This is an audio transcript of the Unhedged podcast episode: ‘Can China rebound in 2024?

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Ethan Wu
2023 was a pretty good year for most global stock markets, but there was a big glaring exception and that was China, which was down more than 10 per cent in the year and just not had a particularly good start to 2024 either. Today in the show, why China is stumbling once again. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in New York, joined from London by markets columnist Katie Martin.

Katie Martin
Hey, man, how are you going?

Ethan Wu
Not bad at all. You know, now that you are in your columnist role, you can think big thoughts about the world. And I think you need especially big thoughts to think about China just because it’s such a different system. The market works so differently. The economy works so differently, the policy responses work so differently. So we’re gonna try to think some let’s call it medium-sized thoughts today about what’s going on in that country and what global investors should take away from it.

Katie Martin
We can achieve that. Medium-sized thoughts? We are on it.

Ethan Wu
That’s our highest aspiration here on the Unhedged podcast. So I mean, maybe just to set the stage, Katie, I remember writing a whole bunch in the first few months of 2023 about the big China reopening boom trade. Goldman Sachs is into it, Bank of America’s into it. All the Wall Street sellside people are into it and they’re like, well, zero-Covid has ended China’s reopening. There’s going to be revenge spending. There’s all this pent-up demand, there’s savings, trillions of yuan of savings, and there’s going to be a huge economic boom, a huge stock market rally. Get in now. And it didn’t happen.

Katie Martin
It so did not happen. It was a massive disappointment for a lot of different investors out there. So if you remember, it’s a little bit difficult to remember because everyone’s timeframes get like pushed out of whack by Covid and lockdowns. But China was in lockdown much, much, much longer than most other major economies. And yeah, so as you say, there was this big idea that once they come out of zero-Covid lockdowns, consumers are gonna kind of revenge spend, as you say, and just splash the cash. They did not do this at all.

And in addition, you got this whole like rewiring of kind of global trade in the sense that a lot of companies globally are thinking, OK, we got our fingers burned last time by having all of our manufacturing in China. Let’s spread it around the world a little bit. Let’s put some in some kind of friendly countries around the world, not rely so heavily just on China. And so for a whole bunch of reasons like that sort of nearshoring, friendshoring thing and like that disappointment from the Chinese consumer, that just meant that the China trade did not work last year at all.

The really sad news is it’s not working this year either, and it sticks out like such a sore thumb, right? So the CSI 300 index is down 5 per cent already this year. Like, you know, last time I checked we’re still in January. This is such a long month. It’s driving me bonkers. Like, I’m doing dry January and it’s killing me. This month just will not end . . . 

Ethan Wu
Oh, no. Get Katie a drink, ASAP.

Katie Martin
Thursday’s the day, boys and girls. So yeah, CSI is down 5 per cent. The Hang Seng in Hong Kong is down 8 per cent, the Shenzhen Composite’s down 12 per cent. These are not good numbers. Meanwhile, you know, you look at Japan, for example. It’s up 7 per cent in yen terms. And that’s still two or three in dollar terms. That’s pretty good. The S&P 500 is just like skittling records. Left, right and centre it’s up like 3 per cent so far this year. Yes, there is a whole thing around, oh it was just a couple of stocks doing the hard work, and that matters. But it kind of doesn’t matter in this context, in the sense that it’s just that China is really out on its own here. Stocks are doing horribly.

Ethan Wu
Yeah. There have been periods of Chinese stock market slumps before that tend to track general weakness in the economy. I mean, I think the one that’s been coming up in some of my reading is that in 2015, right, there was a big surge of Chinese retail investor interest in what people call the “Uncle Xi bull market”. And then the economy started losing some steam. There was a bit of a demand slump. A bunch of retail investors saw their investments falling. They got pretty discouraged. They had borrowed to get in. And, you know, the whole economy entered kind of a period of weakness and the stock market slumped. But then what happened, as often happens in China when there’s a soft patch, is the authorities rode to the rescue and they implemented like a massive buildout project, basically just rebuilding, revitalising all sorts of urban developments across the country. It was a multitrillion renminbi stimulus package. And this is, you know, historically, what happens when the Chinese economy hits a bump.

