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Why is it important to stay focused on the data in order to make informed investment decisions? Listen as Chief Investment Officer Tony Roth speaks again with Shehzad Qazi from China Beige Book about the challenges the Chinese economy is facing. They examine three obstacles: global supply-chain dynamics; the struggle to boost domestic consumption amid economic shifts and social pressures; and the complexities of managing over-leverage in sectors like real estate and infrastructure. 


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China's Economic Engine: Strategies and Global Impact

Tony Roth, Chief Investment Officer
Shehzad Qazi, Managing Director, China Beige Book


Tony Roth: This is Tony Roth, Chief Investment Officer of Wilmington Trust and M&T Bank, and you are listening to Capital Considerations. Today we have a guest that was on about a year and a half ago, Shehzad Qazi. Shehzad is a Managing Director and Firm-wide Operations Lead at China Beige Book, the largest private domestic data collection network dedicated to tracking the Chinese marketplace and economy.

During his time at CBB, Shehzad has helped to develop data collection and develop a range of services and products for financial and corporate clients. And he's a frequent guest in the financial media, including CNBC and Bloomberg and CNN. He's also published pieces in Barron's Foreign Policy and other related publications.

Previously, Shehzad worked at a strategic public opinion research firm and conducted market intelligence in emerging markets and frontier economies. So Shehzad, thank you so much for joining us again. A lot's happened since we last had you on the show when China was still grappling with the reopening from the COVID, which I think is pretty far distant in the rearview mirror today.

Shehzad Qazi: It's great to be back. There's a ton happening on China and I think markets have, unfortunately, as usual, been getting the China story wrong, both from the upside and the downside. So glad to be getting into all this with you today.

Tony Roth: So let's get right into it. I want to frame our conversation today around what I think of as a perfect storm of challenges for the Chinese economy that we had framed in our Capital Market Forecast as part of our overall thinking in the world as we came into the year and those three challenges, and they're obviously related, but I think that analytically, we can think of them as distinct challenges to start to get into the conversation and then we'll see how they blend together.

But first is the, what I'm going to describe as, somewhat forced decoupling of the supply-chain relationships that China bears to the rest of the world. And here I'm talking about the fact that in light of the pandemic, and in light of some of the geopolitical issues, there are certain countries and economies and companies around the world that have decided to try to reduce the reliance on China as a source of key components, or even finished goods, et cetera. So we've seen some near-shoring and anchoring and offshoring to other countries, et cetera. That's one area. And by the way, another phenomenon that is driving this more recently are potential erection of tariffs.

You've seen this on EVs, but potentially within the political cycle, other areas. So that's one challenge that China is facing. The second challenge is domestic consumption. China has been aware of the need for a long time to pivot its economy somewhat away from the reliance on exports and more towards domestic consumption.

And this is partly driven by the need to be able to continue to grow its middle class. And so these issues are related, but of late, it's been harder for China to do that. China has not seen the growth in the domestic economy that they had hoped over the last year or so, and a lot of it has to do with some of the domestic stresses in China, whether it be high unemployment rates for young people. Whether it be the relative unavailability of credit now for residential purchases.

And when we look at the confidence numbers that we see among Chinese consumers, those confidence numbers are pretty low. So that's the second area that China is really grappling with right now. And then the third area is something that's been getting a lot of attention, of course, for a while, which is the over leverage in the Chinese economy within certain areas, particularly real estate. But then also the infrastructure work that has been also contributing to the Chinese economic growth for a long time has certainly come down significantly from its peaks as the Chinese government itself, it doesn't necessarily either have the need or the resources for that magnitude of infrastructure work in China.

And so, when you consider the unwinding of the real estate plus the reduced spending on an infrastructure that that is the 3rd area of headwind for the Chinese economy.

I thought what we might do is just take each of these and talk about what some of the key steps might be going forward. So let's start with that trade issue.

I outlined it as a challenge, but is it really a challenge? Because we've seen record amounts of exports out of China to the rest of the world. Maybe even though this was supposed to be a problem for China, China is sort of just plowing forward into the export market and whether it's because they're subsidizing their exports or whether it's because they're just the provider of last resort that's the cheapest one, they seem to be doing really well. So how would you assess this 1st area?

