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Hello and welcome you are 
listening to Patrick Boyle on 

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Finance, a podcast exploring 
ideas from quantitative finance,

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00:00:08,320 --> 00:00:11,640
examining events occurring in 
markets right now and financial 

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history to see what lessons can 
be taken away, including 

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interviews with some of the most
interesting people in the world 

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of finance. 
To learn more about the podcast,

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visit on finance.org. 
Possibly the two most important 

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things to have understood in 
markets over the last few years 

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have been how Chinese 
deleveraging would impact the 

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global economy and the economic 
impact of COVID lockdowns and 

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the eventual reopenings that 
followed. 

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Right now, a huge change is 
occurring in China as the 

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government made an abrupt 
decision last month to halt the 

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nation's severe 0 COVID policy. 
We're now seeing the world's 

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second largest economy 
reawakened while simultaneously 

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being hit by a massive wave of 
COVID infections. 

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We're also seeing a push from 
Chinese policy makers to 

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stimulate the economy, which is 
still suffering from a bursting 

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real estate bubble. 
China additionally announced 

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just this morning plans to relax
restrictions on developer 

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borrowing, dialing back the 
three red lines policy that 

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burst the nation's real estate 
bubble. 

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China's 0 COVID policy looked 
like it worked back in 2020, 

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when millions of lives were lost
in other countries while China 

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appeared to keep the death toll 
significantly lower. 

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But as other countries 
vaccinated and reopened the 

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Chinese 0 COVID policy became a 
huge burden on Chinese people 

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and the Chinese economy, 
possibly due to the slowing 

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economy or the ballooning cost 
of running the program. 

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The Chinese government began 
easing the COVID testing 

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requirements in late November. 
Without the constant testing, 

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the policy stopped working. 
Omicron began spreading, first 

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in Beijing and then in the rest 
of the country. 

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The authorities moved to lock 
people down once more, but this 

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time, residents fiercely 
resisted. 

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They'd had enough. 
After almost three years, St. 

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protests erupted in China for 
the first time in decades. 

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While the demonstrations didn't 
last very long, the government 

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possibly realized that they 
couldn't win against millions of

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angry citizens who were willing 
to disobey lockdowns. 

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In December, the government gave
in. 

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Sick people could now isolate 
themselves at home, and health 

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codes were no longer required to
enter most places. 

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The 0 COVID policy was replaced 
by the leaded rip policy. 

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A wave of coronavirus hit the 
country and people began staying

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at home once again, this time 
either by their own choice or 

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because they were sick. 
Beijing returned to looking like

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a ghost town in December. 
In Chinese state media, 

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President Xi has declared 
victory over the pandemic. 

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The virus is little worse than 
the flu, according to government

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experts, which of course raises 
the question why the extreme 

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lockdowns? 
The Chinese government has 

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changed the definition of what 
qualifies as a COVID death, 

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ensuring that the official 
number of fatalities will remain

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well below those that have been 
observed in the West. 

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It's difficult to know what the 
illness and death rates in China

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actually are, as the government 
keeps this data classified. 

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But 10s of millions of people do
appear to be catching the virus 

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every day in China, and 
hospitals and funeral homes have

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been overwhelmed. 
According to the scientific 

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journal Nature, China's overall 
vaccination rate is above 85%. 

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That high rate was achieved with
a vaccination passport system, 

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where the unvaccinated were 
prohibited from entry to many 

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public buildings and workplaces.
According to the epidemiologist 

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Ben Cowling, the domestic 
Chinese vaccinations offer 

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sufficient protection against 
severe disease for adults under 

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the age of 60. 
Unfortunately, older and more 

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vulnerable people were less 
likely to go places that 

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required a vaccination passport 
and thus the elderly mostly 

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remained unvaccinated. 
Additionally, there are more 

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multi generational households in
China than in the West. 

