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The Artisan Podcast: China's Boom – Why This Time Is Different



China’s Boom – Why This Time Is Different


Exploring the topic of China’s Boom – Why This Time Is Different, featuring renowned strategist Yan Wang as he shares his insightful perspective with Joseph Abramson, Northland’s Co-CIO.


Major issues to be discussed on this webcast include:

• Whether China’s Post-Covid boom is sustainable

• Key winners from accelerating Chinese growth

• Structural changes in China that make this expansion different from the past

• The outlook for EM stocks and bonds

• Is war between China and the U.S. inevitable?


Yan Wang is the Chief Emerging Markets & China Strategist at Alpine Macro. Prior to Alpine Macro, Yan spent 15 years at BCA Research, as the Managing Editor and Chief Strategist for BCA’s China Investment Strategy service, and played a major role in formulating BCA’s view on the Greater China region and emerging Asia. Prior to joining BCA, he spent six years as an equity analyst in China and Hong Kong. Yan holds an MBA in Finance from McGill University, an M.A. in Economics from Tianjin Institute of Finance and a B.A. in Finance from Nankai University. He also holds the CFA designation.


Make sure to check Northland Wealth’s YouTube Channel for more episodes.


Transcript

SPEAKERS: Joseph Abramson, Yan Wang


Joseph Abramson 0:14

Welcome to the artists in podcast where we share insights from the investment world's leading minds. Today you're in for a real treat. We have yen weighing Alpine macros China and em strategist. Before we begin, now that we're in the age of AI, I need to ask one question of all our guests. Are you a robot?


Yan Wang 0:36

No, I'm not a robot.


Joseph Abramson 0:39

Are you Sure?


Yan Wang 0:40

Yes, I'm very sure.


Joseph Abramson 0:43

Are you lying?


Yan Wang 0:44

No, you wont figuring that out.


Joseph Abramson 0:48

Actually, I've known Yan for many years. And I don't believe that any robot could even come close to him in terms of his thoughtfulness and insightfulness on EM or China, for now. So yeah, when the last time we talked, you were in quarantine in China. At that time, there were widespread lock downs, and the economy was barely growing. What a difference a year or so makes.


Yan Wang 1:14

Thanks, Joe. Thanks for having me against good. It's good to be to be in the office and talk to you. Yeah, so obviously, a lot of things have changed, especially since late last year. So the way that we see it is, you know, I think, if you think about it last year, Chinese economy really suffered massively. So the reason, the biggest reason was this kind of zero COVID policy, right. So you know, basically, if you have this kind of massive burden on the economy, and then as soon as you remove this burden, the economy just bounced back, I think this is precisely what's happening, how sustainable This is, I think the recovery will have lacks, for a couple of reasons. Reason number one is, you know, we said, you know, the self imposed restrictions are removed. And then there was a lot of pent up demand cumulated in the past three years, whereas, you know, COVID pandemic lasted in China for three years.


So you have massive pent up demand, the household sector, the corporate sector, they all hoarded massive cash position. So now they are in a position to deploy that kind of cash. I think this, that's the first one. Likely, you know what, that's the obvious, the most important reason why we are seeing this kind of rebound. Another reason, obviously, is in terms of policy. Right. So in the past couple of years, the Chinese policy largely, was very restrictive. So I and I think, this year after the party congress last year, and also the People's Congress this year, I think protecting growth is the most important priority for the government for Beijing this year. So I think this kind of policy change will also help the economy to, to grow to to recover.


Joseph Abramson 3:13

So, I mean, if we look at these two drivers and China more broadly, you know, it's in a bit of a different place than it has been in past rebounds. So, you know, are there going to be different winners than in the past? Most importantly, for for our listeners, who are Canadians with commodity exposure? Is it going to be like in the past where you know, commodities, or big winners and the Canadian currency goes through the roof? Or is the growth going to be really towards other things this time? And there's a different set of winners and losers?


Yan Wang 3:55

Yeah, that's that's a great question. So I think, you know, once Chinese cycle turns up, in historically, the winners, winners or losers There are I think they are very similar. I don't think this time around things will be completely different per se. But obviously, we know what will rebound more than other sectors, right? So if you look at Chinese economy, in the past, let's say past year, it's actually past three years, the production side or the export side, have been a lot more resilient than consumption in the just by the nature of the slowdown, because basically, consumers were locked in their homes, so they were not able they have not been able to to spend their money. So that's why you have a much more much deeper slowdown in the consumer side than the production side exports actually have, you know, throughout the pandemic Chinese exports did exceptionally well.