Shehzad Qazi: Four or five years ago, the idea of decoupling started to become very popular, a little bit longer actually, you would not have guessed that trade deficits with China would be rising, not just in the U.S., but elsewhere as fast as they have.

And that actually, the Chinese manufacturing sector would be the main growth driver in the post-covid recovery that we've seen take place in China. So a couple of things are very important. Number one, China has made it very clear, The Communist Party has made it very clear that they're going to be doubling down on the industrial side of the economy as they think about the future of their country.

Manufacturing is there. The state's not going anywhere. What's happening, of course, is that they're going to be doubling down on high-tech manufacturing, high-end manufacturing. They want to make batteries and EVs and semiconductors and semiconductor-making equipment, they are no longer interested in making a t shirts or just plastic toys and so forth.

It's very important to have that context.

Tony Roth: Does that desire reflected in the current composition of their manufacturing or is that is that more of a future aspiration?

Shehzad Qazi: I think we're absolutely moving toward that. They have announced quite a lot of money that is going to be dedicated towards the high end and high-tech manufacturing.

But you have to look no further than the EVs issue to realize how quickly they have realized their ambitions and at least parts of the goal are certainly being accomplished today.

Tony Roth: And when you think about the EV issue, just as a microcosm, perhaps for the broader phenomenon, are the tariffs that the West are imposing and erecting on an industry that's largely non-existent yet in terms of the exports to the West—they're trying to prevent them from even starting.  Are they virtuous, in the sense that these are unfair trade practices that China's engaged in and in the way that they're able to deliver these products at such low prices, or is it that they're truly being subsidized in some unfair way by the Chinese government?

Shehzad Qazi: There's no question about the fact that the EV industry in China had been heavily subsidized. And of course, officially, the national subsidies had been taken off somewhere around, I think 2022 or so forth. But there are lots of local subsidies that stay in place and other supportive measures, which has allowed Chinese EV companies to produce cars incredibly cheaply.

That has also, by the way, created a domestic glut problem. There are so many EVs in China right now that there's been a massive price war that has been going on for the last couple of years. And then from the external standpoint, of course, it has allowed Chinese companies to overwhelm the markets, not just in Europe, which is what we talk about quite frequently out here in the West, but of course, also, if you go to Southeast Asia, or Latin America, the Chinese EVs are very much on the roads. They’re being sold in large proportions and purchased in large proportions. But Europe, of course, has been overwhelmed by that. In America, as you correctly pointed out, the goal is to put as many tariffs as possible to prevent Chinese EVs from coming in.

Let's take a step back and realize, though, when a car sells for $9700 to $9900 dollars, what does 100% EV tariff do to it? Make it $18,000? Well, that still makes it far cheaper than any other option around.

Tony Roth: I just think it's remarkable, the price gap that you just described. If a car here would cost $40,000 to $50,000, and it’s $9000 to $10,000 let’s say out of China, that’s four to five times more. Is that gap primarily due to cost of labor here? Or is it primarily due to the fact that they received massive subsidies? The batteries are so much cheaper in China? Even with 50%, 100% tariffs, do you think the Chinese automakers are going to start showing up here?

Shehzad Qazi: I think eventually there are probably going to be Chinese EVs short of some very drastic type of bans.

We will probably get some version of them out here. Now, I think it may change where they may partner with domestic producers and they may have domestic factories and so forth. Keep in mind, by the way, that all they have to do today is show up in Mexico, set up a plant and start exporting from there. So, so keeping Chinese cars out is a very challenging task.

And so far, it's succeeded a bit, but it probably we have to acknowledge, it’s not just the existing tariffs or the hiked tariffs under the Biden administration that are keeping them out. It's probably some kind of corporate and probably political decision to say, do not rock the boat too much. They've been able to take over so many other parts of the global EV market.

America is probably sort of this final frontier. They could do it. It wouldn't be that difficult, by the way.

Tony Roth: Okay. So just to reframe this part of the conversation, there were two reasons that I posited were responsible for this idea of decoupling. One might have been China itself looking to recompose its economy.