The problem now, Katie — and we wrote about this a bit today in the Unhedged newsletter — is just the stimulus response has not been quite like it’s been in the past. There’s not this bazooka or Big Bang-style stimulus that we saw in 2007 or we saw in 2015-18. They’ve been like dripping it out. There’s been like, we’re gonna reduce the park fees and we’re going to slightly cut the interest rate and we’re going to give a tax break to small businesses. Like all this piecemeal stuff, right? But the really big, like the central government borrows a lot of money and spends it, that has been slower to come.

Katie Martin
It has been slower to come. And generally speaking, it’s been trying to sort of fix the symptoms, which is how the stock market’s been performing and not actually curing the underlying problems, the biggest of which by a large margin is the property sector. Property and construction, all of that stuff accounts for something mad, like a quarter of the entire Chinese economy. This is a lot. That’s a lot of money and it’s in trouble. So I don’t know if you remember, like two years ago, Evergrande, one of the big property developers, defaulted on its debt. And there was this whole, ooh, is this gonna be the Lehman moment for the Chinese economy and is everything going to just collapse in on itself? The answer was no, but we have seen something of a slow burn since then.

And so only this week, a Hong Kong court ordered the liquidation of Evergrande, which just tells you this whole thing has not gone away. And there’s a whole big question here around OK, so Evergrande is Hong Kong-listed. What does mainland China do with that? How much of this is enforced? There could be like a whole load of lawsuits. All the rest of it. Will China respect the decision of the Hong Kong court? Again, these are details that kind of don’t really matter as much as the Evergrande liquidation just reminds kind of casual investors, if you like, that the property issues have not gone away.

Ethan Wu
No. Very much so. And real estate busts happen in all kinds of economies. This is not a feature of the Chinese economy necessarily. This is the story of 2008 in the US in a lot of ways. But there’s differences. And one big difference is in 2008, when the US housing bust happened, the Federal Reserve cut interest rates to zero because there was a massive real estate bust going on. The People’s Bank of China, by contrast, has cut. There are various interest rates that they control, but one of them you can look at is the so-called seven-day repo rate, which is one policy rate they use. They’ve cut it from 2.2 to 1.8 per cent. That is not zero. That is 1.8. And you know, that reflects, as you know, the Goldman Sachs analysts pointed out in a recent note, constraints that Chinese officials are under.

You know, for example, with monetary policy, the government likes the renminbi to be stable. But the problem is, when you cut interest rates, you tend to put pressure on currency. You can depreciate the currency. So the, you know, on the monetary policy side, they’re sort of caught between we wanna lower interest rates because that will help the real estate sector. But also we want to keep the currency stable so we can’t cut it that drastically or that quickly. And then on the fiscal side, which would be kind of the main way that you stimulate a flagging economy, there’s all this debt built up in local governments, which is, you know, traditionally a way that you would have enacted stimulus, is borrow at the local government level. You do a bunch of infrastructure rollout. They’re running out of room to do that kind of local fiscal spending.

And so I think the story increasingly is one of constraints and conflicting objectives. And it might have to be a situation where there’s kind of a muddle through. And muddle through is not quite what markets like. Markets like a ride to the rescue. You know, that’s like a vote of confidence. So in lieu of any confidence-instilling measures, the authorities have done a bunch of like weird stuff to the stock market.

