Latest / Sharp China Podcast / Sharp China: New Tariffs Across Key US Sectors; Et tu, EU?; Putin Visits Beijing; Rumors of a Real Estate Bailout

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Sharp China: New Tariffs Across Key US Sectors; Et tu, EU?; Putin Visits Beijing; Rumors of a Real Estate Bailout · Sharp China Podcast

• 0:04
  SPEAKER_00: Hello and welcome to Sharp China.
• 0:06
  SPEAKER_00: I'm Andrew Sharp and you are listening to a free preview of today's episode.
• 0:12
  SPEAKER_01: The China-Russia relationship has, I think, a lot of benefits for China economically and strategically.
• 0:17
  SPEAKER_01: It also has some potential real downsides.
• 0:19
  SPEAKER_01: And, you know, so far, to be honest, I think the Chinese have actually played it pretty well.
• 0:24
  SPEAKER_01: I'm actually surprised relationships aren't worse with the EU.
• 0:27
  SPEAKER_00: I am, too.
• 0:28
  SPEAKER_00: Well,
• 0:28
  SPEAKER_00: and I'm also surprised that China is as audacious as they appear to be in terms of
• 0:33
  SPEAKER_00: welcoming Putin with an official visit like this.
• 0:36
  SPEAKER_00: And I am half kidding.
• 0:38
  SPEAKER_00: But if I were she,
• 0:39
  SPEAKER_00: I would say,
• 0:39
  SPEAKER_00: you know,
• 0:40
  SPEAKER_00: Vladimir Putin,
• 0:40
  SPEAKER_00: let's let's make this a video call this time because we're in a pretty precarious
• 0:44
  SPEAKER_00: spot in the EU with some of these countries.
• 0:48
  SPEAKER_00: But it is what it is.
• 0:50
  SPEAKER_01: Well, I mean, the EU keeps warning.
• 0:52
  SPEAKER_01: And I think that they keep saying that they're upset about this,
• 0:56
  SPEAKER_01: and yet they haven't really done all that much.
• 0:59
  SPEAKER_01: I think over the last couple of months,
• 1:00
  SPEAKER_01: you've seen increasing uses of various tools to go after economic issues.
• 1:05
  SPEAKER_01: But I think the Chinese really believe that they can figure out how to mollify most
• 1:12
  SPEAKER_01: of the countries in the EU enough that it's not going to blow back on them in the
• 1:15
  SPEAKER_01: way that I think some had expected or have been expecting as the war progresses in Ukraine.
• 1:21
  SPEAKER_00: Right.
• 1:21
  SPEAKER_00: And so far, they've been right.
• 1:23
  SPEAKER_00: Right.
• 1:24
  SPEAKER_01: I mean, that's the thing.
• 1:25
  SPEAKER_01: And I think that,
• 1:25
  SPEAKER_01: you know,
• 1:26
  SPEAKER_01: that's the...
• 1:26
  SPEAKER_01: I think people underestimate how it may actually work for the Chinese.
• 1:32
  SPEAKER_01: And they, you know, they... And again, the US-China relationship, I think, I really do think...
• 1:38
  SPEAKER_01: They really just at this point,
• 1:39
  SPEAKER_01: it's just keep it as stable as possible because the US is still so big and powerful
• 1:45
  SPEAKER_01: that it could cause China lots of problems.
• 1:48
  SPEAKER_01: And so they just want to manage it, stabilize things.
• 1:51
  SPEAKER_01: But there is very little or to no expectation of any possibility of improvement in the next few years.
• 1:58
  SPEAKER_00: Okay,
• 1:58
  SPEAKER_00: well,
• 1:58
  SPEAKER_00: one other big story this week,
• 2:01
  SPEAKER_00: and I don't know that there's anything concrete to discuss here,
• 2:04
  SPEAKER_00: but there have been reports that the PRC government is considering a proposal to
• 2:10
  SPEAKER_00: have local governments across the country buy millions of unsold homes.
• 2:14
  SPEAKER_00: That was Bloomberg.
• 2:16
  SPEAKER_00: And then Saishin reported over the weekend that it has learned...
• 2:19
  SPEAKER_00: from multiple sources that policymakers have been studying the creation of a
• 2:24
  SPEAKER_00: national real estate investment vehicle tasked with acquiring and revitalizing
• 2:30
  SPEAKER_00: unfinished and inventory properties across regions.
• 2:35
  SPEAKER_00: How expensive would this be, Bill?
• 2:37
  SPEAKER_00: And how could local governments possibly pay for it?
