You're listening to Strictly Business Podcast with Lindsay Williams.
We have moved into the final quarter of 2024 with many stock market indices
worldwide at or near all-time
highs and suddenly chipping in as well as the interest rates coming down and
inflation abating,
suddenly we've got China coming to the party as well.
It's recently been the 75th anniversary of the formation of the People's Republic of
China.
And they have almost symbolically marked it with a stimulus package, which has set
China equities and other asset classes on fire.
With me now is Philip Saunders from 91 in London, speaking to us from Mexico City.
Just briefly tell us what exactly the Chinese authorities have done, Philip.
So, you know,
what we've seen is increasing concerns about the growth rate in China.
being sluggish.
We've seen Chinese government bond yields sort of collapse to yields of about 2%.
China's undergoing a very, you know, challenging sort of baton change from the
old economy,
which was very property dominated,
to a newer economy that basically is not reliant on property and the build out of
infrastructure to
drive growth.
And it's a tricky transition.
And Up until now, they have not, they've tried to avoid resorting to significant
stimulus.
They've obviously cut interest rates, which is appropriate in a
semi-disinflationary sort of kind of environment.
And the stock market basically had the odd sort of rebound,
but sunk to extremely low levels earlier on.
And finally, you're seeing a sort of much more significant response, which basically
consists not just of cutting rates.
There's no point in just pushing on a string if people don't want to borrow
because property prices are sort of being sustained at
sort of, you know, at overvalued levels,
which has clearly affected consumer confidence because 96% of Chinese property
owners, you know,
it's significant.
And, you know, their property is their savings as well.
And so therefore...
that has a very significant bearing on consumer sentiment and consumer spending,
which has been misfiring during the sort of current recovery.
OK, it all sounds very good.
And it's been the most astonishing rally that we've seen in China equities.
And as I said earlier on, other asset classes as well.
Is it sustainable?
Is this the solution?
Can they build on this in a meaningful way?
Can the economy start to rebuild itself?
Can the property market be free of the shackles of not just empty...
buildings but empty towns yeah well i think that i mean what you've got to do is
step back and say right you know what has the sort of build out of
property achieved in china uh well it's uh accommodated a most extraordinary move
from
uh from uh the provinces if you like uh
uh to the the cities um and you know this has happened without sort of sprawling
favelas
which uh which has been the experience in many other emerging uh economies um
And so in a way, basically, it served its purpose, but inevitably,
things got carried away and there was overcapacity and so forth.
And that's exactly what's been overhanging markets.
And China now needs, obviously, a new growth driver.
So if you look at other parts of China, you know, there's the new economy in
China, i.e.
electric vehicles, you know, the manufacturing, the dominant.
players in solar power, solar panels, you know,
basically wind turbines, etc.
So you're seeing sort of huge growth in these pretty sophisticated sectors that's
happening under the surface.
But the narrative has been very much focused on, you know, what's been going
wrong,
and the structural challenges that they face in terms of actually avoiding a more
deflationary kind of environment.
In fact, the Chinese economy has been growing.
You wouldn't think it if you actually listened to some of the narrative,
particularly in the West.
And one of the reasons for such a sharp rebound was really positioning in
markets.
You know, basically the world and his dog was short Chinese assets where they could
be short Chinese assets.
And so when you're going to move this violent...
it typically speaks to more about investor positioning in markets than necessarily
fundamentals.
However, that being said, you know, quite often inflection points are violent.
And so probably the low is in.
You know, we now have talk about the Beijing put.
You remember the Fed put?
Yes.
Well, now we have the Beijing put.
And enough was enough.
And they're sort of clearly in the process of drawing a line.
So you can now borrow 2% and invest in high yielding Chinese equities,
which seems to be potentially a pretty good thing to do.
So they want to actually draw a line under the equity markets.
And they also want to recognize that growth is unbalanced and they need to do
something about consumer sentiment.
So this is why it's not just a monetary package or a series of monetary measures.
It basically, as we see it well out, it's about basically fixing local authority
financing.
which is another one of the sort of big problem areas, and also doing things to
address the issue of consumer sentiment.
Will it succeed, ultimately?
I think it's, you know, we've seen this before, actually,
if you look at the experience of Chinese equity markets, going back to the global
financial crisis,
we've seen a series of times when there were concerns about economic growth, and
they've come in and they've...
stimulated aggressively and you've seen significant moves in the market, you know,
100,
150% moves, but they haven't been sustained.
And so this might well turn out to be one of those.
I rather suspect there's possibly a little bit more to it this time, but time will
tell.
What I was going to ask you, Philip, is obviously very, very good for China and
Chinese asset classes in the short term.
Hopefully it will extend to the medium and the long term.
Is it good for the world?
Is it good, for example, for a country that produces commodities?
Because commodity prices, which will already hopefully be boosted by lower
interest rates in the developed
world and therefore the lower dollar, etc.
But will the China story, if it develops, which you suggest that it might, there
might be more substance this time,
will it help the global economy as well?
Yes, I mean, I think the answer to that, Lindsay, is it will a bit to some extent.
But.
But, you know,
you're going to have a much less commodity intensive complexion to growth in China.
So it might be good for food producers because China is obviously a massive food
importer.
But if it's not about putting up lots of new apartments,
which I doubt it is because I don't think they want that, then, you know,
demand for some of the more traditional commodities is not suddenly going to take
off again.
So you could see, you know, obviously demand for something like copper, which,
you know, where there's a global shortage, you know,
having the Chinese come back into that market, you know, is clearly going to have
an effect on the price.
You know, is it really going to radically transform the fortunes of iron ore?
You know, maybe not so much.
Okay.
Final question.
I don't know if you've had a chance to sit down with your team at 91 in London and
say, okay, this is.
a bit of a game changer or potentially a game changer shall we re-look at our china
strategy have you done that yet
yes i mean we're continually reviewing strategy and we you know we tend to
basically have a focus on medium-term
strategy and also short-term cyclical environment and we have been building
exposure to chinese equities which has been a
pretty sort of unpopular thing to do uh
simply because you you know that there's never been a better time to build
a portfolio of high quality Chinese equities, where, you know,
the earnings are progressively sort of growing at a pretty healthy clip, and
where, you know,
the price earnings multiples are ridiculously low.
And, you know, that's not necessarily going to actually result in instant
gratification,
if you've just got an investment time horizon of a few months.
But if you're looking at a sort of three to five year period, you know, even after
the rebound, we've seen
then I think, you know, basically you can still build a portfolio of, you know,
really attractive exposures within the China market.
Now, you can then go back to say, well, but China isn't investable and, you know,
they're communists, etc.
And you can never make money and so forth.
I think that that's wildly exaggerated and was obviously more than fully in the
price.
Yes, that theory was debunked quite a while ago.
But Philip, thank you very much for your analysis.
Quite exciting times, actually.
Philip Saunders is from 91 in London.
Speaking to us from Mexico City.
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