Markets Expert Discounts China Overcapacity Argument

Andrew, let’s start with the latest news out of the US, China, US tensions once again back to the fore. You got to imagine that might just dent the rally we’ve been seeing so far. Yeah, but before we start that, can I just get, get, get it, read, get it, get it, read it out of my chest. This, by all means imposed tariffs on EVs and on batteries and on cellular telephones or whatever. If in fact there is a lot of evidence that these are stayed subsidized. But please or please, please don’t bring this nonsensical argument of excess capacity. If excess capacity is the case, then in all Mask must have excess capacity coming out of his ears because apparently he’s exporting quite a lot of his output. I’m a PhD in mathematical economics, I don’t mind saying, and I don’t mind a nice little quantitative definition here. Excess capacity simply defined the output that can be produced reasonably with use of capacity minus inventories. I haven’t seen anything like that being dedicated or somehow calculated in the case of China. But I stress by all means imposed tariffs if state subsidies is somehow distorting the prices. And this is what’s going to happen. So Andrew, might we see an undoing of the rally that we’ve seen in Chinese stocks? Most likely because China does depend for its growth significantly on on on exports and this is not going to help. And of course now said he cleared in his throat, what’s the European Union they’re going to follow? Sweet. So in other words Biden in effect jumped the gun and started out first and the European Union said they have been saying it and they are going to do it and now they will definitely do it and they’re going to impose also tariffs on on electrical vehicles. But there are sectors within China’s market that may be looking pretty attractive. And here case in point is perhaps China developers they continue to extend their gains by two 3% today and that’s because on the back of cities removing those restrictions on sales, what do you make of the property sector Is this a pivot point Is it time to perhaps think about getting some, you know, again I’m stuck a little bit on on numbers because I prefer not to base things on opinions says well, I’ve got a good stomach in my feeling that things are better. I’m always looking at the price of accommodation, newly built flats in 70 major Chinese cities and for nearly 22 months the price has been negative. They are not been falling, no, no, no, no, no. They have been shrinking. Once this has finished, I will feel a little bit more comfortable to say that we are looking at perhaps the beginning of the dawn in the property market because otherwise lifting restrictions, remember you can you can leave all the restrictions you want and you can tell people there are plenty of mortgages for you to have at low interest rates. And if there is no sense of confidence in the property market, all this is not going to make any difference. So Andrew, effectively what you’re saying is still stay away from China, never mind that foreign investors are beginning to, you know, dip their toes into the market. It it’s not a matter of staying away from China, it is a matter of looking at the potential sectors at which something could or would happen and property sector is not. It’s not quite that. Now on top of that we have an external factor on the export sectors of, let’s say electronics and cars and that perhaps leaves us only with things that are of purely domestic importance, living aside the property, which is quite a big of living aside. So I could begin to roll out some rather weak ideas, but at the same time saying keep away from China is keep away from China. Whilst these things are happening and whilst there has yet to be any significant policy measures taken, we had a skew of policy measures that were slightly subdivided and perhaps too much focused on specific areas of the property market. Andrew, there’s been a lot of talk about yuan weakness and how perhaps the PBOC may consider a devaluation of the currency against a backdrop of a very weak yen, all in that hope of supporting the economy. Your thoughts on that? Do you see a major move, Big Bang move on the Chinese Yuan? Not really, for two reasons. First, remember, a central bank can either fix interest rates or exchange rates, not both. Or they can try, OK, but then that implies a great deal as to how much they are going to use their foreign exchange reserves and the impact this will have on their domestic credit. In the case of China, the PBOC doesn’t really have an interest rate policy. Yeah, they have cut some rates, but with a very small amount. And also it doesn’t really have, let’s say, a foreign exchange rate policy like Hong Kong has. It has a kind of a a snake in the tunnel kind of thing. In other words, it is, it is a managed exchange rate and the exchange rate has been allowed to depreciate quite a lot. The reasons for that is, is if they are not willing to push interest rates up in order to maintain the differential, then they will have to let the exchange rate go. Very sensible. OK, so I don’t see anything wrong or bad in the same way that people said, oh, terrible things are happening in Japan because the yen has weakened, Of course it has weakened because the Bank of the Bank of Japan has actually begun to decrease interest rates, therefore widening the differentials to the the US dollar. Nothing wrong with that. You know this horror and terror missing out one O 1 economics. You can only have one thing at a time. The thing is for the, I don’t think anything, Andrew, for the PBOC though, how much room does it have to cut rates given that the Fed is staying higher for longer? Might it take the opportunity perhaps in June or thereafter when the ECB does start to cut its rate? OK, now. Here we go. Thanks. Thanks very much. You raised a beautiful point for me, Chandler, and that is the PBOC controls primarily quantity. In other words, a lot of the things they do is they say we’re going to reduce foreign exchange, we’re going to reduce the reserve requirements of the bank. We’re going to change a little bit in the way the reserve requirements have been used. And they are not touching really interest rates, which is absolutely correct. They can either control quantity or interest rates, not both. And they are clearly unwilling to do too much on interest rates. So I won’t be surprised another another decrease in the in the reserve requirements of the bank, completely correct and consistent policies.