This video was originally produced by the Steno Research channel on Youtube. The original video is linked above.
In a thought-provoking conversation on the “Steno Report” YouTube channel, Tony Nash, CEO of Complete Intelligence and former Director of The Economist Intelligence Unit in Asia, shared invaluable insights into the intricacies of China’s economy and its impact on global dynamics.
Nash began by emphasizing the central planning of the Chinese economy, highlighting the unique blend of open markets in major cities and centralized control by the government. He provided a detailed exploration of how President Xi Jinping’s tenure has seen a shift towards more centralized control, especially concerning statistical reporting and provincial activities.
The discussion further explored the critical role of real estate in China’s economic growth, as it was perceived as a tangible investment amid cycles of economic boom and bust. Nash provided a nuanced perspective on the challenges facing China’s real estate sector, emphasizing the government’s role in managing debt and potential shifts in patriotic duties.
Regarding investment opportunities, Nash believed that China’s future lies in more moderate leadership, anticipating a change from the current administration by the 2030s. He emphasized the need for investors to adapt to evolving dynamics, focusing on national or regional influences in China rather than a globalized approach.
Overall, this discussion offered a comprehensive examination of the complex interplay of politics, economics, and society in China, providing valuable insights for those navigating the ever-changing Chinese economic landscape.
Transcript
Andreas Steno
It is now our great pleasure to introduce Tony Nash to the Macro Sunday podcast. Tony is the CEO and Founder of Complete Intelligence and also the former Director of The Economist Intelligence Unit in Asia. Among other things you have many years of experience in Asia and in China, Tony. So great to see you. Thank you very much for joining our show.
Tony Nash
Thank you, Andre. It’s just a real honor to be here.
Andreas Steno
Tony, one of the things I’ve said many times in media appearances when I’ve discussed China, is that most people watching various financials in the U.S should be aware that many of the pundits discussing China have never been there. You’ve actually been there, you’ve worked there so I’d like to start with a discussion on the Chinese growth model and how the whole model with the politburo sort of trying to design an economic model works. So, Tony how centrally planned is this economy in practice in China?
Tony Nash
Sure. It’s a great question and thanks for having me. Look, the Chinese economy is a centrally planned economy. You have pockets of… And they’re not small pockets. You have pockets of real pretty open markets in Shanghai, Beijing, the places where a lot of the foreigners go. There’s a lot of open market activity there and what I’m saying isn’t to take away from that because there are some real entrepreneurs in China who are fantastic but the Chinese economy overall is a very centrally planned economy, under Xi Jinping that has become more so. I think that that had been a bit decentralized over time. But when Xi Jinping came in in 2012 one of the first things, he did with Lika Chong was dispatch people from the Central Audit Bureau out to the provinces. And that was intended to look at statistical reporting to the central authorities at the National Bureau of Statistics but really what I believe in hindsight is that was really to understand what was going on in those provinces, so they could better control the activities in those provinces. Because things had kind of gotten really decentralized over the previous two governments.
So, you have major organs of the government. I’m sure you guys have seen commanding heights, which is that was out what 30 years ago or something. And you do have these major organs from the transmission mechanisms in banks to export, import, say, the port facilities to steel manufacturers and on and on and on. There are all of these central government controlled organizations that are at key bottlenecks in the economy and that’s really how things are controlled.
You’ve also had these government finance facilities LGFVS, Local Government Finance Vehicles that sprung up over the last say, 15 years or something. And those are becoming increasingly centrally controlled because they can’t manage their debt. And so how is the central government regaining control over commerce? It’s through management of debt and so the central government which controls the banking system has a lot worked with the transmission mechanism in the banks to roll over debt continually since about 2007. And it’s only through that debt management that a lot of these organizations, will call them companies loosely but a lot of these organizations can survive. And so that is how a lot of that central planning and central control is really exercising.
Andreas Steno
So, Tony when a gross domestic target is set that, for example five percent as is the case for 2023. How’s that orchestrated? The target is centrally planned but what about the actual exercise of the plan and the economy?
Tony Nash
Well, you have to look at things like for this, here you have to look at things like how a foreign direct investment has just collapsed in China, right? I mean, these are some of the obvious things that you look at to say, “Is five plus percent even possible?”, it’s not, okay?