• 2:40
  SPEAKER_00: I feel like every conversation you and I have had about local governments for the
• 2:44
  SPEAKER_00: last year or so has been about how dire the financial situation is for most local
• 2:50
  SPEAKER_00: governments around China in the wake of COVID.
• 2:53
  SPEAKER_00: But do you think this is viable?
• 2:56
  SPEAKER_00: And how might the mechanics work?
• 2:59
  SPEAKER_01: So this is, it's a, it's a, I mean, it is, it is the multi, multi-trillion revenue question.
• 3:04
  SPEAKER_01: And,
• 3:04
  SPEAKER_01: you know,
• 3:04
  SPEAKER_01: we last week at the,
• 3:06
  SPEAKER_01: I think it was the last week or the two weeks ago,
• 3:08
  SPEAKER_01: I guess it was the April popular meeting.
• 3:10
  SPEAKER_01: There was language around real estate and that was a bit new and sort of gave hope
• 3:16
  SPEAKER_01: that the leadership of policymakers getting closer to some sort of a bigger package
• 3:22
  SPEAKER_01: to help resolve some,
• 3:24
  SPEAKER_01: if not all the massive messes in the real estate market.
• 3:27
  SPEAKER_01: And,
• 3:29
  SPEAKER_01: You've got a couple of things going on.
• 3:30
  SPEAKER_01: I mean, you've got a lot of things going on.
• 3:31
  SPEAKER_01: But one is,
• 3:32
  SPEAKER_01: I think it was two summers ago,
• 3:34
  SPEAKER_01: there was this movement where all of a sudden a bunch of people around the country
• 3:37
  SPEAKER_01: started not paying their mortgages because they had paid for apartments that were
• 3:41
  SPEAKER_01: being built.
• 3:42
  SPEAKER_01: And then the developer ran out of money, ran away, whatever.
• 3:44
  SPEAKER_01: And so they were still paying their mortgages.
• 3:46
  SPEAKER_01: but they were not getting their apartments delivered.
• 3:49
  SPEAKER_01: And so, and they were, you know, concrete shelves or various states of construction.
• 3:53
  SPEAKER_01: And so then built up this social pressure that the government had to do something.
• 3:57
  SPEAKER_01: And so they came up this idea of the Balgiolo,
• 4:00
  SPEAKER_01: which is basically ensure that buildings under construction are delivered.
• 4:04
  SPEAKER_01: The ones that have,
• 4:04
  SPEAKER_01: because you have this pre-sales model where people,
• 4:06
  SPEAKER_01: people buy before the apartment's,
• 4:09
  SPEAKER_01: traditionally buy before the apartment's built and the developers need that money because they need it.
• 4:13
  SPEAKER_01: You know,
• 4:14
  SPEAKER_01: it's one of the ways they would do financing both for that project,
• 4:17
  SPEAKER_01: but oftentimes they would take the money they got from selling apartments in
• 4:20
  SPEAKER_01: project A and then they'd put it into project B.
• 4:22
  SPEAKER_01: Right.
• 4:23
  SPEAKER_01: And sort of keep
• 4:24
  SPEAKER_01: keep the shell going, right?
• 4:25
  SPEAKER_01: As long as they could find liquidity, they could keep the game going.
• 4:28
  SPEAKER_01: And then of course,
• 4:29
  SPEAKER_01: the liquidity dried up and that sort of triggered this massive interlinked mess in
• 4:34
  SPEAKER_01: the real estate market.
• 4:35
  SPEAKER_01: And so anyway, long, long answer.
• 4:38
  SPEAKER_01: So as part of this set of policies to try and ensure delivery of these onsite homes
• 4:42
  SPEAKER_01: and deal with the social tensions that were being caused by the fact that people
• 4:46
  SPEAKER_01: were paying for apartments that they weren't living in or they weren't going to get,
• 4:50
  SPEAKER_01: they created this idea of a whitelist where basically they hold local governments,
• 4:55
  SPEAKER_01: you create these whitelists of real estate projects that meet certain criteria.
• 5:00
  SPEAKER_01: And if they meet those criteria,
• 5:02
  SPEAKER_01: then they want the banks to give them the project's money so they can finish the buildings.
• 5:05
  SPEAKER_00: And
• 5:06
  SPEAKER_01: Lots of propaganda about that.
• 5:07
  SPEAKER_01: Lots of noise.
• 5:08
  SPEAKER_01: This is great.
• 5:09
  SPEAKER_01: This is going to solve some problems.
• 5:10
  SPEAKER_01: Hasn't actually really done much because there are all sorts of problems.
