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China's 'Bumpy Deceleration'


The bumpy deceleration underway in China will be met with additional economic policy easing, albeit with some notable differences to previous stimulus, says Goldman Sachs Research's Andrew Tilton. He expects a slightly smaller and later stimulus relative to other slowdowns, leveraging not only Chinese policymakers' typical favored tools like infrastructure spending but also a tax cut.

This podcast was recorded on February 1, 2019.

All price references and market forecasts correspond to the date of this recording.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2019 Goldman Sachs & Co. LLC. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanged the Goldman Sachs when we discuss developments, curly shaping markets, industries in the global economy, objects. The global have quoted communications here at the firm China's economy has been in the news. Lately is GDP growth in twenty team was the slowest since nineteen ninety two through the drivers of what we might call bumpy deceleration is some of the hours of call it pal, The tools available to cushion the impact trade tensions and much much more were joined by Andrew Tilton. Goldman Sachs Chief is economists Andrew walk into the problem back. It has to be In November of last year, twenty eighteen, your team, published outlook on China, which you predict, what you call bumpy deceleration of the economy of China. Panting out in light of recent reductions in the growth projections there. What's the matter due to the slow down and what's basely driving it? Well, I think it's confusing to
people, because if you look at GDP, there hasn't been much of a slow down GDP growth with six point six percent last year and in the latest data point. Fourth quarter. Gdp was six point four year a year. So looking at those numbers, it doesn't seem like there's been much of a slow down, but GDP is unusually smooth in China. And so we ask some other analyse, have tried to create our own metrics for what's going on in the economy, we use something. We call the current activity indicator, which rolls up a lot of different monthly economic data to try to get an high frequency estimate for how the economy is doing. If we look at that measure, it slowed for the first half of last year, our latest reading. For December, what's driving the slowdown in what sectors in particular are where we seeing deceleration we're see pretty broadly and that's a difference. From the last time we had a slow down in two thousand fifteen we saw a comparable slowdown, are almost ass, big of a slow down, but it was very
concentrated heavy industry. This time were seeing some effects in investment we're seeing weaker consumers in the last couple months, weaker exports as well. I think they're couple causes for that on the export side. Course the trade wars gotten a lot of attention, but global growth is also slowing. So that's been an important reason why exports have softened on the internal side. Chinese policy make, spent a lot of two thousand seventeen in early two thousand eighteen trying to address some of the systemic risks in their economy, including high policies and a number of areas such as shadow banking, trying to constrain shadow banking and really shrink the so called shadow. Sector and an overriding up credit tightened credit. I mean you're almost too successful in doing that by and that resulted in tighter credit inability to houses and businesses who are now partly because of that spending less amidst slow down where we poised to continue to see pretty strong growth in China still
healthy numbers and growth. What still driving the growth one area where we think we'll see better growth is infrastructure, spending that something that's driven by government decisions and that's a tool the government uses to try to support the economy, and I wouldn't overstate the weakness and concern spending. It has slowed but is still growing at a healthy clip. You still have reasonable household income, growth and relatively high levels of household saving, so some other way yes, we're seeing and respecting is resulting from the tightening credit availability and the eating out of incentives for things like auto purchases that had been in place in two thousand seventeen, so insofar as that slow downs, is driven by government policies of tightening. I think it's less worrisome than something that was occurring on its own. The chinese economy has been growing pretty fast for a long period of time. Now that it's the slow, when might we see at bottom out? We think we can. He had bought him out late first quarter. Second quarter.
I think we still have a few more months of pretty weak activity because we have- seen a turn around again going back to the previous framework. On the external side, global growth hasn't turned around and we don't have a resolution on the trade tensions. Yet and ethically policymakers have talked about a lot of easing, but we haven't actually seen that much yet we think we'll see easier. Fiscal policy is your monetary policy, but as yet the shift has been much smaller than we have seen past downturns, so you mention boosting infrastructure spending as a tool to get the economy going faster again. What tools. Might the government deployed cushion the loud where hearing a lot about tax cuts. So that's not been a typical tool of the government past downturns. Typically, the government tried to spend the money itself, so this is,
in some ways a more american style consumer led recovery? At me I mean the advantage of attacks cut. Is it works fast? If you cut taxes, people know that the tax cuts is coming for sure they may change their spending behaviour fairly quickly. The disadvantage, as you can't be guaranteed at people will spend it if there were about the outlook they may just save the money so You ve got a little bit of a trade off between time and potentially effectiveness or as economists caught the multiplier effect of that tax cut were likely to see a tax got, but we don't know exactly what how big an on infrastructure side? That has been the favoured tool in the past, and we think we will see some of that again this time so Greece government spending on infrastructure, possible tax got with more consumer spending, where's that mean for inflation, the inflation all of them,
violation has been coming a bit lower, particularly on the producer price side of things. The consumer. Inflation is moderate right now and I dont think as a constraint on what policy makers are likely to do at this point in time with growth, slowing and demand pressures weakening were not particularly concerned about. It nation as being a constraint, if anything, I think policy makers are probably word about producer price inflation falling too much that cause a lot of problems back in two thousand fifteen and sixteen because Some of the more indebted companies were having trouble servicing their debts. I dont think were in the same situation today, but that's probably concern should in fact fall further. As the slowdown affected investor appetite for China assets in what asked losses are attracting the most interests, whether people shying away from it.
