0:00
possibly the two most important things
0:02
to have understood in markets over the
0:04
last few years have been how Chinese
0:06
de-leveraging would impact the global
0:09
economy and the economic impact of covet
0:12
lockdowns and the eventual reopenings
0:14
that followed right now a huge change is
0:18
occurring in China as the government
0:20
made an Abrupt decision last month to
0:23
Halt the nation’s severe zero covert
0:25
policy we’re now seeing the world’s
0:27
second largest economy reawakened while
0:30
simultaneously being hit by a massive
0:33
wave of covert infections we’re also
0:36
seeing a push from Chinese policy makers
0:39
to stimulate the economy which is still
0:42
suffering from a bursting real estate
0:44
bubble China additionally announced just
0:47
this morning plans to relax restrictions
0:51
on developer borrowing dialing back the
0:54
three red lines policy that burst the
0:56
nation’s real estate bubble China’s zero
0:59
Comfort policy looked like it worked
1:02
back in 2020 when millions of lives were
1:05
lost in other countries while China
1:07
appeared to keep the death toll
1:09
significantly lower but as other
1:12
countries vaccinated and reopened the
1:15
Chinese zero covert policy became a huge
1:18
burden on Chinese people and the Chinese
1:21
economy possibly due to the slowing
1:24
economy or the ballooning cost of
1:26
running the program the Chinese
1:28
government began easing the covert
1:30
testing requirements in late November
1:33
without the constant testing the policy
1:36
stopped working Omicron began spreading
1:39
first in Beijing and then in the rest of
1:42
the country the authorities moved to
1:44
lock people down once more but this time
1:47
residents fiercely resisted they’d had
1:50
enough after almost three years Street
1:53
protests erupted in China for the first
1:56
time in decades
1:58
while the demonstrations didn’t last
2:00
very long the government possibly
2:02
realized that they couldn’t win against
2:05
millions of angry citizens who were
2:07
willing to disobey lockdowns in December
2:10
the government gave in sick people could
2:13
now isolate themselves at home and
2:16
health codes were no longer required to
2:18
enter most places the zero covert policy
2:21
was replaced by the leaded rip policy a
2:25
wave of coronavirus hit the country and
2:28
people began staying at home once again
2:30
this time either by their own choice or
2:33
because they were sick Beijing returned
2:36
to looking like a ghost town in December
2:38
in Chinese State media president XI has
2:42
declared victory over the pandemic the
2:45
virus is little worse than the flu
2:47
according to government experts which of
2:50
course raises the question why the
2:52
extreme lockdowns the Chinese government
2:55
has changed the definition of what
2:57
qualify is a covert death ensuring that
3:01
the official number of fatalities will
3:03
remain well below those that have been
3:05
observed in the west it’s difficult to
3:08
know what the illness and death rates in
3:11
China actually are as the government
3:13
keeps this data classified but tens of
3:16
millions of people do appear to be
3:18
catching the virus every day in China
3:21
and hospitals and funeral homes have
3:23
been overwhelmed according to the
3:26
scientific journal Nature China’s
3:29
overall vaccination rate is above 85
3:31
percent that high rate was achieved with
3:35
a vaccination passport system where the
3:38
unvaccinated were prohibited from entry
3:40
to many public buildings and workplaces
3:43
according to the epidemiologist Ben
3:46
cowling the domestic Chinese
3:48
vaccinations offer sufficient protection
3:51
against severe disease for adults under
3:54
the age of 60. unfortunately older and
3:57
more honorable people were less likely
4:00
to go places that required a vaccination
4:02
passport and thus the elderly mostly
4:05
remained unvaccinated additionally there
4:09
are more multi-generational households
4:11
in China than in the west around 40
4:14
percent of over 60 year olds live with
4:16
their married children in China compared
4:19
to around 10 percent in Europe and 20
4:22
percent in the United States I have no
4:25
expertise on the effectiveness of the
4:27
various vaccines I’m presenting the best
4:30
information that I could find online but
4:32
a doctor I spoke to said that he can
4:35
only speculate about the effectiveness
4:37
of the Chinese vaccinations but an
4:40
unvaccinated elderly population
4:42
particularly in intergenerational
4:44
households is pretty much covert’s ideal
4:48
hunting ground so that is the situation
4:51
being faced in China right now
4:54
while the end of China’s zero covert
4:56
policy has reduced worries about
4:58
lockdown related supply chain problems
5:01
the nation is struggling with a high
5:03
number of infections which adds
5:06
different pressures to the Chinese
5:07