So in that vein, you would expect whatever slowed the most, during the slowdown period will bounce back the most. That's why, you know, the service sector will probably benefit more, the consumer side, the consumption story will probably bounce back more, the production side will recover, but will not be as dramatic. So let's say the restaurants or the travel related expenditure, so, but nonetheless, if Chinese cycle turns up, you know, production will will rebound capital spending will rebound. So the capital in the Chinese economy is still very, very capital intensive. So I do I do think commodities will also benefit. But, you know, you have some other sectors that will probably benefit more.


Joseph Abramson 5:47

Yeah, no, definitely. Definitely. Definitely makes a lot of sense. And, and your, your thoughts in terms of, you know, a more positive or negative view right now on things like, oil and the metals and the Canadian dollar?


Yan Wang 6:06

Yeah, so, yeah. So, so that's relates to the broader view on commodities. Right. So basically, that's, that's the kind of, you know, they all, it's in the space, same cycle. So we like commodities. Because, you know, our view on commodities, basically, it's supported by this three pillars. One is the, the, on the demand side, which is trying to make primarily China. And then the second factor is the dollar, you know, that, you know, we can talk a little bit about the Fed and the dollar, but we expand the power to, to weaken. So that's the second pillar to be positive on on commodities. And, and then the third pillar would be the supply side. Okay. So the supply side, the difference in the supply side factors differ across different commodities. So I think at this moment, we are more positive on crude oil, energy. Because, you know, we think there's a lot is a more supply side constraints on on oil, then let's add base metals. So yeah, so if we think about like, the three, you know, these three pillars, your Chinese growth is rebounding, which is in the drive driving the demand side, the taller likely is peaking, we're probably from long term point of view, the dollar has become so expensive, so stretched. So you know, it's in the bull market is in the in the final inning. Then the third factor is the supply side, you know, you know, we really look into, we need to look, specific factors on this on the supply side.


Joseph Abramson 8:02

Now, one of the things that worked in the North American context is, you know, some of the winners during COVID, where there was a structural change, before pandemic, so they were already, let's say, gaining market share, continued to do so even after the burst of post COVID. came about, whereas some other things, that they were really just beneficiaries during pandemic, completely fell back to Earth afterwards. You know, one example of structural change is, long before pandemic, people were already moving to small cities, just outside of big cities, and that massively accelerated veering pandemic. It hasn't stopped since. Are there any of those trends in China, where you have a structural change that now that we've moved post COVID? It's just gonna keep accelerating?


Yan Wang 9:10

Yeah, well, that's a great question. It's difficult to say, I think the only thing that I can think of at this moment well, I think first of all, obviously, we're talking about a cyclical story. Right. So in the Chinese economy is rebounding from a from a moment, let's say a manmade disaster. So, last year was a completely another recession was pretty much manmade recession. So we are coming out of that. So typically, this kind of reset this kind of recovery is we can say in two phases. The first phase will be a policy driven phase, right where, you know, basically you remove all the restrictions, then demand just automatically bounced back. And then on top of that the garments kickstart the recovery by policy easing by public spending on infrastructure. So then on the second phase of the recovery will be driven by, let's say more more market driven forces market forces. So, you know, the economy recovers, then, you know, confidence household confidence improves, household income improves, you know, the private sector capital spending intention also improves. So, so that would allow the economy to shift from the first phase of the recovery, which is driven by policy to the second phase, which is driven by letting market forces, so we are still expecting this to happen.


So, structural changes on top of that, you know, we know, the Chinese economy has been really undergoing a very dramatic change, I think, to, you know, on a positive side, obviously, the China in this kind of geopolitical environment, geopolitical environment has become a lot less friendly towards China. Right. So you know, now, many companies are almost modular, most companies are thinking of rearranging supply chain, and least to have a China plus one strategy. So I think that will obviously have important impact on Chinese exporters. So I think we're at the start. So personally, I'm not really very concerned that at this moment, because if you think about most economies that are kind of getting this kind of supply, China plus one, like Vietnam, Vietnam is smaller than the size of the size of Vietnam, GDP is smaller than Xinjiang city. Right?


