CHINA’S HARD LANDING HAS ALREADY BEGUN – w/ Richard Duncan

CHINA’S HARD LANDING HAS ALREADY BEGUN – w/ Richard Duncan

2:43
well just a word first thing on one macro watch that is what i do now in
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writing books is is great it was a great experience i hope to write and publish
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some more books going to hit but it takes a year to write a book and then
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the publisher takes at least six months to to publish the thing and get it in
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bookstores
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so what I’m doing now is macro watching micro watches a video newsletter
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I have learned a new video every couple of weeks and sell this on a subscription
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basis and so this is so much more time line and writing books
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so this has been going on now for about two and a half years
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uh I have 25 hours with the macro watch videos from the archives and as I said a
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new one is uploaded every couple of weeks so recently I’ve been doing a
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series on china china’s in the headlines everyone now realizes the time it’s
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really already started to have a hard landing
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so I’ve done now for of videos back for watch videos that have three have been
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uploaded
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once about to be uploaded next week on explaining this economic crisis in China
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how it came about what’s happening what’s likely to happen next
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yeah the the the macro watch series is as much as I said must following for
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anybody that serious but I think it’s worth the price of the script
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subscription myself just for your liquidity each and your analysis on on
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liquidity flows and flows that are happening which impact markets and in
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that we’re not going to talk about that today but that in itself is worth the
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price of admission if you would
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Richard you brought some slides let’s just jump right into the man and I and I
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know that that just a subset of the of what the analysis you have but i want to
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i want to give our listeners just some basic understanding of what’s going on
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in China and what they should be paying attention to and and then we’re going to
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start with this
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this imbalance this excess surplus that we have in china bee do be the
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difference between production and consumption right China’s economy is
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absolutely wildly unbalanced that have investors so much more than they consume
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every year and in the past they were able to export this excess production
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into the globally comic primarily to be us but now the US economy is so weak and
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global economy is so weak that the rest of the world just can’t continue
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absorbing more and more times exports every year and so between that the reef
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global demand and the fact that the rest of the world is already saturated with
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Chinese good thing that and the fact that per capita income in China itself
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is just soloed the Chinese can afford to buy all the things that china produces
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china now stop with an extraordinary luck
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it has excess capacity across every industry are just a mind-boggling right
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scale and it’s very they’re really facing level
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let’s put it mildly very great challenges as to how they can manage
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their economy now going forward
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so just in this first chart then to begin with
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what this shows is investment in china now that doesn’t mean other people
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investing in China it means how much money is invested in all kinds of gross
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fixed capital formation
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what that means is not only investment in building new factories but investment
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in housing office buildings
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residential buildings commercial buildings all kinds of investor gross
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fixed capital formation
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well you can see that it expanded 50 times between 1990 and 2014
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so just extraordinary explosion of investment that and that has been the
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the real fuel behind china’s economy
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you could say China’s followed a development strategy based on export-led
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an investment driven growth so here you see the 50 fold expansion of the
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investment driven growth and i’m not i’m looking at this
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the things examples of this of the investment where it went into cement
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production for example
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that’s right so the next chart we have cement production
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you can see that it has increased fight 12 times between 1990 and 2014
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and by the way just in three years along between 2011-2013 china produces much
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cement of the United States did during the entire 20th century
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all right that is really quite incredible
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but think about that that means it over the next three years that you might
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china again produces the same amount of cement that will be of course again as