economy and the global supply chain one
5:11
way or another China’s management of its
5:13
Reawakening will have a huge impact not
5:16
just on China but on the rest of the
5:18
world the sudden reversal of policy in
5:22
China has been chaotic to start with as
5:25
factories have been struggling to deal
5:27
with high absenteeism due to sick
5:29
workers illness is not the only problem
5:32
that China is faced with though the
5:34
nation is confronted with a slowing
5:37
global economy dragged down by high
5:39
inflation and energy crisis and
5:42
geopolitical turmoil faced with higher
5:45
interest rates Western Shoppers have
5:48
been tightening their belts and spending
5:50
less which doesn’t help the
5:52
export-driven Chinese economy
5:54
Chinese exports fell in November
5:57
compared to a year earlier led by a 25
6:00
decline in exports to the United States
6:03
westerners who had spent heavily on
6:06
things like exercise equipment and other
6:08
manufactured goods from China during the
6:11
pandemic are now feeling more budget
6:14
conscious the Chinese consumer is not
6:17
spending much either and convincing
6:19
people to spend after three years of on
6:22
and off lockdowns won’t be easy many
6:25
Chinese workers are looking for ways to
6:27
rebuild their savings rather than ways
6:30
to spend them car dealerships in China
6:33
are struggling to deal with unsold
6:35
inventory stores have little need to
6:38
order in more Goods when they are
6:40
already full of unsold merchandise so
6:43
China is faced with slumping demand both
6:45
at home and abroad China’s Factory
6:48
activity contracted even more in
6:51
December due to sick workers and Dam
6:54
happened overall demand service
6:57
Industries in China like restaurants
6:59
found business in December to be almost
7:02
as bad as in early 2020 at the start of
7:05
the pandemic many even closed last month
7:09
as their customers stayed home to avoid
7:11
infection or because they were already
7:13
sick China’s official PMI data released
7:17
last weekend showed a steep decline in
7:21
economic activity its manufacturing and
7:24
services gauges came in at 47 and 41.6
7:28
respectively both falling to the lowest
7:32
level since early 2020 a reading below
7:35
50 indicates a contraction the key
7:39
message from that data is that the
7:41
reopening is not yet going smoothly the
7:44
lifting of quarantine rules has helped
7:47
Drive sales of airline tickets ahead of
7:49
the Lunar New Year holiday on January
7:52
22nd this year the removal of covert
7:55
restrictions also means that goods are
7:58
moving through the country much faster
8:00
the time taken to move Goods around the
8:03
country is more than halved as truck
8:05
drivers are no longer constantly being
8:08
stopped for PCR tests and health code
8:10
checks
8:12
analysts are expecting infection to Peak
8:15
around the Chinese New Year festivities
8:17
later this month as that’s when friends
8:20
and families get together to celebrate
8:22
the economy is expected to begin
8:25
recovering after March analysts at City
8:28
forecast retail sales in China will grow
8:31
11 in 2023
8:34
HSBC projects a contraction in the first
8:37
quarter of the year but five percent
8:39
growth overall for 2023 while inflation
8:43
numbers have been improving in the rest
8:45
of the world some of that Improvement
8:47
has been due to reduce demand from China
8:50
during all of these lockdowns should the
8:53
Chinese economy really heat up the
8:55
additional demand would be inflationary
8:58
worldwide this would be somewhat offset
9:01
by a greater supply of manufactured
9:03
goods coming out of the country though
9:05
before the pandemic China was the
9:08
world’s largest source of outbound
9:11
tourists with 150 million Travelers
9:14
going abroad each year the total value
9:17
of Chinese worldwide travel was just
9:20
over a quarter of a trillion dollars in
9:22
McKinsey is projecting that
9:26
international travel out of China will
9:28
jump from five percent of the 2019 level
9:32
that we saw last month to around 50
9:35
percent by this summer this could
9:37
provide a boost to tourism businesses
9:40
around the world
9:41
foreign Executives have been unable to
9:44
visit their businesses in China for the
9:46
last three years are also likely to be
9:49
booking trips into China again soon
9:52
China’s economy is expected to miss the
9:55
five and a half percent annual growth
9:57
Target that was set by the government
9:59
for 2022 and that’s already the lowest
10:02
Target that’s been said in decades
10:05
economists polled by Bloomberg are
10:07
forecasting full-year growth of just
10:10
three percent for 2022. in addition to
10:13
the wave of covet infections policy
10:16
makers in China are struggling with an
10:19
ongoing property crisis that’s weighed
10:21
on the economy for more than a year
10:24
we’ll get to that in just a moment a