• 5:13
  SPEAKER_01: Most of the projects where they stopped construction,
• 5:16
  SPEAKER_01: didn't complete them,
• 5:17
  SPEAKER_01: it's because they ran out of money.
• 5:19
  SPEAKER_01: And so whoever puts more money in, they're never actually going to get all the money back.
• 5:23
  SPEAKER_01: So they have to figure out who takes the loss and how the loss gets allocated.
• 5:28
  SPEAKER_01: So then you've also got already a whole bunch of other properties that are built,
• 5:32
  SPEAKER_01: unsold,
• 5:33
  SPEAKER_01: they're just sitting there.
• 5:34
  SPEAKER_01: And some are finished, some are not finished.
• 5:37
  SPEAKER_01: It's sort of a big mess.
• 5:41
  SPEAKER_01: And believe me, I'm thinking about it.
• 5:44
  SPEAKER_01: And so and so then it's like,
• 5:46
  SPEAKER_01: OK,
• 5:46
  SPEAKER_01: well,
• 5:46
  SPEAKER_01: how do we deal with this massive overhang of inventory of some cities,
• 5:51
  SPEAKER_01: you know,
• 5:52
  SPEAKER_01: several years of unsold inventory?
• 5:54
  SPEAKER_01: Right.
• 5:54
  SPEAKER_01: There were normal normal transactions would take to digest the already built inventory.
• 5:59
  SPEAKER_01: So what they've been pushing over the last few months is this idea,
• 6:02
  SPEAKER_01: and you've started to see it in local areas where local governments will start to
• 6:06
  SPEAKER_01: buy projects and they buy them at a discount and they turn them into subsidized housing,
• 6:12
  SPEAKER_01: like rental housing,
• 6:13
  SPEAKER_01: low-income housing kind of idea.
• 6:14
  SPEAKER_00: Right.
• 6:17
  SPEAKER_01: And,
• 6:17
  SPEAKER_01: you know,
• 6:17
  SPEAKER_01: that's been happening in a piecemeal fashion,
• 6:19
  SPEAKER_01: but not in a sort of a big enough way to actually move the needle in terms of
• 6:23
  SPEAKER_01: solving the problems in the real estate market.
• 6:26
  SPEAKER_01: So now the hope with this stuff that came out over the weekend,
• 6:29
  SPEAKER_01: first since Haishin,
• 6:30
  SPEAKER_01: then Bloomberg,
• 6:30
  SPEAKER_01: this Bloomberg story,
• 6:31
  SPEAKER_01: there's this hope that somehow maybe there'll be this sort of top level program set up,
• 6:37
  SPEAKER_01: whether it's a new bureaucracy or some sort of vehicle or set of vehicles where the
• 6:41
  SPEAKER_01: government is just going to buy up a bunch of these properties.
• 6:44
  SPEAKER_01: Right.
• 6:44
  SPEAKER_01: basically, then the government's going to end up eating all these losses.
• 6:47
  SPEAKER_00: Okay.
• 6:48
  SPEAKER_01: And,
• 6:49
  SPEAKER_01: you know,
• 6:50
  SPEAKER_01: it's,
• 6:51
  SPEAKER_01: you know,
• 6:51
  SPEAKER_01: there's been a big pop in real estate stocks in Hong Kong and the mainland the last
• 6:54
  SPEAKER_01: couple of days,
• 6:55
  SPEAKER_01: or I guess Hong Kong was closed on,
• 6:58
  SPEAKER_01: was it closed on Wednesday?
• 6:59
  SPEAKER_01: But anyway,
• 7:00
  SPEAKER_01: big real estate stocks are moving because there's this hope that,
• 7:03
  SPEAKER_01: well,
• 7:03
  SPEAKER_01: maybe there's light at the end of the tunnel.
• 7:05
  SPEAKER_01: There'll be some sort of resolution.
• 7:06
  SPEAKER_00: So when you say real estate stocks, those are the big developer stocks, correct?
• 7:12
  SPEAKER_01: The developer stocks.
• 7:12
  SPEAKER_01: Yeah.
• 7:13
  SPEAKER_01: And so,
• 7:15
  SPEAKER_01: And so the challenge,
• 7:16
  SPEAKER_01: though,
• 7:16
  SPEAKER_01: and I wrote a little bit about yesterday,
• 7:18
  SPEAKER_01: is one is who's going to pay for this?
• 7:20
  SPEAKER_01: Because Bloomberg said, well, the local government's going to buy his inventory.
• 7:25
  SPEAKER_01: With what money?
• 7:26
  SPEAKER_01: Right.