Katie Martin
That’s one way to put it, I suppose. They have made a whole series of seemingly good-faith efforts to try and stop the rot here. So last week they were talking about a need for forceful measures, and there were certain restrictions put on capital outflows, so making it more difficult for onshore Chinese investors to use various schemes that help them to put money to work overseas. This week we’ve seen some limits on short selling, so sort of generally just making it harder to bet against stocks. And that’s all well and good. We don’t know how much worse the Chinese market would be at this point if those measures weren’t there, but, I don’t know, if you were managing money, would it make the, would it turn the dial for you?

Ethan Wu
Yeah. There’s just something about that that like probably melts the global investor’s brain that you’re like, people are losing confidence in your stock market because of problems with your economy so you have banned people going short on the market and stopped capital outflows. It’s just, it’s bizarre.

But on the other hand, in keeping with Communist party interventions, they’ve also announced they’re going to do the stabilisation fund, where it’s like Rmb2tn of like state-owned enterprise money to come in and buy the dip. This is like currently being planned and the money’s being mustered.

But this seems to me like kind of like you said, Katie, the word is piecemeal. It’s a bunch of different small- to medium-sized interventions kind of cobbled together to hopefully in aggregate support the market, even though each individual one seems kind of lacking. But you asked the right question, which is, is it going to be enough, this kind of piecemeal, cobbled-together approach?

Katie Martin
Yeah. Is it going to be enough? You know, where is my bazooka? Where is the big splurge of fiscal and monetary policy response that makes all of this go away? We haven’t seen that yet. So global investors are left thinking, OK, are we there yet? Are you ready to get this bazooka out and make this problem go away because it’s got, you know, bad enough?

Or, has there been some sort of strategy shift on the part of the Chinese government that means that they’re prepared to let this kind of run its course a little bit more before they do anything, if they end up doing anything more at all?

So it’s quite a tricky juncture for investors who I think a lot of whom kind of still look at China and say, look, it’s got a 5 per cent growth rate. What’s not to like? There’s still obviously an investment case there, but timing is everything and it just feels a little bit at the moment like trying to catch a falling knife in terms of getting in.

Now, market’s down five. What’s to say it’s not gonna be down 10 in another few weeks? The other thing that I think really eats away at global investors’ urge to kind of get involved here is why bother when you’ve got Nasdaq Composite up four. You’ve got the S&P up three. There are just much . . . 

Ethan Wu
Japan, India.

Katie Martin
There are just so many easier ways to make money out of global markets where you don’t have this like hideous combination of structural, economic, regulatory, geopolitical risk. You know, why be a hero? Why try and pick this up here when you could just end up getting ironed out and not have a very good excuse for your boss at the end of the year as to why you took that decision? So I think a lot of investors, particularly those that had a bad time this time last year on this trade not panning out I think are just gonna sit this one out until the bazooka does come out of retirement. And then that could change things.

Ethan Wu
Yeah. There’s been this kind of grand discourse about is China uninvestable. And I feel like it’s a little overwrought because there are no markets that are strictly uninvestable. There’s always, you know, gonna be room for some specialist investor to come in and, you know, really, really know the details of this market.

But I think the question for like a generic asset allocator unit, your big pension funds of the world, right, is like you said, Katie, can the risks to the Chinese market be slotted into kind of a traditional asset allocation framework, right? Are the kind of political risks entailed ones that you can quantify or account for, right? And I think increasingly, the answer for a lot of people is no. There is going to be a valuation level at which it makes sense to buy Chinese stocks, but it might just be worth not bothering, especially given plenty of opportunities elsewhere.

You hinted at this, you know, in your previous answer, Katie, but there is this complicated mix right now of cyclical economic risks in the sense that do consumers bounce back? How does the recovery go? Can they stimulate the economy? That’s kind of like a short- to medium-term question.

And there is also this kind of broader structural conversation about can China pivot from an investment-driven model, right? One driven by like you build a bunch of bridges and roads and infrastructure, to a consumption-based model, which is what economists have thought China needs for a long, long time but China has struggled to pivot to.

The interaction of all those different risks — political, structural, economic, cyclical economic — that’s incredibly complex. And it just might be something where picking the bottom is going to be too hard for all but the most focused China specialists.