10:27
broad measure of China’s budget deficit
10:30
hit a record high in the first 11 months
10:33
of 2022 this was driven by a few factors
10:37
a slump in land leases to developers
10:40
which are a big source of government
10:42
income fell by almost a quarter from the
10:45
prior year this is mostly driven by the
10:48
struggling and debt Laden property
10:51
developers no longer longer growing
10:53
their land Banks tax cuts a critical
10:56
part of beijing’s efforts to stimulate
10:59
the economy also cut into fiscal income
11:02
official data shows China’s value-added
11:05
tax collection one of the biggest
11:07
sources of budgetary income fell more
11:11
than 25 in the first 11 months of 2022
11:14
after Beijing cut that rates and offered
11:18
rebates in a bid to revive growth
11:21
revenue from taxes on car purchases fell
11:25
by almost a third during the same period
11:27
as Beijing cut tax rates to boost Big
11:31
Ticket consumer items these revenues are
11:34
also being hit by a severe reduction in
11:37
demand for new cars in China the
11:40
government’s fiscal spending led by
11:42
health care and social welfare costs
11:44
continue to grow as Beijing struggle to
11:47
control the pandemic and provide a
11:50
safety net for a fast-growing population
11:52
of jobless adults
11:55
Chinese Ministry of Finance data shows
11:58
that government Health Care spending
12:00
surged 15 in the first 11 months of 2022
12:05
as policy makers invested heavily in
12:08
covert testing and quarantine facilities
12:11
as part of their effort to Stamp Out the
12:13
pandemic this Health Care spending
12:16
likely grew even more in December as
12:19
covert infections overwhelmed hospitals
12:22
in China as government financial woes
12:25
deepen the authorities are coming under
12:27
pressure to cut back on spending the
12:30
government has held the deficit Target
12:32
unchanged meaning that the authorities
12:34
have to reduce spending in order to
12:37
offset any drop in Revenue public
12:40
finances could improve next year if the
12:43
government decides to reduce control
12:45
over the private sector which has been
12:48
beaten down in recent years by growing
12:50
regulations over issues like data
12:53
security and this is particular really
12:55
been the case on the tech sector in
12:58
China
12:59
now we’ve talked quite a bit on this
13:01
channel about the issues of supply chain
13:04
disruptions which were partially driven
13:06
by the zero covert policies and also
13:09
driven by trade disputes with Western
13:12
countries many companies that struggle
13:15
to import critical components from China
13:17
over the last few years have begun
13:20
diversifying their production and
13:22
purchasing away from China Apple
13:25
recently announced plans to move some
13:27
MacBook production to Vietnam for the
13:30
first time in 2023 they’ve been working
13:34
to add production sites outside of China
13:36
for all of their big product lines for
13:39
the last two years to make sure that
13:41
they don’t lose out if there are any
13:43
future trade disruptions after the
13:46
MacBook production shifts all of Apple’s
13:49
Flagship products will have a backup
13:51
production location Beyond China iPhones
13:55
in India and MacBooks the Apple watch
13:57
and iPad in Vietnam today Labor in
14:02
Vietnam is cheaper than in China but
14:05
they don’t yet have the same quality of
14:07
infrastructure for China the loss of its
14:10
lock on MacBook production symbolizes
14:13
the overall weakening of its position as
14:16
the world’s Factory Apple
14:18
Hewlett-Packard Dell Google and maida
14:22
have all made at least some plans to
14:24
shift production and sourcing away from
14:27
China it’s not just tech companies
14:29
either Ted canis a senior executive at
14:33
Ford told the press that the supply
14:36
chain is going to be the focus of this
14:39
decade over the last 20 years China has
14:42
become a major manufacturer of
14:44
automobile components many manufacturers
14:47
are now reducing their Reliance on
14:50
Chinese Manufacturing
14:52
these companies by no means plan to
14:55
abandon Chinese manufacturing entirely
14:57
at this stage that would be almost
14:59
impossible as for one thing it has
15:02
become a big market for many of them but
15:04
they are saying that they expect the
15:06
flow of components from China to plants
15:09
around the world to fall over time many
15:13
automobile manufacturers are saying that
15:15
they aim to make parts and cars inside
15:18
China exclusively for use within the
15:21
country reducing their Reliance on
15:24
Chinese factories for goods sold
15:26
overseas while still retaining a secure
15:29
local supply chain for their own plants
15:32
inside the country
15:33
Mazda Honda Ford and General Motors have
15:37
all been shifting production of some
15:39
components made in China to their home
15:42