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Around 40% of over 60 year olds 
live with their married children

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in China, compared to around 10%
in Europe and 20% in the United 

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States. 
I have no expertise on the 

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effectiveness of the various 
vaccines I'm presenting the best

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information that I could find 
online, but a doctor I spoke to 

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said that he can only speculate 
about the effectiveness of the 

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Chinese vaccinations. 
But an unvaccinated elderly 

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population, particularly in 
intergenerational households, is

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pretty much Covid's ideal 
hunting ground. 

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So that is the situation being 
faced in China right now. 

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While the end of China's 0 COVID
policy has reduced worries about

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lockdown related supply chain 
problems, the nation is 

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struggling with a high number of
infections, which adds different

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pressures to the Chinese economy
and the global supply chain. 

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One way or another, China's 
management of its reawakening 

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will have a huge impact not just
on China, but on the rest of the

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world. 
The sudden reversal of policy in

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China has been chaotic to start 
with, as factories have been 

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struggling to deal with high 
absenteeism due to sick workers.

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Illness is not the only problem 
that China is faced with, 

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though. 
The nation is confronted with a 

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slowing global economy, dragged 
down by high inflation and 

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energy crisis and geopolitical 
turmoil. 

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Faced with higher interest 
rates, Western shoppers have 

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been tightening their belts and 
spending less, which doesn't 

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help the export driven Chinese 
economy. 

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Chinese exports fell in November
compared to a year earlier, led 

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by a 25% decline in exports to 
the United States. 

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Westerners, who had spent 
heavily on things like exercise 

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equipment and other manufactured
goods from China during the 

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pandemic, are now feeling more 
budget conscious. 

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The Chinese consumer is not 
spending much either, and 

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convincing people to spend after
three years of on and off 

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lockdowns won't be easy. 
Many Chinese workers are looking

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for ways to rebuild their 
savings rather than ways to 

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spend them. 
Car dealerships in China are 

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struggling to deal with unsold 
inventory. 

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Stores have little need to order
in more goods when they're 

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already full of unsold 
merchandise. 

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So China is faced with slumping 
demand both at home and abroad. 

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China's factory activity 
contracted even more in December

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due to sick workers and dampened
overall demand. 

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Service industries in China, 
like restaurants, found business

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in December to be almost as bad 
as in early 2020 at the start of

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the pandemic. 
Many even closed last month as 

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their customers stayed home to 
avoid infection or because they 

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were already sick. 
China's official PMI data, 

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released last weekend, showed a 
steep decline in economic 

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activity. 
It's manufacturing and services 

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gauges came in at 47 and 41.6 
respectively, both falling to 

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the lowest level since early 
2020. 

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A reading below 50 indicates A 
contraction. 

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The key message from that data 
is that the reopening is not yet

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going smoothly. 
The lifting of quarantine rules 

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has helped drive sales of 
airline tickets ahead of the 

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Lunar New Year holiday on 
January 22nd this year. 

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The removal of COVID 
restrictions also means that 

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goods are moving through the 
country much faster. 

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The time taken to move goods 
around the country is more than 

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halved, as truck drivers are no 
longer constantly being stopped 

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for PCR tests and health code 
checks. 

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Analysts are expecting infection
to peak around the Chinese New 

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Year festivities later this 
month, as that's when friends 

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and families get together to 
celebrate. 

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The economy is expected to begin
recovering after March. 

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Analysts at Citi forecast retail
sales in China will grow 11% in 

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2023. 
HSBC projects a contraction in 

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the first quarter of the year, 
but 5% growth overall for 2023. 

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While inflation numbers have 
been improving in the rest of 

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the world, some of that 
improvement has been due to 

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reduce demand from China. 
During all of these lockdowns, 

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should the Chinese economy 
really heat up, the additional 

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demand would be inflationary 
worldwide. 

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This would be somewhat offset by
a greater supply of manufactured

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goods coming out of the country,
though. 

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Before the pandemic, China was 
the world's largest source of 

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outbound tourists, with 150 
million travellers going abroad 

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each year. 
The total value of Chinese 

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worldwide travel was just over 
1/4 of a trillion dollars in 

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2019. 
McKinsey is projecting that 

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international travel out of 
China will jump from 5% of the 

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2019 level that we saw last 
month to around 50% by this 

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summer. 
This could provide a boost to 

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tourism businesses around the 
world. 

