This “PETER LEWIS’ MONEY TALK – Thursday 27 July 2023” podcast was first and originally published by Peter Lewis’s Money Talk at https://peterlewismoneytalk.substack.com/p/peter-lewis-money-talk-thursday-27-03f#details
Topics discussed:
• Fed raises interest rates by 25bps.
• US shares mixed, Treasury yields & dollar lower after Fed
• Japan’s population drops by most on record
In this episode of “Peter Lewis’ Money Talk,” the CEO and founder of Complete Intelligence, Tony Nash, joins as a guest to discuss the recent developments in the global economy. The Federal Reserve’s decision to raise interest rates by 25 basis points to 5.25-5.50% is analyzed, with Tony providing insights into the potential implications of this move. He emphasizes the urgency to address inflation while also considering the impact on consumers and businesses facing higher inflation rates.
Contrary to some market perceptions, Tony interprets the Fed’s statements as hawkish, hinting at a more extended period of rate hikes and dismissing expectations of rate reductions in the near future. He points out the significance of base effects in measuring inflation, indicating that inflation rates may increase further as the effects of the previous year’s higher oil prices wane.
Tony and Peter also discuss the challenges faced by companies and consumers amid rising interest rates and deteriorating corporate earnings. They explore potential responses, such as companies cutting costs, possibly leading to workforce reductions, and how extreme weather conditions might impact the market. Additionally, the podcast delves into the situation in China, where there are concerns about deflation and potential devaluation of the currency to boost exports and stimulate domestic economic activity.
As the conversation touches on the European Central Bank (ECB), Tony suggests that Europe may experience a period of inflation due to the surge in energy prices but expects inflation to move towards disinflation over time.
Chapters
01:22 Fed Chairman Powell’s press conference
02:41 Decline in Japan’s population
04:09 US stock market reaction to Powell’s press conference
05:30 Chinese equities performance
06:08 Introduction of guests for discussion
07:20 Fed’s commitment to reaching 2% inflation target
09:07 Interpretation of Powell’s press conference
12:48 Uncertainty in economic data and Fed’s outlook
14:35 Peter doesn’t want to talk
14:38 Andrew questions recession definition
15:45 Peter comments on Powell’s statement
16:03 Tony on recession expectations
17:29 Tony on avoiding stagflation
17:43 Andrew on market volatility
18:27 Next phase: Fed holds rates steady
19:01 Andrew’s approval of Tony’s point
20:11 Tony on deteriorating earnings
22:08 Tony on layoffs and cost-cutting
22:35 Impact of layoffs and reduced savings
23:49 Andrew on climate investment opportunities
24:49 Andrew on climate crisis urgency
25:18 Tony on extreme weather and subsidies
26:31 Peter on Chinese deflation and impact
26:59 Andrew on Chinese deflation and global influence
28:21 Impact of China’s deflation
29:55 China’s need for devaluation
31:06 European Central Bank’s challenge
31:41 Base effect period in Europe
32:37 Replacement of Chinese Foreign Minister
35:27 Continuity in China’s foreign policy
36:54 Wang Yi as a temporary Foreign Minister
38:24 Wang Yi’s powerful position
39:12 Wang Yi’s role as stabilizer
40:57 No significant impact on China’s diplomacy
42:13 Introduction to the economy’s critical point
42:39 Concerns about achieving economic growth
43:20 Anticipation for the big stimulus package
Transcript
Peter
Every Monday to Friday this is Peter Lewis’s Money Talk.
Peter
Good morning. This is Peter Lewis, welcoming you to my podcast, Money Talk, for Thursday, the 27th of July. It’s Fed Day, and we have news and analysis on the Fed’s decision to raise interest rates. That’s coming up. This podcast is sponsored by Surfin Group, which is headquartered in Singapore and offers online financial services to 30 million customers across 10 countries. Thank you for making this podcast one of the most listened to financial podcasts in Hong Kong and Singapore. In today’s business and finance headlines, the Federal Reserve has raised the target rate for the Federal Funds rate by 25 basis points to five and a quarter to five and a half % in line with market expectations and with unanimous support from the Federal Open Market Committee. That brings borrowing costs to the highest level since January 2001. It marks the 11th increase since March 2022 when the Fed started raising borrowing costs from near zero to try to call the economy and ease price inflation. The US Central Bank resumed the tightening campaign following a pause in June after observing that the economy has been expanding at a moderate pace. Job gains have been robust in recent months and the unemployment rate has remained low while inflation remains elevated.