So it's just the the size is just, you know, China, GDP is six times bigger than India. So these economies are not at that kind of scale to really challenge the dominance of, of Chinese manufacturing capacity. So I think, you know, but but the starting point now, now, this is kind of a trend that is already developing and will likely accelerate. So I think this is on the on the negative side, on a positive side, you have in the Chinese companies are also very rapidly climbing up the value chain. We saw that, you know, his previous years, we saw that in less than electronics, right? In white goods. But now, more recently, you know, probably you know that last year, China became the second largest car exporter in the world, and only after Japan. So the EVS you know, the Chinese auto auto industry has been just explosive.


So if Chinese EV technology, battery technology, like solar panel, wind turbine, all these kinds of new energy, technology, it's just dominating. So you see, there's also kind of some sectors that are kind of benefiting from this kind of very powerful tailwind.


Joseph Abramson 13:07

You know, it's funny, because I didn't want to, you know, lead lead the expert in terms of Eevee. But but it seems to me, like that's one of the things where there's this structural change, because if you, if you remember the view, during the last China boom, it was just that, you know, if China's going to industrialize the way America did, then the whole world is going to be full of pollution. And so now, it seems like if we look at evey as a percentage of total car sales, and just all of these things, it seems like China's the leader, and in terms of production, and so on, and so forth. And then there's a few other things where, again, if we looked at the early part of the last China, em, boom, it was just, you know, building out infrastructure with stuff. Now, China is is a leader in many things that require intellectual capital. It's kind of neck and neck. in various areas. It's It's strong number two in terms of genomics, in terms of patents. It's way above Europe. So beyond Evie, is there anything that I mean, it is still a somewhat command driven economy. Government has been very keen on EV for a while. Are there any other areas that the government really wants to see? China taking a leadership role? So if we look, we just had a big important meeting and we had some very major Congress last fall, you know, what are these kinds of structural themes where China could take a leadership role like these new forms of growth?


Yan Wang 15:11

Yeah, so I think I think the clear theme from last year's Congress, one of the themes is self sufficiency in key technologies. Right. So you know, this is also a way for Beijing to deal with this kind of geopolitical headwind. Obviously, the US is weaponizing. IP is weaponizing key technology. So I think, you know, from from Beijing's point of view, right, so they can This is a kind of talking point for them. So they want to be self sufficient in, let's say, semiconductor semiconductor, what semiconductor is a huge deal for Beijing? China, actually net deficit, trade deficit inside Mackinac semiconductor is bigger than Chinese diversity in crude oil. Energy. So just you know, if we think semiconductor is the new, new energy for for the, for the current industry for the for the current wave of industrialization, then you you can, you can understand why Beijing has been so nervous about it. So, yeah, so I think all key tack semiconductor, biotech, space, technology, new material, all these kinds of things.


China has been, has been trying AI Exactly, yeah. So and they have, they have really been trying to support domestic players in this field. So I think I think that's this is a very actually important point, if we can just spend a few more minutes on this. Because if you think about like, you know, obviously, what happened in China in the tech sector in last year, many people were very concerned. Right. So because they were thinking of when they think about Chinese tech sector, they were mainly talking about the Chinese crackdown on Alibaba, and Tencent on gaming tutorial on tutoring business. But if you look at others, other sectors of the tech space, right, so you know, semiconductor, Evie, solar panel, new energy, all these kind of new material, all these kinds of things, bro has been explosive. So that's why it's a very interesting, like, when we talk about China, we really need to have a kind of more nuanced view of these countries in China is never black and white. So if you if we talk about Alibaba, we talk about the crackdown on Alibaba, and on DD, that you hear, you know, Chinese crackdown on tech. But you look at BYD. You look at KTRK itl. You look at, you know, other sectors, it's just booming. So, yeah. So I think there's a lot of this kind of contrast contradiction here.


