The Four Big Structural Forces Holding Back China's Economy

All thoughts is brought to you by Interactive Brokers. IBKR charges margin loan rates from 5.83% to 6.83%. Their clients can also earn extra income by lending their fully paid shares of stock. Join Interactive Brokers clients from 200 plus countries and territories to invest in stocks, options, futures, funds, and bonds globally. Minimize your costs to maximize your returns. Rate subject to change. Learn more at IBKR.com slash compare. This is Barry Rittles here to tell you about another podcast we think you'll love listening to, Masters in Business. Join each week for an enlightening conversation with some of the smartest people in investing and business. Doing business in Europe, it's all about being local. Stocks are way too cheap. This is where you want to be. I think life and markets are intertwined. Subscribe to Masters in Business today. On Apple, Spotify, or wherever you get your favorite podcast. Hello, and welcome to another episode of the AdLocs podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, very weak economic data out of China lately. Yeah, to put it mildly. I'm just starting very directly. Now, the data has been very weak. I have a collection of paraphrased headlines here. Oh. So we're recording. So we're recording. We're recording. We're recording. We're recording. We're recording. We're recording. So we're recording this on August 16th. And we just saw an emergency rate cut from China. They also announced that they would stop publishing the urban youth unemployment rate, which is never a good sign. When you just, when you just announce that a certain data point that people have been tracking for years, suddenly will not be publishing more yet. Exactly. And a particularly politically sensitive data point too. Retail sales are coming in extremely weak. So rising less than 3% a year, they used to be in double digits. We have deflation setting in, which is something we spoke about on the episode we did with Richard Koo. Manufacturing is contracting. Exports are falling. The UN is dropping against the dollar bank loans at a 14 year low last month. You came prepared, Tracy. I did. Yeah, I know it's surprising. But I did actually. I did have no surprise. I've just impressed. I did actually put together the data points because they're so startling. And again, if you compare it with all the excitement from earlier in the year about China reopening the end of COVID-0, there was this expectation that China was going to end up being a positive catalyst for global growth this year. And instead, we are potentially seeing the exact opposite. Yeah, you bring up a good point. I think one of the theories is that there would be this big inflationary impulse globally from the China reopening, demand for steel, demand for various metals, obviously demand for oil and gasoline. And there has been this pretty mild mediocre reopening. It hasn't had that global shockwaves. If anything, people are talking about exporting deflation or disinflation. And then on top of all of the economic weakness that you bring up, there's also the financial market weakness. So there was just a story today about one of the companies that sell some of these wealth management products, missing payments. There's obviously, I think, it's a country card. Country card. A big developer running into a lot of trouble similar, similar to the weakness we've seen in China Evergrande. So to your point, though, just this sort of slew of negative headlines. Well, also, I think clearly there is concern that if you get real economic weakness in China, that could lead to something bad for the global economy, just in terms of real business activity. But I think there's also this financial channel that is probably the one that's likely to be the most problematic. So if you think about China as, in many ways, a giant hoarder of financial assets, the big question now is, what are they going to do with those financial assets? Do they have to, for instance, start selling off some FX reserves in order to support the UN? Are they maybe going to buy fewer US treasuries? So I think that is definitely one aspect of this that is really worth exploring. So many interesting elements right now, we have, so we have to dive deeper into what is going on right now with the Chinese economy and what types of policy responses we might get or we might not get. There's a, I always see, you know, there's like a furious debate always on Twitter. It's like, why don't they just, why doesn't the government just give more money to households sort of like the Richard Kuh conversation, the sort of, you know, to get a boost domestic demand? What's the reluctance to do that? Like all these sort of different questions. So I think we really need to dive into them further. Let's do it. Well, I'm very excited because I think we have the perfect guest to discuss this. We are going to be speaking with Songwen Zoe Liu. She is the Maurice Greenberg Fellow for China Studies at the CFR. And she is also the author of a new book, sovereign funds, how the Communist Party of China finances its global ambitions. Thank you so much for coming on, Adlots. Thank you, Joe, and the Tracy for having me. And I'm a big fan of the Adlots. Very, very kind of you to say, you know, why don't we just start off like super simply? In your view, why