I am nonetheless a bit surprised about this global positive view on investing in China.
Frankly, investing in China is almost equivalent to investing in the future.
This is really a way for investors to diversify not only due to geopolitical concerns, but also due to economic cycles.
I would really like to see that share of innovation or R &D expenditure to further grow as a percentage of GDP.
Come the second half of the year, what are the direct stimulus that we could implement to continue to push forward in retail sales growth?
That is not a strong signal of crisis, and this would mean that the state should really keep his powder dry for more dangerous moments.
The Chat Lounge The Chat Lounge unpacks views and opinions on hot issues in a more casual way Welcome to The Chat Lounge I'm Tzu Yun Joining me to discuss the shift in global investment sentiment Amid China's better -than -expected economic performance Dr. Yan Liang, Professor of Economics Professor Hans -Peter Borghoff, Chair of the Banking and Finance Department, University of Hohenheim in Germany, and Dr. Li Luan, an Assistant Professor of Economics, Peking University in China.
It's a real pleasure to have you all back on the show, professors.
Well, interest from sovereign wealth funds in Chinese markets is increasing, And according to a recent report by American investment firm Invesco, 60 % of global sovereign wealth funds plan to increase their exposure to Chinese assets over the next five years.
That's up from 44 % last year.
And the report came out as China reported second quarter GDP growth of 5 .2%.
That's slightly above market expectations.
consultations. So let me start with Professor Li here in Beijing.
Were you surprised by the growth figures or the rising investor interest?
Yeah, so I read the report by Invesco and honestly, I'm not very surprised by the figure because I think, frankly, investing in China is almost equivalent to investing in the future, right?
Because China has huge investment and, you know, infrastructure in the renewable energy, in AI, in, you know, all of these, fastest growing areas of the business world.
So I'm not surprised that the investors are interested.
Also, I think if we consider the recent policies from the Chinese government that embraces foreign direct investment, I think this attitude of growing interest, at least, is very expected.
And also, I think part of the reason for companies to be willing to invest in China is that sometimes we see companies invest in their upstream and downstream companies to to reduce the cost and also to kind of increase the revenue and profit.
So China has one of the most comprehensive supply chains in the world.
So it makes sense for global companies to look at what our upstream and downstream companies, many of those located in China.
So why don't we just take a higher share in those companies as well?
Also, the last point that I want to mention is if we look at the reason or the drivers of those increased interest of the sovereign funds to increase their China allocation, the number one reason is attractive local returns.
So investors investors have high expectations of the Chinese assets.
And right now is a great moment to increase their portfolio because many of the Chinese assets, the P ratio is very reasonable.
A lot of Chinese stocks are underpriced.
So I think right now is a good moment to increase your holding or portfolio in China if you're willing.
And what about the second quarter GDP growth of the Chinese economy?
Were you surprised at all?
Yeah, I'm slightly surprised about that.
But I think behind it is really we're seeing a a transformation between mainly exporting to US and EU versus right now we're exporting a major share to Belt and Road Initiative countries.
So China is very resilient.
China's economy is really adaptive.
So facing with the uncertainties by tariff and by all these trade frictions, I think that China's economy is swiftly shifting towards different trade destinations.
So overall, I'm pretty optimistic, but also as we are probably going to be discussing for the rest of the show, there are some potential threats in the second half of the year.
All right. And to Professor Liang, what about you?
Well, I share with what Professor Li just talked about.
First of all, I do think that China continues to be a very attractive investment destination, especially I think the survey was done between January and March this year.
So I think it really produces the pull and push effects for global investors to pivot towards China, right?
So there is the push effect because with Donald Trump's back to the White House.
It has already talked about on his campaign trail, these tariffs and American first approach. So I think a lot of these pretty much drive investors away to diversify the investments because a lot of these economic policies are considered as counterproductive, right?
They don't welcome the foreign investments.
They don't welcome foreign trade.
They tend to drive out inflation and disrupt supply chain.
So all these narratives about trade protectionism and investment protectionism, I think, tend to drive global global investors to look elsewhere, especially they have been overweighting in their U .S. portfolio.
At the same time, during this time, there is this pull factor because the survey was done right after DeepSeek was launched.
So it really showcased China's potential in its not only economic performance, its, you know, advanced manufacturing sector, but now really in the leading edge high tech. So I think all of this generate these push and pull factors to incentivize investors come to China.
So as Professor Li mentioned, the top reasons for these investors to invest in China is because strong returns, but also they see the needs for diversification.
And so I think those become really important factors for investors to invest in China.
There are also concerns about inflationary impacts.
And so of course, China is pretty much under the cycle, right?
When the US is seeing increasing inflationary pressure because because of trade protectionism and so on and so forth, China is on the other spectrum, right?
We're seeing more de -inflationary trend in China.
So I think this is really a way for investors to diversify, not only due to geopolitical concerns, but also due to economic cycles.
And when it comes to the economic growth in the first half of the year, I agree with Li I think I'm quite surprised in terms of the very, very strong trade performances.
We thought that, or at least when the tariff was announced back in April, it was extraordinarily high.
And given that the U .S. is still accounting for about 14 .8 % of China's exports, you know, I personally thought that this will affect the export -oriented sector.
But it turned out, you know, China's trade structure has been very diversified and its trade performance has been very competitive.
And so it really helped to weather through these kinds of trade tensions, especially when we look at, you know, the R &B value, the trade export has gone out by 7 .2 % in the first half of this year.
And the dollar value it grow up at a lower rate, but still it's a very high growth rate.
