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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
Welcome to the TCW Investment Perspectives podcast.
I'm Anisha Goodley, head of the Portfolio Specialist
Team for TCW's Emerging Markets Group in Los Angeles.
I'm here with David Levenger, Managing Director and Asia
Sovereign Analyst for the TCW Emerging Markets Group.
Dave is a highly experienced China expert, having previously been
the US Department of Treasury's Senior Coordinator for China
Affairs and the US-China Strategic and Economic Dialogue.
Dave just came back from a trip to China and he's here
today to discuss his main findings and key takeaways.
Dave, thanks for coming back and speaking with us today.
David Levenger, Managing Director and Asia Sovereign Analyst for the
TCW Emerging Markets Group in Los Angeles Always a pleasure, Anisha.
Anisha Goodley, CEO, Portfolio Specialist
Well, let's just kick off with your trip.
You just returned and what were some of your broad observations?
David Levenger, Managing Director and Asia Sovereign Analyst for
the TCW Emerging Markets Group in Los Angeles So there are a
lot of bears prowling the streets in Hong Kong and Beijing.
What was interesting is I think sediment was a bit more bearish in Hong
Kong than Beijing, which was a flip from my last trip there in March.
You know, they say it's always darkest before dawn and the China outlook is
certainly challenging, but I came back feeling that we may have reached a
point that with expectations so low, so is the
hurdle for positive data and policy surprises.
And I think we saw that with the August data, which
came out better than many people had expected.
And, you know, through all the gloom, what I did see is some glimmer
of cautious optimism that the economy may have hit bottom in July.
No one's expecting a strong recovery as property
investment stays weak and global demand slows.
And I think we'll probably see Chinese growth in the fours this year and next
and a gradual kind of slowing of growth to the threes by the end of the decade.
That could be higher or lower.
I think it ultimately depends on confidence, what
happens to private sector and household confidence.
You could see a positive self reinforcing cycle as the
economy improves, confidence improves, people start
spending and investment more, or you could see the reverse.
Property sector continues to bring growth down, confidence
worsens, and private businesses and households pull back.
I'd see the risks as a bit asymmetric, probably upside you'll
get an extra point of GDP growth, downside you'll probably
see cut of two percentage points off of GDP growth.
Four percent growth is not as impressive for China
as the old days, but you got to put in perspective.
US is probably a one and a half, two percent growth economy.
Europe is definitely a sub two percent
growth, probably more one and a half percent.
And Japan is a sub one percent growth economy.
Weighing on Chinese asset valuations, it's not just the expectations of lower
growth, but it's also higher uncertainty of where China is ultimately headed.
For the property sector, for support for the private sector and also
geopolitics, the one thing I felt somewhat confidence in coming back
is, you know, the tail risks you hear about a
crisis in China, I kind of feel is overblown.
Confidence is pretty high and I feel rightly so that the central government
is ready and able to stand behind the big banks and local governments.
So it sounds like you came back a little bit more constructive
than you had been and we're starting to see the impact of some
of the recent measures that the authorities have pushed through.
So in terms of your base case, you think growth
this year is somewhere around four percent.
So below that five percent target.
Yeah, I mean, you know, they'll probably get
a little help from the statistical agency.
Their target is around five percent.
They could get around four and a half, four and three quarters,
I think close enough to say that they've met their target.
Close enough.
And so maybe just walk the audience through some of the recent measures that
they have pushed through in terms of what could really have a meaningful impact.
Yeah, so, you know, we haven't seen any kind of big bang stimulus, but I think
we've seen kind of steady incremental policy easing that's starting to add up.
They are basically unwinding a decade of housing policy that
was predicated on the view that demand exceeds the ply.
They're cutting mortgage rates, down payments, getting
rid of restrictions on how many homes you can buy.
And that's all helpful, though I think you'll see the biggest impact
probably only in the largest cities where demand is the strongest.
They have substantially eased monetary policy.
They've cut rates and they've signaled rates are going to stay lower for longer.
This definitely helps relieve pressure on stressed debtors.
It reduces the risk of defaults.
And probably most importantly, by cutting existing mortgage
rates, it's going to put money in people's pockets.
But you still have a confidence problem.
Despite lower rates, the private sector and households
are reluctant to kind of borrow more to spend and invest.
And lastly, infrastructure.
It continues to be supportive.
I think we'll see more fiscal stimulus for urban
renewal, but the amounts are likely to be modest.
Right.
I think you're making some really important points in terms of the
shift in the growth drivers in China and how there isn't necessarily
going to be this large stimulus that you may have seen in the past.
So my next question then from there is thinking about how do you
think about China in terms of its impact on the rest of the world?
If you think about the next several years, if they are
making this significant push towards higher quality growth.
You know, it's interesting in 2007, a long time ago, Premier Wen Jiabao said
that China's economy was unstable, unbalanced, uncoordinated and unsustainable.
And that was before we saw another decade of kind
of credit fueled property and infrastructure boom.