• 7:27
  SPEAKER_01: Right?
• 7:27
  SPEAKER_01: So who's going to fund this?
• 7:28
  SPEAKER_01: I mean,
• 7:29
  SPEAKER_00: we've talked about local governments writing extra tickets to people to try to
• 7:33
  SPEAKER_00: generate cash flow.
• 7:33
  SPEAKER_01: And the local governments where the biggest real estate problems are the local
• 7:37
  SPEAKER_01: governments with the least amount of money.
• 7:38
  SPEAKER_01: It's actually all related.
• 7:40
  SPEAKER_01: And so there's a real question of who's going to pay for this?
• 7:44
  SPEAKER_01: And,
• 7:45
  SPEAKER_01: you know,
• 7:46
  SPEAKER_01: Caixin in their article,
• 7:47
  SPEAKER_01: they quoted a local Chinese securities company where they said that if they were to
• 7:53
  SPEAKER_01: do this national investment vehicle,
• 7:56
  SPEAKER_01: the Guatai Zhunan Securities estimated that a national investment vehicle would
• 8:01
  SPEAKER_01: need between 9 trillion and 30 trillion yuan,
• 8:04
  SPEAKER_01: which is about 1%.
• 8:07
  SPEAKER_01: $1 trillion and change U.S.
• 8:08
  SPEAKER_01: dollars to about $4 trillion U.S.
• 8:11
  SPEAKER_01: dollars and a little more to acquire the 4.2 billion square meters of properties
• 8:17
  SPEAKER_01: awaiting sale as of the end of 2023.
• 8:18
  SPEAKER_01: We're in a timeframe of one and a half to three years.
• 8:23
  SPEAKER_00: I was imagining we were in the trillions with this plan.
• 8:25
  SPEAKER_01: So we're talking about a multi-trillion dollar bailout, effectively.
• 8:30
  SPEAKER_01: Yeah.
• 8:31
  SPEAKER_01: And where is that money going to come from?
• 8:33
  SPEAKER_01: It can only come from the central level.
• 8:35
  SPEAKER_01: And this is where the government has,
• 8:37
  SPEAKER_01: you know,
• 8:38
  SPEAKER_01: that's a lot of additional debt for the government to take on.
• 8:41
  SPEAKER_01: I think they could do it.
• 8:42
  SPEAKER_01: So I'm skeptical that we're going to see some sort of big solution coming out in
• 8:49
  SPEAKER_01: the next few weeks because it's just so expensive and it is not clear who's going
• 8:54
  SPEAKER_01: to pay for this.
• 8:54
  SPEAKER_01: Now, we're recording on Thursday.
• 8:57
  SPEAKER_01: By the time this podcast comes out, we'll have gotten the full answer.
• 9:02
  SPEAKER_01: But today,
• 9:03
  SPEAKER_01: people got excited because the State Council announced this press conference tomorrow,
• 9:07
  SPEAKER_01: Friday afternoon,
• 9:07
  SPEAKER_01: I think at 4 o'clock,
• 9:08
  SPEAKER_01: where they were bringing in – and I'm going to read you the thing right here –
• 9:12
  SPEAKER_01: where they are bringing in a press conference Friday afternoon in Beijing time with
• 9:16
  SPEAKER_01: multiple ministries,
• 9:17
  SPEAKER_01: including the housing ministry,
• 9:18
  SPEAKER_01: the PBOC,
• 9:19
  SPEAKER_01: the People's Bank of China,
• 9:20
  SPEAKER_01: the Financial Regulatory Administration to talk about
• 9:27
  SPEAKER_01: policies related to this ensuring housing delivery, right?
• 9:30
  SPEAKER_01: And basically what it sounds like from that is they're going to loosen the criteria
• 9:34
  SPEAKER_01: around who gets on the white list because so many banks are unwilling to fund these
• 9:38
  SPEAKER_01: broken projects.
• 9:39
  SPEAKER_01: So now they're going to sort of encourage them to fund projects that are even more broken.
• 9:42
  SPEAKER_01: But we'll find out tomorrow.
• 9:43
  SPEAKER_01: So my point is that the news flow this week has created a whole new level of hope
• 9:49
  SPEAKER_01: that we're closer,
• 9:50
  SPEAKER_01: that the Chinese government is closer to some sort of resolution for this massive
• 9:54
  SPEAKER_01: real estate problem
• 9:56
  SPEAKER_01: I would just suggest that people remain fairly cautious because the problem is so
• 10:00
  SPEAKER_01: big and so complex that on the one hand,
• 10:04
  SPEAKER_01: announcements of some program get people excited and stocks go up.