So that really helped to cushion, for example, the fixed asset investment.
I think it's somewhat below my expectation that largely due to the slowdown in the USD sector investments.
The retail sales stayed quite strong at 5%.
I think, you know, the trading program has been quite effective.
So all of this just show that the Chinese economy is really very resilient and it's able to really rely a lot on both in terms of exports, but also in terms of domestic consumption demand to drive the economy forward. And to Professor Borkoff, what's your observation in Europe?
I think generally it seems a European sentiment, if you will, about a Chinese economy is not that optimistic, right?
Because the Invesco report also shows a very sharp regional difference in outlook.
You know, 88 % of Asian funds plan to increase allocations to China, 73 % of North American funds, but only 13 % of European funds intend to do the same.
So were you surprised by the Chinese economic performance in the second quarter?
And what's your interpretation of Invesco's report?
Well, let me maybe first start with the growth rate.
With GDP numbers, we must always be a little bit cautious because they're pretty noisy.
They get adjusted quite oftenly after the first announce.
We shouldn't put too much into small changes.
They're very, very unreliable.
But nonetheless, it shows the Chinese economy is really resilient.
And this is a positive signal for the world market because it means we still have an open world market which allows adjustments.
So like if one trading partner becomes a problem, you might move to somewhere else and you have just a homogeneous idea about what kind of products we need and we can adjust to different markets.
So this is a positive view represented by these numbers showing that we are not totally dependent on a single partner, even if the single partner is a very big one.
That's something we experienced in Germany with energy when we lost the energy supply from Russia due to the aggression of Russia in the East. Then the prices did really jump up, which was very bad for our economy because it depended very much on that.
But then market adjusted and now the prices have come back for a long time already.
regarding the investment fund, I am nonetheless a bit surprised about this global positive view on investing in China.
I think it represents a rather positive expectation for the future, a very optimistic view, which says that these growing international tensions we have won't lead to cut ups of supply chains, won't lead to a situation where more and more trade barriers will make it harder to adjust, because I mean this is long term investment, awfully.
So this is a very positive view and similarly in Europe, we don't have that so much. We are more aware of the risk of the ongoing situation.
Again, don't forget the war, it's happening in Europe at the moment and so So we're maybe much more aware of these kind of tensions, interruptions of the effects of sanctions, the need for sanctions also to avoid the extension of the war.
So this is maybe a different view on the world we have due to geographic situations than maybe an investor in the United States might have, which is everything moves on as it did before.
Or someone in Asia is very far away from this threat.
So I think in this respect, Europe is different.
Another aspect for Europe might be that we always have so much strategic dependency on China.
China. Because I mean, China and Europe just was kind of core cooperation in international supply chains.
So the degree of dependency is pretty, pretty big.
And so maybe in this concept of de -risking, if we diversify, maybe we shouldn't invest in China, but somewhere else to have a more global perspective on our investments and also our supply chains.
That might be another reason.
And finally, I think for some countries it's also this supply chain issue might be also to some degree part of the pro story.
you try to integrate your supply chain within China, because going out of China, going into China, it might become more and more difficult in this more disrupted world.
So having global, complex global supply chains might be more difficult.
So you reduce the complexity by investing more in a single country.
Yeah, a little bit of a surprise.
Shouldn't the American investors be more cautious because, you know, the United States is the country that is pushing so hard to contain China?
Isn't that right, Professor Leon?
well i think yes to some degree the geopolitics will be one factor that i think would make you know american investors to think twice when it comes to investing in china but let's not forget i think first of all this survey shows mostly is um towards you know southern wealth funds and also the central banks so it's not just the usual pure you know commercial interest i think the geopolitics the way to balance safety and diversification and return are really at the the back of the minds of these investors.
For Americans, as I mentioned earlier, I think the fact that they have invested so heavily and overweighted in the North American market, right, believing in this US exceptionalism, I think it makes sense for them to diversify a little bit their portfolios to China for diversification purposes.
But also some of the investors argue, you know, it's not just about the return or the diversification, but also about the market assets.
The fact that China has been opening and expanding the market assets for foreign investors, I think that also plays some role to invite, you know, these investors to come in in China.
Well, the United States, especially given what has happened, you know, lately, when it comes to, for example, the dollar value has, you know, depreciated by about 9 .5 % since Donald Trump took office.
And when you look at the 10 -year cherry yield, it also has gone out by, you know, about 12 % from 3 .99 % back in April, before the liberation day to now 4 .49%.
percent. So that's a 12 percent increase in debt yield.
So what that means is, again, I think investors, especially in North America, being overweight in the American market has long bought the story of American exceptionalism.
Now they're seeing the U .S. market may not be as rosy as what they have believed in.
And Chinese market is not as, quote unquote, uninvestable as they have been touting in the past. That is really hoping to make a kind of shift. Now for Europe, I think one of the things that we know is the U .S. dollar, of course, is the largest reserve currency.
Over 53 percent of the official reserves are in the dollar and euro is the second largest currency.
But it's only about one third of the U .S.'s importance.
So that just shows that the euro is in a way being underweighted when it comes to the government official reserves investments.
So a lot of these wealth funds and central banks, they may want to up the reserves and other safe investments in the euros rather than in the Chinese yuan or the dollar for that matter.
So I think that's why also with, you know, recent, you know, our German professor could weigh in more.
This recent gesture, right, with the German government decided to invest more and spend more in both military build up and also civilian investments.
So I think that just basically incentivized the markets to increase the weight of the euros in their portfolios.
that's probably what caused the kinds of regional divergences.
