Subscribe
Share
Share
Embed
BMO Smarter Investing is a podcast series that's all about helping you make smarter investment decisions. Join top BMO economists Douglas Porter, Sal Guatieri, and Jennifer Lee each month as they discuss the latest market developments and insights.
For more information about how you start
investing with confidence, visit bmo.com/onlineinvesting.
BMO Smarter Investing - August 2026
===
[00:00:00] Introduction: This is BMO Smarter Investing for August 2026. Join top BMO economists, Douglas Porter, Sal Guccieri, and Jennifer Lee, for trends and forecasts across the economic landscape so you can make more thoughtful investment decisions
[00:00:20] Sal Guatieri: Hi, everyone. Sal Guatieri here, and joining me is Art Wu, Director and Senior Economist at BMO.
[00:00:26] Art, thanks for joining the podcast. I thought it would be a great time to bring you in since you just came back from an extended family vacation to China, specifically Shanghai, and you actually penned some of your thoughts in a recent note.
[00:00:41] Art Woo: Yes. I was able to spend a couple weeks in Shanghai and the surrounding region.
[00:00:46] It was great. A bit hot, I must admit. And although it wasn't really work-related, I did get a chance to speak to some contacts and some friends about the economy, and I did get a better sense of how [00:01:00] things are feeling on the ground these days.
[00:01:02] Sal Guatieri: Okay, before we dive into some topics that I think our listeners would like to hear about, such as the state of China's housing market, the trade war, the exchange rate, and even oil prices, what were your key takeaways from the trip?
[00:01:17] Art Woo: Yeah, Sal, perfect. I think my big-picture takeaway is that China is still experiencing intense deflationary or disinflationary pressures. Moreover, I think these pressures are still largely a byproduct of hyper-competition or what has become better known as involution, which sort of popped up into everybody's minds in the middle of last year.
[00:01:44] I say this because of the array of stories I heard about how companies are still aggressively cutting costs to preserve profit margins or even lower average sales prices. So this sort of explains why we're hearing more reports about how bad China's [00:02:00] job market is these days. You know, one prominent economist academic actually estimated the unemployment rate may be twice as high as the official five percent, as he's included discouraged workers into his tally.
[00:02:16] But, you know, I got a bigger sense that wages may be under greater pressure, and this is impacting more workers and also explains why they are unable to spend like in the past. This has come on top of the big drop in housing prices and long-standing concerns over, you know, saving for retirement. It's this combination of weak consumer spending, but on the flip side, boom in exports is why every China economist these days is characterizing the economy as either K-shaped, two-speed, or dual track.
[00:02:53] And the latest stats for the month of July provided further evidence this picture hasn't changed. Retail sales [00:03:00] only grew zero point six percent year on year, and exports rose twenty-four percent. And if I can finish off, I think it's a reason why we think the central bank will likely need to ease monetary policy further in the coming months.
[00:03:16] Sal Guatieri: That's really interesting because it seems like China is one of the few countries that is actually experiencing disinflation pressures, the, the complete opposite of what we're seeing in most of the advanced world, especially the US, where because of higher oil prices in particular, the bigger threat right now is higher inflation.
[00:03:36] And of course, China's housing correction seems to be part of that disinflationary pressure. I'm wondering if you can elaborate on the housing correction a little more, as there have been some headlines popping up about a recovery in Shanghai's market. Is this a sign of better things to come?
[00:03:54] Art Woo: Yeah, it's a great question.
[00:03:57] If I can put it this way, I didn't get a strong [00:04:00] feeling that housing is on a verge of a definitive turnaround or even stabilizing, at least from a nationwide perspective. I think the Shanghai rebound of late in terms of transactions and prices is a really a unique situation just because it, you know, it's such a prominent city.
[00:04:18] But it really looks like a combination of ease and restrictions for non-residents, so they've been attracted to, you know, more attractive school zones, and a sudden surge in demand for luxury property from China's new wealthy class has really lifted the market. You know, Beijing's actually recently followed suit and eased restrictions on new residents, and it'd be interesting to see if they see the same type of rebound.