markets they say that they’re doing this
15:45
to increase the resilience of their
15:47
supply chains and that it has nothing to
15:50
do with decoupling from China
15:52
nonetheless this is not great news for
15:55
China
15:56
a trend towards near Shoring or friend
15:59
Shoring could be good for countries like
16:01
Mexico and India who might see
16:04
manufacturing grow within their
16:06
economies The Economist Michael Pettis
16:09
argues that there’s a good economic
16:11
reason for Washington to encourage
16:14
switching production from countries with
16:16
large persistent trade surpluses like
16:19
China to countries like Mexico with
16:22
balanced trade or even trade deficits
16:25
doing so he argues would increase Global
16:28
demand and increase direct and indirect
16:31
U.S exports in line with any increase in
16:35
U.S Imports because wages and household
16:38
income make up a larger share of Mexican
16:42
output Mexican export revenues are
16:45
converted into Imports in a trade
16:48
surplus country like China workers earn
16:51
a lower share of their production and
16:53
the export revenues are converted into
16:56
savings which are then exported and
16:59
there’s a net reduction in global demand
17:02
last year American investors put more
17:05
money into Mexico buying companies and
17:08
financing projects than into China
17:10
according to an analysis by McKinsey
17:13
Global Institute it’s not just Western
17:16
companies either some Chinese exporters
17:19
are now diversifying abroad looking at
17:22
Manufacturing in locations like Vietnam
17:25
Cambodia Mexico and turkey where they
17:28
can manufacture cheaply and not be as
17:31
reliant on a factory in a single
17:33
location China’s strengths in
17:36
manufacturing and its Workforce are
17:38
still hard to beat even in the midst of
17:41
a raging epidemic but there is more
17:43
competition from abroad than ever before
17:46
and big companies learned a lesson when
17:49
they were surprised by the breakdown in
17:51
trade with Russia less than a year ago
17:53
they don’t want to find themselves in a
17:55
vulnerable position again should trade
17:58
disputes heat up there will be a real
18:01
focus on how or Chinese policy makers
18:03
attempt to fix the country’s ailing real
18:06
estate sector in 2023 and that is still
18:10
an ongoing problem as I mentioned
18:12
earlier Bloomberg is reporting this
18:14
morning that Chinese policy makers are
18:17
rolling back the three red lines policy
18:20
that burst the Chinese property bubble
18:22
back in 2021. details are still sparse
18:26
but policy makers might permit some
18:28
property firms to add more leverage by
18:31
easing borrowing caps and pushing back
18:34
the grace period for meeting debt
18:36
targets set by the policy the crisis in
18:39
the real estate sector which started
18:42
when several high-profile developers
18:44
defaulted on their debt in 2021 has
18:47
delayed or halted construction of
18:50
pre-sold homes across the country these
18:53
construction Halls triggered protests by
18:56
home buyers some of whom refused to pay
18:58
mortgages on unfinished homes while
19:01
Beijing has unveiled a 16-point plan to
19:04
ease the credit crunch the numbers still
19:07
paint a gloomy picture at a key policy
19:10
meeting last month leaders vowed to
19:13
focus on boosting the economy in 2023
19:16
suggesting they would roll out new
19:19
measures that improved the financial
19:21
condition of the property sector and
19:24
boost Market confidence the measures
19:26
announced so far are not sufficient to
19:29
drive a turnaround but policy makers
19:32
have signaled that more support is on
19:35
its way China’s Minister of Finance
19:38
recently told the Press given the need
19:41
for more spending to support the economy
19:43
fears have been mounting over the rising
19:46
local government debt risks and the
19:48
potential impact on the state-dominated
19:51
banking sector
19:53
this statement essentially acknowledges
19:55
that policy makers are aware that more
19:59
state-directed infrastructure spending
20:01
to boost economic activity is likely to
20:04
be malinvestment productive investment
20:07
boosts an economy by more than it
20:10
increases debt so this problem only
20:13
occurs when there is malinvestment as
20:16
long as Chinese policy makers demand
20:18
more growth from the economy than can be
20:22
sustainably delivered Beijing won’t be
20:25
able to prevent the debt burden from
20:27
rising in the short term the economy is
20:30
likely to grow as business activity
20:32
resuming equates to growth in the long
20:35
run if policy makers don’t want debt to
20:38
grow unsustainably they will have to
20:40
accept more reasonable growth rates
20:43
below two to three percent if you found
20:47
this interesting you should watch my
20:49
video on the rise and fall of the
20:51
Japanese economy have a great day