And we've made it very clear that China's not going away from a purposeful export policy, it may change the mix, but that's not going away. The other element to that are the consumers of those exports saying, hey, I want to diversify my supply chain. I want to near shore, I want to onshore.

How would you assess the overall impact of that on the degree of consumption of interest in consuming Chinese goods? In other words, there may be some companies on a pinpoint basis. Apple's moved a lot to India, but when you look at it overall, is it really having a material impact?

Is it really a headwind to the Chinese economy?

Shehzad Qazi: What's really going on here is not only do you have Western producers and factories, predominantly American who are saying, okay, we need to have a China plus one or China plus whatever policy where we are producing in multiple countries. Okay. You've got that going on.

I say this always tongue in cheek. Companies that have realized that they need to instantly take advantage of U.S. China decoupling are predominantly and probably primarily Chinese companies who themselves have said set up shop in Vietnam, set up shop in Mexico, set up shop in a third country, and let's reroute the inputs from there.

A lot of the Chinese exports today that are making their way into the United States are, as you may have seen in the data, bilateral. Those exports have actually fallen in recent months and maybe even over the last year. But, you have exports going out to Southeast Asian countries and elsewhere where they're being rerouted.

So the decoupling is playing out in that format where it's really just Chinese products and Chinese goods and Chinese factories supplying, but not supplying directly out of China.

Tony Roth: The real locus of production is Chinese owned, not foreign owned, and therefore what's happening is China saying, okay, if you don't want to consume directly from China, I'll just go to another country and set up my plant there and you'll consume it.

And when your board or your stockholders or your C suite from a strategy standpoint, looks at its exposure to China, it’ll be satisfied that that exposure is reduced, but in fact, those profits will all funnel back to China because it's still going to be a Chinese company.

Shehzad Qazi: That's essentially it. The other thing, of course, is the policymakers, the politicians, whether it's Congress or the White House, they haven't really decided what do they really want from decoupling.

There really isn't an end goal or objective that has been laid out. So this type of rerouting of trade may eventually be palatable to the powers that be in Washington, D.C. At least to a vast majority of them. So I think that's a very interesting political aspect to keep in mind.

Does Congress come back and say, no, not good enough? We don't care about the geography, the region where it's coming from, the jurisdiction that's coming from. We care about the actual producers.

Tony Roth: Shehzad, let’s go to the second point, domestic consumption. So can you just tell us a little bit of background and context around how it's been important for the Chinese government to be able to provide a higher standard of living for its people and how that is essentially from its perspective, a very important premise around increasing domestic consumption in order to keep people happy, in order to keep people on the path of social mobility upwards and then how they're doing on that point.

Shehzad Qazi: So for the last at least 10 years, probably longer, we've heard consistently the party talk about the fact that they are going to have a economy that is going to be run based on domestic consumption. We've heard different names for it, rebalancing, derail circulation, and so on and so forth. But the bottom line is that is that the Chinese economy and the Chinese policymakers have in reality just completely been unable to accomplish that goal today.

If anything, increasingly, it's looking like that they may be suffering a setback because when you look at things like the youth unemployment problem, you've got all these young people coming out of universities and colleges with degrees that would lead them to, theoretically, high-paying white-collar jobs, but those high paying white-collar jobs do not exist for them.

They're taking jobs that are much lower scale. They're earning much less. That's a problem. Let's talk about a bigger problem supporting your private companies, which predominantly happen to be SMEs. This is where the transmission of credit comes in.

Large firms, state owned firms, they have consistently hoovered up so much credit, and it has come at the expense of the SMEs. So if the small companies, the private companies are not getting the type of policy support they need, they're unable to invest and hire and expand and create the jobs, which again, of course, means that your whole idea of creating a strong middle class and upper middle that can consume, and that's what drives economic growth, is just not being materialized.

And what are we hearing at the same time? We're hearing the party, especially the president, Xi, say we're doubling down on manufacturing and industry.

Tony Roth: This is really so important because even though they're going to get a good score on the first area of difficulty that we described, it's more of a illusion that that's really a headwind, despite all of the West trying to position it as something they're going after, it's not really having much of an impact.