But I also agree, if it's pure of a supply chain management perspective or real investment, you know, productive investments in FDI, then I do see that Europe has been always worried about over -reliance on the Chinese supply chain.
So that could be a reason that they don't want to, you know, put all eggs in one basket, so to speak.
But again, here we're talking about so -and -so's funds, we're talking about central banks.
So I think I see the reason for them to up the share of euro -denominated assets as opposed to yuan or other currency for that matter.
And that is really consistent with, you know, Vandalian has been talking about giving that the dollar, hegemonic is being challenged.
They really wanted to double down to promote euro.
So I think that might be one of the reasons that drive the European investors towards more maybe European assets as opposed to the Chinese assets when they wanted to reduce the weight on the US market.
The Chat Lounge. The Chat Lounge unpacks views and opinions on hot issues And another, I don't know if I can call it a paradox here, is the fields those sovereign wealth funds are interested in, especially digital technology, software.
That's favored by nearly 90 % of respondents, advanced manufacturing and automation, 70%, and clean energy and green tech, also 70%.
So, Professor Lee, why are these sectors attracting the most attention, especially given their exposure to geopolitical risks?
Are they investing for short -term speculation or long -term gain?
Yeah, so that's a very good question.
I think part of the reason, at least for clean energy and green tech, is that the US, through its big bit of a bill, is cutting a lot of subsidy to renewable energy.
But the fact that they're cutting subsidy doesn't mean that the demand for these infrastructures ceases to exist. So global investors and global consumers still need suppliers for these renewable energies.
So China having the comparative advantage because government, instead of cutting subsidy, is actually providing subsidy to these sectors.
So of course, in a global competition in these areas, I think China is gaining more competitive advantage compared with the US.
Now, when we talk about the other sectors like digital technology and software, I think China has its unique advantages.
For example, for whatever technology there is on the market, China is usually one of the earliest countries or regions to apply the technology in a vast market.
So it's usually very fast in applying the technology, experimenting the technology to different sectors.
And also not to mention, China has a very big talent pool in terms of its engineers, in terms of programmers.
So if you look at, for example, AI, soon after US introduced the Chachi PT, now China has its own version, DeepSeek.
So I think part of the reason why the European countries are less interested in China is also due to the fact that Europe does not have its sovereign AI or the competing AI model with China and US model.
So I think a lot of investments, including the deal with NVIDIA, is aiming to build its own.
But back to the question, overall, the gap between the cutting -edge technologies between China and the U .S. and other regions are shrinking.
In some areas, for example, the humanoid robots, the advanced manufacturing.
In some areas, China is even beginning to lead the global market, to lead the other countries.
Those factors combined, it's understandable that investors are paying more attention to these sectors.
Right. And now let's turn to what's underpinning the confidence of those world's most shrewd investors, starting with China's overall economic performance.
So as we mentioned, GDP growth hit 5 .2 % in quarter two, slightly above the 5 .1 % average forecast. Professor Liang, what factors do you think contributed to this better than expected result?
result. Actually, you've already all touched upon this a little bit.
But which sectors do you see have demonstrated the most notable resilience and vitality?
Do you see any unbalance or problems here?
Well, so first of all, the domestic retail sales have been pretty strong and resilient.
So we're looking at the first half of the year, the total retail sales have gone up by 5 % year on year.
This is actually accelerated from the first quarter.
So I think the trade in program, which is basically allow consumers to purchase electronics, home appliances, and all of these waste government subsidies.
That's really helped to promote the sales of household appliances, the audiovisual equipment, cultural and office supplies, and communication equipment and furnitures and so on and so forth.
All of these have seen double digits growth.
And so I think that really helped to promote the consumption growth.
So that is helping to uphold the GDP growth rate.
As I also mentioned earlier, in terms of the trade performance, I think that is also demonstrate how resilient China's trade sector has been.
So the total value of the exports in the first half has gone up, you know, by, I believe, 7 .2 percent, if you measure that in the yuan value.
In the dollar value, the overall exports are gone up by 5 .8 percent.
So, again, there's very large drop in the exports to the U .S. For example, it fell by 16 .1 % in June and that was actually improved from May because in May that was the month where the full tariff effects were built on the economy.
And so China's exports to the U .S. actually dropped by 34 % back in May.
But as you remember, in June, things got better because of the Geneva talk.
So both sides de -escalated.
But that said, I think, you know, the drop in the exports to the US have been fully compensated for by the increase in shipments to Southeast Asia economies and also to Europe.
The shipments to the Europeans have gone up by 7 .6%, actually.
So all of this just shows that China has been diversifying its export partners.
And now ASEAN remains the largest trading partner.
Europe comes second.
So the United States, being still the third important trade partner, does not seem to really affect negatively, right?
the China's export performance, and despite all these trade tensions.
So, I think when it comes to retail sales and exports, I think, you know, China is doing very, very well.
Now, from the supply side, you know, China has always been very competitive in industrial output production.
And so that shows in the number as well, when you look at the industrial output has gone up 6 .4 % year on year in the first half.
What I think particularly important is also the high -tech manufacturing that consistently grow at a higher speed than overall industrial production.
So, So basically showing that, you know, it's not only China is able to produce a lot of industrial outputs year in and year out, but also it has climbed up the value chain.
It has been able to improve the value added in its industrial production.
So all of these, I think, are the very important demand side factors and supply side factors, right?
The demand side is export demand, the consumption demand.
The supply side is the very, you know, productive manufacturing sector.
