Odd Lots - How Does The Chinese Economy Work?

Episode Date: January 28, 2019

Matt Boesler, an economics reporter for Bloomberg, had the opportunity to report from Beijing for a few months in 2018. He shares with us his experience there, and what he learned from the opportunity. See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast, Odd Lots on Amazon Music. And welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weizanthal. So, Joe, you know I'm over in Hong Kong, right? You've realized this. Yeah, that much I did know, yeah. Excellent. So now that I'm in the Asia region and I'm very, very close to China, I've taken a great, great interest in Chinese monetary policy and economics. What is it like, Tracy, as someone, like I've only ever worked in New York, basically. And you've worked in New York. You've probably worked in London.

I'm not sure, but I suspect you have. You've worked in Abu Dhabi. You've worked now in Hong Kong, probably like a bunch of other places. You're very international, just a very international person. So do you go around the world just like acquiring new interests and having to learn on, get familiar with new things, and then you sort of drop the old thing as you move to the next city? Yes, absolutely. I develop short-term expertise and then quickly forget it. But on the subject of expertise, you know, clearly I sort of wanted to build up my knowledge base of how China's economy works and how its monetary policy works. and specifically the People's Bank of China, the central bank over there. And it's very different to how the Fed works.

So even if you've been watching the Fed for, you know, decades and decades, it might not actually be that useful when it comes to applying your knowledge to the Chinese market. Yeah, I've always felt this way that I have some familiarity with how the Fed works in the United States, and I have some familiarity with how the U.S. economic system works, and the data that we're supposed to look at to gauge the health of the U.S. economy. But when I think about China, by every facet, I just feel like I must be such a tourist because I have some passing knowledge, but I never really think that I have any real understanding of what's actually going on.

And so, yeah, it just feels like this very sort of closed off world to me that I can't really begin to grasp the mechanisms and the levers and all that. And if you think about it, there are some things that immediately spring to mind when you think about the PBOC. I mean, notably, I guess, the complexity of a lot of its monetary policy operations. Like, it has dozens and dozens of things that it does. And then another thing that people talk about a lot when it comes to China and economics is, of course, the quality of the data. You know, people are always suspicious about the economic data being published by the Chinese authorities. So there are immediately. immediately some idiosyncrasies, some differences to the U.S. that come up straight away. Okay, so am I going to be a Chinese eco expert after this episode? I hope so. So in the same way that I sort of got shipped off to China, Matt Bosler, Bloomberg's longtime reporter on the Federal Reserve and U.S. economics, got sent out there late last year for a job swap. I think he was there for about three months. And the really interesting thing about his experience is because he's followed the Fed and U.S. economic policy for a long time, he's the perfect person to sort of give us a great overview of exactly the differences between the U.S. and the Chinese monetary policy system and what it's like to actually go out there as a Fed reporter and suddenly start reporting on the PBOC.

Well, it's a cliche, but they always say that people should report on topics kind of as if they were. a foreign correspondent. And so I think what that means is if you get too familiar and too comfortable with the story, then you could sort of miss the forest for the trees and you miss the things that other people might find really interesting and are actually really important. And I feel like Matt had the opportunity to sort of see this new world from the outside and maybe give us some interesting perspective. Yeah. So let's bring him on. Matt Bosler of Bloomberg News. It's so good to have you. Hello, hello. Thank you guys so much for having me. on today. So, Matt, did I describe your career path correctly, you know, writing about the Fed and economic

policy for a long time and then in Beijing late last year for a few months, right? That's correct. Since I started in journalism about seven years ago, the vast majority of what I've done has been covering the Federal Reserve and the U.S. economy. So this was a very interesting experience for me, as I'm sure you're well aware. So just, uh, just, uh, to describe what you work for Bloomberg, you're our colleague, and you're sort of brought to Beijing for three months. What was the stated premise of your time there? So we have a job swap program here at Bloomberg. It's a great opportunity to kind of get different reporters into different regions of the world and see how things work, you know, in different areas. So I am on the U.S.

economy team here in New York. And while I was in Beijing for three months, I was swapping on the China economy team there. So, you know, it ends up being a little bit similar, especially because the big story on both beats for that three month period was the trade war between the U.S. and China. So that at least made it a little bit easier to kind of adjust at first. So I'm curious, when you landed in Beijing and, well, maybe even before that, you know, when people said you're going to go over to China to, you know, the capital to cover the PBOC. What did you think about that prospect and what were your initial impressions or, I guess, preconceived notions of how the PBOC works? Oh, it was a really exciting prospect because obviously I have all of my experiences in developed

markets, right? And we know there's kind of this dichotomy in financial markets where developed markets in general work very differently than emerging markets. And so I was really looking forward to getting some of that experience, seeing how things work in more of an emerging market setting. And of course, there's no better place to do that than China because it's simply the most important, not only emerging market, but one of the most important markets in the entire world. And so that was extremely exciting. In terms of initial impressions, one thing that really struck me was just how many more people we have sort of covering the U.S. economy. You know, these are two economies that are basically more or less the same size. And just in general, not just

