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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.
Anisha Goodly [00:00:06] Welcome to the TCW Investment Insights podcast. I'm Anisha Goodly, portfolio specialist for the TCW Emerging Markets team in Los Angeles. China is a topic that is consistently on investors’ minds, given the size of the market, its impact on the global economy and growing political influence. Against the backdrop of the recent 20th Party Congress of the Chinese Communist Party, the challenges of the Chinese economy, particularly its property sector, and ongoing tensions with the West, now is a great time to talk about China. Joining me from New York is Dave Loevinger, who is a sovereign analyst for the TCW Emerging Markets Group covering the Asia region. He is a highly experienced China expert, having previously been the U.S. Treasury Department's Senior Coordinator for China Affairs and the U.S. China Strategic and Economic Dialog, as well as Minister Counselor for Financial Affairs at the U.S. Embassy in Beijing. Dave, thanks for taking the time to share your thoughts on China today.
Dave Loevinger [00:01:03] Thanks, Anisha. Always a pleasure.
Anisha Goodly [00:01:05] Well, let's just jump right in. You know, I think what's, what everyone's really thinking about right now is, you know, think about this year. China has pursued pretty stringent zero-covid policies, which has weighed on economic growth. But you've seen the equity markets rally recently on the speculation of a possible reopening. So, what's your take on recent headlines? Has there been a real change or a tone, or should we temper our expectations?
Dave Loevinger [00:01:29] So Anisha, you're right that COVID policy has been a major drag, probably the biggest drag on China's growth this year. The impact, it's not just the lockdowns themselves, but it's the uncertainty about lockdown policy that kind of has hung over household and business sentiment. And I think the reality is, in the short term, things are going to get worse. It's getting colder in China as we get into winter. People are staying inside. Cases are rising. All that said, I think last week's announcement on China's COVID policy sent a very important signal. That lockdowns and mobility restriction should be less economically harmful, and that cities and towns and provinces need to do a better job of balancing kind of public health needs and growth priorities. And also, the announcement sent an important signal that China is ramping up big time preparations for a much bigger reopening next year. I think it's going to be after the National People's Congress in March. But the reason why I think markets rallied is one, again, despite what's going to be probably a rocky month or two, the direction of China's COVID policy is clear. The risks are lower. So, this is not going to be locked downs forever. And investors have to start thinking about what is going to be one of the big global trades in 2023, which is the China reopening trade.
Anisha Goodly [00:03:22] Well, thanks, Dave. So, we see a better growth picture next year. But I think let's also touch on the recent party Congress, because what you saw was Xi Jinping basically consolidated power. So what are some of the policy implications of this on top of, you know, what you're thinking of in terms of zero-covid policies, a better growth picture?
Dave Loevinger [00:03:41] Yes. So, Xi Jinping certainly ran the table. And consolidated power to a degree that we haven't seen since Mao Zedong. And he broke a lot of eggs making this omelet. He threw out a lot of norms that had been put in place after Mao died. One mandatory retirement on experience. People had to have to get promoted on kind of a balance of factional representation. He got rid of all of that to put his guys into place. I think the implications for policymaking is it's going to be more ideological going forward. It looks like when you look at the background of top officials that made it into the Politburo Standing Committee is fewer with market experience, fewer with international experience and with less collective leadership. I guess the optimistic view is policymaking could be more efficient and better able to overcome vested interests that stand in the way of reform. But I think the bigger risk is of policy mistakes, and it may take longer to correct. Policy stakes is a well-known Chinese idiom about crossing the river by feeling the stones. And that just means taking one step at a time when you're going from point A to point B. And I thought that was always an important part of China's growth success in the past. They would try things out, and if it wasn't working, they would change course. And I think the fact that Xi has surrounded himself with his supporters makes it a bigger risk that you won't have this necessary course corrected.
Anisha Goodly [00:05:52] So then let's just pivot a bit and take that a little bit, you know, step back a bit and just think about US-China relations, which have been rocky. Right. So recently, Biden and Xi met and there was an initial take that that meeting was constructive. So, again, you know, what do you anticipate for US-China relations and touch on a number of different facets, so, touch on, you know, the tech sector relations with Taiwan as well as climate change.