hasn't China seen a more robust recovery since the lifting of the COVID restrictions? Well, I would say that, actually, I have always met a contrary. Oh, good. I like this already. I, you know, if, you know, November last year, I put out a piece on the foreign policy, basically made the argument to say that the zero COVID is the least economic challenging problem that President Xi Jinping was facing that day. And even the party, in this case, it would be the party. And even if the party decided to remove zero COVID policy the next day, the economy won't rebound, sustain a robust rebound very quickly. And the reason comes from what I characterize as the four Ds, demand that demographics and decoupling, at that time it was decoupling and now it's the risking. This is great. The four Ds. I think it's like the four Ds of the apocalypse. Yeah. No, that's really, I feel like if you want to like have your thing, that's like a really demand and that demographics undecoupling, I'm writing these down. So this is exactly what I wanted to ask you because I remember even in 2018, 2019, there were concerns and a lot of discussion about a slowdown in China's economic growth. And then COVID happened and we sort of forgot about a lot of the structural issues that we had been talking about. And then lo and behold, in 2023, it feels like a lot of these structural problems are coming back to haunt the Chinese economy. Can you dive a little bit further into what those issues are? Yeah, sure. I would argue that a lot of these structural problems, exactly as you were describing Tracy, it seemed that during COVID, we were from both inside China and outside China, we were overwhelmed by the sudden pause of the economy because of the shutdown factories and all that. And it seemed that temporarily, the pause of the economy covered up the structural problems that had been embedded into the Chinese economic growth model. And then once the party suddenly acted the zero COVID policy, given the consumption pattern that we have observed here in America or in Europe, people started to realize, oh, okay, so this is a 1.4 billion market and people are going to spend. And that would be powerful and inflationary. And, but short-term, revengeful expenditure would not necessarily overcome the long-term structural problems that have attracted the Chinese economy even just from GDP terms. You know, we think about the Chinese economy. There are different ways that you can argue that the Chinese economy has picked. I mean, I'm not necessarily that category, but if we just a measure it from GDP perspective, or in terms of export as a percentage of a GDP, the Chinese economy already picked. You know, China surpassed Germany back in 2010 to become the largest trading, or the largest exporting economy in the world. And it has, as it's a height, export as a percentage of GDP was about 30% and has since then plateaued and decreased right now is about 20 something percent. And if you think about GDP growth, the double digit growth period already ended. So from that perspective, what do we actually observe? Goes back to the four Ds. The problem with demand is not necessarily at, you know, I'm not talking about the ultimate demand, I'm specifically talking about the household consumption component of demand for a lumpier of the time. You know, yes, you can, we can make the argument to say household consumption as a percentage contributing to the Chinese GDP is, you know, it's about 40%. Yeah, it has been low and, you know, global average. I'm not even talking about, you know, the OECD level. I'm talking about like global average. It's about a 60% of GDP, whereas China is 40%. We can make the argument to say, well, the household consumption has been a drag on the Chinese economy. However, up until 2012, by the end of 2012, actually household consumption's contribution to GDP growth, at least has been on an upward projection. Yeah, other word of the growth of household consumption has been positive. You know, you see Chinese people do discretionary vacations and all that, but that has changed since 2000. 13. And if we just a stretch it in between President Xi Jinping's two-term, the second term was either worse than the first term. So let's go further into that. A, why has it gotten worse? And then B, you know, there's all this talk. It's like, why don't they just do household stimulus? Or some version of that. And people are sort of bemused. Maybe it's the word it's like, oh, why isn't the Communist Party more willing to extend support directly to the people and rebalancing things? A, why did it get worse? But why is there this reluctant to do something like what we did in the US, just sort of print money and give it to people? You know, Joe, that's an excellent, excellent question. You make me think about the Y aspect of it, right? So fundamentally, there are, I would argue that there are two aspects of why there has been a decreasing household consumption. The first one is, obviously, you can empirically observe from the data. There has been a decline in household income growth. And household income growth up until President Xi Jinping, before President Xi Jinping came to power, household growth was, income growth was significantly faster than after he came to power. And he's, again, he's the second term was worse on average than his first term. So