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Foreign executives who've been 
unable to visit their businesses

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in China for the last three 
years are also likely to be 

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booking trips into China again 
soon. 

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China's economy is expected to 
miss the 5 1/2% annual growth 

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target that was set by the 
government for 2022, and that's 

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already the lowest target that's
been set in decades. 

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Economists polled by Bloomberg 
are forecasting full year growth

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of just 3% for 2022. 
In addition to the wave of COVID

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infections, policy makers in 
China are struggling with an 

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ongoing property crisis that's 
weighed on the economy for more 

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than a year. 
We'll get to that in just a 

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moment. 
A broad measure of China's 

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budget deficit hit a record high
in the 1st 11 months of 2022. 

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This was driven by a few 
factors. 

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A slump in land leases to 
developers, which are a big 

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source of government income, 
fell by almost 1/4 from the 

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prior year. 
This is mostly driven by the 

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struggling and debt laden 
property developers no longer 

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growing their land banks. 
Tax cuts are critical. 

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Part of Beijing's efforts to 
stimulate the economy also cut 

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into fiscal income. 
Official data shows China's 

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value added tax collection, one 
of the biggest sources of 

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budgetary income, fell more than
25% in the 1st 11 months of 2022

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after Beijing cut VAT rates and 
offered rebates in a bid to 

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revive growth. 
Revenue from taxes on car 

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purchases fell by almost a third
during the same period as 

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Beijing cut tax rates to boost 
big ticket consumer items. 

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These revenues are also being 
hit by a severe reduction in 

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demand for new cars in China. 
The government's fiscal 

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spending, led by healthcare and 
social welfare costs, continued 

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to grow as Beijing struggle to 
control the pandemic and provide

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a safety net for a fast growing 
population of jobless adults. 

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Chinese Ministry of Finance data
shows that government healthcare

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spending surged 15% in the 1st 
11 months of 2022 as policy 

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makers invested heavily in COVID
testing and quarantine 

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facilities as part of their 
effort to stamp out the 

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pandemic. 
This healthcare spending likely 

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grew even more in December as 
COVID infections overwhelmed 

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hospitals in China. 
As government financial woes 

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deepen, the authorities are 
coming under pressure to cut 

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back on spending. 
The government has held the 

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deficit target unchanged, 
meaning that the authorities 

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have to reduce spending in order
to offset any drop in revenue. 

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Public finances could improve 
next year if the government 

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decides to reduce control over 
the private sector, which has 

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been beaten down in recent years
by growing regulations over 

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issues like data security, And 
this has particularly been the 

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case on the tech sector in 
China. 

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Now we've talked quite a bit on 
this channel about the issues of

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supply chain disruptions, which 
were partially driven by the 0 

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COVID policies and also driven 
by trade disputes with Western 

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countries. 
Many companies that struggle to 

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import critical components from 
China over the last few years 

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have begun diversifying their 
production and purchasing away 

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from China. 
Apple recently announced plans 

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to move some MacBook production 
to Vietnam for the first time in

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2023. 
They've been working to add 

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production sites outside of 
China for all of their big 

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product lines for the last two 
years to make sure that they 

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don't lose out if there are any 
future trade disruptions. 

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After the MacBook production 
shifts, all of Apple's flagship 

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products will have a backup 
production location beyond 

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China, iPhones in India and 
Macbooks, the Apple Watch, and 

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iPads in Vietnam. 
Today, labour in Vietnam is 

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cheaper than in China, but they 
don't yet have the same quality 

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of infrastructure. 
For China, the loss of its lock 

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on MacBook production symbolizes
the overall weakening of its 

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position as the world's factory.
Apple, Hewlett Packard, Dell, 

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Google and Maida have all made 
at least some plans to shift 

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production and sourcing away 
from China. 

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It's not just tech companies, 
either. 

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Ted Kanis, a senior executive at
Ford, told the press that the 

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supply chain is going to be the 
focus of this decade. 