Your appetite has been mooted in the public. Equity markets are overall well out to foreign. Investors have been a little bit cautious demand investors have been extremely bearish throughout much of two thousand eighteen, in fact, in recent years, two thousand eighteen stands out as a situation where domestic investors were significantly more worried about the chinese outlook that foreigners it's off had been the reverse and domestic investors turn out to be right and their work. In so far as growth has slowed significantly, you have seen some signs of a better equity market performance. Recently The scheme that has been more consistent over the past year has been lower rates, so the bond market has rallied on easier monetary policy and lower global rates as well. Goldman Sachs Research hosted a big MAC, a conference in Hong Kong last month. Given all the trends were discussing woes on the minds of the clients there at all, Efforts in Hong Kong, clients were pretty
served if, in their expectations for equity returns this year through mid highs. We'll digit returns generally think, Asia would do better than other regions of the world. Most investors get on board the idea that the FED would do relatively little, maybe one or two rate hikes this year. Pretty sanguine about trade, so we asked clients whether they thought the tree board escalate, pause or maybe actually there be a formal deal. A relatively small fraction, less than twenty percent of clients, felt that there be further escalation in a trade war. I think that's an area where things were even a bit more optimistic than I expected so as the presidency is never ceases to remind us. China has very large trade surplus with the United States, which is its largest trading. Still we a lot here about the impact in the United States, but what's the economic impact of that surplus within China, while
same thing. Is China has a big surplus with the? U S, as you said, and naturally has attract a lot of attention from President Tromp and others, but actually doesn't have a big surplus overall, in fact, in some quarters it hasn't had a surplus at all. So I've, seen a big change from the China of the global financial crisis period, export nation you had at the huge surplus, to one. That's come down in recent years, been kind of two to three percent of GDP, but in the early part of two thousand eighteen was actually marshalling negative when oil prices were higher China's an oil importer. So from that perspective, the weakening current account surplus is benefactor that other things equal would tend to push the currency.
we could direction. The pattern of trade is such that China runs deficits with a number of other places, imports alot of materials and components from other places. That then, are assembled and export it elsewhere. That's oversimplifying, of course, but in particular a lot of that deficit that the? U S has China is really a deficit with other parts of Asia with the rather than just being the past. China's pastorate not to be clear. The majority of the deficit with China is with China by a substantial fraction. Something like a third reflects value added from other parts of Asia. That's then, combined into a final in China that goes to the Eu S, so obviously the present to get China's attention and try to resolve this issue, put tariffs in place as the tariffs affected caught him in China, and wouldn't people expect for the year ahead. The tariffs them elves have then only a part of it
for the economic slowdown that we ve seen last year, as I mentioned, we have a lot of tightening in domestic policies that drove that. So our estimates of the impact of tariffs on exports and that effect on GDP is really only a few tenths of a percentage point. We don't think that's very large if anything, the effects on uncertainty and suppressing, perhaps business investment as businesses wait to see what's going to happen, those my ultimate be bigger than the impact on exports in fact so far, are pretty manageable in the sense that China's currency depreciated about five percent and a trade waited basis a bit more versus the door last year. If you think about that that almost offsets the ten percent tariff bracket that the? U S put on two hundred billion of chinese imports to the Eu S, it's only the twenty five percent tariff that went on fifty billion of chinese goods. That's really not been offset thus far, so I think it's manageable, but there's a lot of concern about what would happen should those tariffs escalate. Thus, the pressure on China,
beyond trade or to some of the key risks or opportunities the conference attendees were focused on regarding China. I think there is a huge attention on chinese policy. How much stimulus is going to come and when our take is that at the moment the risk is that perhaps stimulus? is a little smaller and later than it has been in the past or the markets expect. So that's a risk in terms of growth. On the downside I think markets are sniffing out the possibility that what we do get stimulus and if we get a more comprehensive resolution on the trade tensions, then that's a potential upside risks, not so much for the first or second quarter terms of the economy that, maybe for later in the year, stepping back a bit from the economy. At this point in time, chinese policy there have been very focused over the past decade, or so at least shifting the composition of their economy to something that might be more sustainable in the long term and
moving away from big capital spending on infrastructure projects and like two more consumer driven economy. Like you see in Europe and the United States give us how well they have done What remains to be accomplished, I think there's a lot still ahead on making that trend, mission, I think it's fair to say that analysts were hoping for a faster transition in this regard. On the one hand we do see some signs of change. Policymakers have talked about not wanting to over stimulate the economy with infrastructure spending and borrowing, but, on the other hand, in the current downturn, looks like there to resort to at least a little bit of that. The easy letter, Nepal, its uneasy Paul and another key goal of the leadership, is China's advancement technologically. They want to see strong, sustainable growth and they want to achieve technological parity or leadership relative, the United States and a number of different