Bloomberg, but writ large, there are much more resources devoted to covering and sort of explicating the U.S. economy than China. And that probably is for all of the reasons that I think we're going to get into in this discussion, some of which you teased at the top about, you know, data quality, relative paucity of data. And just general interests. I think there are sort of waves where people can be very focused on the U.S. and get away with being very focused on the U.S. for long periods of time. And then you have sort of not crisis, but, you know, sort of rare situation that arises in China like we did in 2015 with the devaluation. And certainly like we've seen over last year or so, where everybody all of a sudden is like, oh, I need to understand

China. We need to start devoting more resources to understanding China. Yeah. On that last point, so obviously there's the trade story. And no one really knows how that's going to end. But the other big thing that sort of independent of trade that you hear a lot from people is, well, what if China is just experiencing some sort of end to its growth model or it can't stimulate its own economy the way it used to or that it's undergoing some sort of excluding trade, some deeper structural change that's going to bring it to a slowdown. And everyone is concerned about that, including investors. here. What is going on in China right now that has people so concerned? Yeah, so you nailed it. I mean, that's a very important part of the story. It's not just the trade war. It's everything that China has been doing to sort of de-leverage its economy, try to rebalance that growth model toward a more

sustainable consumption-based model and move away from investment and sort of export-oriented growth. And so what the analysts are kind of saying right now is all of this growth slowdown, that we've seen in China. You know, we just got fourth quarter GDP numbers the other day. All of that so far just reflects sort of the leftover effects of the de-leveraging campaign that was really underway in earnest in 2017. And we're not going to really start to see the effects of the trade war in the official Chinese economic data until the first quarter. And part of the reason for that is that with these tariffs that the U.S. has put in place on China and vice versa, there's there's been a lot of front running of those tariffs because they don't go in effect until,

well, they were supposed to go in effect January 1st and then they got pushed back another three months. And so the export, the trade numbers have actually looked pretty good in the fourth quarter because of that effect. And so now all the economists are saying, of course, we're going to see that payback in the first quarter. It's going to look pretty bad. And so we haven't really yet to see that effect of this conflict in the official data yet. It's much more that other story that you represent. referenced some of the stuff that China's already been doing to try to get on a more sustainable economic model. Right. The de-leveraging campaign. And of course, this kind of relates to a little bit

what I alluded to in the intro, which is that China has a sort of unique and vast toolkit of monetary policies. And some of those are, you know, credit channels that arguably led to a build up of debt in the economy, which the authorities are now trying to reduce. Can you walk us through the differences between what the Fed does in terms of its monetary policy toolkit and what the PBOC does? Sure. So as you alluded to, there are a lot of different sort of money market tools that the PBOC uses to implement monetary policy. And the Fed has a lot of those tools too. And And the difference is that's always sort of the background in the Fed monetary policy conversation. The Fed monetary policy conversation is always much more about what are they going to do with interest rates

or of course since the crisis, what are they going to do with their balance sheet, which gets you into the money market aspect a little bit more. But for the most part, you don't really talk about money market stuff unless something crazy is happening in markets. And all of a sudden, again, people are kind of like, well, we need to figure out. what's going on in money markets now. It's this thing that we haven't really paid attention to because we're mostly just interested in what the Fed is going to do with interest rates. And so in China, the banking system is very much an extension of the state in a way that it's just not in the

U.S., right? And so that sort of gives rise to the necessity for all of these different types of tools to implement monetary policy because you have a situation where essentially the banks are taking marching orders from the government, and then that has various effects on the economy, and then the government might decide, well, that's not the effect we intended, or we want to reverse that, say we want to do a big de-leveraging campaign, and then you might need all of these new monetary policy tools to kind of implement that, to kind of take care of the... So it's a little bit more ad hoc, is I guess what I'm trying to say overall, and that makes for an interesting sort of landscape for Chinese money market analysts.