that's one aspect in terms of income, household income growth. And then the second aspect of it would be household balance sheet DTO raileration. And a lot of these comes down to housing market, a property value depreciation because of control on real estate policies and all that. Now, the reason why there has been a reluctant in terms of a stimulus, basically provide a stimulus checks to Chinese household, is not that Chinese economists have not thought about that option. You actually do, see people do that on Chinese social media when they realize that, oh, you know what, my cousins in America, they just become just a lineup or waiting in their house and then mail would come in and get, you know, a stimulus check, you know, some students were even getting stimulus check. And then the problem becomes, well, historically there has not been this kind of a precedent, but no precedent does not necessarily stop the government from inventing one, right? And the deeper problem I would argue is the politics. The politics simply would not necessarily work. Part of that is because, empowering, this is probably deeper in the Chinese political philosophy in the sense that, well, you know, it's a, depending upon which political scientists or political economists you are talking to, some people would say, oh, you know, Chinese system is authoritarian capitalism or fragmented capitalism or fragmented authoritarianism and things like that. But fundamentally, what do we observe? Is that the Chinese economic growth model has been viewed upon financial repression and at the center of the financial repression are the Chinese banks and who controls the bank is essentially the Chinese government led by the Chinese Communist Party. In other word, the Chinese Communist Party has always been at the center of a capital allocation and by empowering the household or for that matter, the private sector, it basically dilute or potentially remove their relevancy. Interesting. This is exactly what I wanted to ask you and I just did a thread on Twitter that made a similar point. But how much of this is a political economy problem in the sense that both on the business side and the consumption side where we've seen the Communist Party be sort of, well, be controlling in many ways. So for instance, on private business, we've had the property crackdown, the tech sector crackdown, and that would apparently seem to perhaps make people more reluctant to do their own startups and things like that. And then on the household side, it does feel like you have a reluctance from the party to sort of empower the individual at the risk of losing some of their own power and perhaps the collective power. I am a political economist, so I would argue. The answer is yes. Yes. You are right, Tracy. And from a intellectual perspective, I do think this is a political economy problem because if you look at the history of the Chinese economic growth since 1949, it's not a data that economy has never experienced shocks. Actually, the Chinese system experienced a lot of shocks from even in the 1950s, you experienced the Chinese economy experienced the grip leap forward. And when the communist took over, they also destroyed a lot of banking systems in Shanghai and elsewhere established by the imperialist. So, and then there was also cultural revolution and all that. But then there is also the sudden stop of the cultural revolution. In other words, the Chinese political economic system, A, is not short of crisis or for that matter, man made crisis. And secondly, the Chinese economic system was also not unfamiliar with sudden reverse or sudden policy corrections. And what that means for today, that basically means the rapid growth of the Chinese economy has fundamentally been led by the government and the party and is just a degree of party state involvement. Now, if we think about the rise of Deng Xiaoping, he crease monitor the rapid rise of China and all that. But if we remember what actually made China, the starting point of China's rapid growth was not necessary. Yes, it was 1978, the clear signal that China is reforming and open up. But then there was a Tiananmen and the China was put under sanctions and all that. And then 1992, he made this famous southern tour, the Tiananmen, all those places. And he gave a clear signal during his speech when he was touring the southern part of China. And I was just recently revisited his speech. So I remember this is something that I learned very recently. This I read his speech so many times. So he cited this one example. This rich person, apparently he was one of the, if not the earliest, he was one of the earliest Chinese entrepreneur to make 100 million yuan. He was the founder of this sunflower seed company called Shazguadze or Idiot sunflower seed. When idiot sunflower seeds, yes, or food sunflower seeds, Shazguadze. And what's his name? What's his name? So at that time, out of jealousy or some other reasons, there were some voices among Chinese people or policymakers to say, this guy becomes so rich, we need to take him down. And he's in his speech. Don't you think that I'm aware of this kind of recommendations? But we cannot do that. He's dragged it down. And the reason he also explained why he, the party cannot do that. He said, if we punish to him, that would ascend a terrible signal. It would make people think that