Joseph Abramson 17:59

Yeah, well, I think one thing, underlying all of that is a tremendous number of really cheap engineers. So cheap engineers will always find something very interesting to do. I mean, if we look at the US when they were reducing their military in the late 80s, and 90s, all of a sudden, these engineers, you know, got fired from the military, and basically started the internet and Cisco and Microsoft, and so on, really grew tremendously after that, so maybe we see something similar in, in China. I was just wondering, like, very related to that, and policymakers and regulation, and so on and so forth. Would you say that policymakers blinked and basically they'll do whatever it takes to re accelerate growth. So we saw that the removal of COVID restrictions, we saw that a lot less regulation coming down the pipes kind of a staving off in terms of worrying about the excesses in the property sector and really kind of supporting the property sector and then up until the few weeks ago, trying to kind of warm up in terms of international relations. You know, once growth goes from again, when we last talked close to zero, to what the government would view as decent growth, let's say five to 6% and more than a couple months, are they just gonna relapse back into not completely relapse into massive regulation again, but are they going to relapse and then start re-regulating start kind of redistributing wealth Health, having the economy become less free market oriented and more kind of top down from the government? Or do you think that just growth got way too weak, they're gonna put the policy gas pedal to the metal and do whatever it takes. And we're really, at least not for a couple of years going to see much of a relapse in terms of re-regulation, and redistribution of wealth. What are your thoughts there?


Yan Wang 20:37

Yeah, that's a great question. So I think in the next, let's say, in the next two, three quarters, the policy outlook should be quite straightforward. Should be the heart. As you mentioned, the economy has been so weak labor market is so challenging. deflationary pressure is so strong housing market is in a deep slump. So obviously, they would want the economy to grow. Right. So you know, they, this year, they want to create 12 million jobs. And, you know, this is, if you look at the Chinese, historically, one percentage point of GDP growth creates about 2 million jobs. So then if you they want to create 4 million jobs, they need the economy to grow 6%, you know, they say they want the economy to grow 5% That's their kind of target, or estimate, I think they have to grow faster than 5%. And even like, if they create 12 million jobs, this year, they estimate about like, almost like 1516, new young people will join the labor force this year. So basically, even if they create as many jobs than in this, you have a lot of you know, young people will be really looking for jobs. And and also the the youth, the young people I thought were great at this moment, I think it's like 60 70%. So that's near record high.


So this is still a very kind of a serious concern for Beijing in this, this can be a kind of potential source of social, social instability. But so from this point of view, I do think Beijing will do whatever it takes to revive the economy, at least in Alexa in the next couple of quarters. But the out that you mentioned, it's a very interesting question. And, you know, obviously, nobody has the has the crystal ball at this moment, but we can think about how the way that we I visualize, you know, I tried to get a sense of how the solution will involve going forward. So the way that I see it, you know, China has in the past, let's say, 30, some 3040 years, growth has been, you know, phenomenal. Right. So, you know, the, whatever measures that we look at the economy has been extremely successful. So that's, you know, that kind of success, that kind of massive prosperity. Obviously, one reason, so, to me, one, one of the reasons of that kind of prosperity was due to what I call kind of the Wild West policy in basically whatever they could achieve the economy, achieve growth, you know, they did whatever it took to grow the economy. So then you had a wild west error in Chinese growth. So that was okay. When the economy was, you know, people were very poor. So people didn't really care much, they were just looking to make more money. But then you reached a level where China was no longer a poor country, right? So you know, the per capita GDP is, has reached a middle income, country level, high middle income country level. So then people's desire, people's needs began to change.


So that's why in the past couple of years, if we think back in a environmental campaign device, Jinping, was a top concern by Chinese people to like you mentioned earlier, what if China continued to industrialize with all these kinds of polluting industries, then if all the other Chinese people would be would be that light? Right, so in a few years, so obviously, that needed to change. So that's why they began to do this environmental campaign to clean up the air the water, you know, they began to to plant more trees. I think it's the same thing like we know Chinese Gini coefficient was very, very high. Right. So basically, people were the income disparity was very high. So that was also a source of social discontent. So that's why Xi Jinping is trying to change that. So I don't really think the policies that he's thinking completely, you know, do not make sense. I think, I think actually the starting point was correct. But it's just the whether they are able to manage a proper kind of balancing act between between doing the right thing to make, we know that Reza in economics is all about a trade off between efficiency and the quality. So we can we can just be hopeful that, you know, they will try to promote equality without sacrificing too much in a way of efficiency.