[00:04:45] Otherwise, I got a sense that there are still a lot of concerns outside Shanghai, Beijing, Shenzhen, and Guangzhou, the big four, that there's-- most cities are still stuck with a huge overhang of supply of either [00:05:00] unsold, newly built housing or a growing amount of existing housing being put up for sale. So I think the prevailing view is that the housing market will still take a few more years to truly find a floor, but maybe we're getting closer there.
[00:05:17] Perhaps more interestingly, and it was mentioned a number of times, that there are concerns expressed about, you know, rising vacancies in the office sector, and this is sort of consistent with this whole cost-cutting theme that the corporates are on. It was just mentioned that many companies were shifting from more expensive to cheaper offices and maybe even from bigger offices to smaller offices.
[00:05:41] Maybe this is a good place to slip in a few words about, you know, AI and the demand for office space and workers, but there was plenty of discussion on this topic. And basically, what I heard is AI is being utilized much more this year. But to what degree is hard to know in terms of how it's impacting the job market.
[00:05:59] The [00:06:00] counterargument, interestingly, I heard, is that the cost of labor in China is still quite low, if not cheap, and sort of that human beings remain a competitive alternative.
[00:06:10] Sal Guatieri: Okay. Of course, we cannot not talk about the trade war. Any new thoughts there as things could be heating up again prior to President Xi's visit to the US in late September?
[00:06:23] Can China's exports continue to motor along, or will the economy be in serious trouble if the export engine begins to sputter?
[00:06:32] Art Woo: Yeah, you know, I have to admit this is one area that didn't really come up for discussion because I think most were simply sitting on the sidelines like us and waiting to see how the news flows.
[00:06:44] You know, most believe exports are likely to remain strong simply 'cause that's where the government has devoted a large part of their resources, and also simply because, you know, pricing power abroad is greater than domestically, so there's a huge [00:07:00] incentive for manufacturers and companies to direct their goods abroad.
[00:07:05] Otherwise, you know, I think friction between Beijing and Washington and even Europe, everybody expects it to rise. I mean, s- this is sort of highlighted by President Trump's latest report stating that a number more than 40 countries are supporting the flow of Chinese goods into the US under false labeling.
[00:07:26] Still, I think we'll get a better idea when Presidents Xi and Trump meet next month, but I don't think the broader trade truce negotiated in South Korea late last year is suddenly gonna fall apart. I think most expect President Trump to be focused on midterm elections and, you know, you still have the Iran war festering, and stirring up more trade tensions with China may not be the best time.
[00:07:53] But the reality, it's a relationship that remains quite fragile and could go off the rails any time. [00:08:00] But I think, you know, if we look at things from a broader policy perspective, this really means Beijing self-sufficiency drive, it's likely to continue. They're gonna remain quite concerned about getting cut off from, you know, more of the higher tech goods made in the West and, you know, at the same time, this means a lot of financial resources is still gonna be skewed towards this high-tech drive.
[00:08:23] It also has implications for the exchange rate
[00:08:26] Sal Guatieri: Well, that's a good segue. I know that you have written about the debate about China's currency, which exploded in the Twittersphere and was covered in The Economist magazine in, in late July, continues to rage on this month. Would be great if you could elaborate.
[00:08:43] Art Woo: Yeah, I'll try to keep it short 'cause it's probably a debate that's worthy, you know, of an entire podcast on its own. But the crux of it, it was mainly triggered by an economist opinion piece titled Don't Blame Global Imbalances on the [00:09:00] Undervalued Yuan, which was written by a trio of economists, two of them being former IMF chief economists.
[00:09:08] This came out in late July. In a nutshell, the trio stated that forcing a sharp and quick appreciation could worsen existing deflationary pressures in China and maybe actually reduce demand for foreign goods, which would actually lead to a bigger trade surplus. And instead, they're arguing that structural reforms are required first to address, you know, sort of the domestic disportions of weak consumer spending.