we changed our policy of reform and open up. And there are so many instances that we can do things and make people think we changed our policies. And we cannot do that. So from his perspective, the big risk as he criticized it is to make mistakes, to make people think that we changed our policy. Interactive brokers pay up to 4.83% on instantly available cash in your brokerage account. How much interest can your broker pay? Interactive brokers can serve it in prudent risk management uniquely positions them to pay up to 4.83% on uninvested, instantly available cash in your brokerage account. The best informed investors choose interactive brokers, rates subject to change. Visit ibkr.com slash interest rates to learn more. Access a vast selection of global fixed income securities at interactive brokers bond marketplace. Search their deep availability of over 1 million bonds globally. ibkr has no markups or built-in spreads and low fully transparent commissions on bonds. ibkr displays the highest bids and lowest offers received from the electronic venues they access. In addition, clients can interact with each other by placing bids and offers online to execute their trades. Learn more at ibkr.com slash bonds. This is Barry Rittles here to tell you about another podcast we think you'll love listening to, Masters in Business. Join each week for an enlightening conversation with some of the smartest people in investing and business. Doing business in Euro, it's all about being local. Stocks are way too cheap. This is where you want to be. I think life and markets are intertwined. Subscribe to Masters in Business today on Apple, Spotify, or wherever you get your favorite podcast. Can I ask sort of, I don't know, maybe it's a devil's advocate question or I don't know how to characterize it. But obviously there's this big household debt overhang that you're talking about. It seems from the outside and it seems from any comment. There's like a pretty unhealthy real estate market in terms of the level of speculation, the level of cost, et cetera. It also seems as though the government would like to sort of find a way to get out of that trap where it's not all about not everything revolves around the cost of housing or buying a new apartment. Is there an argument to be made that stimulus direct to household today under the current economic structure would just sort of further fuel a real estate bubble or real estate demand and that until the sort of domestic economy has shifted in some way more such that it's not out of that dynamic that it doesn't make sense to boost demand for those reasons. First of all, I would say household demand for properties or for housing in China is a perpetual decline for two reasons. The first reason is that from empirical data, we can observe that China's urbanization rate has picked. And secondly, this goes back to one of the four days. On the third day, demographics. As of last year, Chinese population growth for the first time declined. And there are some numbers saying that actually now India's population is more than Chinese population. So from the end, it's not just the population decline on its own, it's not necessarily causing an immediate shock or negative shock on housing demand, but it's actually the lower family formation rate and the idea that people for whatever, for cultural reasons is very expensive to get married for fancy, you know, banquet and all that. But you know, it's also very expensive to risk his in China, especially in big cities. So from that, those are the two structural reasons why demand for housing is a perpetual decline in China. Even if the government gives stimulus checks to the Chinese household in the current mix of policy environment, I would not necessarily be confident that the Chinese household are going to be incentivized to spend or be thinking that this is a good time to buy house. And at the reason, there are two reasons. The first reason is negative confidence shock. And the second is a deflationary policy environment. And the negative confidence, part of that comes from, you know, people's material feeling that their household balance sheet deteriorated as being filled by the Chinese people as, well, you know, I can you purely observe the value of my house went lower. And yet I am still paying a lot of mortgage. So you see, well, there is early mortgage payment, which the banks are not happy about it. And then on the other hand, as the Chinese GDP grow slows down, you know, 3% last year despite record a high export last year. And then on top of that, we see the move out or the redistribution of global supply chains and international multinationals become less, you know, bullish about the Chinese market, then, you know, high paying jobs there are less the high paying jobs being created. So Chinese people becomes like, well, wait a moment. I don't think I'm going to make more money. Therefore, they are not going to be incentivized to spend. They are going to be more incentivized to save, not because of good environment, but because of lack of confidence. And then deflationary policy environment is because people are waiting. Well, it seems that from the beginning of this year, the government has put out so many policies to incentivize people to spend or for that matter support the housing market. And there is this popular saying, if you don't