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much as US did in the entire 20th century and the same for the following
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four years in the same for the following three years but that would represent no
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growth whatsoever for China that would just be zero growth in the cement
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industry so it just gives you some idea of how much excess capacity and
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production they’re drowning out and by the way they now have fifty nine percent
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of global cement capacity and the next chart is on steel
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it’s a similar story 12 fold increase the spring 1998 2014 and they now have
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fifty percent of global steel production at me
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problem is the world doesn’t need that much
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global steel production capacity the capacity utilization for the world is
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only sixty-five percent that mean
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thirty-five percent of all existing capacity for steel in the world is going
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on used and so that’s why it’s pointless for China build any more steel capacity
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because they can’t sell the steel they’re making already but if they don’t
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continue investing and they’re not going to have economic room and then and and
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they’re not only economic growth job creation and with 1.3 billion people
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a lot of still moving from the Royal to the urban centers looking for jobs they
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expect the government to create jobs
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so now you’ve got this artificially high run rate and the jobs associated with
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any kind of slowing could mean layoffs but it also means lack of job growth and
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and that’s what they hold the government accountable 20 is
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am I correct in that you are right and I’m going to put this into a bearer
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perspective
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China’s main goal for the last several decades has been to create jobs through
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this investment driven an export-led growth and they have succeeded
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brilliantly in doing that
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oh they have created 390 million jobs in the last between 1980 and 2015 so this
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is having a population explosion of the population is more than doubled in china
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during my lifetime
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they had to find these people jobs and i have so the strategy worked out really
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really up until the time that the US economy went into crisis
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2000a so long as the u.s. current account deficit continue to grow larger
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and larger every year
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that was great we’re going to us but it happened it
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it’s bitch it’s actually it’s we asked about the deficit but it’s been the
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deputies been shrinking so by trip is peridot up shits
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it’s actually starting to strangle China because of this lack of extra funds
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coming in right
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is that a fair assumption that’s right so starting in up until nineteen eighty
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years so the US trade was in balance under the bretton woods system trade
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have to balance it was only after nineteen eighty-two us started running
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these very large trade and current account deficits and by 19 by 2006 the
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current account deficit groan all the way out to a hundred billion dollars
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that one year long so you could call that with the international monetary
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system that follow the breakdown
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good system no one really gave it a name but I think it’s properly called the
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doll extended so as long as the current account deficit that the u.s. is growing
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then the global economy boom so that was the dollar standard boom
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but after two thousand six particularly after 2008 us crying context that
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corrected by about half the battle to the standard bust and that’s when
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China’s troubles really began to be noticeable
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they tried to keep their economy growing by allowing bank loans to explode
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since 2009 bank loans have triple in China and that resulted in even more
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investment and even more excess capacity but now the bank loans are not
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performing and non-performing bank loans are essentially destroying the bank
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deposits within the bank’s bigger reach the point now where they is
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is there really running into a brick wall
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if they continue having more and more credit growth this is just going to
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exacerbate their problems
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the more money they will Len and invest in this state to more money they lose
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so that’s the measure of China’s crisis this point to always FX currency
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reserves that they had from options such a great trade with with America went
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into their banking system three to four trillion dollars
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it goes i did reserve ratios at probably 16 and a half
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let’s say 25 times that’s just an explosion of credit built all of this
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production
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now you says his 2000 years been a problem now we’ve had quantitative