Katie Martin
Yeah. I mean, one other thing to think about here, and I’m being sort of slightly galaxy brain on this, but nonetheless is, investors have choices. They don’t have to put money to work in China. They do have sort of seemingly safer, easier, more straightforward calls that they can make elsewhere.

And if anything, those calls should get easier in the sense that if China keeps suffering economically as it is, then it remains stuck in a deflation problem. And that is something that it can export all around the world. You know, you have this huge economy, one of the biggest in the world. If it’s in deflation, that has to have an impact on other economies around the world.

If you take that a stage further, you say, OK, well, this helps to clamp down on inflation in other major economies and therefore, central banks are on a slightly firmer footing in terms of being ready to cut interest rates, which makes other global markets perform better, which in turn makes China a less appealing investment option.

So on the margins I would say this kind of exporting of deflation just hurts it on two fronts: first of all, from the domestic economy point of view, and second of all, from the point of view of helping other big markets. Again, I might be overthinking that, but I think it’s something to bear in mind.

Ethan Wu
Katie, this is a thought too big for the Unhedged podcast.

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We promised the medium-sized thoughts only, and you’ve gone far too big beyond our mandate. I don’t know if I can handle this.

Katie Martin
You can do it.

Ethan Wu
I’ll try my best. All right, Katie, we’ll be back in a moment with Long/Short.

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Welcome back. This is Long/Short, that part of the show we go long a thing we love, short a thing we hate.

Katie I’m keeping the China focus going. I am short snowballs. And this does have to do with China. It’s not just me being annoyed with the New York weather this time of year, but we had a story in the FT a couple days ago about so-called snowball derivatives, which are these contracts that make money as long as Chinese stocks do not go down too far.

What’s happened in the past couple of years, Chinese stocks have gone down too far. A bunch of retail investors who bought snowballs, which gave you kind of a certain income payout — again, given stocks trading within a certain range — they’ve not done so well. People are nursing losses on these derivatives. I think rule of thumb, if someone’s trying to sell you a derivative contract and it has a cute little name like snowball, just say no. I’m short.

Katie Martin
Right. Yeah, it sounds bad. I’m also short snowball derivatives. I am limit long, however, the pastor in Colorado who, he and his wife got dinged by the Colorado SEC, which I confess I did not know was a thing.

But anyway, they got dinged for running a crypto scam and the pastor made a video, I don’t know, about a week or 10 days ago or something. Who was saying the accusation against me is that we sold a cryptocurrency predominantly to Christians, and the whole thing was a scam, and I’m paraphrasing here, but he said, that’s true, this is all true. However, the Lord told me to do it, which as defences go, I’m very much here for, this is very good. So he and his wife siphoned off like $1.3mn or something from this scheme that they used on a home extension.

Ethan Wu
Allegedly.

Katie Martin
Again, he did that because it was the specific instruction from God, who I would have thought would be a bit busy to, you know, really get too deeply involved in people’s home renovation plans, but apparently not. I believe the latest he said on this is that he might have misheard God.

Ethan Wu
It happens to the best of us, you know. The Lord told me marble countertops . . . What can I do? What can I do? Maybe I misheard Him.

Katie Martin
Crypto is the gift that keeps on giving and, you know, if it wasn’t for this, where would we get our kind of laughs, you know? I just . . . 

Ethan Wu
What would we have for Long/Short if not for crypto?

Katie Martin
What would we have for Long/Short.

Ethan Wu
You’re long like the never-ending bountiful stream of Long/Short content that comes from the crypto world.

Katie Martin
The Lord told me to be long this in Long/Short. Such are the mysterious ways that He works.

Ethan Wu
All right, Katie, thanks for being here. We’ll have you back very soon. And listeners, we’re back in your feed on Thursday with another episode of Unhedged. Catch you then.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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