buy, if I don't buy, the housing price per square meter next week is going to be cheaper by 200 yen. So everyone goes on strike, right? To try to get a lower price. I think this is such a good point because historically, a lot of Chinese growth has been driven by infrastructure investment and housing. And it feels like infrastructure has kind of run its course. China does have a lot of great infrastructure right now. And at the same time, housing the other sort of twin engine of growth, there are a lot of doubts about it as you just laid out perfectly. I want to go back to something you said earlier. I've never heard anyone phrase it quite like this, but I think it's absolutely correct. The idea that the Chinese economy is sort of predicated on financial repression and that introduces inherent limitations in a situation like this. Can you talk a little bit more about how you see that working? Sure. The, you know, there are still many people talk about financial repressions and obviously people, you know, Tracy, you are absolutely right. A lot of infrastructure and housing have been to the twine growth engine for the Chinese economy because the drive up aggregate demand and they also drive up global commodity prices. Right. And I'm going to say that it's not that China built too much infrastructure or for the matter too much housing is that they overbuilt it to the extent that if population growth, population keep growing or more international companies move into China or there are more demand for factories because of entrepreneurs and all that. Growing supply, growing demand of the whole idea is, this is the Chinese policy makers mentality. As long as I build it, as long as I provide it, the infrastructure, they will come, right? But now the problem is, international companies are not coming for a variety of reasons and a lot of the reasons goes back to my quote about Deng Xiaoping. Reason the Chinese leaders have simply made policy choices and policy decisions, created a huge uncertainty and a signal, even if they did not have the intention, but at least from our observation, they created the signal that perhaps the Chinese government or the party change their policies with regard to reform and open up. So a lot of these boil down to, yes, the party is still very much out of the center of capital allocation in this whole idea of financial repression. This whole idea is to use high savings that Chinese people tend to save and this high savings is being channeled through Chinese banking system and the four biggest banks are state owned and through lower depositors saving rate, lower depositors rate, the banks are able to lend cheaply to support state owned enterprises or channel credit to sectors that are prioritized by the government. And many people who follows China, especially state owned enterprises, they are familiar with this idea of the government has these guidelines or government guidelines for prioritized, prioritized sectors every five years or so, they would update it. Right. You know, so we've talked about household demand, we've talked about debt, we've talked about demographics, there was actually a headline just yesterday and Reuters, China's fertility rate, drops to a record low 1.09 in 2016. Oh, the one headline I left off on the list. Yeah, you had to save one for me, I appreciate that, which is so obviously still going, you know, in the wrong direction. And I want to talk about, you know, the actual topic of your book, but I think maybe there's the fourth D in your fourth D framework, the decoupling. And so obviously, I mean, I think there's some like sort of intuitions, like okay, like US or global multinationals, maybe like less inclined to invest in China, obviously the sort of growing trade tensions that started under Trump and really have continued or maybe even registered higher under Biden. But how do you think of that word decoupling? What does it mean to you? Like how do you define it? Honestly, I felt decoupling at the individual. First of all, Joe, I appreciate that you're asking me, you know, how I feel about it, because people are very confused about what is decoupling or what are talking about. Do you risk it? And there is actually no formal definition about what they are at a personal level. The moment during COVID, the moment I realized, I cannot get on a plan from New York to go back to Shanghai or Beijing. For me, that is a sign of decoupling. And right now, if I am correct, there is still no direct flight between New York and Beijing or Shanghai. I didn't realize that. And the flight, right now I think there are concrete policies that, you know, concrete initiatives in the aviation industry, between US and China to increase the flight, but it's still very below pre-pandemic level. So what we are, we can't concretely observe less and the less people to people communication. And from economic sense, obviously, or political economy sense decoupling, obviously, means, or for that, you know, right now, we are talking about the risk, is very much a Western term, if we view it from China or Chinese policy makers' perspective, because this is the term that they condemn a lot. You see, primarily in the summer Davos, in Tianjin, that decoupling is a terrible idea, is a false preface, and all that. But decoupling, really, I understand it from the perspective of supply chain