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easing and all sorts of forms in America and you know the depth of his deficit
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has been shrinking in America we still producing all this credit and how has
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that impacted China because I know my personally believe that credit was about
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bringing demands forward which it did briefly
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it’s been about this explosion supply in emerging markets nine trillion dollars
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of extra funding when it went into into those countries which are big and
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importers RX
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where’s to China our china’s imports and china’s imports are huge
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as are their exports so this business compounding itself but i’m going to
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grappling with his women quantitative easing of help be helping China
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well I think you get the quantitative easing the Fed is done in the u.s. they
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created 3.6 trillion dollars in three rounds and yes that dramatically pushed
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up us asset prices
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I household sector net worth is flying now to something like eighty five
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trillion dollars which is sixty percent above where it wasn’t 2009 another so
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that created a tremendous wealth effect that did stimulate something in the US
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and that it did pull in more enforcement would have come in otherwise allowing
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China to sell more exports and it would have been able to do otherwise
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but still even with the quantitative easing that hasn’t been enough to allow
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China’s economy to keep growing because China’s economy is now so large
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this is roughly sixty-five percent the size of the US economy now and we’re
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talking about such large numbers
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it’s very very difficult to make it continue growing by six or seven percent
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of here which is what the Chinese authorities would like to do and you can
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see some of the slowdown and some of these other charts that we have one
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showing the household consumption in China that the growth rates alcohol
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consumption versus the household versus the growth grade to investment in China
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well investment is growing at a seventeen percent a year on average from
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nineteen ninety two 2014 the consumption is only grown by thirteen percent year
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on average
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so consequently you have this extraordinary gap that’s formed between
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how much china produces and how much it consumes just in the years between 2005
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and 2014
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china invested four point six trillion dollars more
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it consumed and then one year alone 2012-2013 actually if they invested 900
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billion dollars more than they consume
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so again in the past they were able to export all this excess production but
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now the global economy is to read to allow them to keep doing that and it’s
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also interesting to look at 40 channels on credit growth versus china’s gdp
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growth now but one of the broader measures of credit growth in China is
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called aggregate finance that includes bank loans at corporate bombs and and
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and a number of other creche credit measures
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so that’s one of the most preferred two measures of credit and China aggregate
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financing
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well it in this chart you can see that everyday financing which is the blue bar
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has been slowing quite significantly from extremely high rates 2009 a great
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financing in that one year increased by thirty-five percent trying to stimulate
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China’s economy during the worst part of the global recession great recession but
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since 2009 the credit growth has been slowing very significantly and last year
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it grew by 12 points six percent which is still I number but you can notice as
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credit growth slowed
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so did nominal GDP grows and last year
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nominal gdp growth through bio and 6.4 person roughly as much as advocates
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financing so one of the things that I focus on in macro watches is credit
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growth because I believe in this new world of fiat money and credit growth
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drives economic growth and that’s true not only in the United States but in
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China and elsewhere
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– so what you can see in this chart is as credit growth has slowed down so has
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the nominal gdp growth now this is even more alarming because the the in
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absolute numbers
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I’ve been financing is twice as large as the gdp and you’ve been
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you can see that in the next chart that the absolute level up the growth in
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aggregate financing last year with 15 trillion you are and with 15 trillion
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you want with the flu credit they were only able to achieve four trillion quad
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work with Judy Pedro
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so it took almost four you can said four dollars worth of credit to generate one
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dollars worth of gdp growth just not