You also have to look at… so that’s kind of one of the obvious factors, you have to look at imports and exports which are really declining and that’s a major factor. You also have to look at things which… and this is not a China specific issue. This is every country you have to look at things like the total factor productivity variable within national income accounting.
TFP is a fiction in every country. There is no country on earth that has an actual total factor productivity value. In China it’s ratcheted up and ratcheted down based upon where they need the number to be, okay? And to be honest this happens everywhere TFP is a residual but it’s a major factor-ish within national income accounts. So, there are a number of ways that China can play. I think they’re… the economic authorities are in a very difficult position this year for a number of reasons. They have so much of an issue with debt that they’re having to devalue in a controlled way, devalue CNY in a controlled way. So, that they can raise their export income their CNY denominated export income meaning… sorry, that comes in dollars but then they convert it to CNY, right? And they can then use that CNY at a devalued rate to keep their debt alive, right? So, and all of this goes back to some basic principles in China, is there really isn’t kind of a western form of bankruptcy there.
In a centrally planned State, it’s a very different. It’s more insolvency, which is kind of the same but it’s different and so if there was a bankruptcy release mechanism within China you could have a lot of this debt kind of dissolve, like we do in the west, right? But it’s just not possible in China.
Andreas Steno
So, Tony when we look at the Chinese growth model, it’s been at least partially reliant on construction activity and the real estate sector. And we know that the Chinese demographics look out rid abysmal 20, 30 years ahead. So obviously they need to change the course somewhat, on this construction sector. How do you view this real estate conundrum in in China and the structural outlook for the debt related to that sector?
Tony Nash
I think, for real estate itself obviously it’s core, real estate is core in every country. And part of the problem with China is there’s this very, I wouldn’t say it’s explicit but it’s almost explicit social contract of “Hey! We’re in an autocratic state. So, if you behave people of China and there isn’t social unrest, we will continue to raise your standard of living.” and that’s basic and you would hope that’s the case in every country but I think in the west it’s a little bit looser. I mean, you have good years and bad years. And people go bankrupt and people have difficulties and this sort of thing in kind of Freer economies.
In China there is an expectation since things are centrally planned that the standard of living will continue to rise. And one way that was done has been through real estate investment because if you’re in China, where can you invest? you can invest in Chinese stocks, you can invest in wealth management vehicles, which are super sketchy, you can invest in real estate which is very very tangible. In Asia there is generally a connection to real estate because the economic cycles in Asia are way up and way down. So, if you invest in stocks, it’s kind of an intangible, so it’s nice when you can get it and it’s nice when it’s doing well but it evaporates.
And the perception is that real estate is at least tangible. It’s something that you can get something out of if everything goes belly up not necessarily true but that is a perception. And so, we’ve had real estate boom dramatically over the last what, 20, 30 years, of course. And so that’s accelerated and accelerated and accelerated, and it creates an expectation within the Chinese people that their house price will continue to rise, that these multiple locations that they probably own will continue to rise and then that helps fuel economic growth. Obviously, that’s not the case anymore. We saw in the July data I can’t remember how much house prices are down but it’s down, they’ve been down month after month, for a while. What will happen there? Well, you’ll see a lot of these marginal developments either kind of coincidentally catch fire or they’ll be destroyed, and that’ll be counted in GDP as some sort of economic activity. And then, they’ll be built up at a higher standard at some point and that’ll be GDP additive and so on and so forth.
So, the economic planning officials are incentivized on value add. So, they will find a way to count these destructive activities into the value add for GDP. Keep in mind Chinese officials are Chinese National statistics bureaus never revise previous data prints, never. So, that’s really convenient so you’re always have a short-term memory, you forget what happened last quarter and so if they had to go back to last year or two years ago or three years ago and revise things down, they can forget all about that. And then they can have some of these activities GDP additive for the current quarter or the current year. So, this is kind of the games that are played. And again, I want to make it clear, this is not just China this happens in every country gaming the GDP calculation is done in every single country on Earth.
But real estate is core to China you may have say merging of some of these companies these sorts of things because Country Garden and Evergrande have such massive debts. You may have to see some consolidation there and some real pain for those individual private sector companies which will likely become public sector entities at some point or ostensibly public sector, meaning the government will own you know a massive amount of the equity in that company but it’ll still operate like a private sector company, sort of almost like what Japan’s done with some of their companies.