diversification. The idea is really not about getting rid of China, simply because China is on every part of your supply chain. How could you possibly get rid of China, right? But it's really about not being overly reliant on your one simple supplier. The whole idea of, you know, you can't 101 used to be economy of scale, but now economy of scale become a risk. Huh, that's very well put. Economies of scale becoming a risk. So why don't speaking of scale, why don't we talk about the sovereign wealth funds, because when you look at the numbers of something like CIC, I mean, they're massive, with China, the numbers are almost always massive. The accumulation of this wealth, and the fact that it is held by these public investment entities, what does that mean in times like this? China has, you know, billions, possibly trillions of dollars worth of FX reserves. I can't remember the exact number. I think there's some debate over it now as well. But could they tap some of those assets to provide support in times of economic slowdown? Tracy, that's an excellent point. In times of economic slowdown, I would say there are opportunities, but in times of economic crisis, they have done that before. And actually, China's sovereign funds initially was not created for geopolitical or geoeconomic aspiration, power projection. It was created out of crisis. The very first time that the Chinese policymakers used foreign exchange reserves was to recapitalize the Chinese banks in the early 2000s. When the major Chinese state-owned banks were crippled by non-performing loans, at that time, some of those banks were suffering from non-performing loans as high as higher than 20% or 25%. So by definition, they were, you know, non-solvent. So at that time, they decided that they created this special policy vehicle called Central Beijing and used foreign exchange reserves through Central Beijing to recapitalize these Chinese banks. They have been quite accessible. Therefore, when there were a few, I think it's around 2015, if you remember correctly, there was this Baoshang in Han Crisis. It's another medium-sized bank crisis in China and a lot of the confusion at that time people were saying that, oh, you know, the Central Bank is going to take it over. Actually, it's not the Central Bank. It was the Central Beijing. And now, when a lot of these bad loan managers or bad debt managers or the so-called state-owned asset management company, a lot of them are in trouble now. And the idea is, I wouldn't be surprised. You know, Beijing is going to step in and take them on its balance sheet. Because this is a well-established channel that Central Beijing knows what to do it and do it successfully. Interactive brokers pay up to 4.83% on instantly available cash in your brokerage account. How much interest can your broker pay? Interactive brokers can serve it of in prudent risk management uniquely positions them to pay up to 4.83% on uninvested, instantly available cash in your brokerage account. The best informed investors choose interactive brokers, rates subject to change, visit ibkr.com slash interest rates to learn more. Access a vast selection of global fixed income securities at interactive brokers bond marketplace. Search their deep availability of over 1 million bonds globally. ibkr has no markups or built-in spreads and low fully transparent commissions on bonds. ibkr displays the highest bids and lowest offers received from the electronic venues they access. In addition, clients can interact with each other by placing bids and offers online to execute their trades. Learn more at ibkr.com slash bonds. This is Barry Rittles here to tell you about another podcast we think you'll love listening to, Masters in Business. Join each week for an enlightening conversation with some of the smartest people in investing and business. Doing business in Europe, it's all about being local. Stocks are way too cheap. This is where you want to be. I think life and markets are intertwined. Subscribe to Masters in Business today on Apple, Spotify, or wherever you get your favorite podcast. Stepping back further, I mean, you know, a lot of sovereign wealth funds around the world I associate with real commodity export countries. So obviously the Norwegian sovereign wealth fund, one of the biggest, the various golf sovereign wealth funds and they tend to be in large part about sort of currency stabilization given the inherent volatility of GDP and their export channel. You mentioned, you know, this sort of origin of them and the banking crisis. Broadly speaking, what purpose do they serve for China currently sitting beside the current economic weakness? Sure. In a joy, I appreciate that you mentioned the origin of the sovereign funds, right? And because a lot of these sovereign, so-called sovereign wealth fund in the entire universe of the sovereign wealth fund as Tracey mentioned earlier, these funds are massive and the Chinese funds are actually massive. CIC alone, it managed more than 1.3 trillion asset, which is larger than the size of Mexico's GDP. And I think Mexico is like the world 17th largest economy or something like that. And China has more than that. So broadly speaking, despite that, yes, you know, originally these funds were the first time that China did it was to solve a crisis and then as China's reserve accumulation increase or at least, you