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it takes more and more credit to generate GDP growth in China showing us
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that the credit is increasingly miss allocated and wasted
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Richard a big part of China’s GDP is is investment its capital formation coming
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into the country and we’re we’re witnessing our least the perception
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perception is is tremendous capital leaving China right now
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how is that impacting its ability to sustain credit growth when you’ve got a
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capital by could say a capital flight going on
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well you have a very interesting project let me show you one other chart first
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before I answer that – just put it with this clearly the perspective how much
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credit growth we’re talking about this is the one that shows credit growth in
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the US vs credit growth in china now we had us credit growth was shown the blue
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bar and these are all in billions of US dollars and China’s credit growth is
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shown in the red bar and the numbers are actual up to 2015
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but after 2015 and i extrapolate out credit growth in China based on last
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year’s rate of credit growth which was 12 . six percent for here so it is
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it’s amazing for the last seven years now
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credit growth in China has been more than credit growth in the United States
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even though the US economy is still much larger than China’s economy and notice
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that it
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credit growth in China continues to grow at this last year’s ray 12.6 percent
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then by the year twenty twenty-one total credit growth in China that year will be
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more than the peak level of credit growth in the United States in 2007 the
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year leading up to the great the Great bubble that was the peak of the u.s.
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bubble and we know how that ended in the United States and it certainly wouldn’t
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be any better in China where income is so much lower that it makes it much less
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easy for China to manage such a high level of death
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so China’s China’s facing very serious challenges on a number of fronts the
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first of all it’s not going to be easy to fund this kind of credit growth and
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secondly even if they can fund it then it’s certainly not going to be possible
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to invest that money probably
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and it will just result in a higher level of performing logs which will
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destroy your bank deposits now up until last year the real origin of the money
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that funded China’s great economic food
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it came from China’s current accounts reports the traitor
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plus they also had a surplus on their financial account money coming in for
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instance to build factories and up in between 1990 and 2014 that in total was
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four trillion u.s. dollars and that went into China’s thanks
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and through the miracle of fractional reserve banking and the money multiplier
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that route 20 trillion dollars with the credit expansion during that period
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looking ahead though things are going to become more difficult because in 2015
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trying to experience
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I happen trillion dollars of capital flight a half a trillion dollars left
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China on their financial account and this happened because of fears that the
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Chinese authorities were going to devalue the currency which they did on a
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small scale in August
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so once it became clear that the Chinese currency was no longer going to continue
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appreciating every year and then it was probably going to begin depreciating
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everyone trying to get their money out of China all at one time
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so the money that have been doing in money flows that had been goin in and
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financing the great china boom
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well they they reversed and so that time liquidity conditions in China and it
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will make things more difficult for the Chinese to find it extraordinarily large
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amount of credit that they need to keep the economy growing if they were to
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devalue the you want and I certainly a lot of sense that that is in the works
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I wouldn’t that bring in new capital investment because money would be
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cheaper bigger dollars coming into a smaller currency and help investment or
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is that going to just say even the rumors of it stimulate more capital
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flight
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well sorry if they had one big one off the evaluation twenty percent then that
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would make China
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what’s more competitive in the global econ so their trade surplus with we grow
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sharp line and that would bring in more money into China but of course
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China’s trading partners would protest very loudly because already China
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already has a very large trade surplus with the rest of the world
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its overall current account surplus last year was about three hundred billion