Andreas Steno
Tony, to me this real estate crisis and especially the crisis within some of the big developers you’ve mentioned Evergrande and Country Gardens seems almost designed by the CCP in China via this three red lines policy implemented in August 2020. So, do you agree with me that it is a crisis designed by the Politburo by the end of the day and if so where does it leave us in terms of hopes for a big stimulus package for the real estate sector?
Tony Nash
I don’t think it’s designed by them because it makes them look like a fan… like economic planning failures. So, of course at the edges some things may be designed and certainly there’s definitely been a lot of thinking about, how to kind of deflate the real estate bubble and the real estate expectations. I can guarantee you that there have been tens of thousands of hours burned on trying to figure out how to steer this thing. But I don’t necessarily think that kind of the crash has been intentionally designed. I think, the reaction is probably what’s been more designed and how to kind of steer things down because it’s embarrassing for these high-level committees and mid-level bureaucrats and economic planners for this stuff to happen. So, nobody wants…
So, I’ll give an example in July of 2015 when we saw Chinese stock markets crash, it was literally a patriotic duty to buy shares even as markets were crashing. And we saw that in 2001 in the U.S when George Bush stood up and said, I’d invest in stock markets, all that stuff. So, but it’s more of a core issue and you had a lot of people who were bureaucrats and in state-owned companies who had lost 30 to 40 or 50 percent of their wealth in June of 2015, who felt obligated to continue to buy into markets because it was their patriotic duty to do that. And so again this is a very strange things that most westerners don’t understand that it is your patriotic duty to buy into falling markets, as a Chinese bureaucrat as a Chinese say party member, this sort of thing. And when I say party member, I don’t mean some kind of Minion.
The first time I spoke at the Central Communist party school in Beijing there were venture capitalists in the audience. So, party members are across the economic spectrum. So, it’s their patriotic duty to buy or was in June of 2015 to buy shares. It could at some point become a patriotic duty to buy properties to keep that market up. I’m sure there is pressure right now on people to do that indirectly but at some point, once kind of the winners are chosen by say the center committee or the NDRC or whoever, there will likely be a patriotic duty to buy real estate among certain groups okay to prop up the value in certain areas or whatever. This sounds strange but if you guys ever read this book called The Red Star it’s a history of Stalin and it talks about how Paramount paranoid and fearful everyone was uh in the Soviet system. There is almost zero comprehension from Western analysts among how terrified Chinese bureaucrats are when they come into the office every day.
So, when I was working in the NDRC and I always say this when I mention this, I was an advisor to the NDRC for a couple years. I never collected any money in terms of compensation or expense reimbursement from the NDRC. I’ve never been paid by the Chinese government but I’ve been in meetings where Chinese officials have literally started crying. And there is terror within the Chinese bureaucracy and this is not understood. So, Western analysts, Western economists have to understand this, there is no Think Tank writing about this, there’s no journalist talking about this has been the way for years, this is what I observed in 2015. XI Jinping’s power has Consolidated even more since then so I can’t imagine the pressure on those bureaucrats right now politically and bureaucratically to align with whatever they need to do. And sometimes those or many times those kinds of requirements are not verbally communicated, they’re informally communicated those expectations.
Emil Moller
Just to follow up on that, what do you think that means for the transportation of information and the validity from which decisions are made?
Tony Nash
Well, there’s always like in every political organization there’s always the official line and then there’s the unofficial communication and there is so much back-channel communication within the Chinese government that by the time someone gets to a mid-level bureaucrat they have to infer a lot from the communication, they really don’t know what that communication is saying.
Now imagine if you’re a Chinese citizen, what you’re getting is so many derivatives from what the original intended communication was, you’re having to try to figure out how you need to act. Of course, they’re the explicit messages sent out but there’s so much inferred and you can understand how things like the cultural revolution and other things happened when there’s so many degrees from power and that message may be amplified the further you get away from the center.
Emil Moller
Yeah. I’m also thinking about how the bureaucracy works internally and that is to say if, who wants to be the deliverer of bad news so to speak and…
Tony Nash
Oh, nobody
Emil Moller
Yeah.
Tony Nash
Nobody. And that’s a great point. Nobody. And when I say all of this I need to stress that the people I knew in the Chinese bureaucracy were some of the smartest people I’ve ever known. These are not stupid people.
