Summary

Leland Miller focused his call on the property sector distress story; Evergrande. He explained how it can be appropriately seen as China moving to a different growth model. Throughout 2021 we have seen a progression of de-risking of the financial system and the property sector. We are on the cusp of China shifting its gears. The Chinese Communist Party would not be pushing these very difficult structural reforms if it didn't think that the risks of not doing it, didn't outweigh the risks of doing it.

Regarding whether the implosion of Evergrande is China's Lehman moment, Leland explained the big story with Evergrande is not the contagion risk; it's going forward looking at the growth story, and how much this signals a potential slowdown in long-term growth. There is a break down in the old global playbook direction of how data should be greeted by an aggressive stimulus in order to make sure that growth targets are met. Xi has dramatically upended China's traditional playbook for both GDP growth and stimulus going forward.

For sector data and expectations of a policy response, Leland referred back to the beginning of the COVID recovery, where an overwhelming industry led recovery and retail and services were lacking quite dramatically. The idea of year-on-year growth that early was a fiction that the party wanted to push in terms of just talking about the vanquishing of the virus, causing consensus by China Watchers that we were going to see a retail bounce back because the recovery would normalise and industry would give up its lead to the retail and services sector. Subsequently it would result in a big surge in consumer spending in the second half of 2021. However, CBB saw the opposite. Their data in the Q2 2021 showed the lowest level of retail sector borrowing that CBB had ever seen; Much less borrowing, much less investing, much less hiring. The reason the party has decided not to reverse course and re-leverage, is that when looking at the most politically important metrics; overall jobs, services sector, job growth, manufacturing, job growth, etc., those are still looking rather good.

Leland discussed the Chinese steel and aluminium type sectors and whether they are getting more serious on the environment, explaining how he believes that the environmental push elevated itself from an economic issue to a social political issue a few years ago. He believes China is serious about dealing with its environmental problems because it’s no longer solely an economic risk, it’s a potential threat to party rule and claim over the economy and country. The short-term exigencies of the power crisis are demanding a response, even if the long-term goal is to decarbonize. All of a sudden they're opening back up to Australia on coal and they don't have a choice.

Leland summarised the US trade representatives’ speech regarding its policy on China as being an awful start due to them saying talking has not worked with China for 20 years and so regardless of that they’re going to do more talking. However, he went on to say how despite this, the US are preparing tougher moves on China. There is a 301 investigation on Chinese subsidies and another investigation on overseas investing that could frighten people. The headline risk on this is quite large as if they come out with something saying investment flows into China are problematic, the markets won't like that so that's something to watch out for.

Leland responded to the factors that could be behind Chinese growth possibly slowing down to only 1-2% per annum in 10 years’ time. China’s demographics will be an enormous headwind going forward. However, the question is whether the headwind will be in this decade or the next. The basic problem can be summarised as China is growing old much faster than it's growing rich. With more people reliant on a younger generation, it won’t be sufficient. An option could be to let firms fail, let investment products blow up, let workers become unemployed, deal with the fallout and move forward. Then you'd have a stronger, healthier economy sooner, but of course, it would be impossible to deal with for the party. They should be at 1 or 2% growth in a decade, but it completely depends on whether China's leader at the time decides to carry on with restructuring reforms.

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