Peter
In a press conference after the meeting, Fed chairman drone Powell was perceived by financial markets as leaning more towards the Dovish side, raising hopes among traders that the current tightening cycle has ended. He emphasized how much the central bank has already done and the amount of time it can take for monetary policy to call inflation. We can afford to be a little patient as well as resolute as we let this unfold, he said. He added that it’s possible that the Fed could raise rates at the September meeting if the data warrants it, but also possible that the central bank could hold steady. Mr Powell insisted that the central bank would take a data dependent approach going forward when determining additional hikes and he then clarified that no decision to raise borrowing costs further has been made. Japan’s population has recorded the largest annual decline on record despite efforts to boost birth rates, data showed on Wednesday. The Ministry of Internal Affairs and Communications said the number of Japanese nationals fell by 801,000 in 2022 from a year earlier to 122.4 million. That’s the largest drop since records began in 1968. The population of Japanese residents has decreased for 14 consecutive years after peaking in 2009, but the population of foreign residents increased by 289,000 to 3 million.
Peter
That’s the first rise since the onset of the coronavirus pandemic in 2020. On today’s money talk, I’m joined by Andrew Ferris, the CEO of Econosis Advisory, and from the USA, Tony Nasch, Founder of Complete Intelligence. And with a view from Taiwan is Ross Fe gold, Business Development Director at SafePro Group. Us stocks swung into positive territory during Federal Reserve Chairman Gerome Powell’s press conference as he said there was disinflation. Even as he also said that central bank officials had not yet made a decision as to whether to raise interest rates again in September. But the main indices ended the session mixed. The S&P 500 saw a peak of 4,610 before pairing gains after drone Powell said he doesn’t see inflation returning to the 2 % target by 2025. The index ended the day virtually unchanged at 4,567, but at its highest level since April 2022. The Nasdaq composite lost 0.1 % to 14,127. The DAO added 82 points, that’s 0.2 % to 35,520, extending its rally to 13 days. That’s the longest winning streak since January 1987. And if the index rises for 14 straight days later today, it will match the longest streak in history, going back to June 1897.
Peter
That was roughly one year after the DAO was created in May 1896. After the closing bail, Facebook owner Meta reported better than expected results and issued optimistic guidance for the third quarter. The company returned to double digit revenue growth in the second quarter for the first time since the end of 2021, reporting that revenue in the three months ended June 30, rose 11 % to US$32 billion as advertising rebounded. Meta shares rose as much as 8 % in after hours trading, and prior to Wednesday’s close, the stock was up 159 % this year compared to the 19 % advance in the S&P 500. Chinese equities were low at Wednesday as the previous day’s euphoria over the Politburo’s statement of support for the beleaguered property sector and the promise of measures to boost consumption and the overall economy faded. Hong Kong’s Hang Seng Index retreated after Tuesday’s 4.1 % rebound and closed 69 points lower, that’s 0.4 % at 19,365. The tech index fell 0.9 % after a 6 % rally the previous day. And on the mainland, the Shanghai composite index slipped a third of a % to 3,223. The Hang Seng mainland properties index, which surged 14 % on Tuesday, retreated 1.8 % Wednesday.
Peter
And futures markets are pointing to a gain of 140 points for the Hang Seng at the open this morning, that’s around 0.7 %. And you can get more details on the latest market movements in my daily newsletter, which you’ll find at Peter Lewis Money talk. Sub stack. Com. Every Monday to Friday, this is Peter Lewis’s Money Talk. Let’s join our guests. We have with us in Prague this morning Andrew Ferris, the CEO of Econosis Advisory. Thank you for staying up for us once again on your world tour.
Andrew
Thank you. Perfectly all right, Peter. It’s a pleasure.
Peter
Okay. And over in Texas in the USA, we find Tony Ash, who is the founder of Complete Intelligence. Welcome, Tony.
Tony
Thank you, Peter. Thank you very much for having me.