Joseph Abramson 25:43

No, definitely, you know, very, very thought provoking, and you're right, there's, there's no easy answer. Um, let's kind of switch gears a little into financial markets. So China's economy has been accelerating and growing above expectations, and liquidity has started to improve on many different measures. Normally, this is very bullish for financial markets. In fact, that is the most bullish combination that you have in financial markets. And the rest of the world is the opposite, decelerating growth and decelerating liquidity and stimulus. So growth is going to keep decelerating. Yet Chinese financial assets have not outperformed. Why?


Yan Wang 26:42

Well, it outperformed, let's say since November, right. So you know, if you look at Chinese assets, you know, Chinese MSCI China, rebounded from the bottom in November to probably middle of last month, rebounded by like, 50%. So it's a massive rebound. So obviously, I think the time horizon matters here. So I think, you know, we had a massive rebound. And so then now there may be some profit taking. So I think that's probably what's happening. So I see, I see the problem as technical instead of cyclical. So I think, you know, you mentioned this the most bullish phase of the equity market, that's, I think that's makes perfect sense. This is we know, in Alpine, this is what we call the sweet spot, where, you know, the multiples are still quite low. Exactly. Yeah, the multiples are still quite low. Earnings are beginning to improve, and the policy is still very accommodative. So that's the sweet spot. So I don't really see, you know, I don't really see reasons to be negative at this moment. Unless the sweet spots, let's say turns sour. You know, if if the economy is already boomed, then, you know, we are at the, you know, policymakers are about to tighten, that elevator, the equity volleyballs are elevated. So we're not there yet. So that's why I think I think so quickly, I think it still makes sense to be to be more positive on China versus the rest of the world. Okay.


Joseph Abramson 28:28

So I guess one one risk to the to the bullish view, right? Because if we look at China, or em, overall, they're very correlated. You know, the last 10 years has been a disaster. It's like massive underperformance leading these markets to be extremely cheap and, and extremely hated. And that usually is a setup for a structural change, with your catalyst being China blinking and accelerating liquidity which will accelerate growth. I guess one risk to this view is is geopolitical risk. relations with the US are getting pretty ugly, post the balloon incident, maybe there's a few other things behind the doors. If we look at, you know, fairly recently, the foreign minister gave the warning that unless the US changes course, there will surely be conflict and confrontation. So Chinese leader Z reflected these similar views. He recently chose that minister and so he must have been on board with that kind of very strong statement that I don't know when's the last time that relations between the US and China have been that bad publicly. When's the last time we heard a statement like that over China?


Yan Wang 30:01

Yeah, so that would be the Alaska meeting. Right? So in a few either maybe two years ago, two, three years ago. Yeah. So, yeah. So I think that's a very real concern for sure. So that's something that we have to be mindful. So this is a we're talking about new world is a new world order. So, at this moment, we're I'm not really overly concerned, or I think fundamentally, fundamentally, I believe, both the US and China, ultimately, they are rational players. They would, you know, if you think about Biden by the administration, he has been trying to reach out to Beijing to, to talk to talk about, you know, installing cartwheels to, to, to make sure the rivalry does not, let's say, you completely degenerate into some kind of downward spiral.


Joseph Abramson 30:58

But as part of that same speech, it was said, you know, no level of guardrails could protect against the path the US is on it. Right. So it's a kind of a very different view. And it's a scary one.


Yan Wang 31:12

Well, yeah, well, no, I think I think, like watching this view is that has been there. So this is what Washington wants Beijing to be cooperative, whenever in a Washington was beginning to cooperate. And, you know, Washington can just do whatever, to crack down on Chinese tech sectors, without without being without Beijing retaliating. So I think this is what this Chinese new prime minister, Foreign Minister is heading back. Right. So basically, you can do whatever you want to do, without me saying anything. Right. So I think I think this is still it's not completely surprising to hear Beijing is saying this. So, but realistically, the geopolitical tension between these two countries has been rising since Trump. Right. So and the if you look at in the past couple of years, you know, the tariff, war, all these kinds of embargoes, all these kinds of, you know, American, putting Chinese companies on this Entity List. Chinese trade with the US last year reached a new record high, despite all this. So you still have a, you know, it's a very, this is a still very, very globalized system. So I think, I think, I thought, so basically, putting Chinese companies on the list would be, let's say, a risk for specific companies. But so far, the macro impact has been fairly limited.