[00:09:35] So this sort of runs in contrast to the conventional argument that a much stronger currency would result in China importing more and exporting less. But the main reason for those arguing for a stronger renminbi quickly and right now is they're of the view that it's really the only way to get China to move on structural reforms, such as building a [00:10:00] larger social safety net.
[00:10:01] I think both sides, you know, they have valid arguments, but maybe pushing more extreme positions from an actual realistic implementation perspective that Beijing could actually pursue. So I think both solutions are unlikely to happen. No real reforms that push Chinese household incomes upwards and increase imports, nor are we likely to see a huge or large and swift currency move that spurs reforms.
[00:10:32] I think we're likely gonna see Beijing continue with its recent path, which is to let the renminbi strengthen as has occurred over the past year. It's quietly up nearly nine percent on year-on-year terms on a nominal trade-weighted effective exchange rate and seven percent on real terms. It's actually had quite a big move.
[00:10:55] Sal Guatieri: Art, I'm wondering in the time left if we could touch upon two more [00:11:00] topics, crude oil and the stock market. More specifically, all signs seem to suggest China has played a big role in helping to keep crude oil prices much lower than would otherwise be the case by dramatically reducing their imports. And that's really surprised the energy forecasting community.
[00:11:18] How much longer can they keep this up?
[00:11:21] Art Woo: So it's a great question that I don't frankly have a great answer for, because the fact of the matter is we don't really have a good hand on China's true stockpile of reserves of crude oil refined products. There are, you know, a large number of estimates that range from like one point two billion barrels up to one point seven billion barrels.
[00:11:44] And interestingly, it seems like China didn't really draw down on them heavily when they started to reduce imports significantly in April, I mean, imports of crude oil. So instead, the refineries were really the [00:12:00] ones who slowed down production, which led to the decline in imports of crude oil. But either way you cut it, if you look at those numbers, China has the ability to continue suppressing their crude oil imports at current levels for several more months, or certainly well into next year.
[00:12:18] However, if you think those, even those estimates are on the low side, you know, the International Energy Agency, they recently estimated global inventories are close to seven point nine billion barrels. So they're at a healthy level, standing at the similar level back to the same period in two thousand twenty-five.
[00:12:37] So this sort of lends support to the idea that the world was operating with a heavy excess supply before the start of the war, and this has really been a key factor that's helping to prevent crude oil prices shooting above a hundred dollars per barrel on a sustained basis. But, you know, the war looks like it will continue to drag on, so we're sort [00:13:00] of in watch and wait territory.
[00:13:02] Sal Guatieri: Okay. Art, any final thoughts with respect to China's stock market? I couldn't help but notice last month's headlines that the authorities injected 60 billion yuan to support A-shares, reportedly in an effort to counter global market jitters.
[00:13:20] Art Woo: It actually didn't pop up in any of our discussions or my discussions, but I would tend to take the authorities' comments at face value.
[00:13:29] I think they were looking to prevent a loss of confidence given the global backdrop at the time. And for those who recall, this is not similar to 2015 when events back then were, you know, highlighted by the government actively encouraging or cheerleading the stock market rally, you know, through state media comments.
[00:13:52] So put another way, I don't think Beijing is seeing the stock market as an avenue to generate wealth for its investors, [00:14:00] but I think they wanna make sure it remains stable and a really a viable funding channel for companies to increase equity issuance. So this has been highlighted by already a number of big IPOs that have taken place this year, which is much more than took place last year.
[00:14:16] Sal Guatieri: Well, Art, thanks much for this great discussion. I know I, for one, am better informed about China's growth prospects and challenges, and I'm sure our listeners are too.
[00:14:29] Introduction: Thanks for listening to BMO Smarter Investing, a podcast brought to you by BMO InvestorLine. We're here to empower Canadians to invest smarter.
[00:14:37] For more information on how you can start investing today, visit bmo.com/onlineinvesting. And be sure to subscribe to this show to get the latest episodes wherever you listen to podcasts.