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dollars so to devalue further simply in order to make that very large current
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account surplus very much larger would be completely out of there by anyone’s
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standards and China’s trading partners would probably put up trade tariffs
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because already there is a very loud backlash against three trained around
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the world
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now if they just tried to depreciate the currency graduate then that could call
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it a different set of problems because people would realize it
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the currency is going to keep losing value about Sultan war people trying to
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get their money out what they can for the evaluation occurs then we have even
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more capital flight
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so either strategy they adopt is going to cause problems and injectable to
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whatever extent the China does the value gradually or one large one off the
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evaluation is going to be very damaging for the rest of the world because if
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china d values then China will have less purchasing power so it will not be able
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to buy as many things from other countries
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so the other countries who sell commodities to China presence
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well first of all the commodity prices to drop chocolate and then the currant
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juice of the commodity producing countries like Australia Brazil those
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currencies the least value and then the profits of the metal and mining
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corporations who sell commodities their problems would take another big get
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and so would be another big stock market self
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that’s why there was such such such ramifications
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last August and obviously you know markets result it significantly right
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and now what Richard what can we read into I noticed the FX the federal the
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currency reserves the current count our fault of currency reserves are falling
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in many in China
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they’ve been selling us treasuries not to annex a major way but they certainly
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have been selling maybe more party they’re no longer a quiet acquiring
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treasuries up
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what should we read into the fs the currency reserves falling
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that’s the last year to foreign exchange reserves well from the key which was
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sometime 2014 now they followed by something like a hundred billion dollars
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to now three point two trillion dollars for
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China’s foreign exchange reserves are but I think the more significant thing
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is that reserves have not been growing rather than the fact that they have been
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shrinking
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let me explain so in China’s foreign exchange reserves go up
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that is because of war money is going into China that is leaving child and
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that would tend to put upward pressure on Chinese of a Chinese currency in
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order to prevent the upward pressure on the currency the central bank of china
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pboc friends money from De Niro and buys those born currency primarily dollars
27:20
and a fixture in the air fixed exchange rate and so they accumulate foreign
27:26
reserves that way and as they accumulate more and more . exchange reserves they
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need to invest those reserves in up it
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so if they accumulate dollars which is the main currents they accumulate the
27:40
men need to invest those new dollar reserves back into US dollar-denominated
27:45
assets like Treasury bombs
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this is that point upward pressure on the Treasury bombs and put downward
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pressure on the yield and it generally gives a boost to the financial markets
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in the United States
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so that’s when corn exchange reserves are increasing but I don’t think it’s
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add negative when they decrease
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it’s just not it’s just not positive but it’s not it’s not symmetrically negative
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because china central bank has to sell or exchange reserves but someone else so
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they may have to sell their Treasury bombs when when the foreign exchange
28:28
reserves go down there selling treasury bonds but someone else is buying those
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Treasury bonds
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so for example last year I as i mentioned it was for five hundred
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billion dollars
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leaving China their financial account those people wanted to sell their
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chinese yuan and buy dollars
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so that’s what they did so with one and bought dollars but then those people
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have dollars so they needed to buy us dollar-denominated assets like Treasury
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bombs like the Treasury bonds that the PBOC was selling gonna start foreign
29:08
exchange reserves for following but so that’s good
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complicated put the PLC was selling bonds but someone else selling you want
29:18
to buy those box because they were something you want to find dollar the
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way we have noticed when Richard what I have noticed is the buyers who are
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absorbing those cell phones that are being sold treasured being sold are
29:31
really people fleeing negative interest rates
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we’ve got ten point four trillion dollars where the bonds of standing