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Over the last 20 years, China 
has become a major manufacturer 

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of automobile components. 
Many manufacturers are now 

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reducing their reliance on 
Chinese manufacturing. 

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These companies by no means plan
to abandon Chinese manufacturing

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entirely at this stage. 
That would be almost impossible.

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As for one thing, it has become 
a big market for many of them. 

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But they are saying that they 
expect the flow of components 

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from China to plants around the 
world to fall over time. 

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Many automobile manufacturers 
are saying that they aim to make

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parts and cars inside China 
exclusively for use within the 

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country, reducing their reliance
on Chinese factories for goods 

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sold overseas, while still 
retaining a secure local supply 

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chain for their own plants 
inside the country. 

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Mazda, Honda, Ford, and General 
Motors have all been shifting 

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00:16:10,160 --> 00:16:14,200
production of some components 
made in China to their home 

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markets. 
They say that they're doing this

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to increase the resilience of 
their supply chains, and that it

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00:16:20,960 --> 00:16:23,880
has nothing to do with 
decoupling from China. 

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Nonetheless, this is not great 
news for China. 

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A trend towards near shoring or 
French shoring could be good for

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countries like Mexico and India,
who might see manufacturing grow

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00:16:37,280 --> 00:16:41,160
within their economies. 
The economist Michael Pettis 

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argues that there's a good 
economic reason for Washington 

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00:16:44,960 --> 00:16:48,400
to encourage switching 
production from countries with 

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00:16:48,400 --> 00:16:52,120
large, persistent trade 
surpluses, like China to 

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00:16:52,120 --> 00:16:56,600
countries like Mexico with 
balanced trade or even trade 

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deficits. 
Doing so, he argues, would 

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increase global demand and 
increase direct and indirect US 

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exports, in line with any 
increase in US imports. 

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Because wages and household 
income make up a larger share of

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Mexican output, Mexican export 
revenues are converted into 

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imports. 
In a trade surplus country like 

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China, workers earn a lower 
share of their production and 

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00:17:26,119 --> 00:17:29,920
the export revenues are 
converted into savings, which 

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00:17:29,920 --> 00:17:32,920
are then exported. 
And there's a net reduction in 

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00:17:32,920 --> 00:17:36,960
global demand. 
Last year, American investors 

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00:17:36,960 --> 00:17:41,280
put more money into Mexico 
buying companies and financing 

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00:17:41,280 --> 00:17:45,400
projects than into China, 
according to an analysis by 

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00:17:45,400 --> 00:17:49,880
McKinsey Global Institute. 
It's not just Western companies,

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00:17:49,880 --> 00:17:52,560
either. 
Some Chinese exporters are now 

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diversifying abroad, looking at 
manufacturing in locations like 

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00:17:56,840 --> 00:18:00,960
Vietnam, Cambodia, Mexico and 
Turkey, where they can 

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manufacture cheaply and not be 
as reliant on a factory in a 

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single location. 
China's strengths in 

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manufacturing and its workforce 
are still hard to beat, even in 

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the midst of a raging epidemic. 
But there is more competition 

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from abroad than ever before, 
and big companies learned a 

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00:18:20,960 --> 00:18:24,080
lesson when they were surprised 
by the breakdown in trade with 

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00:18:24,080 --> 00:18:27,320
Russia less than a year ago. 
They don't want to find 

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00:18:27,320 --> 00:18:29,840
themselves in a vulnerable 
position again. 

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00:18:30,000 --> 00:18:35,000
Should trade disputes heat up, 
there will be a real focus on 

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00:18:35,000 --> 00:18:38,600
how Chinese policy makers 
attempt to fix the country's 

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00:18:38,600 --> 00:18:41,840
ailing real estate sector in 
2023. 

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00:18:42,120 --> 00:18:44,440
And that is still an ongoing 
problem. 