And service, by the way, has gone up by 5 .5%, which is also very significant.
If there are any dark spots, I would say, is again, how much this trade in program will continue to drive up retail sales, because not everyone is going to continue to buy washing machines or tablets and so on and so forth.
So, come the second half of the year, we need to think about what are the direct stimulus that we could implement to continue to push forward in retail sales growth.
And then also when it comes to real estate sector, I think we're seeing deceleration in the real estate sector investment and also the home sales have gone down quite significantly in June.
So these are some of the dark spots that I think will require more forceful policy measures because the housing market is still very important to affect both consumption due to the confidence and due to the wealth effect.
It is also important for the supply side, because without housing constructions, a lot of the businesses upstream and downstream will be affected negatively.
These are, I think, the major concerns, if you will.
But still, I think the economy is growing quite steadily, and it's quite resilient, given the most recent data.
You talked about domestic demand, but there is some other data show that imports rose actually just 2 .3 percent, falling short of expectations.
Does this reflect continued weakness in domestic demand?
Well, I think the total imports, yes, were down by 2 .7 percent in grand value in the first half of the year.
But there are two silver linings.
One is, I think, you know, the import actually increased by 2 .3 percent as of June.
So we see, you know, some improvements in that import demand.
demand. That's, you know, one aspect of it.
And then the second aspect is that I think there is a general, still the weakness in terms of demand.
But I think the reason that we also see import decline has more to do with the substitution effect, that I think now for example, you know, Chinese consumers would prefer domestic brands or domestic products over foreign products.
Chinese consumers used to really like to purchase imported cars, imported electronics, but now they find that domestic substitutes have even superior quality and at very competitive prices, thinking about Xiaomi phones or Oppo phones, thinking about Chinese EVs, and so on and so forth.
So I think these kinds of substitution effects should not be ignored to explain why we see the import decrease.
It's not completely a story about weak demand, because we do see domestic retail software going up quite substantially.
Then to Professor Borgov, apart from the retails and trade, like Professor Liang just mentioned, do you see any other bright spot in the Chinese economy or the second quarter performance of the Chinese economy?
Danny speaking, I see a dark spot in the high level of state involvement we have to have this development, which are positive, but which costs a lot of money.
And if you look at Chinese state debt, I think it's rising and this might become a problem.
I mean, the official numbers are still far away from what, for example, the United States have, but they are already higher than what we have, for example, in Germany.
And we are going deep into debt at the moment.
So I think the question is, how do we make the system sustainable without so much state interference.
But that's very short -term.
Obviously, in the long -term, the government will consider pulling out, but...
Yeah, but you must find paths to that.
That's not so easy because there's a certain expectation of the population.
That's something we know in every country.
There's certain expectations.
The more the state get involved, the less crisis we have and the less people get used to that everything runs smoothly because without state support, sometimes you have a crisis.
And my advice would have been always in Europe, risk more crisis because then you have more change, more dynamics, in the long run and particularly have less state interference and you need the strengths of the state the physical strengths and the ability to act of the state if you have a real crisis severe crisis yeah so i think this is a political problem that might be discussed in china me as an outsider i have no no real word there but i think what is the role of the state should be something to discuss it's worth thinking about what is the role of the state even in the medium term or short
-term perspective. Should we risk a little bit more of a crisis instead of stressing our fiscal power at points where we do not really need it so urgent?
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Welcome back to the chat lounge.
We continue our discussion on global wealth funds pivoting to China as growth beats expectations.
I'm not sure if Professor Li would have a different opinion here.
Well, to some extent, I see Professor Borgov's concern, especially when related to local government debt and also to the real estate market.
I think a lot of the logic behind local government revenue and local government debt is completely changed.
So instead of depending on land sales, right now we are seeing a big decline in real estate, whether it's new house sales or land sales.
So that only leaves the local government to very limited ways to increase government revenue.
And if we do not have a sustainable way of controlling this local government debt problem, that could potentially be detrimental.
But I think the good sign behind all of this is that first, the real estate market, the decline is starting to show signs of stabilization.
So for example, if you look at the total sales in terms of the square meters of newly built of houses, commercial housing, year on year, the decline this year is only 3 .5%.
So last year, that number is like almost 20%.
So we're seeing, even though it's still slowing down in terms of their housing demand, that slowdown is being slightly contained.
Another point is that, as Professor Liang mentioned, a lot of the high -tech industries like 3D printing, EV, like humanoid robots are having 40%, 30 % growth.
So local governments, if they double down in their industrial policy, in their investment in these industries, in the very long term, I think it's very likely that in terms of tax revenue, in terms of the local government finance, these industries can bring a positive effect on the overall economy.
Another point, let's say dark spot is CPI.
So especially PPI is having more than 2 % decrease according to the National Bureau of Statistics.
I think part of the reason of that is intensified competition competition between companies.
So we're seeing CPI pretty much, you know, remain stable.
The worst case scenario behind that is that if people have deflationary expectation, they will postpone their purchase for durable goods, and that will decrease the profit margin for firms, and which in turn will decrease people's disposable income, and that will further bring down the demand and also prices.
So that could potentially be a very some, you know, scenario.
scenario. But some people would say, is that real worry?
Because, you know, people can buy things at a much lower prices.
Isn't that a good thing?
Something that, you know, maybe Americans or Europeans are hoping to have right now?
Yeah, yeah, I'm just about to get to that.
So part of the reason is that I think GDP is not a perfect measure for a standard of living or welfare.
So if, for example, we double the price, but we have the quantity, we still get the same GDP.