29:37
around the world that are negative interest rates primarily Europe and
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rather than take a negative he’ll they’re built they’d rather buy us
29:44
treasuries even at pathetic 1.7 1.8 on the 10-year I’m because the currency has
29:51
been relatively stable they’ve been given actually making money on the
29:56
currency to because the US dollars been going up because of the money coming in
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what kind of catches so I think that’s in the short term offset but i’m not
30:05
sure how sustainable that’s going to be if you have China has to continue to
30:10
sell its FX reserves and how much money it up time that money will keep coming
30:15
in especially with us having to increase its debt levels and the model is rolling
30:19
over
30:20
what you said is absolutely correct but do keep in mind that when the reason
30:26
China’s foreign exchange reserves are calling is because Chinese people want
30:31
to sell Chinese 1 and x dollars and so when they do that they have dollars and
30:41
with those dollars they want to buy Treasury bonds so the PBOC sewing
30:45
Treasury bombs but there are also a lot of chinese people now have a lot of
30:49
dollars they didn’t have before
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you want to buy Treasury and they can do that they can bet there’s no capital
30:55
restrictions of leaving it they can transact those those purchases right now
30:59
without any restrictions
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well it’s very hard to say what you can do and what you can’t do in China
31:04
it depends on who you are and who you know ok
31:08
the second a hat I but you could we expect capital controls in the future or
31:14
China or s capital controls
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I’m and more aggressively exactly their dad we got pictures here people
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believing with 70,000 american dollars wrapped around her wasted and they’re
31:26
being arrested at the airport then search because of this capital flight
31:29
but I mean more intense capital controls
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well it’s not those people the seven billion problem is these large
31:37
state-owned enterprises added before just say for the largest Chinese facts
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which are the four largest banks in the world now they can move money around in
31:48
the serious ways that the government either can control or chooses not to
31:54
control because after all the government controls the state-owned enterprises and
31:59
largest banks controls am at home
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did you do you think there’s a devaluation of the yuan coming it looks
32:05
like there will be steady depreciation sustained appreciation vs up one up and
32:11
it’s done
32:12
IRA just going out to be more of a steady depreciation you know much of it
32:17
depends on what happens to the dollar
32:20
the whole point of the little devaluation in august and in my view
32:24
they did the PBOC the central bank devalued by about three percent
32:30
well that was a very clear warning to the bed
32:33
that is a bed continue hiking right at that point the bed was talking about
32:38
hiking interest rates they haven’t started yet
32:40
it’s a bit had highlighted in a series of interest rate highest and of course
32:46
the dollar would have continued to appreciate and because the Chinese
32:50
currency is roughly picked the US dollar that would have made the Chinese
32:53
currency continue to appreciate as well so that little devaluation with the dlc
32:59
telling the Fed very clearly that if you hide
33:03
we’re going to devalue
33:04
and so the bed didn’t hide in September as it had intended to eventually did
33:11
highlight a little bit in december but since then they have I to get him
33:15
Richard is not exactly what we’ve seen in the month of May since May first the
33:20
bullets ooo are we talking about we’re going to have a rate increases coming
33:25
maybe june july up until we had a bad labor number here or suddenly came out
33:29
the table but during that period of time when yelling they were all talking
33:33
china devalued four times in the month of make minor not but they were like
33:37
shots across the bow once against do it to America saying do not increase the
33:43
rates and drive the dollar in my reading more into those rates are those not very
33:47
clear the dollar goes up the one is going to go down and and let that’s a
33:53
problem because the more than you want goes down the cheaper Chinese goods will
33:59
become in the United States and that will increase deflationary pressures in
34:04
the united states making it more difficult for the Fed to achieve its
34:08
mandate of two percent inflation
34:11
so this is really this is this is something that the PLC is holding over
34:20
the fit some extent to prevent them from hiking rates but of course the US
34:26
economy is far too beat the pension be hiking right anyway our gdp in the first
34:32
quarter was only up 0.8 for some things are deteriorating pretty rapidly and if
34:39
no in normal circumstances these would be the sort of circumstances would see
34:43
the fifth cutting interest rates rather than hiking up
34:46
you would think so wouldn’t you we see him
34:49
it makes no sense that had it on the surface there’s other strategies go
34:54
ahead Richard
34:55
we’re running out of time but I’d like to go back how we started that is the
34:57
job through that the job creation in china and the absolute requirement to
35:02
sustain jobs
35:04
you can’t keep building ghost cities and and go smalls it etcetera to sustain it
35:11
what do you think China is going to be do we have social unrest
35:14
being in China and what do you think the government’s going to do to sustain
35:17
these job growth
35:18
well this is a child like to show you is China share of the world
35:23
Jiki investment and household consumption expenditure
35:28
so in green what the Green Line shows you that as a 2014
35:35
China’s share China’s economy its share of global gdp China’s economy made up
35:41
thirteen percent of the global economy but chinese investment
35:46
sorry chinese consumption of alcohol consumption
35:50
it may have only nine percent of the world’s total consumption
35:54
on the other hand chinese investment made a 24-point four percent of all the
36:01
world investment so almost a quarter of all the investment occurring in the
36:06
world occurred in China are in 2014
36:11
now that is mind-boggling
36:14
because again investment is not just investment building factories but
36:20
investment includes building all kinds of structures residential structures
36:25
office buildings commercial buildings and industrial buildings so so already
36:31
china investment is a quarter of World investment
36:35
now if they continue growing these sorts of the kind of growth rates that they
36:39
have the last two decades
36:40
then within 10 years love it
36:45
China’s growth rate of investment continues at the same rate and the world
36:49
growth rate of investment continues at the same rate within 10 years Chinese
36:54
investment will make up sixty percent world invest so clearly that’s just not
37:00
possible
37:01
that’s not going to happen so the investment is going to have to slow and
37:05
other Chinese policy makers tell us is that they’re going to move from a
37:09
strategy for growth strategy
37:11
they’re going to move from investment-driven growth to
37:15
consumption-driven growth but that’s just not possible because if you begin
37:20
