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