Peter
You’re welcome. The Federal Reserve has raised the target rate there, as you heard, for the federal funds rate. So it raised the target range for the federal funds rates by 25 basis points to five and a quarter to five and a half %. That’s in line with market expectations and it was a unanimous decision from the FOMC. It brings borrowing costs to the highest level since January 2001. The Fed made minimal changes to its post meeting statements and failed to provide a clear indication of the FOMC’s future moves. The committee said it remained highly attentive to inflation risks and will continue to assess additional information and its implications for monetary policy, but it underscored the priority of bringing inflation back to the 2 % level. Andrew, let me ask you, how wed is the Fed to its 2 % level? Because it seems to me that if it is, there’s going to be more pain to come. The Fed is going to have to carry on raising rates and potentially tip the economy into recession to get there.
Andrew
Yeah, this is Peter. This is not an interpretation. This is effectively based in fact, because Powell was quoted in saying that he just doesn’t see that the 2 % inflation. I’m not quite sure what he actually said, or sorry, correction, the interpretation of what he actually said was whether this is going to stay till 2 % or we will not be able to get it there at 2 % in the year 2025. That is, well, I don’t know, strictly speaking, 24 months from now.
Peter
Yeah, that’s what I think he said. That’s what I think he did say, that he doesn’t anticipate it getting there to 2025.
Andrew
Then very, very briefly, of course, they’ve raised interest rates now to 525, 550. And then hopefully, let’s say, this will bring the inflation to %. And then, of course, the question is, is where they will be able to keep it at two % once the increases have failed it out or stopped? Because then, of course, the next expectation will be that they will start cutting interest rates. And if this will allow the inflation to begin to accelerate again, you know what I’m getting at? In other words, the scenario has to be a little bit more finessed. We don’t expect them to say, look, there is going to go at two % and then they will stay at 2 % despite the fact that it will start cutting interest rates. They are not saying that. But equally, they are not saying that enough is enough, 2 % will be there and that will keep the inflation there and that’s the end of the story. We don’t need to cut, we don’t need to increase. It’s a thankless task. Classical, have you stopped beating your wife? Kind of question. Whatever you say is wrong.
Peter
Tony, it is quite hard, isn’t it? To work out what is actually the Fed is saying. The markets initially took it quite positively, but then seemed to change their mind as the day wore on. But how do you see this?
Tony
I actually did not see it as doveish. It was interesting on the 2 %. He said we don’t see inflation hitting 2 % until 2025 or so. It could be later than 2025, his expectation hit 2 %. So on the one hand, we love the Fed raising rates, but on the other hand, we also have consumers and businesses paying higher inflation and seeing higher inflation. So there’s a real sense of urgency. At one point, Powell said policy is not restrictive enough or long enough to have its full intended effect. So he’s saying two things there. First of all, he doesn’t see policy as restrictive enough. Second of all, it hasn’t been in place long enough to have its full intended effect. He capped off that comment by saying, we have a long way to go. So this is the Fed chair saying these things. This is not some commentator. And so that’s the house of you. And when you keep in mind that it was a unanimous vote, to me, I actually saw this as a hawkish tilting press conference because there’s been this implied expectation that we’re going to get through 2023, and then in January of ’24 or so, we’re going to start seeing rate reductions.
Tony
But he made it pretty clear today that he doesn’t see rate reductions, certainly not in ’24 and probably later than that. So this elevated rate environment that we’re in right now, it sounds like he’s pretty comfortable here. Now, one thing also to keep in mind is we’re looking at year on year inflation with base effects. So this time last year in the US, crude oil was over $100. I think in June it hit $130 a barrel. And so if we’re looking at a 3 % core inflation rate in June with crude and secondary and torsionary impacts at $137, I think, once that comes down, that core inflation will rise even more. So there are other effects and he knows this. And I think what he’s doing is setting people up for September when those base effects really do come off and those inflation ratings are significantly higher likely. And people are saying, hey, you didn’t raise fast enough, or you didn’t continue raising fast enough. He’s conditioning people right now for the other side of these base effects, which will come in the second half of August and in September.
Peter
Yeah, I’m with you. I didn’t see how that was a particularly dovish statement. I saw plenty of things there which could indicate the Fed is going to continue. But I suppose, Andrew, the truth is in the matter, the Fed doesn’t mean now it’s until September. So we got four to two months of rounds of monthly data on jobs, inflation and consumer spending. The trend doesn’t seem particularly clear at the moment on any of them, does it? Andrew?