So So right now in China, I think it's kind of like the reverse.
So prices are being decreasing pretty drastically.
If you look at new EVs, if you look at cars, if you look at growth rates, I think a lot of areas, the prices are declining.
But if you look at people's real consumption, it doesn't necessarily have to be the case.
So if, as you said, if people are buying more quantities with lower prices due to the fact that the firms are innovating, the firms are competing, is that necessarily a bad thing for consumers?
Not necessarily. necessarily.
So that goes to the, you know, a lot of the suggestions that to China, you know, keep having these consumption stimulus policies towards higher consumption.
My opinion is kind of mixed because if I think by the end of the day, it's the welfare, it's the real consumption that matters.
But if we do not generate enough nominal revenue for the firms, I think overall, if firms keep competing and the profit margin keeps shrinking, that could eventually, you know, lead to a reduction in people's paycheck, in people's salary, which could be very detrimental to people's demand.
So again, I don't have like a clear answer to what we should do, but I bet the other two professors have a better understanding on this issue.
Right. Professor Liang, do you have a clear answer to that?
Well, I think I agree with Professor Li.
I think, you know, this is really a two -sided, right?
It's a double -edged sword. On the one hand, it is true that, you know, when you have very affordable prices and living costs, it actually increases people's real welfare, right?
The real well -being is improved.
But at the same time, I think the difficulty of desinflation or deflation is really, it affects people's expectation, right?
If you think that things are going to be cheaper tomorrow, then you would hold up purchases today.
So this could reduce consumption demand with the expectation that price will continue to fall.
And of course, this would also affect business investments, right?
Why would you invest today if you believe, you know, all the capital goods are going to become cheaper tomorrow?
tomorrow. So all of this could, in a way, you know, reduce demand.
And so that would affect jobs, that would affect income.
And so that would be a downward trend.
But that said, I think there is a debate about whether or not, you know, China's disinflation is largely due to very suppressed demand.
Or is it just because there is the increasing demand, but it's just the supply expense even more.
So unlike, you know, what happened in the United States, the Great Depression is you have a very large retreat of consumer demand and investment demand.
In China, used to see retail sales grew by 5 percent, used to see investment grew by 2 .8 percent.
But it's just that the supply -side productivity growth really allowed the expansion of the output more than the demand side.
So according to some of the arguments, this is not going to be the same as the depression story that the United States has experienced.
This is where China has a very large productivity growth, a very transformative industrial landscape.
And that's real enjoyment for the households.
I would say, though, you know, first of all, we do see in June, the CPI has gone up by 0 .1 % year on year.
So that reversed the trend of the first five months in China.
So we're likely to see a little bit more stabilization of prices and to see more positive trend on that price change.
And second is I think we do see the industrial profits have gone up actually as of the first five months.
I haven't seen the very latest number for the first half half a year or the June number, but it seems that there's some improvements in terms of the industrial profits.
But yes, in some sectors like EV, I do think that some measures need to be taken to bring in the kind of cut -throat price competition.
But I think eventually, from a macroeconomic perspective, the aggregate level of profits among enterprises are still determined by the demand side rather than by the supply competition story, because competition always produces winners and losers.
So if there is the demand there, if there is aggregate profit there, that just means that the winners are going to take more and the losers are going to be really out from the market.
So I think that the key still is trying to continue to boost domestic demand, especially to unleash some of these, I would say, pent -up consumer demand.
Yeah, maybe the Chinese central government also shares the same opinion because they tend to come up with more stimulus plans like the trading program Professor Liang earlier mentioned.
Now, renowned economist...
It's a deflation issue from a European perspective.
I mean, our experience the last decade was our central bank was almost obsessed with the deflation risk.
So they defined a new optimal price raise of 2 % instead of going closer to zero.
When inflation came, they defined new inflation rates, core inflation rates, to explain that there is no real inflation.
And so they started to raise interest and fight inflation more than a year too late.
And so we had a real inflation jump and lost a lot of value and destabilized our economic expectations with this inflation.
So I think whenever we're talking about deflation, we should never forget that deflation, there's always inflation risk also.
And there's strong pressure of states who are deep in debt to accept higher inflation, to devalue their debts.
This has happened in Europe, unluckily, and we are not very happy about that.
So I think if you're running around 0 % price increase, that's very fine.
I don't think that somebody will stop buying products just because they might be cheaper next year by half a percent.
If we talk about higher negative inflation rates, we might get into trouble.
But I think at the end of the day, it is fine.
And it's price stability, almost price stability you have in China.
With regard to housing, well, here, again, as an outsider, I ask myself if these are the first signs, also the first sign of demographic change in China.
Population is not increasing fast anymore.
So the pressure on these markets might go down.
And this is also a good thing because, I mean, how many people should live in a country and on earth globally?
But this might be already the first sign that someone, the expansion of building property comes to an end because you just don't need so much for the smaller population you might have in the future.
But maybe that's the reason why the central government decides to come up with more state intervention, right?
Like providing more liquidity and more stimulus packages, right?
Professor Rogoff? I'm not sure about that.
Because I said I'm very skeptical about too much state involvement in that.
I mean, if population is going down, this has gross effects.
One must be aware of that.
In the end, a grown, young population is more dynamic than an aging population which is staying on the same level or even going down.
And that's something China has to cope with like many other countries.
How should I say in a riper stage, the growth rates you have when the country was young and dynamic and used new opportunities, I don't think these growth rates will ever come back and trying to uphold such a level of growth for whatever reason.
I think that's an exercise you shouldn't try because it would overstretch state resources in the long run.
