Odd Lots - The Four Big Structural Forces Holding Back China's Economy

Episode Date: August 21, 2023

The Chinese economy is in a slump. Industrial production is down. Retail sales are down. The property industry continues to struggle. The People's Bank of China just did a surprise rate cut. So what's driving the decline and what can the government do about it? On this episode of the podcast we speak with Zongyuan Zoe Liu, the Maurice R. Greenberg Fellow for China Studies at the Council on Foreign Relations and the author of the new book Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions. She explains how the "four Ds" — demand, debt, demographics and decoupling — are acting as a persistent drag on the Chinese economy right now. We discuss possible policy responses and how China's war chest of financial assets plays into the government's strategy.See omnystudio.com/listener for privacy information.

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Subscribe today wherever you get your podcasts. Bloomberg's Surveillance, Essential Listening, each and every business day. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, very weak economic data out of China lately. Yeah, to put a mildly.

I'm just started very directly. No, the data has been very weak. I have a collection of paraphrased headlines here. 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 When you just announced that a certain data point that people have been tracking for years, suddenly will not be published anymore. 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 really came for paratrace. I did. Yeah, I know it's surprising, but I did actually... I'm not surprised. I'm just surprised. 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-Zero, there was this expectation that China was going to end up being a part.

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 that hasn't picked, you know, there has been this pretty mild, sort of 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 sort of like economic weakness that you bring up, there's also the sort of like 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 garden, the big developer running into a lot of trouble similar to the weakness we've seen in China Evergrand. 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 U.S. treasuries? So I think that is definitely one aspect of this that is really worth exploring. So many interesting elements right now. 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. 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 Koo conversation. It's sort of, you know, you got to 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 Adelots. Thank you, Joe and Tracy for having me. And I'm a big fan of the Adelots. Very, very kind of you to say. You know, why don't we just start off like Super Svalod? 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 been a contrary. Oh, good. I like this

already. You know, in November last year, I put out a piece on foreign policy, basically made the argument to say that 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 4Ds, demand debt, demographics, and decoupling. At that time, it was decoubling, and now it's derisking. This is great, the 4Ds.

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 demographic. Oh, and decoupling. 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 exited the zero COVID policy, given, you know, 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. But in short-term revengeful expenditure would not necessarily overcome the long-term structural problems that have dragged the Chinese economy, even just from GDP terms. You know, if 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. That is that

category, but if we just measure it from GDP perspective or in terms of export as a percentage of 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 has at its height. Export as a percentage of GDP was about 30 percent 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 we actually observe goes back to the 40s. 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 lump of the time, you know, yes, we can make the argument to say household consumption as a percentage contributing to the Chinese GDP is, you know, is about four. 40%, it has been low and, you know, global average. I'm not even talking about, you know, the OECD level. I'm talking about a global average. It's about 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 trajectory. In other words, 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 2013. And if we just stretch it in between President Xi Jinping's two term, the second term was even 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 as the word, it's like, why isn't the Communist Party more willing to extend support directly to the people and, you know, rebalancing things? A, why did it get worse? But why is there this reluctant to do something like what we did in the U.S.? Just sort of print money and give it to people? You know, Joe, that's an excellent question. You make me think about the why aspect of it, right?

So fundamentally, I would argue that there are two aspects 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 again, his second term was worse on average than his first term. So that's one aspect in terms of household income growth. And then the second aspect of it would be household balance sheet deterioration. And a lot of this comes down to housing market, 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 check to a Chinese household. It's 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 can just line up or wait in their house and the mail would come in get a stimulus check. Some students were even getting stimulus check. And then they problem becomes, well, historically, there has not been this kind of precedent, but no president 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 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 built 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 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, 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 crack down, the tech sector crack down, and that would apparently seem to perhaps make people more reluctant to do their own startups and things like that. And then,

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 this is yes. Yes. You are right, Tracy. And from an 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 about

the 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 grape leap forward. And when the communist took over, they also destroyed a lot of the banking systems in Shanghai and elsewhere established by the imperialist, right? 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 political 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 it's just a degree of party state involvement. Now, if we think about the rise of Deng Xiaoping,

he correspond to 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's reform and open up. But then there was Tianmen. And China was put under sanctions and all that. And then 1992, he made this famous southern tour, he toured Shenzhen and 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 might 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 a hundred million yuan. He was the founder of this sunflower seed company called a shaz-z-gwa-ze or idiot sunflower seed. We're an idiot sunflower. Idiot-stunflower seeds. Yes. Or Fu sunflowersies, shahs-gouazz. What a name?

