00:00Your title of your report is China's economy isn't stalling, it's pivoting.
00:04Obviously, it's pivoting to have a dual track and have more consumption.
00:07How long is this going to take then?
00:09I think it will take a while.
00:11Let's not forget that it has started during COVID when we have the dual circulation policy.
00:16So I think China has been planning this for some time, and it's finally bearing fruits or taking effect.
00:21So in a way, I think China has been trying very hard, investing overseas,
00:24both as a way to digest some of the overcapacity, domesticate.
00:28Also, trying to reflect its capability of growing more broadly and more internationally.
00:33So I think, in a way, this is helping China in an escalation of the tension around trade and tariffs.
00:41Yes, but how long can the economy keep on relying on the old pillar, and that is exports?
00:47Look at the trade surplus, a record, trillions of dollars in surplus.
00:51That is causing angst among trading partners, no doubt.
00:54So you have to pivot a little faster.
00:56I think it really depends on not on China, but on the rest of the world and their attitudes towards this, right?
01:03I think it's without a doubt that China's manufacturing capability is beyond and above.
01:07And the question is whether that is going to bear some unintended consequences in trade,
01:13in local employment, in local politics.
01:15I think that is the bigger question about, well, how much of the headwind we're going to see in 2026 from the rest of the world.
01:22At the same time, I always try to say that, well, the way how we see it is probably a little bit unbalanced.
01:28Well, China is exporting a lot, but that's partly because we're not digesting or consuming as much as we could or should.
01:36So in a way, I think the policy should be focusing more or acting faster in trying to boost China's domestic consumption.
01:44Yeah.
01:44So the Central Economic Work Conference and the latest plenum in December or November,
01:49and then now the National People's Congress and the CPPCC, the Longhui,
01:54the priority really is going to be boosting domestic consumption.
01:57How are you going to do that without exacerbating the fiscal situation?
02:01Because by most accounts, the local authorities do not want to boost fiscal spending.
02:07I think that's part of the pivoting.
02:09I mean, yes, I do think that we should expand the fiscal deficit.
02:13I think that's the first and foremost.
02:15I've been advocating for in such a low interest environment,
02:18we should be more aggressive and then breaking the bank, so to speak, to increasing the ceiling of fiscal deficit.
02:24But even if we were to keep the same fiscal deficit,
02:28I think there are at least two routes through which we could make it more balanced and more effective.
02:33One is I think we should be more effective in providing social welfare programs
02:37and trying to be more active in targeting those lower income or less privileged stratus of the society.
02:43So I think the marginal propensity to consume for that group is much, much higher
02:48for people who already have one or two houses in leading cities.
02:51So I think that is one direction I have been advocating the policymakers to make.
02:56Two is I think, I mean, there has been some discussion about trying to subsidize,
03:00subsidizing consumption, subsidizing interest payments for mortgage
03:03so that you can free up some of the purchasing ability from Chinese households.
03:09And finally, there is one very peaceful, powerful piece of advice, which I think is expectation.
03:15How can you stabilize the confidence, try to improve the expectation so people are more willing
03:20and more encouraged to spend?
03:22The confidence game.
03:24How do you boost household confidence?
03:25Because they're holding on to their savings because their paper wealth,
03:29because of their household value has gone down.
03:32So it's a chicken and egg thing.
03:33Which one do you resolve first, right?
03:35Do you get people to spend or do you boost their confidence?
03:38How do you begin to put a floor on the property dilemma?
03:45I think that's a harder question.
03:47I think I probably have an easier or better solution, which is the equity market, the A-shares market.
03:52Okay.
03:53Yeah, I think it's not very easy to fix the property problem.
03:56I mean, after all, it was a bubble.
03:58And you always have to live through some of the painful adjustment and moderation
04:02after the collapse of the bubble.
04:04But now I think in Chinese households, their home assets are pretty much concentrated
04:10in either houses or equities.
04:13Equities used to be making a much smaller fraction than it is now.
04:17So with hopefully a slow yet sustainable bullish run in the A-shares market,
04:22hopefully we're going to see some improvements in not only the wealth effect,
04:26but also the confidence associated with that.
04:28Okay.
04:28Well, the A-shares have been doing pretty well so far.
04:31Not too bad.
04:31Also, the RMB has appreciated.
04:33We've seen it on the, you know, the daily fixing is, well, today it was a little weaker,
04:38but again, the trend has been, you know, stronger than seven.
04:41So 6.9 and change.
04:43How much further will the Chinese authorities allow that to happen?
04:46Given the deflation cycle is still pretty entrenched.
04:50Yeah.
04:50I think first and foremost, I'm very encouraged to see that RMB is going through this two-way fluctuation.
04:57I mean, because we had that reform of exchange rate mechanism about a decade ago.
05:02I think it's really nice to see that the market is now playing a greater force in setting the exchange rate.
05:07I mean, of course, with the intervention of Chinese government.
05:10But I expect there's further appreciation or strengthening in the RMB in 2026,
05:15although probably not as much as people were hoping for people from outside China.
05:19I think we have to keep in mind that foreign exchange plays a very important role in China's ability to export.
05:26And given export's importance to China's GDP in the past two or three years,
05:30I think it's very hard for China to experience a large appreciation and maintain its ability to export.
05:36And also, related to what you just described, I think a bigger level, a higher level of appreciation
05:42is going to eat into greater deflationary pressure in China's domestic situation,
05:48which I think is related to the confidence problem that we're talking about.
05:52So I think those all matters are somewhat interlinked.
05:55And I think we have to be very careful with going into one direction, but not too much too fast.
06:00How much longer will the AI boom happen?
06:02I do know that authorities have come down and cracking down a little bit on
06:06or tightening up the restrictions on listing requirements here in Hong Kong
06:10because so many AI companies have come here to list because they want to take advantage of this boom.
06:15How much longer does it have?
06:17I think it will still run for quite some time, even though probably with less enthusiasm.
06:22In a way, I think the run-up of the capital market is trying to encourage China's AI entrepreneurial activities
06:28and trying to use that to compete with the U.S. eventually from a national security perspective.
06:32So in the direction, I think that will persist.
06:35But then given how much enthusiasm has been poured into that in the past 12 months,
06:40I think the regulator is right in trying to curb some of that enthusiasm,
06:44trying to sustain and maintain a longer and gradual run, bullish run in the market.
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