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00:18:44,840 --> 00:18:47,640
As I mentioned earlier, 
Bloomberg is reporting this 

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00:18:47,640 --> 00:18:51,640
morning that Chinese policy 
makers are rolling back the 

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00:18:51,640 --> 00:18:55,400
three red lines policy that 
burst the Chinese property 

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00:18:55,400 --> 00:18:59,760
bubble back in 2021. 
Details are still sparse, but 

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00:18:59,760 --> 00:19:04,000
policy makers might permit some 
property firms to add more 

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00:19:04,000 --> 00:19:08,120
leverage by easing borrowing 
caps and pushing back the grace 

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00:19:08,120 --> 00:19:11,480
period for meeting debt targets 
set by the policy. 

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00:19:12,040 --> 00:19:15,480
The crisis in the real estate 
sector, which started when 

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00:19:15,480 --> 00:19:19,880
several high profile developers 
defaulted on their debt in 2021,

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00:19:20,120 --> 00:19:24,320
has delayed or halted 
construction of pre sold homes 

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00:19:24,320 --> 00:19:27,440
across the country. 
These construction halls 

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00:19:27,440 --> 00:19:31,440
triggered protests by home 
buyers, some of whom refused to 

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00:19:31,440 --> 00:19:34,360
pay mortgages on unfinished 
homes. 

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00:19:34,960 --> 00:19:39,200
While Beijing has unveiled a 16 
point plan to ease the credit 

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00:19:39,200 --> 00:19:42,760
crunch, the numbers still paint 
a gloomy picture. 

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00:19:43,160 --> 00:19:47,680
At a key policy meeting last 
month, leaders vowed to focus on

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00:19:47,680 --> 00:19:52,280
boosting the economy in 2023, 
suggesting they would roll out 

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00:19:52,280 --> 00:19:56,040
new measures that improve the 
financial condition of the 

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00:19:56,040 --> 00:19:59,400
property sector and boost market
confidence. 

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00:19:59,760 --> 00:20:03,520
The measures announced so far 
are not sufficient to drive a 

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00:20:03,520 --> 00:20:08,160
turn around, but policy makers 
have signalled that more support

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00:20:08,160 --> 00:20:11,720
is on its way. 
China's Minister of Finance 

305
00:20:11,720 --> 00:20:15,880
recently told the press given 
the need for more spending to 

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00:20:15,880 --> 00:20:19,920
support the economy, fears have 
been mounting over the rising 

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00:20:19,920 --> 00:20:23,880
local government debt risks and 
the potential impact on the 

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00:20:23,880 --> 00:20:28,480
state dominated banking sector. 
This statement essentially 

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00:20:28,480 --> 00:20:33,200
acknowledges that policy makers 
are aware that more state 

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00:20:33,200 --> 00:20:37,400
directed infrastructure spending
to boost economic activity is 

311
00:20:37,400 --> 00:20:42,080
likely to be malinvestment. 
Productive investment boosts an 

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00:20:42,080 --> 00:20:46,480
economy by more than it 
increases debt, so this problem 

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00:20:46,520 --> 00:20:49,360
only occurs when there is 
malinvestment. 

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00:20:49,600 --> 00:20:53,960
As long as Chinese policymakers 
demand more growth from the 

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00:20:53,960 --> 00:20:58,800
economy than can be sustainably 
delivered, Beijing won't be able

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00:20:58,800 --> 00:21:01,240
to prevent the debt burden from 
rising. 

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00:21:01,520 --> 00:21:05,560
In the short term, the economy 
is likely to grow as business 

318
00:21:05,560 --> 00:21:09,520
activity resuming equates to 
growth in the long run. 

319
00:21:09,520 --> 00:21:13,960
If policy makers don't want debt
to grow unsustainably, they will

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00:21:13,960 --> 00:21:19,520
have to accept more reasonable 
growth rates below 2 to 3%. 

321
00:21:20,080 --> 00:21:21,960
Thanks for tuning into the 
podcast. 

322
00:21:22,080 --> 00:21:25,080
If you're enjoying it, please 
share it with your friends as 

323
00:21:25,080 --> 00:21:27,600
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324
00:21:27,840 --> 00:21:30,200
Have a great day and talk to you
again soon. 

325
00:21:30,320 --> 00:21:33,600
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332
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