What a name. So at that time, out of jealousy or some other reasons, there were some voices among Chinese people or policymakers to say, you know, this guy becomes so rich, we need to take him down. And in his speech, Deng Xiaoping said, I'm aware of this kind of record. But we cannot do that. He striked it down. And the reason he also explained why the party cannot do that. He said, if we punished him, that would send 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. And we cannot do that. So from his perspective, you know, the big risk, as he characterized it, is to make mistakes to make people think that we changed our policy. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business.

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Subscribe today. wherever you get your podcasts. Can I ask sort of, I don't know, maybe it's a devil's advocate question or, I don't know how it characterize it. But, you know, obviously there's this big household debt overhang that you're talking about. It seems from the outside and it seems from any commenters like a pretty unhealthy real estate market in terms of the level of speculation, the level of costs, et cetera. It also seems as though the government would like to sort of find a way to get out of

of that trap where it's not all about, you know, not everything revolves around the cost of housing or buying a new apartment. Is there an argument to be made that stimulus direct to households 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.

Oh, the third D 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 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 banquet and all that. But, you know, it's also very expensive to raise kids in China, especially in big cities. So from that, those are the two structural reasons why demand for housing is on 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, A, B, incentivized to spend or be think that this is a good time to buy house. And 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, you know, as, you know, being felt by the Chinese people as, well, you know, I can empirically 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 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 being, there are less high paying jobs being created. So Chinese people become 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 the 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 yuan. 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. There are so many people talk about financial repressions and obviously these people, you know, Tracy, you are absolutely right. A lot of infrastructure and housing

have been the twine growth engine for the Chinese economy because they drive up aggregate demand and they also drive up global commodity prices. Right. And I would 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. The whole idea is

this is the Chinese policy makers' mentality. As long I build it, as long I provided 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 create a huge uncertainty and signaled, 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 changed their policies with regard to reform and open up. So a lot of these boil down to, yes, you know, the party is still very much at the center of capital allocation. Yin, 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, you know, the four biggest banks are state-owned. And through lower depositors' saving rate, lower depositors' rate, and they are able, 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, you know, who follows

China, especially state-owned enterprises, they are familiar with this idea of the government has these guidelines or government guidelines for 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 in Reuters. China's fertility rate drops to a record low 1.09 in 2020. The one headline I left off my list, Jerry, found it. 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 4D framework, the decoupling.

And so obviously, I mean, I think there's some like sort of intuitions like, okay, like U.S. 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 retarded it higher under Biden. But how do you think that we're decoupling? What does it mean to you? Like how do you, how would you define it? honestly, I felt decoupling at the individual.

First of all, I appreciate that you asking me, you know, how I feel about it because people have, people are very confused about what is decoupling or what are talking about derisking. 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. sign of decoupling. And right now there is, if I am correct, there is still no direct flight between New York and Beijing or Shanghai. Huh, 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 U.S. and China to increase the flight, but it's still very below pre-pendemic level. So what we are, we can 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're talking about de-risk, is very much a Western term, if we view it from China or Chinese policymakers' perspective, because this is the term that they condemn a lot. You see Premier Li Qiang in the summer devils in Tianjin, that, you know, decoupling is a terrible idea, is a false prefaces and all that. But decoubling 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, Econ 101 used to be economy of scale, but now economy. economy of scale become a risk. Huh. That's very well put. Economies of scale becoming a risk. So, 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, we 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 a 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 Hei Jin and used foreign exchange reserves through Central Huayjin to recapitalize these Chinese banks.