Andrew
Clearly, in terms of economics data, got a sound like an economist, the answer is yes and no, because the labor data, the job creation data have been strong. Inflation can down incredibly quickly if you think that a few weeks back, Peter, we’re talking at 6 %, and now it’s 3 %. But strangely enough, the PCE that used to be the favorite blue eyed boy or blue eyed girl to be politically correct, seems to have dropped out of the picture. So I’m not quite sure why now is the pure CPI inflation the one that we are gunning for. And yes, and hence the Fed has said that the turn economy do not see a recession, meaning two quarters back to back negative GDP growth, but definitely a slowing down in the economy. So what am I ended up with? I put all these things in a box, shake it out, let them drop on the floor, and I end up with the same mess.
Peter
So it is hard to read the words, but you mentioned something there that was noticeable in the statement, and that’s that Mr. Powell was saying the Fed now believes it can pull off a soft landing. He said the central bank’s own economists have now reversed their call that the US economy was going to enter recession. He said the staff now has a noticeable slowdown and growth starting later this year. But given the resilience of the economy recently, they are no longer forecasting a recession. What do you make of that?
Andrew
Sorry, is that me, Peter, you’re asking?
Peter
Sorry, I don’t want to talk to you. Yeah, sure. And then I’ll move on to Tony.
Andrew
Yeah, exactly that. And again, I always go back to the expression, what do they mean by recession? And given that they are in inverted commas American and they are in the Fed, they do mean two quarters back to back of negative GDP growth, which I will try to run with the numbers. I just can’t see this happening anytime soon under current circumstances. So if he means that, yes, I have no idea, he said this proudly that we’re going to soft land the economy and we’re going to have inflation down. And at the same time, as Tony also confirmed our suspicions, he says we’re going to bring the inflation down, but that ain’t going to happen till the year 24. If that, well, I hate when it becomes talmuric Bible interpretation of the words of the great master. And I mean, poor Powell, what else can he say? He will spell it out as clear as he can. And then we end up interpreting his words. And I think this is embarrassing.
Peter
Tony, he was rather self-congratulatory, wasn’t he, in his statement? He said, we’ve already done a lot already and we brought inflation down. He was saying, we’re going to get this soft landing now. Our own economists say that there’s not going to be a recession. He sounded rather proud of himself.
Tony
Yeah, but if you notice, he said our economists say there won’t be a recession. He didn’t say I, Jerome Powell, think there won’t be a recession. So he’s relying on the staff. So there’s deniability. And so I’ll tell you, at the beginning of ’23, what we were telling our clients is that we wouldn’t necessarily see a recession, but we would see very slow growth in Q3 and Q4. And I think that’s where this is just barely between 0 and 1 %. And I think that’s where Powell is heading. And I think that’s what he’s hedging toward is, the staff don’t see a they don’t see a recession, but we do expect a serious decelaration. And what he doesn’t want is a stagflationary environment where we do have a recession and we still have inflation. And this is I think is why he kept underscoring the fact that we have a long way to go. We’re not there yet. We’re not going to see recession. So he wants the optionality to be able to accelerate if needed and maybe not accelerate, but to continue to raise rates if needed. And I think he also doesn’t want to put the Fed in a position where they’re raising and then they’re lowering and they’re raising and they’re lowering because all that does is create uncertainty for people.
Tony
And it creates huge volatility, not just in markets, but also on the street, in the marketplace when people are buying homes or people are buying cars or buying groceries or whatever.
Andrew
Peter, I would like to add not only my full approval, but Tony has offered a pivoting point as far as I’m concerned. And that is, I will turn around to investment advisor stroke analysts and say, how dare you think that the Fed at any time is going to cut interest rates before year 25. Hello, they’re telling you this. Well, all right, it might change his mind as as data change, but unless the data are really spectacular, okay, we are going to be stuck with the number five for many years. I’m clearing my throat because we are now beginning to use the word 26 as opposed to just 24 or 25.
Peter
From what you’re both saying, really, it sounds like then that if economic activity slows in the final quarter of the year, the next phase, really, of this cycle is that the Fed just holds rates steady as inflation slows, which then means that inflation ingested, real rates are actually going higher, but it’s absolutely not going to cut. So am I right? Is that really what you’re saying? That’s going to be the next phase of this, assuming that we don’t get any more rate rises?
Andrew
I’ll jump again, Peter, and I will say yes.
Peter
Okay.
Andrew
Over to you, Tony.