And China's playbook has fundamentally changed.
I think China's leadership believes it was the
old playbook that got them into this mess.
And so when they talk about high quality and sustainable growth, it
means they're not going back to the old playbook and they're willing
to endure some short term pain to get to where they want to be.
And I think you have to give the government some credit on property.
I think they recognize that the first thing you
do when you're in a hole is you stop digging.
And they recognize that fundamentals like a shrinking
population don't support high levels of property investment.
And they want to shift investment away from property to technology that
reduces China's vulnerability to US sanctions, reduces carbon intensity
and can be new growth drivers for a smaller and aging population.
I fundamentally see property in China gravitating towards
what I call the Singapore model with much more kind
of public housing, both for ownership and rentals.
They're also convinced that their relationship with the
US is going to remain fraught for the foreseeable future.
So just like in the US, they're focused on de-risking relations and
national security concerns are going to take a precedent over growth.
What this means for the rest of the world is China's growth is not
only going to be lower, but it's going to feel very different.
It's going to be much more service oriented.
There's going to be less import intensive construction and capex, fewer imports.
Trade and investment is going to continue to shift
away from development markets to emerging markets.
And you're going to see a shift in commodity man from iron,
ore and coal to things like nickel, copper and cobalt.
Obviously, other emerging markets are also going to benefit
as companies adopt kind of a China plus one strategy
to de-risk their dependence on China's supply chain.
What does this mean for markets?
Clearly, rates are going to be lower for longer.
I think any kind of material backup and yield would
be an opportunity to fade on the RMB exchange rate.
They are trying everything to keep exchange expectations anchored, but
ultimately, monetary policy divergence between the US and China with US rates
higher for longer and Chinese rates lower for longer, it is going to keep
pressure on the RMB to depreciate until US growth turns and the
market starts more aggressively pricing in rate cuts in the US.
Thanks, Dave.
I actually want to pivot a little because I don't think
we can do a China podcast without talking about US China
relations and some of the tail risks as well as Taiwan.
I don't think we can.
I hear your point on what you were saying in terms of China's
growth model and focusing on de-risking and independence
and you're seeing what's happening here in the US.
But I think we can also say that after a few bad years, the last few months
seem to have improved a bit, right, off of, potentially off of a low.
So I'm curious what you think of that relationship just
in light of some of the news over the last few months.
Yes, Venetia, I think you're right.
In just the last couple months, we've seen a thaw in what
had been a pretty deep freeze in US-China relations.
I feel that the catalyst was the Bolivian incident that
scared both sides and scared a lot of investors as well.
It really demonstrated how a pretty modest security threat could escalate
so quickly and just how much kind of communications channels and
crisis management capacity had deteriorated between the two countries.
So I think we've had some good couple of months.
There's been much more communications and
high-level visits between the US and China.
I thought Treasury Secretary Yellen nailed it when she said
the fact that we have such a bad relationship increases
the need to reduce misunderstanding and miscommunications.
The Biden administration finally came out with their draft regulations
on outward investment, and I feel like that is about the best
we could have hoped for in the current political environment.
It was very targeted.
There's a clear preference to exclude portfolio investment.
And I have to say on Taiwan, I was very pleased to hear Biden say
a couple weeks ago that China's economic challenges make it less
likely that they're going to take aggressive risks on Taiwan.
First, because I think he's right, and that
was generally the consensus in Hong Kong.
And secondly, I think it sends an important signal to China hawks in the US,
including in the Biden administration, that we need to lower the volume.
All that said, Anisha, you know next year is the next
year, not just in the US, but in Taiwan as well.
So hopefully this fall will last, but you'll probably see
a pickup in rhetoric as we get closer to the elections.
Right.
Requires very close monitoring.
So let me recap a bit, and then I want to give you an opportunity
to add anything else that we may have missed, just in
terms of your trip or just some of your takeaways.
But it sounds like you've come back a little bit
more constructive on China, on the China outlook.
And part of that is that the market has been so bearish at this point.
You've seen the US in some ways defy expectations,
and China come in below expectations.
So any sort of positive data could actually kind of just help market sentiment.
So that's one of my takeaways from your trip.
And then that around 5% target, it seems
like you may be coming in in terms of 4%.
Maybe it's a little bit higher in terms of what you're
seeing in terms of statistical data from China.
But it also seems to me that some of the tail risks potentially
have dissipated a bit, just in light of what you're saying
about US, China and Taiwan, but again, worth close monitoring.
Anything else to just mention in terms of China's impact on the rest
of the world when you think about just the next three to five years?
And again, just a shifting growth model?
Anything else you want to touch on there?
No, Aneesha, I thought you summed it up pretty well.
Well, Dave, thank you so much for joining us today.
And we'll have to have you back on in a few
months as well just with your latest update.
All right.
Thank you for joining us today on TCW Investment Insights.
For more insights from TCW, please visit tcw.com/insights.
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