I just want to real quickly connect what you just said about the nature of the banking system as an extension of the state to the overall Chinese export investment driven growth model that some people think maybe coming to an end or that China itself wants to start to curb. So is the idea that the current model is essentially you have all these industrial players, maybe some make carpets and some make semiconductors and some make semiconductors and some. Some make various industrial goods. And then the state promotes them via the channel of encouraging banks to lend to companies that export all of this stuff. That's exactly right. And it's very interconnected in terms of the state-owned enterprises and the state-run banks, right? So at the administrative level, you certainly have a lot easier time kind of controlling all of that, directing those flows, directing that investment, then you would have. have in the U.S., which is kind of this wild west free market economy in comparison.

A state-owned corrugated cardboard box company would get a loan from a state-owned bank, which is directed by the PBOC to induce a certain amount of lending to hit some target. And that's sort of been the classical. That's the classical model of how the economy is right. Yeah, that's more or less it in a nutshell. That's kind of the way they've been doing things for several decades. Matt, so you get to Beijing and you're meant to be covering the PBOC, Chinese monetary policy, the economy. How did you get started? Because I imagine it's kind of daunting when you first get there, right?

Yeah, absolutely. And so one of my major responsibilities was focusing on the economic data side of things. So in terms of the economy beat, there are kind of three major areas. One, of course, is the central bank and monetary policy. The other is the trade wars and sort of all of the fiscal policy surrounding that. And then the third, of course, is the economic data. And so much of the work we do here at Bloomberg is covering that economic data, analyzing the economic data and so on and so forth. And so one of the first things I did when I got there is I just spent a lot of time on the Bloomberg terminal on some of our eco functions like ECST, for example, just really going through all of the sort of data sources. that we have available in terms of the Chinese economy. And that ended up being really important and fruitful

because it gives you a sense of sort of the array of the official government data. In the U.S., we have so much official government data. We have releases almost every morning. And all of these data sets have very long time series that go way back. They're generally very highly regarded, trusted, in terms of, you know, the output that is being produced by these statistical agencies.

There's just a really long tradition there. Whereas in China, obviously, that's not the case on a number of levels. And so it really puts a premium on being able to draw in these alternative sources of data that don't have all of those same concerns. And it turns out we actually have a lot of stuff on the Bloomberg terminal that a lot of people don't know about when it comes to Chinese economic data. So one great example is satellite imagery. So we have a index that is based on satellite imagery that tracks lighting across, you know, the Chinese manufacturing industry.

And so it kind of generates an index on the state of Chinese manufacturing based on, you know, the lighting readings that the satellites are picking up. So that was kind of one of the first things I did was just trying to really go through inventory, all of that stuff, pull it out, put it into, you know, sort of a release schedule so that we had a way to kind of track that, especially, you know, during this whole trade war thing where we really need those alternative sources of data because it's not even, like we said, showing up in the official data yet. Could it be that, I mean, you would think that as China continues to develop that the government would create more highly respected data series, but could we just have sort of mostly privately collected data like satellites and other surveys?

Do we need as much official government data as we have in the United States? It depends on what you're using it for. So I think certainly for us as journalists and just society more broadly, I think it's really important to have these official government statistics that we can refer back to. But an interesting example like here in the U.S. is the Institute for Supply Management, the Manufacturing Purchasing Managers Index that they put together. So this is a private company.

It's a private survey of private sector individuals. The government has nothing to do with it. Yet this is one of the biggest movers in the bond market every month, right? When that comes out at 10 a.m., you know, whatever day it comes out, that's one of the most important economic releases we have here outside of the official jobs report and the official inflation report and the official GDP numbers. And so I think the answer to your question is yes and no. There are definitely room for both of those things, both in the U.S. and in China.

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Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. So anecdotally, I've heard some economists complaining that the data situation in China is sort of getting even worse as the economy slows. And we have had some stories like Guangdong province stopped publishing its PMI, supposedly, because they didn't file the paperwork in time or something like that. But you also have stories that, you know, the Chinese authorities have started pushing their own alternative indicators like, I guess the funniest example was an underwear index that showed that

everyone was buying more underwear and therefore the economy must be doing really, really well. What was your experience like in the three months you were there? Did you hear people talking about a lack of economic data that had previously been published? Or is there a sense that as the economy slows, China is going to become more selective in what it's publishing? There were a few examples like that, like the Guangdong PMI that you mentioned. One of the really interesting things to watch out for this year in 2019 is it seems to be the case that analysts believe that the official GDP statistics are doctored or unreliable in some way. But the really interesting thing was that they thought that the official statistics that were being published by the Chinese

government in 2018 actually lined up pretty well with the underlying economy. And so there's kind of this view that the Chinese government smooths the data, both on the upside and on the downside. So when in 2017, they were trying to de-leverage growth had some other tailwinds from global growth, was maybe doing a little bit better than the officially reported numbers suggested. And then in 2018, apparently they happen to line up very nicely and both the economy was actually growing 6.5% and that's also what the Chinese government reported. But now the analysts are saying,

well, our trackers are pointing to a much sharper slowdown in 2019 and we don't think the Chinese government is going to be willing to own up to that in the official statistics. And so it seems like we're kind of perhaps crossing below those official statistics to the downside again. So that will definitely be a very interesting thing. to watch as it develops. So you mentioned that in the U.S. there's a few sort of top shelf indicators.