Tony
Hey, Peter, I think that… Thanks for that. I think that we have to keep a couple of things in mind. First, rates are rising and companies and consumers are adjusting to that. Month by month, consumers put record amounts on credit each month. Consumers in the US had reserves to spend on price rises through, say, Q1 of 23, but now they don’t. And they’re having to buy things at these elevated prices on credit, and that’s a problem. Now, that’s on credit in rising interest rate environments, so that’s a problem. The other consideration is when we look at corporate earnings in the US, earnings have deteriorated in this quarter. We had great breakthrough earnings for Meta and other stuff, but they’re the exception, they’re not the rule. Earnings have deteriorated by about, I think, 3 % this quarter. I could be wrong there.
Peter
I think.
Tony
It’s.
Peter
Higher even. I think it may be higher than that, according to fact set.
Tony
Right. So we’re in a deteriorating earnings environment. And so companies are not able to continue to expand their margins like they have been able to do over the last two years. And so they’re feeling it on the financing side and they’re feeling it on the margin side. They’re also feeling it on the salary side because to hire people, it’s more and more expensive. And how mentioned payroll and salary quite a few times saying, really, inflation is a problem, but payrolls and employment are a real problem as well because they’re not slowing down.
Peter
And how is that then going to work its way out of the system? Is it going to be that there will be less vacancies advertised, or do you think there will actually be layoffs to try and ease the pressure before the latter?
Tony
I think there’ll be both. I think it’ll start with the former and end with the latter because when you have margin compression, when companies don’t have the margins or the earnings that they had in the past, they have to find places to cut costs. And we’re an environment right now where commodities generally are rising again. Those input costs are generally rising, but companies are going to have to find a way to cut some of their overhead so that they can get investors the earnings that they need. And so that’s going to have to come from somewhere. And it’s probably going to come in the form of headcount. Pex started doing this probably nine months ago, but it’s going to roll into other industry sectors as the margins begin to hurt.
Peter
And this Andrew is all going to come. Sorry, Andrew.
Andrew
No, no, no. Peter, you’re not in the place. You’re the boss here. I am not, again.
Peter
I was just going to say that really, what’s going to happen is that these layoffs are going to start, or the problems in the job markets are going to start also at the same time that people have used up all their paychecks from the stimulus and have run down their savings. So that’s presumably going to have quite a big hit on consumer confidence.
Andrew
Yes, but can I now… Yes, I cannot disagree on that. But can I twist the thing a little bit and bring two very important issues in here. And this is something that Tony has already touched. And I will, let’s say, try to stick my finger in the jugular, and that is what you buy in this market. Now, strictly speaking, if you really believe what Paolo is saying, I have no reason to disbelieve it at all, is really equities are going to be under pressure for the next two years by higher interest rates and a slow in economy. Okay, this is essential. And if you were to stick to bonds, then of course you will be permanently bedeviled at the time that the Fed may just begin to cut interest rates and therefore you’re going to be caught with a bundle of equities whose prices are falling. And in the middle of all that, I’m afraid I have to raise this because it really is really upsetting me. We are having in November, December, the COP meeting, that is the environment meeting of the United Nations, the 28th one taking place in Dubai. My God, what a horrible background situation.
Andrew
We are entering complete silence in the market. All the fires, the horrible weather. We’re back to the racism. We’re really thinking, Well, will the increase interest rates, decrease interest rates? There are two things here. There have to be colossal, but really colossal opportunities on climate updated investment because this is really ringing loudly and clear. Or on the other hand, given that I can tell you, because I observe this very, very closely for a number of clients, very little is being done. A lot is being done, but not anywhere near the 1.5 %. And given what has happened this year in the terms of the extremes weather we have had, and leave Greece aside, it was not just Greece, it was right through Europe, I think, Peter, to put it, let’s say, in a very gentle and diplomatically correct phrase, in the next five years, we are all going to be dead. So there will be a lot more things to worry rather than where their interest rates are going up.
Tony
Zilch.
Andrew
Influence in the market. Absolute silence. Nothing. Not one to use a good English expression, bloody word. I’m beginning to use to start to write in a great deal more without being alarmist. But this is the truth. This is what physically actually is happening. As Tony said, we’re going to have three more weeks whereby we’re going to die. Okay, if I was in Greece, we’ll have three more weeks where I’m going to die. Okay, so it’s not fun.
Peter
Tony, you’ve had the extreme weather as well, of course, in the US. Do you think this is going to start becoming a market issue?