Yeah, like you said, those problems like demographic problems, there are indeed some long term issues which cannot be solved by short term solutions.
But we got some imminent problems to solve here, which is, you know, like you earlier mentioned, the slumping housing market, which is really worrisome to a lot of people here, obviously, including some economists.
economists. So coming back to the question of the, you know, what's going to happen next, some renown.
It's a natural process that somehow the dynamics moves from one industry to the other, and it was a fast -growing population with a fast -growing economy.
The housing market is very important.
If the population doesn't grow anymore, you go in a different industry.
I mean, China is doing fine in other industries.
So somehow we should keep this kind of changes within the economy in mind, keep this in mind and say this is a natural process.
One cannot be always good everywhere but you have to look at the situation and then be happy with where you can from your actual standpoint be successful I think that China is doing nicely in this respect with their new technological competences they use very successfully.
I totally agree but for now there are a lot of maybe more urgent problems to solve for the government or those economists but now it comes like you know Huang Yiping who's a member of the central bank policy committee has called for 1 .5 trillion yuan, or over 200 billion US dollars in fresh stimulus to boost consumer spending and support exchange rate flexibility amid US tariffs, which is a big concern now and needs to be settled.
I can't say right away, but very urgently.
So, Professor Li, how urgent is the case for further stimulus?
Would such a move be enough to, you know, sustain momentum into the the next year?
I think it really depends on what type of stimulus are we talking about.
If we talk about, for example, further trade -in policy or further consumption coupons, that sort of stimulus, I think the effect of those stimulus policies are probably going to be reduced for a little bit compared to the first half.
Because as Professor Liang also pointed out, we can't keep buying new phones or new tablets.
We need to shift towards, for example, service.
So that's why when we see, for example, the service sector is growing more than 5%.
When we see the tourism sector are growing, those are all very hopeful signs.
But by the end of the day, it's the durable goods, it's the cars, the houses, the furnitures, the refurbishment of houses.
Those used to be the pillar of China's economic growth.
So in the future, whether we still depend on those pillars, and whether we still stabilize the housing market and even expect housing market to grow, I don't know.
I just don't think it's a very realistic goal.
So in terms of the housing market stimulus plan, for example, issuing central government debt to the local government so that they can convert some of the inventory housing into affordable housing, I think that might be a good way to convert some of the local government debt and make it more liquid in the market.
market, but I think a caveat for that is if we have those affordable housing policies, it also kind of diminishes some of the local housing demand, because right now you can live in affordable housing.
So you don't need to buy a house.
Otherwise if you don't have these affordable housing, you still need to buy a house somehow.
So further down the road, I kind of agree that depending on the housing market, depending on real estate market for the next 20 or 50 years is probably not the way to go.
goal, the way to go is depending on those highest growing sectors.
For example, the advanced technologies like AI, like 3D printing, like humanoid robots, those sectors are growing very fast. So if we just give them a little bit of time, if we give them the right policy, the right environment for them to grow, do not give them too much hassle so that they can grow into these tech giants.
Look at how NVIDIA grow over the past several years.
If we can have our own NVIDIA, if we can have our own industry leaders in the next couple couple of years, further down the road, those companies are going to contribute to a very large share of the Chinese economy.
And maybe a lot of the problems we are facing today will be solved.
The Chat Lounge. The Chat Lounge unpacks views and opinions on hot issues in a more casual way.
The Q2 growth did exceed the government's annual target, but it was slower than the 5 .4 % growth recorded in the first quarter.
So is it a sign of waning stimulus effects, which I think Professor Liang talked about and showed some worry there?
Or is it a natural rebalancing, Professor Liang?
Well, first of all, I agree with the professor that the housing market needs to be readjusted.
And so this is precisely when 2020, the three lines policy was introduced is really to curb the runaway construction in the real estate market.
At the peak of the real estate boom, in China in 2021, before the readjustment started, the real estate plus infrastructure account for about 31 % of the total GDP in China.
That really way exceeded countries like the United States was only 18%.
And other countries that experienced a housing boom, you know, and then the following path, like Spain, Ireland, they were also much lower than China's, you know, 31%.
So it is clear with demographic changes and urbanization changes, there is a limit for the real estate sector to continue to boost the economy.
And that's why I think the government has taken this view that we need to adjust away from the real estate sector.
And so a lot of bank credits, a lot of policy supports, a lot of entrepreneur investments now go into the advanced manufacturing sector, but still because housing was the biggest wealth for families.
And so according to the Wall Street Journal, I'll take it with a grain of salt, they estimated that the housing market slump basically wiped out $18 trillion worth of household wealth.
And so what What that means is this is going to reduce households' confidence.
It will reduce their wealth.
It will reduce this demand.
And so that is, as you just mentioned, the short -term problems, right?
That there is the confidence issue.
There is the purchasing willingness kind of issues in the short term.
And that is kind of the collateral damage, right, with this housing adjustment.
It needs to be done.
But I think what government tries to do now with a lot of policies is trying to manage the kinds of collateral damage to mitigate, to reduce this kinds of collateral damage.
So the trading program and other programs, other policies, stabilizing housing market with relending facilities and so on and so forth, the revitalization programs and so on and so forth, are really trying to stabilize the housing market.
It's not to go back to the old model, right?