Actors in that probably is going to require more private sector involvement, more innovation, but at this in time, the authorities still want maintain a strong state sector that still seems to be something that's important them that in more sense of areas of the economy. They want stronger on enterprises and enterprise of the many cases can compete abroad. So I think, in some cases, their tensions between those different goals. And tensions that haven't been fully resolved, let's talk about one specific Gary, where there's been a lot of coverage here in the United States and I presume elsewhere. There is a lot of talk about the re son, artificial intelligence in the United States, primarily a private sector initiative with lots of companies investing in a lie in China. It has a private sector component, but the state is very focused on leadership there at any rate, those two models. Today,
especially the air space people talk about the advantages the chinese system is maybe it's more than the system, its large population. First of all, so there's more. A lot of bigger data, bigger data and The government is willing to provide that data to companies that can use in process it, for example, for a nation wide facial recognition system for use by law enforcement, state security, Domini, faces to analyze and those are available to the public and private companies who want to do work in that area. So, from that perspective, bigger data sets maybe fewer privacy related restrictions. It's a place where you have more work with, and that's, one potential advantage of operating China. Another is that the state does provide support and funding in different ways for enterprises and that space it's a goal of top leadership and therefore for companies that need or want to acquire, sensitive technology or research. Those are things that govern tries to support
one key component for sustainable growth and long term is more vibrant capital markets in China's don't to modernize its capital markets in a lot of attention on the connections in the equity, but there's recently been some changes in terms of income markets, which are typically bigger but get less attention, talk a little bit the evolution of the fixed income markets in China, where we had a seminal event this week, which is that China is included in the Bloomberg Aggregate index. Some of the largest global bond market indices with well in excess of a trillion and close the two trillion of assets under management following that broader index. So that index will now include China, at a gradual increase in weight over the next twenty months, starting in April, that is major event for global bond It's here you have one of the largest bond markets in the world in China that wasn't formally
food it in these global indices. That is not as correlated or historically with that will be a huge destination for global capital. Coming investors need to learn more about the chinese bond market. You'll see capital inflows into China, which is important for policy makers at a time when the current account surpluses eroding capital info from bonds will help support the currency and limit the depreciation pressure. So I think this is a major event and you'll, probably he moves by the other bond indices in the relatively near future to include China. We expect we're taking this right around the Chinese New year and would happen the new year of years, the chinese government officials get together and Sir set policy for the your head. What should we be looking for out of policymakers in China as we had into March? I think This'Ll be able equally interesting, so called two sessions meetings. This is so named because there, the National People's Congress and each chinese people's political consultative committee
I think I got that right. That occur each march important political meetings where leaders meet in Beijing and often make announcements with respect to policy. They announced the policy targets, for example the GDP growth target for year and also lay out more detail in terms of policies in specific sectors, and so, given that we are looking for more economic stimulus this year before size, that steamers will probably become clear. Then, if it doesn't before then too. I think these meetings this year will be particularly important, so we talked quite a bit about the economy in China and its impact on had states, but the chinese economy is a massive factor for other economies in Asia. So trade tension between the. U S and China has a play out for. rest of Asia and one of the things we are to be looking at them. Thinking about, I think, they're, potentially big, wings in the impact of the band other parts of Asia.
depending on how trade tensions play out. One thing to say for starters is that chinese growth itself is important for the rest of Asia, We find that, depending on the economy, one percentage point China could mean somewhere between a zero point one zero point: three percent slowdown elsewhere, so there's meaningful sensitivity to China around the region, particularly for the smaller open economies that have more exposure to global trade but then how the? U S and China resolve their trade tension will be important, say China agrees to by significantly more. U S, agricultural and energy, and perhaps you manufactured goods, maybe even semiconductors. Well, there's some important My conductor, manufacturers in Asia, so to the extent that that demand shifts to the? U S that displaces potential demand from elsewhere. Regions. I've read Korea, memory would be Korea, microbes,
Sesar could be Taiwan, so those would be places that would be effected. Energy could potentially fact places like Malaysia in Australia so there could be spill over effects from China agreeing to buy a lot more. U S! Exports, because China doesn't need more than its buying also if it agrees to by substantially more of that someone has to come from somewhere. We your colleague tomorrow on podcast last year. He also listen Hawkeye. We asked Miss Phoebe think about New York, so we have to ask you as well, but do most or to when you hear New York getting to do well. I worked in a U s: economic team for nine years, so I lived here for nine years, so for me at seeing France that I haven't seen for a while going back to my old, neighborhood, Brooklyn and being good food awesome thanks for joining us today, Andrew Vacuum, that conclude, this episode of Exchanges- Goldman Sachs thanks for listening.
We hope you Kanjorski next on the spot, Castro's where did on February. First, two thousand nineteen- all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs, and
he too the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too that listener, nor to constitute such person a client of any Goldman Sachs Entity.
Transcript generated on 2021-09-19.