Tony
I’m not sure. I don’t really have a view on that. It’s been hot in Texas this year, but I don’t know how much over normal it’s been hot. Last year it was pretty much the same pattern. So I honestly don’t know. The other thing that I… Just to add into what Peter said is, we have a situation where because of shutting down nuclear and other things, European countries particularly have started to rely on fossil fuels. And if we do enter a higher interest rate economic slowdown environment, there are very few economies, aside from Germany and Europe, that actually have the funds to subsidize the build out of green infrastructure.
Peter
Andrew, let me bring up another subject then and see what you think about this if I throw it into the mix. China is very close to falling into deflation, isn’t it? Certainly, we’re seeing disinflation in China. What impact is that going to have on the rest of the world, including the US?
Andrew
Well, there are three things going here. This deflation is… Hello, Peter?
Peter
Yeah, I’m here.
Andrew
Sorry, very sorry. I thought I have lost you also as well. No, I’m here. We can hear you. Chinese deflation is completely domestically driven. It is a matter for the Chinese to worry about because it is not driven by external factors, it is driven primarily by the domestic weakness of the economy, number one. Number two is the Renminbi has been consistently weak, which means that as far as the Chinese export in inflation, you would always think it in terms of Chinese products are cheaper than ever. B oth because domest, the prices are falling and also because the Renminbi is weak. So that’s potentially it’s a deflationary rather than an inflationary pressure on the world. And the third point is one great big resounding warning that it is not true that we’re looking at global economy. We are looking at economies that have got very much phases on their own. And blessed the little boots of Japan, they’re still sticking to negative interest rates as if nothing has happened. A lot has happened, but their policy appears to be consistent, not necessarily correct, but consistent. So China cannot be a bad deflationary influence in the world.
Andrew
On the contrary, if Chinese goods are of some importance as input in other countries, then there are good news. They’re going to be cheaper.
Peter
Okay. Tony, what I was asking Andrew, just as you got cut off there, was the impact of China on all of this. China is very close now to slipping into deflation. Consumer price inflation is zero. On the producer price level, it’s already negative. What’s the risk that China exports deflation around the world?
Tony
I think China exporting deflation is really the status quo. That’s what they’ve done for the past 25 years. So if they go back into exporting deflation, which they were doing before the COVID supply chain inflation hit, it’s business as usual for China. But with the domestic CPI and PPIs as low as they are, because China is entering or has already entered a balance sheet recession, I think they may have to devalue to a level that they’re not quite comfortable with in order to actually export that deflation. So they need stimulus within China, but it’s really hard to see them borrowing more and taking more debt because their debt levels are so high. So there’s a real likelihood that we see notable devaluation of C&Y to really boost exports in China so that they can get more domestic economic activity.
Peter
Let me ask you finally, just very quickly about the European Central Bank. They’re meeting later today. Andrew, they’re expected to lift rates as well. I think the ECB is probably fair to say is in a more difficult position than the Fed, isn’t it?
Andrew
Well, to the extent that in absolute terms, they’re having a watching rate of inflation between 5 % and 5.5 % and everybody else apparently is having lower rate of inflation. And yes, politically it is tricky because there are equal voices. For example, the Italians asking for stronger, tighter monetary policy, and presumably everybody else is not so. So yes, they are not yet at the point that they are seeing some light at the end of the tunnel. Although somebody said sarcastically, yes, light at the end of the tunnel, there was another trend coming in the opposite direction. But yes, they’re having a tougher period because still the increases in interest rates are not paying off as clearly they are doing so far in the United States.
Peter
Tony, final word to you. The ECB, are they behind the curve?
Tony
I think they are a bit, but I do think that will enter again, like the US is in a base effect period because of high energy prices from a year ago in June. Europe is about to enter that zone where natural gas prices and energy price has really spiked in Europe. And I think they’ll have 2-3 months of very good inflation readings, meaning inflation moving in the right direction toward disinflation.
Peter
Thank you both very much. That was Tony Nash, founder of Complete Intelligence over in the USA, and Andrew Ferris, who is the CEO of Econosis Advisory.
Peter
I’m joined now by Ross Fe gold, who is Business Development Director at SafePro Group over in Taiwan. Good morning, Ross.
Ross
Good morning.