Joseph Abramson 32:55

I mean, you kind of raised an interesting point, most of our viewers really only get Western media, and some are more or less, some are more, right. But it still has that bent, and certainly the media and the US populace has become objectively much more negative towards China for some time, if you look at the percentage of, of actually both Democrats and Republicans, citizens that have a positive view of China, it's it's declined massively the last two or three years. So if we look at this, you know, geopolitical conflict with the US, whether it's over Taiwan or helping Russia or anything else. What's the Chinese perspective? Like? How are they how are they viewing this? I'm not asking right or wrong. It's not normative. But can you give our viewers some sense as to the view from the, from the other side?


Yan Wang 34:01

Yeah, so I think from Beijing's point of view, they are very concerned, this is happening. They don't want to shoot to let's say, sabotage the relationship with Washington because, you know, obviously, this is the dominant superpower in the world. And, you know, this is so critical for China's national security national interest, you know, when maintaining trade normal trade and normal financial flows. I think that's so I think I don't think deep down Beijing wants to really upset Washington. But I think now Beijing realizes you're rightly or wrongly, US is just have this kind of containment strategy. And you mentioned this kind of, you know, bypass is in support on getting tough on China, I think.


And also, I think this from beginners point of view, they are concerned this is kind of creating a downward spiral. Right. So the white politicians are so anti China is because the public opinion in the, in the US has turned against China. So like, you know, favorite opinion on China has dropped to an all time low. So then, so then you can see the public was allowed by the public, by by politicians, by their opinions by the media. But then, because of this, you you almost have, you almost see a kind of vicious cycle where the public opinion is, is getting worse on China, and then the politicians are capitalizing on that kind of sentiment. So you have this kind of feedback loop. So I think I think that's something Beijing is concerned about. So that's why I think I don't think Beijing wants to challenge Washington by the fact that he's, you know, China is itself is this is a massive econ massive country. So the rise of China itself, is disruptive. So I think this is just, it's just inevitable. I think this kind of conflict. Yeah.


Joseph Abramson 36:18

Well, that's that's Paul Kennedy seminal book from the 1980s that we've discussed so many times, the rise and fall of great powers that first its economic power, and switching from a current account deficit to surplus with the opposite happens for the leader, eventually, that economic power leads to political power, and way after the fact is the military power. And the tough part is when you get the switch, because the person who had the power still views themselves as powerful. And the person coming up, says, I deserve more. And there was a very long period of time, when, at least to a non expert, outsider, like me, China was quiet, like during that last China boom, yeah, US did lots of stuff pre Trump that pissed off China. But they didn't do that much. They were kind of quiet. And now they're becoming a little bit louder. I know, it's really tough. But let's try and keep this answer to two minutes that the two views on Taiwan are, they basically can't go together. And it that was quiet for a long time. But it doesn't seem so quiet right now. Is it inevitable? Maybe not in your two or three years? But isn't it inevitable that we'll have a military conflict over Taiwan?


Yan Wang 37:47

I think it's very, very unlikely, unless obviously, unless, you know, Beijing says certain things that you cannot do, you cannot declare, let's say, formally declare independence. You can there, let's say allow us to reset troops to station troops in Taiwan. So things like that, unless that happens that I doubt there will be a war over Taiwan. You know, I think simply think about it, you know, Taiwan is hundreds of miles away from China's coasts. And China's coast is the most vital part of the Chinese economy. Like, you know, 90% of Chinese people live on the east side of an east part of China. So it's hugely popular. Population density is very high, the the coastal provinces, they are the most important economic powerhouses for China. So a war in Taiwan, will not only hurt Taiwan, but also will damage some of the most vital provinces in China. So I think the economy cost would be a lot bigger than the paging is able to some of another reason is on the Taiwan side. I don't think I don't think, you know, we can compare Russia, Ukraine, with China, Taiwan, because, you know, think about it in whatever Russia does to Ukraine, their purpose is to, to make sure, Ukraine will not be part of, let's say, the NATO to to pose a military threat or national security threat to Russia. So basically, what they want to do what the Russians want to do in Ukraine is to to, to destroy to destroy the capacities in Ukraine to fight back. But for for China, it's a different story, right? So China views. Taiwan is part of this kind of great nation around us Renaissance. So Beijing wants to maintain prosperity in Taiwan. So they cannot really just, you know, destroy and conquer I have to make sure Taiwan is a stable and prosperous part of the Greater China. So that's why I think the purpose, the strategic purpose is different from Russia its purpose over over Ukraine. So yeah, so I think just from that, I can hardly see a real conflict between the two sides of the Taiwan Straits anytime soon,