It's not to go back to this housing construction -led growth type of model, but really to stabilize it, to stabilize people's expectation about their wealth, about their housing value, so that we hope to boost their confidence and increase their consumption demand.
end so i can see you know this is the way that needs to be done so trading policy has certain merits but it could run out of steam so you need to find new ways for example maybe standardizing services right services in china still very much below you know the advanced countries levels it only accounts for less than half of the gdp and employment share is only about half compared to advanced countries easily 70 80 percent so i think there's two very large role to boost service sector that would help to increase service consumption but also increase increased jobs, because that's a sector that is very
labor intensive. And you can also see really some kind of misallocation of resources right now in the Chinese economy, where we're talking about retail sales of services gone up by over 5 % year on year.
But when you look at the investment in the tertiary sector, most of these services, it actually went down by 1 .1 % in the first half of this year.
So on the one hand, you have a growing service sector.
On the other hand, you have declined investment in that service sector.
So I do think that service sector could be given more support and that would i think help to provide some of the short -term stimulus but also in terms of the long term to have more consumption -led growth now my last point really i wanted to just quickly uh in terms of the role of the state i think china really has a very interesting hybrid model that has proven quite successful in the past 40 years now i do think the government debt especially at the local level could be a problem but when you look at the central government debt it's less than 30 percent of gdp the local governments on the the balance
sheet debt, it's about 47 % of GDP.
Now there's a lot of hidden debt, that's for sure.
So I think the problem here is really not the total amount of debt, but really the very distorted debt structure where the central government has more capacity to take debt and they don't do that.
The local government is constrained and yet they're taking on a lot of the spending requirements, the need to spend for the local businesses, for infrastructure spending, for public services and so on and so forth.
So I think that needs to be fixed for the local government to be able to to continue to provide for their people and to be able to support their local businesses.
And Professor Borghoff, if you're saying that state of innovation is undesired, how would you advise that China develop its economy, especially when it has to deliver its economic growth goal in the second half, especially when the US -China trade tariff war might be triggered in the second half because it's just a temporary so -called ceasefire, right?
It might come in the second half of the year.
I mean, that's absolutely right.
And for sure, this geopolitical risk plays a big, big role.
But how much can you influence from internal perspectives?
The outcome is very unclear.
Sometimes looks very arbitrary if you look at the policies of the US in this respect, although sometimes there's more planning behind it than we believe.
That's why we must be careful with that.
So macro perspectives, global perspectives is really dominant at the moment.
But still, we in Europe always have a debate between either more state money or more deregulation.
So giving more freedom to enterprise, it will give them more freedom to develop markets, less rules.
I don't know how big this issue is in China from external perspective.
It's very difficult.
But for us in Europe, it's clear instead of giving state money, we should give freedom to act.
And if it is discuss with people in the economy, they always say, I want to have more money from the state, and then ask them, but would you not prefer to have deregulation, which allows you to act?
And they say, yes, the regulatory costs are pretty high.
That's something we can cope with.
So I think more liberalization of markets might also help to develop.
up besides very very well -aimed state support on my personal experience on also my research services and mainly on small very innovative companies where we should really focus on if you give us state money because there we have real market pay lesson for financing areas sometimes and so that estate can really help but such general interventions of state are very very dangerous because they really need a lot of money to be successful and in the long run as i said all sorts of financing capacity of the states are not endless i'm always a bit surprised that you look look so much at the next six months.
Because, as I said, the biggest risk for the next six months on a global level, there is nothing you can do except look what the politicians make.
And if you look at your number, the GDP rate is going down from 5 .4 % to 5 .1%.
I think that is not a strong signal of crisis.
And this would mean that the state should really keep his powder dry for more dangerous moments if you talk about more general interventions into the market.
All right. But for the second half of the year, there seems to be some other encouraging external developments, right?
We see NVIDIA CEO Jensen Huang announced the company would resume exporting H20 chips to China, though they're not its most advanced product.
And U .S. Commerce Secretary Howard Lutnick indicated a broader U .S.-China trade dialogue could launch early next month.
So Professor Leon, how might these external signals impact China's economic trajectory in the rest of the year?
We're seeing some sort of a softening stance from the United States after the London talk.
I think Bloomberg just reported that Trump may have said something along the lines that he would continue to extend the trade truce for another three months.
So we'll see about that.
But I think the London talk did improve that in terms of, you know, the export ban on high end ships that has been relaxed.
As you just mentioned, H20 will be able to to be exported to China.
So we're seeing some kinds of de -escalation and China's, you know, the exports of rare earths has gone up by, you know, 60 % as China delivered the promises of relaxing the export control on the real earth as well.
So we're seeing both sides de -escalating in good faith.
But of course, things are still quite, I would say, fluid, especially when you think about Trump's tariff policies to other countries that could also have an impact on China.
For example, the tariff to Vietnam now is set at 20%, but then for any transshipment, that would go up to 40%.
So setting a lower rate for some of the Asian economies could tend to also have the effect of diverting trade from China or the supply chain from China.
In other words, I think we're still not out of the woods.
I think the global situation is still quite uncertain and it could also be still relatively unfriendly.
So that's why I think it's all the more important for China to use domestic policy tools to provide the buffer.
And I would agree with the professor that in terms of long -term planning, I think that is really, you know, where the forte, right, of the Chinese government.
They've been always thinking the long -term, whether it is the five -year plan or it's made in China 2025, all of these are really long -term when it comes to economic planning.
But at the same time, I think some of these short -term buffers to help the economy to weather through, you know, the hard times and also to provide some inclusion for the economy, I think that is still necessary.
I would say in the recent years, China had three levels of challenges, not only because of the COVID and the scarring effect, but also the real estate sector readjustment, and also some of the regulatory crackdown in the tech sectors and in the afterschool tutoring programs and so on and so forth, and the heightened external uncertainty.