This, on the other hand, is a real problem. Do you think that it is a problem that is festering and growing underneath the surface that could cause three years, five years political instability for the ruling party, or is it not that acute?

Shehzad Qazi: It's probably not so acute to cause political instability in the next three to five years.

But what happens a decade into this and what happens thereafter? So it will compound unless the party is able to make the hard decisions that it must and actually do what it says it wants to do in one press conference after another—the things that I just laid out,

Tony Roth: Let's move into the third area, which I understand, of course, is somewhat aligned, but it's distinct from the second area.

In other words, the problems that have existed in the real estate space, the very inflated, artificially inflated values of real estate have an impact on people's ability to become middle class by buying real estate, et cetera. But the problems around getting a job are distinct from the problems around the financial economy that have left the property market so inflated that have left the government without these big infrastructure projects any longer or the money to pay for them.

Where are they in solving that and unraveling that? What's the path do you think in order to heal the financial economy as it relates to real estate excess, as well as the infrastructure issues?

Shehzad Qazi: When we talked about this a year ago, I said that the real estate market in China is undergoing what will be a multi-year restructuring, four or five years easy.

We continue to believe that in the next four to five years, you know, we're going to see that property will continue to become a smaller and smaller proportion of the Chinese economy given the party's very good and very correct decision to deflate the property bubble and to do so at a time and place of their own choosing.

And they stuck with it. That is to be, I think, applauded. Now what they're trying to do, of course, is figure out how do you stabilize this? They have put in lots of measures in place, meaning that they have actually pulled back a lot of the restrictions on purchasing property, a second property and so forth.

They brought down mortgage rates. They have increased approval rates for mortgages, which is, of course, all related. The question for markets is will the market stabilize?

My own outlook for the year is that we probably are going to find, from a cyclical standpoint, some kind of bottom in the Chinese housing market this year.

So I think there's going to be a little bit of breathing room, but that markets will get it and more importantly, Chinese consumers will probably feel a little bit more confident near the end of this year. That said, that doesn't mean the problem goes away. That just, I think, means, you know, you get a little bit of stability for maybe, maybe six months to a year or so forth, but you're still dealing with the ongoing issue of what happens to other developers, maybe smaller, regional developers, whose names we don't hear as often as we hear about Evergrande or Country Garden and so forth, that still might be looking at piles and piles of debt that they have to figure out how to repay.

At the same time, they've got projects that they haven't finished. So I think that story, the saga continues, although it's not going to be as big and splashy, probably as the initial the Evergrande collapse and then the others, that came down with it over time. But property it's got a while to go before it stabilizes in China from a structural standpoint.

Tony Roth: And with all this going on in China, one of the things that they've not been suffering from is the kind of inflation that the West has suffered from, where there's been a big spike in demand and in certain cases, coupled with some supply constraints, whether it be in the labor market or earlier in the cycle, goods, but no longer.

So, given that there's no problem on that level, when you look at the outlook for growth in China, not being constrained by tight financial conditions because there's no inflation to fight really over there. How do you put it all together just from a pure economic standpoint and think about where the economy is likely to go?

Because it's been decelerating as a result of the inability of consumers to keep up with the historic growth rates and close the gap, if you will, as manufacturing had been tapering, although now manufacturing is making a comeback. So when you put it all together, what does it look like?

Shehzad Qazi: You know, growth in China is going to essentially remain sub 5%.

And if things go really south in the coming, you know, half a decade or so, we could be hitting 1%, maybe even 0% certain years. The outlook is sub 5%, bet on it. They don't go past that at all. This particular year, you know, it started off on a pretty strong note. We are seeing sort of economic activity start to lose altitude a little bit.

My guess is they don't surpass last year's growth figures, but they get close to that 4.8%-4.9% growth level. It's going to be a little bit slower than last year, but all around not a terrible economic story. I think markets are going to have to start wrapping their heads around something they really struggle with.

They either look for a terrible China story or a booming China story. They're going to have to start getting ready to deal with a meh, okay, not so good, not so bad China picture, and then really start digging deep below to see where the growth drivers are and where they're not. So the China story is getting a lot more nuanced than it, I think it used to be, at least for the Western investors.