Emil Moller
No.
Tony Nash
These are very very worldly very very intelligent people. So, the Chinese government is not stupid but the Chinese government also is not a monolith. So, we hear Beijing said this or German High said that or whatever, they can say that but that’s not exactly how the Chinese government is going to act. And so, these guys are very smart in terms of say emotional intelligence. They’re survivors, they’ve survived in the bureaucracy this long they know kind of what is expected of them. If they believe it’s time for them to cry in a meeting then they start to cry in a meeting. They’re also incredibly intelligent the level of education that I saw with my interactions in China is incredible. So, these are very smart people but the information we’re seeing, the economic data we’re seeing very highly articulated. And again, very key to remember those data are never revised. So, the information you’re seeing is information that you need to see right now but in a month it’s debt nobody cares.
Andreas Steno
So, Tony in times of crisis where does this leave Western hopes for Chinese stimulus? We saw a package from China after 2008. A pretty big one four trillion as far as I remember. Is something like that on the cards or what’s the most feasible outcome of all of this?
Tony Nash
Yeah, it’s a really good question we’ve all been waiting for. I think right now we’re in a position where these protests in December of 2022 were very embarrassing to the Central Committee, very embarrassing. And whether or not we believe there would be a major stimulus I think that the central government sees the economic need right now as an opportunity to exercise more power over the people and over the economy. So, is there a big stimulus coming? Well, I think it all depends on who’s going to align with what the central government wants more. So, there is a race among the provincial leaders, there is a race among those core industries, there is a race among business leaders, to show who can align with the central committee’s desires the quickest. And those are the people who are going to get stimulus, like this is not just an agnostic kind of, hey we want the Chinese people to succeed. This is very much political game to see who can actually get those stimulus crumbs and we’ve seen crumbs spread here and there.
I don’t believe we’re gonna see massive High-Speed Rail investment. all that stuff. I mean, that’s an old chestnut that’s been revived and revived since like 2005, so that’s all played out but there is a bias toward things like technology. But it’s not the Jack Ma type of Technology it’s more of a different era. So, it is core chipsets GPU’s. It is in say energy technology and so on and so forth. And so those guys are… and anything kind of technology related that’s export led like EV’s, that sort of thing. So, those guys are going to get the stimulus because it makes the leadership look innovative. It makes them feel good. There may be some kickbacks here and there, who knows. And so, these are the guys it’s a the stimulus process is a political process.
Andreas Steno
Yeah, I’d like to conclude with… I don’t know the million- or trillion-dollar question here. Tony. I think I’ve asked this exact question to at least 20 various portfolio managers based in either on U.S soil or European soil and I’ve received a “no” from all of them. So, with the 10 or maybe 20-year horizon, do you…
Tony Nash
Shouldn’t tell me that because it makes me want to say “yes”.
Andreas Steno
Yeah, but with the 10- or 20-year Horizon do you see any decent investment opportunities from a risk we wrote perspective in China?
Tony Nash
Oh, absolutely yes, I do. I do not believe that Xi Jinping will be in power by 2030. I believe that the next Chinese leader will be more of a moderate because China is wealthier. And wealthier nations want more moderate leaders, they don’t mind you know giving lip service to communism or whatever but they’re wealthier. And I do believe that we will have another leader either by 2030 or in the 2030s who will be a more moderate leader who wants to put this wolf warrior diplomacy nonsense aside and engage as a country among countries. And really want to grow China’s place in the world and grow China’s economy in a very advanced way. Of course, there are huge pockets of China that are still poor that person needs to come forward and really move China forward. So, yes. I believe there are and will be opportunities in China. They won’t be what we had from say the mid-90s until say 2015. That’s that that was too easy and that’s gone. It will be more of a national or regional influential investment rather than a globalized investment, I believe.
I think we’ve gone through that wave of globalization the kind of second wave of globalization from say 2001 to you know three years ago. I think that’s done and I think the investment opportunities in China in the 2030s will be more either national or regional.
Andreas Steno
Tony Nash, CEO and founder of Complete Intelligence and former director of The Economist intelligence unit in Asia. Thank you very much for being with us to discuss China it was a great pleasure to host you.
Tony Nash
Thank you.