Peter
Now, China has announced the replacement of Foreign Minister Chen Gang. What month after he disappeared from public view, Mr. Chen had been seen as a close associate of President Xizhiangping, China’s state news agency, Xintong Rua, said on Tuesday that the country’s Parliament, the National People’s Congress, had removed Mr. Ching and remained and replaced him with the country’s most senior diplomate, who is Wang Yee, who was his predecessor as Foreign Minister. Ross, what on earth do you make of this? It’s quite an astonishing situation, isn’t it? We still don’t really know what has happened to ching gang.
Ross
Yeah, two key things here. One, as you said, we don’t really know what happened to ching gang. But two, and probably more importantly is, regardless of what transpired and what the reason is for Qngang being replaced after the unexplained absence, other than the brief mention that there was a health issue, is continuity. And especially with Wang Y ee coming back as Foreign Minister, and he was the more senior foreign policy official anyway, this is not going to herald a change in how China interacts with other countries, whether it’s the countries that it’s friendly with or the countries that it has a more transactional relationship or the countries that it has a difficult relationship, obviously. Most notable one in the latter group would be the United States, but also increasingly Japan, Australia and Western Europe.
Peter
But it does raise some serious questions, doesn’t it, about transparency? I mean, even by the standards of the opaqueness of the Chinese Communist Party, this is an astonishing situation because he was handpicked, wasn’t he, by President Jiz hongping for this role. He’d been the US ambassador, the Chinese ambassador to the US for just about two years, and then he was elevated massively into this position, and now suddenly, equally abruptly, has been removed from it. It suggests there’s some very odd things at the lease going on in the Chinese Foreign Ministry?
Ross
It certainly does. But unfortunately, as you said, this is an opaque and not a transparent government. So until they tell us more, we can only speculate. And I’m sure many of the listeners have heard or read about the various theories for why Qinggong was removed, other than simply being a health reason, allegations of corruption, extra marital affairs, even espionage. Maybe e will get more information from the government in the coming days or weeks, and maybe we won’t. That’s just the nature of the system. A lot of attention has been put on to the aspect that it was he J inping personally who elevated Q ingang above other potential candidates in the Chinese government to take on this role, which he did take on at a relatively young age compared to some of his predecessors. But our arguably, it also shows that he, when necessary, will change somebody that was close to him or somebody that he had mentored or elevated. If the facts demand that he does so, he’s not going to keep someone on who is a political liability. And perhaps ching on have become a political liability for reasons that we don’t know yet.
Ross
And that us, he made the change. So I’d be very careful, even though some people are rushing to say so, that this shows some weakness in C. J. Pink’s position. In fact, one might argue it actually shows the opposite.
Peter
But you could argue, couldn’t you, that when you’ve handpicked someone, particularly durably, without counsel and without proper due diligence, when that goes wrong and it turns out to be a bad decision for whatever reason, it would normally put your judgment into question, wouldn’t it?
Ross
Well, at minimum, it might put the due diligence. Did you do the right due diligence? It’s a question. But we see that even in more transparent and democratic systems where people were hiding something in their background in a criminal matter or extra marital affair. And then it comes out once they’re elevated to the next highest position. So I think it’s the due diligence aspect. And if there was something there with Qigong, not health related, did they overlook it? Did they just not know about it? Or did they know about it and decide that it’s okay, we’ll live with it as long as it doesn’t come out. But they were worried for whatever reason recently that it would come out. We just don’t know. We might never know. But again, I don’t think this is going to signal any weakness in C. J inping’s overall command of the government and the party.
Peter
What about Wang Yee? Is this a temporary move until Beijing can find a suitable successor? Clearly, they needed to stabilize the situation. They’ve got important meetings coming up, issues going on with the US, so they need a stable foreign policy. So he’s obviously a stable pair of hands because he’s done the job before. But is this just a temporary move, do you think?
Ross
The expectation is this will be temporary, but nobody could really define temporary. So as you said, they need a steady hand to come in and stabilize the Ministry in his more senior role Wong. He was more a big picture guy when it came to foreign policy decisions. And the person who holds the title of Foreign Minister, which Chngong had, is more about the operational aspects of the Foreign Ministry. Now, now, Long E has got to do both. This is a big bureaucracy, the Foreign Ministry I’m referring to, and it needs to be run day to day. So he needs to make decisions about spending budgets, promotions, things like that. So that’s a lot of work. I don’t think there’s any expectation that Long E will do this open ended, of course. Again, this being China, they might surprise us. But the expectation is that they will look for a more suitable, younger candidate who could do it for a number of years. And that would not be Wang Yee. And Wang Yee probably doesn’t even want to do it. He did it already. He had been promoted upstairs to the more senior role, and he’d probably enjoy that.