Tony Roth: I want to talk about the markets in a moment, but before we jump into the market opportunity. Whether it be strong or weak in the near term, that's always our focus as investors, of course, I wanted to ask you about the geopolitical environment, and I think it would be really fascinating for our listeners to hear about their perception and their take.

They're very nationalistic, as I understand it, and even though we may look at the alignment of China with Russia, with North Korea increasingly, and we're in a geopolitical world now that's feeling, there's probably a less pretentious word to call it, but the word I've settled on for the moment is deatomized.

We've had all of these pinpoint geographically isolated issues for many decades, whether it be the Middle East, whether it be Southeast Asia, indeed, whether it be Russia and Ukraine, et cetera, but now they seem to be deatomized. In other words, they're getting more global and you're going into this sort of World War 2.0, bipolar world with all this nationalism, how is the domestic populace responding to the autocratic regime's alliance with the more communist or more, probably a better word is regressive side of the continuum, if you will, and how does that impact China? Because as an example, we were talking a few moments before we started our conversation formally Shehzad, and I said, when was the last time you were in China?

And he said, well, I haven't been there for a long time. Because, you know, they're not open in the way that they have been in the past. And it's, it's not trivial for someone like me to go there. And someone like you, you're not a spy, you're, you're just a guy that's a financial bean counter with all due respect, even though you're really great at it.

Maybe if you wouldn't mind starting with that, why haven't you been there? Tell us about the environment and then talk to us a little bit more about how that geopolitical direction of China may be impacting the people on the market and the economy if at all.

Shehzad Qazi: So, you know, Tony, I think what's happened, of course, is that the environment in China has become very constrained.

They’ve become very strict with their laws around what they consider to be espionage, what they consider to be a data and information that's allowable. Your access can be allowed to it. And if you are, and what, of course, is off limits and increasingly, people don't know what is off limits. And that has really spooked the foreign investor. It has really spooked foreign business people.

I've had the opportunity over the last six or eight months to increasingly meet with people coming here from China, which I think is great. There is this concern. They say, Oh, come visit us in China. Come, come see how things are. And that would be fantastic.

But, with the exception, I think, of the very top corporate executives of the United States and some European countries, people are still very reticent to go on the ground. As many announcements as you hear of the year of the foreign investor and the party trying to attract foreign investment, their policies, regulatory policies, the National Security Ascendant view, which has meant the hammer comes down really hard and fast if they don't like what you're doing, I think has really discouraged folks from actually going there physically and even thinking about, expanding business.

Tony Roth: Has direct foreign investment plummeted?

Shehzad Qazi: It has.

Tony Roth: How do you quantify that? How important is that to its economy?

Shehzad Qazi: That's not good for the Chinese economy, right? Nobody's talking about China being capital star. But China certainly wants to attract foreign capital.

They especially want to attract foreign capital in industries that are strategic interests of theirs. And that becomes incredibly difficult to do when you're in a regulatory environment, that seems unpredictable. That seems like a complete black box. And so foreign investors don't want to deal with that.

That problem is much bigger and larger than just any one individual.

Tony Roth: It's not just a pure capital standpoint. It's also an expertise, a know how, another…

Shehzad Qazi: Absolutely.

Tony Roth: …foreign direct investment brings to China, much more than just capital.

Shehzad Qazi: That's absolutely right. It's not a good thing that folks first went to Hong Kong and then they immediately left and went elsewhere.

They came back home.

Tony Roth: If I'm a reasonably moderate Chinese person who maybe I went to a university, maybe I didn't. I'm looking at this and I'm saying, oh, my gosh, this is a disaster for the country. Why are they leading us down this path? Of course, that's not what's really happening. My understanding is that people are very nationalistic and they think that the U S is the evil empire.

And generally speaking, they're very all aligned with what president Xi is doing.

Shehzad Qazi: Look, it's always hard to gauge public opinion in places that are a little bit closed off. And I certainly don't want to claim that I have my pulse on a public opinion on politics in China. But I think we have to remember that narratives are very powerful.