• 10:08
  SPEAKER_01: But on the other hand,
• 10:09
  SPEAKER_01: actually working through the details and all the problems that come with some sort
• 10:13
  SPEAKER_01: of a bailout,
• 10:17
  SPEAKER_01: it's nothing that's going to be resolved in any sort of easy,
• 10:20
  SPEAKER_01: clean or fast way,
• 10:21
  SPEAKER_01: I don't think.
• 10:23
  SPEAKER_01: I guess the point is if they're actually taking steps to resolve it,
• 10:27
  SPEAKER_01: people will feel confident that eventually they'll be laid in a tunnel.
• 10:30
  SPEAKER_01: That would be maybe the logical explanation.
• 10:33
  SPEAKER_01: I don't know.
• 10:34
  SPEAKER_00: As we consider the possibility of what appears to be an impossible undertaking,
• 10:40
  SPEAKER_00: if all of this went exactly as policymakers planned,
• 10:44
  SPEAKER_00: and granted,
• 10:45
  SPEAKER_00: the details haven't been specified,
• 10:47
  SPEAKER_00: so I think the plans may still be in flux,
• 10:49
  SPEAKER_00: but would...
• 10:52
  SPEAKER_00: It is a true mess of considerations in all of this,
• 10:55
  SPEAKER_00: but would it affect the prices of real estate across China?
• 11:02
  SPEAKER_00: Because I know that real estate has traditionally been a savings vehicle for Chinese citizens.
• 11:09
  SPEAKER_00: And as prices have crashed and it's harder to sell housing,
• 11:15
  SPEAKER_00: obviously that affects families and their savings.
• 11:17
  SPEAKER_00: So would this address any of that issue or would it be strictly addressing the
• 11:22
  SPEAKER_00: shortfalls that developers and the contractors and workers have experienced over
• 11:26
  SPEAKER_00: the last several years?
• 11:28
  SPEAKER_01: Well,
• 11:28
  SPEAKER_01: this is one of the complications because if the government's going to go in or
• 11:32
  SPEAKER_01: local government or central government or whatever the vehicle or vehicles are,
• 11:34
  SPEAKER_01: if they're going to go in and they're going to buy these properties or buy these
• 11:37
  SPEAKER_01: projects and turn them into low-income housing,
• 11:40
  SPEAKER_01: well,
• 11:40
  SPEAKER_01: they're probably not going to pay the price that people paid for neighboring housing.
• 11:44
  SPEAKER_01: In fact, they're probably going to pay a lot less per square meter.
• 11:47
  SPEAKER_00: And that may be the market rate at this point.
• 11:50
  SPEAKER_01: Right.
• 11:50
  SPEAKER_01: But then the people who bought their housing at a much higher rate are going to be really upset.
• 11:54
  SPEAKER_01: And we've seen repeatedly over the years, even in a project that's on sale, when they sell in phases.
• 12:00
  SPEAKER_01: So people who bought in phase one, so they paid 20,000 renminbi a square meter.
• 12:03
  SPEAKER_01: A long time ago, you could get a price of 20,000 square meter.
• 12:07
  SPEAKER_01: And then phase three comes around or phase two, and the market's a little slow.
• 12:11
  SPEAKER_01: And all of a sudden, they start charging 15,000 square meter.
• 12:14
  SPEAKER_01: Regularly, you'll have people protest.
• 12:16
  SPEAKER_01: And so if you have this large-scale repricing of real estate in certain areas,
• 12:22
  SPEAKER_01: certain neighborhoods,
• 12:23
  SPEAKER_01: certain cities,
• 12:24
  SPEAKER_01: where the government's coming in or some government,
• 12:26
  SPEAKER_01: local government,
• 12:27
  SPEAKER_01: central,
• 12:27
  SPEAKER_01: whatever the vehicle is,
• 12:29
  SPEAKER_01: buying it below what people think,
• 12:31
  SPEAKER_01: below what they paid or what they think it's worth,
• 12:33
  SPEAKER_01: you're going to cause a whole different level of complications around social discontent.
• 12:37
  SPEAKER_01: So this is a real...
• 12:40
  SPEAKER_01: This is a real serious problem.
• 12:45
  SPEAKER_01: And they are very sensitive to the whole sort of social content,
• 12:48
  SPEAKER_01: especially as you said,
• 12:50
  SPEAKER_01: when so much of household wealth is tied up in real estate.
• 12:55
  SPEAKER_00: All right, and that is the end of the free preview.
• 12:57
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• 13:01
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• 13:21
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