The ISM privately collected is one of them, but then also the jobs report, GDP, inflation. What are the indicators that China watchers pay most attention to? There's a monthly data dump that has retail sales numbers, industrial production numbers, and business investment numbers. And those are pretty important. Those come out around mid-month. And those kind of give you your sort of monthly reading on what the hard official statistics are saying.

And there are a number of interesting storylines going on in those official statistics right now. For example, retail sales, retail sales growth has been slowing a lot. And part of that has been this collapse in auto sales in 2018. 2018 was just a terrible year for auto sales. And you really start to see this reflected around the world now. You look at Germany, for example, it's really been slowing a lot. And a lot of that has been attributed to the fact that auto sales in China have declined so much.

Germany has sort of become this manufacturer of cars for Chinese consumers in a sense. So you can see that rippling around the world in other areas. Another interesting storyline in that monthly data dump that's happening right now is that, So you get the industrial production numbers and the business investment numbers side by side. Manufacturing industrial production growth has been slowing a lot because of the deleveraging, the environmental crackdown, now the trade war. But manufacturing investment growth has actually been accelerating a lot. And so normally those two things move up and down together. But it seems to hint at, you know, there's something coming here.

perhaps it's, you know, more fervent industrial upgrading policy underway in Beijing, that sort of thing. It's not really clear from the data exactly what's going on, but that's another interesting thing to watch. And then the other big marquee release, I would say, are the PMI numbers that come out at the beginning of the month. There's like five, right, or more? So the Chinese government has an official purchasing managers index. And this is the kind of the main difference between the Chinese economy and the U.S. economy in terms of these data sets is the Chinese government publishes its own, whereas we don't do that in the U.S. They're all private sector surveys. But there is also a private sector PMI that market puts together, which they do the ones for the rest of the world. And those tend to, you know, move together as well. And so that's one interesting question that arises too is, well, there are all these concerns about the reliability, the accuracy of data. published by the Chinese government. But if you look at the official manufacturing PMI that they've been putting out,

it's been slowing a lot over the last several months, kind of in line with these other private sector indicators like the satellite imagery, for example. And so, you know, it's not clear how much of that, for example, is being doctored. That tends to be a big market mover. That's one of those things that can really set the tone for the entire following month the way like a job support in the U.S. can. So, Matt, you mentioned retail demand there. And of course, there are concerns around what people are calling a consumption downgrade in China. This notion that we were seeing a big boom in consumption as China's sort of reorient its economy away from industry and now that's slowing down for various reasons.

What was your take on that issue? And could you maybe frame how important consumption is for the overall, all Chinese economy and for the government, the authorities, the ruling CCP party, because of course there's this notion of a social contract in China, an idea that the authorities can stay in power as long as the domestic population is happy and they feel like they're wealthy and their lives are improving. Absolutely. So consumption is vitally important to not only the Chinese economy, but really the world economy. And it really goes back to this thing they have to do, which is rebalance their economy, which is not only important for the sustainability of Chinese growth going forward, but also global growth, because when we talk about these big global imbalances that

build up, a lot of that has been a result of Chinese industrial and trade policy. And so, and of course, U.S. policy, you know, interacting with that. In terms of the consumption downgrade, that's definitely something that you were hearing more reports of toward the end of my stay there. It's not something that is necessarily really easy to just go out and walk around Beijing and observe with your own eyes. But one related issue that I think kind of gets to this is it did seem like the people I talked to, especially, you know, college students, you know, early career age type people were really souring on the job market, which I thought was really interesting because when you look at the Chinese economy, it's still growing fire. or six percent, whatever the number may be. And for us in the West, we just think of that as this insanely high rate of growth. And it's hard to imagine that at that level of growth, you could really have a slowdown in the job market kick in in the way it seems to be kicking in there. And so it definitely

