAKER_00: something in September got the attention of the top leadership that made them have
• 9:37
  SPEAKER_00: this out-of-cycle popular meeting and push harder on stabilization policies.
• 9:43
  SPEAKER_00: On the other hand, they seem relatively confident that they're going to hit their target.
• 9:48
  SPEAKER_00: So it's like, okay, we're just going to maybe add a little gas here, add a little gas there.
• 9:52
  SPEAKER_01: Don't overreact.
• 9:52
  SPEAKER_00: Tweak here, tweak there.
• 9:54
  SPEAKER_00: Don't overreact.
• 9:55
  SPEAKER_00: Steady as she goes.
• 9:59
  SPEAKER_00: That may work,
• 10:01
  SPEAKER_00: and I think there's reason to be skeptical,
• 10:04
  SPEAKER_00: but it does not then lend more ammunition to the idea of animal spirits.
• 10:11
  SPEAKER_00: And so it goes back to,
• 10:12
  SPEAKER_00: I think,
• 10:13
  SPEAKER_00: what—and yesterday,
• 10:15
  SPEAKER_00: the People's Daily piece,
• 10:16
  SPEAKER_00: they talked about it specifically,
• 10:17
  SPEAKER_00: right?
• 10:18
  SPEAKER_00: This idea that you don't want a crazy bull, you want a slow bull.
• 10:24
  SPEAKER_01: Slow and strong.
• 10:25
  SPEAKER_00: Slow and strong.
• 10:26
  SPEAKER_00: And so I'm trying to think where was it?
• 10:29
  SPEAKER_00: Did I put it in here?
• 10:31
  SPEAKER_00: It's sort of slow and steady.
• 10:33
  SPEAKER_00: Right.
• 10:33
  SPEAKER_00: So we should avoid being a mad bull, feng niu, and instead aim to be a slow bull, man niu.
• 10:40
  SPEAKER_00: So basically, that then is probably not great for the idea of animal spirits, at least in the short term.
• 10:48
  SPEAKER_00: Right.
• 10:49
  SPEAKER_00: Medium term could change.
• 10:52
  SPEAKER_01: Some of the incremental policies like solidifying some of the social programs and
• 10:57
  SPEAKER_01: expanding them so that people feel more secure and are less prone to just save all
• 11:03
  SPEAKER_01: their money,
• 11:04
  SPEAKER_01: that makes sense because that's one of the challenges that they face if they wanted
• 11:08
  SPEAKER_00: to put money in people's pockets.
• 11:09
  SPEAKER_00: It's been talked about for many, many, many years and come up as a needed reform for many, many years.
• 11:15
  SPEAKER_00: And so the question is,
• 11:16
  SPEAKER_00: This time, is it different?
• 11:18
  SPEAKER_00: And they're actually going to make it happen.
• 11:19
  SPEAKER_00: Well,
• 11:20
  SPEAKER_01: and the other question is,
• 11:21
  SPEAKER_01: if you just gave people money,
• 11:24
  SPEAKER_01: would they just immediately save that money?
• 11:26
  SPEAKER_01: Because that's how dire the sentiments are.
• 11:29
  SPEAKER_01: And people are worried about their future and worried about their real estate investments.
• 11:34
  SPEAKER_01: I mean, that's one of the challenges that policymakers face.
• 11:37
  SPEAKER_01: But when you zoom out, I mean, watching all this,
• 11:40
  SPEAKER_01: On one hand,
• 11:42
  SPEAKER_01: you have a bunch of traders around the world who are waiting for a stimulus in
• 11:46
  SPEAKER_01: hopes that the market will pop.
• 11:48
  SPEAKER_01: And so that has sort of been its own parlor game.
• 11:51
  SPEAKER_01: And it can look kind of ridiculous.
• 11:53
  SPEAKER_01: Animal spirits, this, that, and the other thing.
• 11:55
  SPEAKER_01: On the other hand,
• 11:56
  SPEAKER_01: though,
• 11:57
  SPEAKER_01: there are a number of obvious structural issues with the Chinese economy right now
• 12:01
  SPEAKER_01: that have not really been addressed by the flurry of announcements from the PBOC
• 12:06
  SPEAKER_01: and the other state officials this fall.