And, and more importantly. We talked about decoupling earlier, U.S. China or Western decoupling from China. There is ongoing Chinese decoupling from America, right? So they are very much preparing the population to understand,  Hey, look, we need to become independent because we're growing and we're becoming stronger and the West, the old colonial powers, the old empires are not happy with our rise.

So we have to protect ourselves. So there's probably likely a pretty sharp nationalistic turn domestically, if I had to guess, but more importantly, it's playing out in a very practical manner where you are seeing China building capacity, limiting and trying to bring down its dependence on Western expertise and technology, because they see what's coming down with these export controls and tariffs and sanctions and so forth.

Tony Roth: And I asked this question and your answer is so important to this overall dialogue because political stability is the basis for social stability. We want to make sure we spend a moment fleshing that out. And it sounds like it's indeed fairly stable politically, notwithstanding what might be our distaste for the choices that are being made and our perception of the limiting nature of those choices for the country and for the people.

So putting it all together, Shehzad, when I think about investing in China, we have been rigorously noncommittal in our investment. We do have active managers. We give them some latitude to decide what region within emerging markets to invest.

We've been very cautious and circumspect around changing our allocation one way or the other. Does that resonate with you?

What's your take? I know that you're, you're not an investor per se, but I know you think about these things.

Shehzad Qazi: My long-running complaint has been markets are too used to flying blind on China and there for far too long settled for guesswork as being good, authentic, reliable research.

And what that has led to in parts is this panic. It’s that, okay, we're just going to run away from China. We're going to pretend like China doesn't exist. Well, China exists. It's the second-largest economy. It's a very, very important. Global player. So we just cannot look away. However, what investors need to do is realize that they have been relying on terrible data, poor research, and change that.

Start actually looking at figures, data, and give up the guesswork to at least have a sensible understanding of where, you know, where you are today. The answer doesn't necessarily mean that you have to go in and buy Chinese equities. But you should have a pretty good reason for why you're avoiding them or for when you decide the time to go in is. We don't have that right now.

People are avoiding Chinese equities, but that's still based on just as much guesswork as when they were rushing into Chinese equities in January of 2023 because it thought that the stock market was going to skyrocket and the economy was going to take off. So unfortunately, the reasoning hasn't changed.

That's the biggest drawback here. That's kind of how I would approach it and that's how I would counsel the markets and investors to think about China. To start relying on good data.

Tony Roth: I’m not surprised that you would give that answer as an independent, greater supplier of data to the market. So that Shehzad, that makes me, I love your answer. It's the perfect answer given the role that you play in the system. It's interesting because I think a lot more about the U.S. economy and the global economy ex-China than I do China per se and generally speaking, we have enough information and we feel confident enough to make decisions. But sometimes you don't have enough informational content to make a strong decision or we think about the economy as presenting an optimistic or a hopeful or a constructive outlook, But we know that there's an element of chance, and we know we need a little bit of luck. And I would say that when that element or measure of luck that's needed becomes the predominant element of your decisioning, then you sort of pull back and say, gee, either I avoid the market altogether, or if, in this case, it's too big to avoid because the second-biggest economy, I'm just going to keep a neutral allocation.

So that's where we're at. And I think that the if there is a take away from the episode. It's really that we need to stay engaged. We need to stay rigorously focused on the data that we do have and make sure that when the level of degree of luck that's needed in order to make a wise decision seems to have reduced to a certain quantum and we have enough information to feel good about a decision, whether it's positive or negative, then we act on it.

Shehzad Qazi: Yeah, I couldn't agree more.

Tony Roth: So Shehzad. I want to thank you so much. What a great conversation and so relevant. We covered a tremendous amount of ground today. I am looking forward, if you're willing to have you back again in about a year and see, see how things transpire.

 Shehzad Qazi: Sounds great. Would love to. It'll be a very exciting time, I think.

Tony Roth: All right, well, thank you. And I want to remind everybody to go to Wilmington Trust dot com for a full roundup of all of our investment and broader wealth management content and thought leadership courses. Thank you all for listening today.



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Shehzad H. Qazi
Managing Director
China Beige Book 


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