So I think with the three levels of challenges, I do think that the Chinese government need to attend to some of the short -term economic performance.
But I don't think the Chinese government is over, I think, stimulated economy.
Compared to back in 2008, 2009, the Chinese government rolled out 4 trillion yen value of stimulus, much, much larger proportion compared to GDP back then compared to now.
The 4 % deficit to GDP ratio only increased the deficit spending by about 1 .6 trillion compared to 2024.
So it wasn't a, what people would call a bazooka type of approach. In fact, I think Chinese Chinese government avoided using kind of bazooka and have more targeted approach, whether to a stabilized housing market or the equity market.
I think those are quite targeted.
There's no hangout cash to the household like the U .S. has done, or Europeans have also provide a lot of cash subsidies for the households after COVID.
And Chinese government didn't do that.
So in a sense, I don't think this is overstimulus.
And I think some policies to address the short -term challenges, I think it is important, but that's not to say they're going to give up any sort of long -term planning.
So that would be, I think, a right approach. Right.
Thanks for the explanation.
And the last question to you all.
And internally, does China have the ingredients needed to deliver strong growth or desired growth in the second half of the year?
And what key indicators should we be watching next?
Is it credit flows, private investment, household confidence, or something else?
Maybe we start from Professor Borghoff.
Well, what I get from this debate is that the internal demand plays a big role at the moment.
So we must keep, if you talk about these numbers, we keep this in mind.
And we must look at external shocks coming from the environment of high frictions we have in the trade deal and other global political issues.
So that's what's seemingly driving at the moment the Chinese market as a solid basis for further development despite all these external turmoils.
So I think this consumer confidence plays seemingly a big role at the moment.
Right. Professor Li?
Yes. I'm pretty optimistic, I think.
So facing the second half of the year, there are a lot of uncertainties in terms of geopolitics, in terms terms of trade tensions.
So I think the worst case scenario is that the age of globalization ceases to exist or become the past, and every country start to manufacture their own products.
Even if that becomes the case, which is very unlikely, China has the most complete supply chain.
We have a very robust manufacturing sector.
So I think in terms of sustaining a reasonable standard of living, I'm pretty optimistic that the Chinese supply sector is able to do that.
So for the key indicators, I'm pretty focused on, for example, the high -tech manufacturing, especially the growth rate of the value added for high -tech manufacturing, as well as the digital economy, the growth rate of those.
Also, I think in terms of the share of R &D as a percentage of GDP, right now it's around 2 .7%, which is around at or above of the level of EU approximating the average of OECD countries.
So in the future, I would really like to see that, you know, share of innovation or R &D expenditure to further grow as a percentage of GDP.
Indeed. And last but not least, Professor Liang, please.
Well, I think I remain quite optimistic for the second half of the year.
Like I said, when it comes to the geopolitics for the United States, the high tech ban has been softened and tariff wars seem to be also somewhat stabilized.
So I think the external environment will be continue to be, you know, uncertain.
But I don't think it's going to be as bad as, you know, what we had in May, when the tariff rate was announced at 145%.
But of course, I think China has been taking a quite proactive role trying to continue to diversify its export destinations and work with other countries.
And I think summit with the EU is something that I am getting a very close eye on.
And hopefully, some, you know, sensible negotiations would help to promote a better relationship between, you know, China and EU, that would be tremendously helpful.
And it's very much needed to defend the multilateral system within the United States in the room.
When it comes to the domestic economy, the high tech momentum will continue to build up.
And we know that as a matter of fact, 70 % of the technological innovations come from the private sector.
So it's a very much vibrant ecosystem where you have a lot of investment that goes into it.
When it comes to capital, you get a lot of talent, right?
Jensen Fong basically said 50 % of the global AI talent are in China.
And it also has already great foundation to start with when it comes to AI model, when it comes to AI patent.
China has a lot of these successful, you know, ingredients.
The next step, of course, is trying to promote the adoption and really the use of AI technologies in a wide range of sectors.
And I think China is doing quite well, you know, with the open source models and with the cost -effective AI technologies.
I think this will allow China to adopt and diffuse the technologies.
So what I remain to be relatively sort of cautious is, again, the demand side when it comes to consumption demand, And especially, you know, when the local governments are under certain debt stress, that could create some undesirable effects because when the local governments are not able to pay their suppliers, they're not able to provide public services, they're not able to support local businesses.
This could, again, create some kinds of a downward trend.
So what I would be really focusing on is to look at, you know, the local governments, their budget situations, their housing market, and also consumer sentiment.
I think this will really shape the domestic economy in the second half of the year.
At last the economy is really go very astray, I don't see very large changes in policy trajectories.
I think most of the policies have been announced at the NPC back in March, and some of the monetary policy will remain more swift, but from the Lujiazui meeting and also the earlier Central Bank and financial regulators meeting, it seems that they will continue to be prudent, it will provide targeted liquidity injections in certain sectors, but again, I don't see any sort of bazooka type policies, either from the fiscal or monetary side to try to zoom in on the economy in the second half of the year.
With that, we come to the end of our chat for this session.
Many thanks to Dr. Lian Yang, Professor of Economics, Willamette University in the United States, Dr. Li Yun, Assistant Professor of Economics, Peking University in China, and Professor Hans -Peter Borghoff, Chair of the Banking and Finance Department, University of Hohenheim in Germany.
The show is available on all major podcast platforms. Please email us your comments at radio .cgtn .com.
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