laying off people who work in steel factories
37:26
then those people are going to consume or they’re going to consume less reason
37:31
consumption has been growing in China as much as it has because investment has
37:36
grown so much
37:37
now you may lay off the Chinese still manufacturing worker and that worker may
37:43
find a job in the services industry but as we know from the US experience wages
37:50
in the services industry it
37:53
wages they are much lower than in the manufacturing industry
37:56
so that’s not going to boost consumption so if they begin it investment grows it
38:02
if investments lows as it must
38:05
the consumption is also going too slow so what that means going for it is
38:12
well first of all China’s economy is going to continue slowly significantly
38:15
but in order to have any growth at all
38:20
chinese government spending is going to have to increase sharply just as it did
38:25
in Japan after japan’s great economic bubble hot in 1990 the only way to pan
38:34
is managed to avoid collapsing into the Great Depression for the last 26 years
38:38
they have very very large budget deficits sixty percent of GDP almost
38:44
every year for the last twenty secures the Japanese government debt has
38:48
increased from sixty percent of gdp in 1990 up to two hundred fifty percent of
38:53
GDP now so we’re going to see something quite similar in child
38:58
chinese government debt is going to rise very sharp keep trying to economy
39:01
problem
39:02
collapse and you have a very severe recession / depression
39:06
now in my opinion China’s hard landing has has already begun after decades of
39:13
having very rapid row and industry after industry double-digit growth rates
39:18
there’s a there’s a chart on this Chinese hard landing
39:22
I have you got you can see that all that changed in 2015
39:26
instead of growing at an annual rate of ten to twenty percent of year suddenly
39:32
industries like steel production cement production rail freight
39:37
there and building under construction
39:41
those were all negative another way through there were already in recession
39:45
now so china announced that their economy grew last year by six points
39:51
seven percent in nominal terms that group that would be six point four
39:56
percent
39:57
well maybe it did and maybe it didn’t as far as the rest of the world is
40:02
concerned it really doesn’t matter how much
40:04
China’s economy is growing by what matters for the rest of the world is how
40:09
much chinese imports are growing when chinese imports are growing as they were
40:14
for decades that make China a driver global economic growth but last year
40:19
china’s imports contracted by seventeen percent so seventeen percent contraction
40:25
and chinese imports that is a hard landing i would say by anyone’s
40:29
definition
40:30
so did the hard landing starting in 2015 and is likely to be very protracted no
40:37
matter what the Chinese government does going forward and this is going to
40:40
impact everyone around the world in fact that already has asked just ask brazil
40:47
brazil is now suffering the worst depression in 100 years because the
40:54
commodity prices the craft to the lack of Chinese demand for commodities and
40:59
that’s wrong
41:00
brazil a major market producing country into a depression
41:05
so we’re already feeling the consequences of this hard landing in
41:10
china and the longer it goes on the more serious consequences could become and
41:18
they’re beginning to become not only economic consequences but increasingly
41:21
political consequences are all around the world we’re seeing a rapid rapidly
41:28
growing backlash against free trade and the rise of strange political candidates
41:38
on both the right and the left both Donald Trump and Bernie Sanders are anti
41:44
free trade and it’s they have a lot of supporters
41:49
fully understand that position and supported entirely
41:53
so there is a growing risk that the longer
41:57
China’s economy is it is current state
42:03
struggling the greater the risk that we will have a political backlash against
42:08
free trade trade barriers could go up in that case that makes the chances of a of
42:14
a global we’re already
42:19
we already have a global recession the chances of global depression will
42:23
increase if we have a backlash against free trade protectionism advances
42:28
now I think what is likely to happen is that we are going to have a globally
42:35
coordinated fiscal stimulus program on a very large scale
42:41
sometime after the next u.s. president takes office in January 2017
42:48
because they’re really at this point there are there are no alternative to
42:51
drive the global economy you us credit growth was too weak to drive the US
42:56
economy
42:56
China’s economy is effectively in crisis as Japan’s and Europe’s monetary policy
43:03
now has done pretty much all it can do the negative consequences to comp
43:08
quantitative easing
43:09
I’m are now almost great at the positive consequences of quantitative easing
43:16
so the added benefit of more quantitative easing is very insertive so
43:20
monetary policy is really run out of potential to drive the global economy so
43:26
that means we’re going to have to have a very large round of globally coordinated
43:29
fiscal stimulus
43:31
I think that’s what we expect in 2017
43:34
if we don’t get that then the chances are that are global recession will
43:40
become a global depression
43:42
the crowds as soon as 2018 and I think that that we were talking earlier Larry
43:47
Summers is going around the world former Treasury Secretary United States
43:51
proposing to exactly that a globally coordinated fiscal infrastructure
43:56
spending program initiative not just it coordinated but certain
44:02
in every country we’re getting more and more of that visibility I think it’s a
44:06
high probability
44:07
Japanese Prime Minister there and back at the g7 meeting recently announced
44:15
very loudly
44:16
he thought the current global crisis is a severus it wasn’t the peak in 2009 and
44:23
he called for a globally coordinated fiscal stimulus program and subsequently
44:28
he backtracked on hiking the consumption tax and which is we have been fiscal
44:36
tightening
44:37
so really ever Germany of the great cold out here
44:43
they are reluctant to have more fiscal stimulus they have a date
44:48
they have actually have a small government budget surplus which is
44:53
really the the worst possible thing you’re going to do in a world in
45:02
recession with political tensions growing and the threat of severe
45:07
severely disturbing political outcome that threat is growing by the day and
45:16
the longer the global economy remains weak
45:18
the greater the risk of a very unhappy little full outcome will be those
45:24
chances are increasing
45:26
I’m getting the sense Richard you’ve seen things go from which the financial
45:30
crisis to economic crisis that we’re soon gonna be facing political crisis
45:34
because of the follow
45:36
lack of growth and jobs slowing economy lack of confidence in government center
45:41
and I think people like Trump and Sanders that are just bellwethers of
45:47
what’s to come we can talk about Maria panting France epilepsy and in Italy
45:52
Corbin and the UK we’re seeing this all around the world right now is just
45:57
almost anti-government at the establishment because they just don’t
46:01
believe that the system is working
46:02
am I reading too much into that will certainly anti-establishment
46:05
yes I do
46:08
look the same state at the Republican Party believe has just lost control of
46:14
their part
46:15
Donald Trump thats stolen the Republican Party away from the Republican
46:19
establishment because the rank and file of the Republican Party have been