• 12:09
  SPEAKER_01: And like there's this second group of economists and China watchers who have
• 12:13
  SPEAKER_01: reasonable questions about when or if Xi is going to take any action to stimulate
• 12:19
  SPEAKER_01: domestic consumption,
• 12:20
  SPEAKER_01: to insulate the economy from not only deflationary pressure,
• 12:25
  SPEAKER_01: which seems pretty real,
• 12:26
  SPEAKER_01: but also like geopolitical vulnerabilities and some of the trade policies that
• 12:32
  SPEAKER_01: might emerge over the next couple of years around the world.
• 12:36
  SPEAKER_01: we have no real answers on that question after the last two and a half months of speculation.
• 12:41
  SPEAKER_00: No, but I would say the base case really should be this is a incrementalism.
• 12:48
  SPEAKER_00: They're not going to fundamentally deviate from the course they've set.
• 12:51
  SPEAKER_00: It's just how do they keep things moving forward?
• 12:56
  SPEAKER_00: And so it's like waiting for Godot, waiting for stimulus.
• 13:00
  SPEAKER_00: It's sort of not... Here we are again.
• 13:02
  SPEAKER_00: Right?
• 13:03
  SPEAKER_01: Well, I'm not holding my breath.
• 13:05
  SPEAKER_01: But I just feel like there are factors in play.
• 13:23
  SPEAKER_01: And planning to provide more support for exports per the readout of last week's
• 13:27
  SPEAKER_01: state council executive meeting.
• 13:29
  SPEAKER_01: And as I read that Monday night,
• 13:32
  SPEAKER_01: I saw a tweet like 20 minutes later from someone named Justine Haig,
• 13:37
  SPEAKER_01: who wrote China is taking over global manufacturing.
• 13:40
  SPEAKER_01: By 2030, they will account for 45% of global manufacturing.
• 13:45
  SPEAKER_01: That's one country making nearly half the world's stuff.
• 13:49
  SPEAKER_01: How do they do it?
• 13:50
  SPEAKER_01: Strategic industrial policy with a long time horizon.
• 13:55
  SPEAKER_01: And this is one of the great paradoxes of the PRC success story in modern times,
• 14:02
  SPEAKER_01: because like it's true that the manufacturing growth and the industry planning has
• 14:07
  SPEAKER_01: just been outrageously successful and made in China 2025.
• 14:11
  SPEAKER_01: Like it's almost 2025.
• 14:14
  SPEAKER_01: And for all intents and purposes,
• 14:16
  SPEAKER_01: that worked and is an example of really impressive foresight and execution.
• 14:22
  SPEAKER_01: But on the other hand,
• 14:23
  SPEAKER_01: it's also becoming clear that the rest of the countries around the world are not
• 14:27
  SPEAKER_01: blind to all of these changes and some of the threats that they pose.
• 14:31
  SPEAKER_01: And it seems like the PRC policymakers are a little blind to the possibility that
• 14:36
  SPEAKER_01: countries around the world will answer industrial policies with stronger industrial
• 14:42
  SPEAKER_01: policies and trade policies of their own.
• 14:45
  SPEAKER_01: And so it's like the foresight only seems to extend so far.
• 14:48
  SPEAKER_01: And I have not seen any groundwork being laid for a contingency plan in the event
• 14:54
  SPEAKER_01: that most of the biggest consumer markets in the world start to more aggressively
• 15:00
  SPEAKER_01: decouple from the massive manufacturing beast that China has become.
• 15:05
  SPEAKER_00: Well, I think their baseline assumption is that that won't happen for most of the big markets.
• 15:10
  SPEAKER_01: All right.
• 15:11
  SPEAKER_01: And that is the end of the free preview.
• 15:13
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• 15:17
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• 15:19
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• 15:23
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• 15:24
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• 15:25
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• 15:31
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• 15:36
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• 15:36
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• 15:40
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• 15:42
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