Dave Loevinger [00:06:18] Yeah. So, until the Biden/Xi meeting, which was just a couple of days ago, US-China relations had been in this steady, mutually reinforcing downward spiral. I do think markets need to pay more attention to the technology restrictions that the US announced last month. These were far reaching. In my view, this represents a fundamental shift in U.S. policy towards China. In the past, the U.S. had targeted kind of technology restrictions on kind of specific, militarily relevant technologies. These restrictions are much broader and aimed at kind of much more comprehensive economic containment of China. And I think the National Security Adviser, Jake Sullivan, said it quite well. The U.S. policy in the past was for the U.S. to maintain its relative technological advantage over China. So as kind of the U.S. innovated, it will allow China to innovate as long as the U.S. kind of stayed ahead of China. Now it looks like the U.S. policy is coming as big an absolute advantage as possible. And many of these new restrictions are meant to kind of really freeze China's technological capabilities. I think in 2023, we're going to see more of these restrictions and those are probably going to expand to restrictions by foreign companies on investing in Chinese companies, particularly direct investments, possibly on portfolio investments in Chinese companies in the tech space. All this said, you know, to fix global issues like an issue you mentioned climate change. The US and China have to find a way to cooperate. The challenge is, you know, as tensions get worse, it's harder to create space for cooperation. On Taiwan, obviously a concern. I still think the near-term risk is somewhat low. Again, think about it. Xi just consolidated power to an extent that again, we haven't seen since Mao. And any move to invade Taiwan would be incredibly risky for Xi and the Communist Party because there's no way they could be certain that they would succeed. And if they don't succeed, you know, an unsuccessful invasion of Taiwan would not only bring new leadership, but could bring a new regime in China. So, it's a big risk to the party.
Anisha Goodly [00:09:28] A lot of really great points in there. So, I want to actually then think about it. So, you have US-China relations, and you have you have maybe some stabilization, but potential for worsening in certain areas. So, then what does that mean for emerging markets? Because a lot of emerging markets are dependent on both the U.S. and China. So, do you envision and this is a bit further out, but do you envision a scenario where some EM's may have to choose and are there winners and losers in that in that case?
Dave Loevinger [00:09:54] You know, my sense is, first of all, you know, when you look at China's announcement over the weekend on COVID policy, and on property, and you combine it with the lower-than-expected inflation prints that came out of the U.S., I think all of that is positive for EM. It reduces uncertainty. I think it reduces some tail risks, fears that like the worst possible outcomes might happen for Chinese growth for Chinese property. And again, I think that has, you know, definitely sparked a rally in emerging market assets. I just got back from traveling in Southeast Asia and the message was very clear, including from countries that are allies of the U.S., they're not going to choose. China is by far the biggest trading partner of all of these economies. But they want the U.S. They want the U.S. to be a security partner because they are fearful of China's rise. I do think this whole notion of what's called a China Plus One strategy, so even if big multinationals are still going to be investing in China, they're going to be diversifying their supply chains, hedging risks. I think part of this has to do with the sanctions that we've been talked about. I think part of this has to do with branding risks. And companies are going to find themselves kind of caught between a rock and a hard place of, you know, serving the Chinese market, but then outside of China, being criticized for whether they're sourcing from factories that might use forced labor or just being too close to China, that's going to be a challenge for them. But I think the biggest thing, why companies may look for alternatives to China with the lockdowns that have occurred typically in Shanghai and some of the other big kind of economic zones.
Anisha Goodly [00:12:23] Yes. And I think you're right. I mean, we've been pretty consistent on our end in saying that there are a few things that we're looking for, for next year in order to really become more bullish on EM. And, you know, you're starting to see some of that playing out with U.S. inflation potentially declining, you know, coming in weaker than expected; stabilization in China and Chinese growth after a weak year. So, it's anecdotal, but the tone that we're hearing on our end, there's been a shift. And we've had some conversations on the desk about this, how there's been a shift of looking at valuations, recognizing there's value and but some of these catalysts for a turn maybe coming closer. Well, Dave, thanks so much. I will just quickly summarize some of the key takeaways and it's always a pleasure to speak with you and catch up on China. So just as a base case, we do see growth improving next year relative to this year, and so, some loosening of the ZERO-COVID policies. We have to really monitor the policy in China given the changes on the back of the party Congress. With respect to U.S. and China, US-China relations, it's going to be differentiated. There's going to be increased pressure in terms of tech, but then maybe potentially some partnership on in terms of climate change. So, with that, thank you, everyone, for listening. We're glad to have you on this. And if you have any questions, please, of course, reach out.
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