they have been quite successful. Therefore, when there were a few, I think it's around 2015, if I remember correctly, there was this Bauchang-in-hang crisis. It's another medium-sized bank crisis in China. And a lot of 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 central and now when a lot of these bad loan managers or bad debt managers are the so-called state-owned asset management of the company, a lot of the market, in trouble now. And the idea is, I wouldn't be surprised, you know, Huizin is going to step in and take them on its balance sheet. Because this is a well-established channel that Central

Huizien knows how to do it and do it successfully. On April 4, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, we did this to you. What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. 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 Gulf 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, the sort of origin of them and the banking crisis. Broadly speaking, what purpose do they serve for China, like currently sitting aside the current economic weakness? Sure. And Joe, I appreciate that you mentioned the origin of the sovereign funds, right? Because a lot of this sovereign, so-called sovereign wealth fund in the entire universe of a sovereign wealth fund, as Tracy 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, Tracy 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, picked at $4 trillion. right now is 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 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, Tracy, 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. And sometimes I would question the color coding aspect of it.

Oh, really? But his charts are great. my estimation of the size of shadow reserves or whatever, you know, the assets, the foreign exchange asset that are not recorded on China's official foreign exchange statistics would be in ballpark in the same proximity to breast estimate. And in particular for a lot of these assets managed by state administration of foreign exchange, you know, 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 U.S. treasuries because the yield on U.S. treasuries was so low and the opportunity for us to hold most of our reserves in U.S. treasury is so high. Therefore, we need to diversify

in strategic asset overseas, such as critical minerals, oil gas, or, you know, some startup companies and all that. And 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. Right? And for China at this moment, systemic risk becomes being sanctioned by. the West. This is my assessment. Obviously, you know, I did not get this from Xi Jinping or anybody.

Sure, sure. But given what Russian, 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? Most of the sovereign funds invest in Europe and... America, they are not necessarily politically aligned or geopolitically aligned in times of geo-economic 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 U.S. treasuries. And there is a sort of perpetual concern that one day China is not going to be there to finance the U.S. 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 U.S. 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 U.S. treasuries. At that time, the opportunity cost was purely in terms of economic. But now the problem becomes perhaps there is also geopolitical risk. Right. 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 U.S. Treasury in large amount too fast either because ultimately any volatility in U.S. Treasury market or for that matter, the depreciation of U.S. dollar, is going to inflict a huge pain on the Chinese central bank balance sheet as well. So I just have one more question, and this is going to be one of those questions, it's totally unfair because it's actually like incredibly open-ended, and we could probably do another hour on this, but it would like, you know, it's got to be like one question. But, you know, the title of your book, how the Communist Party of China, or 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? This is actually another episode, isn't it? 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 Deng Xiaoping onward, before up until 2013 or the end of 2012, the global ambition has been growing the economy, raising up the people's life standard, so that the party can stay in power. And starting from 2013 and onward, we started to see there is inflation of

the party's ambition from the Belt and Road initiative to the building of shift. 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 his 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 on like how this is all changing and where it's all going and how it's evolving.

Songman Zouli Lute, this was a fascinating conversation. Really appreciate you coming on Apple. Thank you both for having it. me and again, I'm a big fan. Oh, thank you so much. 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 on some big thing. It's 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. 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 like, you know, like I sort of had this conception that, well, maybe for like domestic industrial purposes, you know, you want to like prioritize the interests of certain exporters or certain industries, but just the idea of like an inherently like sort of like decentralizing effect is one that I hadn't thought about at all. Well, and also it sort of 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, you know, 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 ringroads of Beijing, you get a real sense of their sort of monumental importance to the economy. There's 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 U.S. 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 melon seeds. and I'm going to go off and research. That's what I thought. I was like a sooner-to-get sunflower seat company. I was going to do that 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 Allowway. You can follow me at Tracy Alloway. And I'm Joe Wisenthall. You can follow me at the stalwart.

Follow our guest, Songwen Zoe Liu, at that same name, Songwen Zoe Liu. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashel Bennett at Dashbot. and check out all of the Bloomberg podcasts under the handle at podcasts. And for more Oddlots content, go to Bloomberg.com slash oddlots, 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. 24-7 listeners like yourself are in there chatting about all these topics,

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