know, Tracey was right, there is a debate with regard to how we should think about the size of China's foreign exchange asset. But if we think about foreign exchange reserves using IMF's narrow definition, China's foreign exchange reserve was at one point peak at $4 trillion, right now it's plateaued around $3 trillion, slightly higher than $3 trillion. And as China reserve accumulates faster and more, the debate in terms of how to better manage China's foreign exchange reserves started. And after President Xi Jinping came to power in particular, there has been a shift to strategically use the foreign exchange reserves to serve certain foreign policy agenda or to finance a certain government initiatives, such as the creation of the Silk Road Fund to specifically advance or finance the belt and the road initiative. Right. So I remember Brad Setzer recently just on the debate over the size of FX reserves, Brad Setzer had a great piece of research about the possibility that maybe China has an additional $3 trillion, I think it was, worth of assets that aren't necessarily accounted for in official statistics. The idea being that if it hadn't channeled so much of that money into the Silk Road Fund or Belt and Road and programs like that, this would be an available pool of cash that it could use for other things. What is the political appetite, I guess, to move away from using that money to exert Chinese influence in other parts of the world, buy up commodities, things like that, build ports in Africa, whatever, versus maybe starting to channel some of it more domestically. No, Tracey, that's an excellent point. Brad and I, we are colleagues. And somehow we have done independent research on similar topics and all that. His research has always been brilliant and solid. His charts are fantastic. I would question the color coding aspect of it. Oh, really? Yeah. But his charts are great. My estimation of the size of shadow reserves or whatever, the assets, the foreign exchange asset that are not recorded on China's official foreign exchange statistics, in the same proximity to breast estimate. And in particular, for a lot of these asset managed by state administration of foreign exchange, it established domestic and international investment corporations. And my assessment of to what extent this would be used to solve, to project power globally, I would say perhaps in the current global geopolitical environment, not so much. And the reason is because this is perhaps is another point where China's policymakers tend to think differently in terms of economic or financial management diversification. It used to be the at least starting from 2007 to 2013. During this period of time, the discussion about diversification of foreign exchange reserves has been diversified away from US treasuries because the yield on US treasuries was so low and the opportunity for us to hold most of our reserves in US treasuries is so high. Therefore, we need to diversify in strategic asset overseas, such as critical minerals, oil gas, or some startup companies and all that. And a certain people even put out agenda in terms of, these are the six areas that we need to think about in terms of strategic asset. But now diversification becomes a risk. Because diversification cannot diversify away systemic risk, and for China, at this moment, systemic risk becomes being sanctioned by the West. This is my assessment. Obviously, I did not get this from Xi Jinping or anybody. But given the West collective sanction against Russia, especially the freeze of Russian reserves, now you realize, well, who has the largest foreign exchange reserves in the world? Well, it's China. And where are most of the reserve invested or most of the assets invested or owned by sovereign funds? There are most of the sovereign funds investing in Europe and America. There are not necessarily politically aligned or geopolitically aligned in times of geoeconomic contingency, such as Taiwan. I think that's a very reasonable assumption. You actually brought up something that I wanted to ask you about as well, which is China's buying of US treasuries. And there is a sort of perpetual concern that one day China is not going to be there to finance the US deficit, I guess. How realistic is that concern in an era where China is potentially worried about something like sanctions? To be honest, I'm not surprised that the appetite for China to slow down or buy less, US treasuries has exist or has already happened. Part of the reason is because the conversation has already started in the 2000s. And the people already realized, well, there is opportunity cost of holding US treasuries. At that time, the opportunity cost was purely in terms of economic. But now the problem becomes, perhaps there is also geopolitical risk. The diversification aspect of it. And then the other aspect of the debate comes down to, well, perhaps China would not necessarily want to dump US treasuries in large amount too fast, either because ultimately, any volatility in US treasuries market, or for that matter, the depreciation of US dollar is going to inflict a huge pain on the Chinese central bank's balance sheet as well. So I just have one more question. And this is going to be one of those questions that's totally unfair because it's actually like incredibly open-ended. And we could probably do another hour