seems like that is underway at the moment. And that's definitely a risky situation for the Chinese government for all of the reasons you outlined. And I think that's why we're going to see more fiscal support in the form of tax relief. That's kind of the main tool they've been leaning on over the last couple months to kind of backstop the Chinese economy. Could it be that if things keep slowing the Chinese government would ever do another sort of 2009 type mega stimulus and build tons of more bridges and rail and go cities and just everything to pull out all the stops to increase demand in the economy? What the Chinese government says is that development across China has been really uneven. So there are areas to do that sort of infrastructure investment where it wasn't done before. So outside of the major areas, right, like Beijing and Shanghai and Guangzhou. But to your point, I mean, this is the reason why people are a little bit worried now about this episode as opposed to sort of the 2015, 2016, 2016 global growth slowdown or the 2008-2009 slowdown. Because in both of the those episodes, the Chinese government came in really strong with stimulus and kind of really kept the world economy afloat, not just the Chinese economy. And now the fear is that they don't really have the capacity to do that anymore. A, because they're already trying to de-leverage and they recognize

that they need to change the growth model, but also B, because their current account surplus, which used to be very large, has diminished dramatically and is on the verge of deficit. And so the Chinese currency is very important for the government and the economy. And there's a feeling that if they were to just go for another blowout stimulus, kind of running these big twin fiscal and current account deficits, then there wouldn't be a lot of support for the currency. And you could get into kind of a dangerous situation there. And that's why people are kind of bracing for what is this going to look like this time. Are they going to be able to manage it or not? So, Matt, you did great work in the three months you were in Beijing, but I feel kind of bad saying this. You know, the most memorable

thing for me was, but it's always a very good, a very good start. You really did. You really did, but the most memorable thing for me of your stay has to be this photo that started circulating of you at some sort of, it was either a PBOC or an economics press conference. And, you know, you're blonde, you're probably like two feet taller than everyone else in the room, you know, it was all these mainland Chinese reporters and they all have their heads down. They're scribbling madly and you were staring straight ahead. What was going on in that photo? So that was my turn to ask a question. And, you know, a lot of the U.S. media companies are blocked in China so we can't access our own website. And that's the same for the Wall Street Journal

and the New York Times. Most of the outlets there. And so we tend to have to have. slightly different questions that we bring to these press conferences than the local Chinese media, which tend to ask questions, which are a little bit more in line with perhaps what types of questions the government would like to answer. And so I can't remember off the top of my head what the exact topic of that question was, but that was sort of the situation that was happening there. Well, people are just going to have to go online and search for that photo because it is pretty amazing. Matt Bosler of Bloomberg News. Thank you so much for that.

A really great conversation. Thank you guys. Thanks, Matt. So, Joe, I doubt any of us are going to become experts in Chinese monetary policy and the economy after just 30 minutes. But I thought that conversation was really, really great. And it's a good first step, right? Yeah. No, I think that was a very helpful sort of basic explanation of the key difference between how monetary policy is conceived of in the U.S.

and other developed markets versus China. So obviously here we mostly just think about the interest rate. And the interest rate applies to everyone and applies to all the banks versus this idea of the central bank and the banking system being the primary levers of a sort of state-run economy in which money can be directed or directed backwards via different more direct priority. is sort of very different conception of what monetary policy is for than I think we think of here. Yeah, it's sort of a weird amalgamation of a command economy, but with market-based characteristics, I guess. I thought one point that Matt made really well was also the global importance of China and just the idea of, you know, there's a reason why you sort of want to rein in supply demand and balances in China, right?

because they end up impacting the rest of the world. So everything we've just discussed should be of interest to anyone who, well, watches global markets and economies or takes any interest in them whatsoever. Yeah. And I hadn't thought about that last point before about the sort of limitations that China currently faces on engaging in aggressive stimulus spending because, of course, if China were to do another huge fiscal boom infrastructure, that would require a lot of imports theoretically and at a time when the current account is already close to flipping to deficit and they're already concerns about capital flight and the strength of the currency, then you can see why they're in a more constrained situation with respect to those things than they might have been during previous slowdown.

So you can understand why maybe the slowdown in China is seen as slightly more intractable or difficult to solve than previous slowdowns we've seen over the last decade. Yeah, but at the same time, the Chinese authorities and the PBOC especially have a history, let's say, of being really, really creative when it comes to solving economic problems. So it'll be interesting to see if they can come up with stuff this time around. This has been another edition of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.

And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart. And you should follow Matt Boasler on Twitter. He's at Bose underscore. And you should follow our producer on Twitter. He's Tofer Forges, but on Twitter he's at Forges T. As well as the Bloomberg head of podcast, Francesca Levy, at Francesca today. Thanks for listening.

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