Ross
One more thing on this point. To their credit, especially when we think about competition with the United States, whether it’s the Foreign Minister or Wang Yee as the foreign policy guy, but within the party apparatus, they travel a lot. And that’s one of the reasons why often feels like the US or Western Europe are a bit behind in places like Central South America or Africa, or even more in more recent years, Oceana, the Pacific Island countries that’s gotten so much attention US China competition. But they really do travel a lot. And whether Wang Yee wants to take on that burden is also something he’s going to have to consider. It might factor in how long he does this job on a.
Peter
Temporary basis. It leaves Wang Yee in a very powerful position, really, doesn’t it? Because he’s on the Politburo. He’s come back to being the Foreign Minister. He’s probably one of the most powerful ministers we’ve seen in a long time in terms of his status. So presumably he’s got very close ties. He’s certainly very trusted by President XI J inping.
Ross
Yeah, without a doubt. And that’s why he was brought in to stabilize the situation. That’s why he does trust him, does look at him as someone who could stabilize the situation. But again, I don’t think the intention is that it would be a long term solution.
Peter
Do you think it damages in any way China’s diplomatic efforts? Because it comes at an important time, doesn’t it? Where it’s got a lot of foreign policy challenges going on at the moment. So to lose your foreign minister at this time is not the best thing in the world.
Ross
Probably not, because, again, there will be continuity. And the countries that have a positive relationship with China, places like Africa, some of the countries in ASEAN, this will not change that. If there are programs that are in flight or under discussion, they probably won’t stop the discussions. They won’t be killed off. Interestingly, even in the news in recent days is talk about China trying to persuade Korea to reset that relationship a little bit, obviously, with the conservative president taking office last year, there was a bit of a reorientation to the United States. So these things seem to operate regardless of who is at the top of the apparatus. And I think that’s how most countries will approach their relations with China.
Peter
Now, the National People’s Congress has been busy this week because as well as removing the Foreign Minister, they’ve also removed the head of the People’s Bank of China. Although that was more expected, wasn’t it? He had the Yigang had reached retirement age and he’s been replaced by Pangong sheng, which was the expected move. But I suppose the thing there that’s noticeable is that it’s the first time since 2018 that the top two positions at the PBOC, the governor and the Communist Party secretary, have been held by the same person.
Ross
Yeah, that’s right. To be fair d upon, from most of the analysis of his skills, most people feel like he’s done a lot of different jobs in banking and in government related to the same issues and especially with foreign exchange. But and people generally will say that he’s qualified for the job. As far as unifying the two positions, one could say that given the doubts about economic growth for this year, probably going to be a little soft or slower compared to some of the great years of the past 20 or 30 years. Having one person do the job just ensures everything is moving in lockstep. And ultimately, that’s what he’s been paying once.
Peter
And it comes, obviously, when this is a critical point for the economy, isn’t it? The government wants to revitalize the private sector. It wants to boost consumption, wants to stabilize the housing market. The PBOC previously under Yee Gang had been quite conservative, hadn’t it? It didn’t really rush into making decisions, rarely changed monetary policy. Do you think things are going to change?
Ross
Yes, because if global outlook doesn’t look good and if the domestic outlook doesn’t look good, they’re going to have to do something. Clearly, they want economic growth in the five or above figure, 5 %, 6 %, and it might be very difficult to achieve that. And you just mentioned a long list of areas that are going to be of concern to policymakers. So, again, I think that shows it’s one of the justifications to have the same guy with both the party job and the civil service job. And we’re all waiting for the big S, the big stimulus package, what exactly will be in it and when will they announce it?
Peter
That’s what the markets are waiting for as well. Ross, thank you very much indeed. Always a pleasure to talk to you. That’s Ross Fe gold, who’s Business Development Director at Safe Road Group. Thank you for listening to Money Talk this morning. You can find more business and finance information from around Asia in my daily newsletter, which is at peterlouismoneytalk. Substack. Com on tomorrow’s program. I’m joined by Francis Leung, the CEO of GEO Securities, and Kenny Wayne, the head of investment strategy at KGI Asia. With a view from Australia is Tony Lawson, CEO of Staten Partners. Bye for now.