46:25
suffering under the policies advocated by the republican party elite free trade
46:31
free flow of capital around the world
46:35
deregulation and they have not benefited from any of these things back their
46:41
standard of living is not increased for decades so suddenly
46:47
Donald Trump is pointed this out to them and we have all defective to him and he
46:52
his policies are really innocence in many ways the complete opposite of what
46:56
the Republican establishment has advocated and and push forward for
47:03
decades and to be fair this much the same can be said about the democrat
47:08
party after all it was Bill Clinton past
47:12
napa and ross perot remember in the Eternal Word your bras throw and I had
47:20
shocking sound sucking sound that with also wages to fall in the US
47:26
unemployment rise and be a blow to the American middle class and that’s
47:32
certainly been the case
47:34
and so that’s why Bernice and it is so popular so the elite within the Democrat
47:40
Party are there hanging on by their fingernails
47:43
so what we’re seeing is a backlash against free trade
47:47
now the problem is i mean i can certainly sympathize with all those
47:51
people who are opposed free trade
47:54
they have good reason to be but if we put up trade barriers in the global
47:58
economy begins contracting that’s only going to make all of our problems works
48:03
so rather than going for protectionism what we need to do is find policies that
48:08
will make the demands of other countries grow rather than calling us to man
48:13
for global products to shrink so we need to be more imaginative in my first book
48:20
the dollar crisis which was published in 2003
48:24
I you can see that there was a big US housing bubble is going to pop it didn’t
48:30
take too much imagination to see what would happen the global economy when it
48:33
did pop would be much less
48:35
global demand and a severe global recession and we would need new sources
48:40
about demand we were going to ever be able to grow out the crisis
48:44
so one of the chapters and that book was called a global minimum wage which I
48:49
advocated pushing up wages in the manufacturing industries of all the
48:55
countries around the world if we could just push up wages right now to the
49:02
going wage rate the manufacturing industry
49:04
lower away is probably something like eight dollars today and there are
49:10
hundreds of millions of people in the world who would be delighted to work for
49:13
five dollars today
49:15
I think we’re going to make globally , crow
49:18
we need those wages to go up not go down as they have been doing so
49:23
just as in the Western countries we had minimum wages now for a century in many
49:29
places around in the Western developed economies
49:32
we know how the global economy we need to find a way to make the wages in the
49:37
manufacturing sector go up to going down
49:40
so if we can reach a global accord to boost the wages of the manufacturing
49:45
industry by just one dollar a day per year
49:49
so the next year they go to nine dollars a day year after that they go to ten
49:53
dollars a day
49:54
you have about 11 and 12 / 30 within a decade or so they would double or triple
49:59
and that would increase the purchasing power of the people at the bottom of the
50:02
pyramid globally so they could buy more things
50:05
the Chinese factory workers could find more but it’s rather than less goods
50:08
that would be a way to make the global economy grow rather than resorting to
50:13
nineteen thirty style tariffs resulting in a global depression
50:19
so we need to find a way to make the global economy grow by creating more
50:23
I would get the man rather than allowing the global economy and flow through
50:27
greater protectionism but we have head winds of robotics and automation black
50:33
factories accelerator which is incredible headwinds for this to drive
50:37
up the labor costs and as more and more automation is happening in the existing
50:42
manufacturing facility so moving something to get take advantage of
50:47
Labor’s not there the same as it was before so driving up those labor cost is
50:51
going to be difficult process but we’re not talking about raising the wages in
50:54
these countries of fifteen dollars an hour
50:57
we’re just talking about raising them to $15 day and rope
51:02
robots are not going to be competitive at fifteen dollars a day for a long time
51:06
to come
51:07
at zero percent interest rates they could be very competitive terms of
51:11
investments it
51:12
no you’re absolutely right that’s all relative but Richard I could just it’s a
51:17
heck of a problem but we just have a lack of demand and we have massive
51:20
population and we have labor arbitrage and to get this in any kind of
51:25
coordinated fashion our governments have never been really good
51:28
even within a sovereign country of getting good quality ever mind having it
51:33
coordinated it it almost take a crisis to become coordinated one also yes
51:38
you’re right of me
51:39
so therefore the US could impose this unilaterally it would be nice if we can
51:44
all reach a deal to raise the wages but that probably not going to happen that
51:49
would be cheating
51:50
so the way that this can be done would be for the US Treasury secretary to go
51:57
on television and say if you cannot prove that you’re manufacturing workers
52:02
are paid nine dollars a day
52:04
we’re going to put a ten percent error on your goods and then we just we go to
52:11
nine dollars day and the next year they would go to ten dollars a day and then
52:16
if there were no cheating
52:18
the other countries would have no incentive to cheat because after all
52:21
they want their workers to have a higher income they want the global economy to
52:25
grow the US could enforce a higher global wage rate uh unilaterally since
52:30
it is the fire first and last resort
52:34
it comes to imports I will arrest the world so Donald Trump says he’s a great
52:40
negotiator
52:42
if this is this kind of deal in these negotiate not putting a train trips and
52:48
making our trading partners pay their workers more so they can find more
52:51
American girls that we will always pictured we’re way past your deadline
52:55
but I you I I just enjoyed talking to you so much and I have so many just
52:59
absolutely great in for insights
53:01
some of them i sure will be controversial with many many viewers but
53:05
but I I know how well deeply you think these things through in the logic behind
53:10
it
53:11
we need a break can you count listeners how they can subscribe to macro watch
53:15
and i know you have a special offer to write so yes well first of all I would
53:21
ask that they visit my website
53:23
Richard Duncan economics . com and at the very least sign up to get my free
53:28
blog on macro watch is based around the idea is that in this new world
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power to make sure the credit growth and liquidity its fans so that the global
53:51
economy doesn’t collapse and those other things too many things that I monitor
53:57
and in macro wash
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54:49
and as I said the beginning anybody who’s serious about understanding macro
54:53
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54:54
you can’t do it without a subscription to macro lunch and and really getting
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these in these uh these insights
55:00
Richard always a pleasure and we’ll talk to you again when you’re free

Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference

Stephen SchwarzmanThe following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More


China, 2015 Stock Panic, A-Share Bubble