on this, but it's got to be like one question. But the title of your book, how the Communist Party of China, sovereign funds, how the Communist Party of China finances its global ambition. We've been talking a lot about the financing. But what are the global ambitions? Like that? This is actually another episode. I know it's a whole other episode because we are probably a whole series of like, but I do think we should like touch on that. Like how would you summarize the global ambitions of the Chinese Communist Party? I think the global ambitions have changed and evolved over time. It used to be the case that from things shopping outward before up until 2013, or the end of 2012, the global ambition has been growing the economy, raising up the people's life standard and so that the party can stay in power. And starting from 2013 and outward, we started to see the, there is an inflation of the party's ambition from the Belt and Road Initiative to the building of shared human destiny. And a lot of these reside or resonates with the current leader, President Xi Jinping's continued search for great ideas. And this brings me back to Deng Xiaoping. Deng Xiaoping in this 1992 tour. He said, it is okay for us to not have new ideas as long as we do not change with our economic reform and open up policy. But right now, the ambition seems to be changing and it seems to be a moving target with regard to figuring out what exactly we are trying to do. Well, I do think maybe we should, at some point, have you back for like an hour, just like how this is all changing and where it's all going and how it's evolving. A song and Zoe Lut, this was a fascinating conversation. Really appreciate you coming on up. Thank you both for having me and I'm a big fan. Oh, thank you so much. Thank you. ["Deng Xiaoping in China"] Tracy, I thought that was great. I need to come up with something like the four Ds of something. Just like, I feel like a calling card, some big thing is like, it's so good. Well, I'm glad you asked that last question about the ambitions of China because I think it hints at the fundamental tension here, which and Zoe mentioned this, which is for years, the party justified its control by promising economic growth. So you have that social contract, but I think the difficulty now is what if that control is coming at the expense of economic growth? You know, if we're talking about a lot of these difficulties are in fact a political economy problem, then I think it raises that question and becomes extremely tricky for the party to actually navigate. I hadn't really thought about that point before about the sort of, I guess I would say inherently decentralizing effect of more household demand, right? That at some level, if households have more cash, if they're less financially repressed, et cetera, then at some level, like there's a limit of the degree of control that political leaders can have about that spending and where it goes and how that money is consumed. I hadn't really, I sort of had this conception that will maybe for domestic industrial purposes, you want to prioritize the interests of certain exporters or certain industries, but just the idea of an inherently decentralized effect is one that I hadn't thought about at all. Well, and also it highlights the importance of the public business entities in China. And this is something that I only realized from actually spending time in Beijing, which is a lot of countries have big government buildings or monuments of some sort. A lot of the biggest buildings in Beijing are the CIC and the other sort of state-owned enterprises. And if you walk around the ring roads of Beijing, you get a real sense of their sort of monumental importance to the economy. There is physical evidence of it, which you can't really appreciate unless you see them. The other thing that I thought was really interesting was the idea of more need for diversification in order to offset the decoupling aspect that Zoe talked about. But again, in times like this, where you need more money to support the domestic economy, but at the same time, you're worried about the external environment and you want to diversify away from the US to sort of offset that. That also seems really difficult to do. So many interesting things. Also, can I just say, I am now I'm slightly obsessed with idiot melons seeds and I'm gonna go off and research. That's what I'm doing. I'm sure you're gonna get off, I guess. I was gonna do the same thing. Yes, excellent. All right, shall we leave it there? Let's leave it there. Okay, this has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest, Songwen Zoe Lu. At that same name, Songwen Zoe Lu. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashal Bennett at Dashbot. And check out all of the Bloomberg podcasts under the handle at podcasts. And for more Odd Lots content, go to bloomberg.com slash Odd Lots. We post transcripts, we have a blog, and a newsletter that comes out every Friday. And, and before I forget, we also have a discord. It's really fun. 24 or seven listeners like yourself are in there chatting about all these topics, economics, macro stuff, currencies, super interesting plays, discord.gg slash Odd Lots. And if you enjoy Odd Lots, if you like these conversations, then please leave us a positive review on your favorite podcast platform. Thanks for listening.