Joseph Abramson 40:26

very comforting. So, if we look overall, there, there is both internal and external political risks in China, but you know, you make a very strong case for em, which we agree with, at Northland. Is there any reason why you need to beat buy em stocks overall, why you can't just buy em X China, it's, it's historically highly correlated, the turning points are the same, including most recently. What are your thoughts there? Do we need to take the political risk of actually being invested in China? Or can we just buy em X China?


Yan Wang 41:11

Yeah, that's a good point. I think, I think EM overall correlates with China a lot. Right? So you know, the broader trends are similar. So there is a case that you can buy em without China, I think there's, it's, you know, you can see a case of that. But also, we talked about, first of all, historically, China has been outperforming em, benchmark massively in the past less than 20 years. Obviously, we had, we had a almost like black swan event last year. So China underperformed. But that's not norm. Right. So if you look at historical trends, China has been outperforming within an upward trend, but then last year was really a two sigma event. So you actually can see a case where you want to be more positive on China at this moment, simply because, you know, it's such an extreme event.


But also, on the other hand, we talked about, you know, Chinese rising power in Chinese tech career, right. So you know, it's not just about Alibaba, it's all it's also some semiconductors, EVs, solar panel, producers, you know, new new materials, all these kinds of things, battery technologies, they are very, very competitive. And they are very, very, they almost all of them are private owned. So you don't really see these kinds of potential. In any other young countries, like, globally, you have US and China, that's all you don't really have the similar players in other young countries. So if you want to gain exposure to these kinds of technologies, actually, China and the US is probably the only place that you want to go. And you don't want to put all your eggs in one basket, which is which is the US so you know, maybe China is actually a is interesting place for us. Okay,


Joseph Abramson 43:02

and just, you know, a word, you know, our clients will always be in balanced portfolios, bonds are a lot easier to buy now than they were in the past. What are your thoughts on specifically emerging market bonds? Do you like them in absolute terms? Do you like them relative to bonds elsewhere? Do you like them relative to em equities? And then within that, do you favor the US dollar in bonds or the local currency?


Yan Wang 43:40

Yep. So the simple question, the simple answer is, we like em local currency bonds more than their power bonds. For because, basically, we have like this two themes. For for our, for our Ian bonds view, the first theme is EM, ds inflation. So you know, like in the US, em countries had inflation problem, and then they tightened very, very aggressively. So we see signs that inflation is peeking out. So what's different between the US and emerging countries is all yet most mostly I'm countries they tightened a lot more aggressively than the Fed. So they're, let's say real policy rates are positive. But the Fed policy rate is still kind of lower than inflation. So they may have a case to stay higher for longer, but em countries inflation is already rolling over many countries like Brazil, Mexico, South Africa, South Africa, their inflation has already fallen below their policy rate. So they have a stronger case to, to pause or even to to to ease As soon as in the region drops, let's say, two more kind of comforting level, from from policymakers point of view. So I think so if that's that's the case, then we can see a case where em, local interest rates will begin to fall. So that's the first theme.


The second theme is the dollar, you know, we talked, you know, we believe the dollar has made, has made a long term peak will begin to moderate. So if that's the case, we would like yeah, global currency bonds, because because you know, the current you have the currency side as well. So you have local currency bonds, have higher yields, potentially with appreciating etc. So that's why we like em, local currency bonds at this moment.


Joseph Abramson 45:46

Okay, that's fantastic Yan. Thank you so much, for your time, just to kind of reiterate some of the major views. Yan likes em, local currency bonds, because he thinks that the central banks are more ahead of the curve than the developed markets, and the currencies should go up. He likes em stocks, overall, you know, they're still very under owned, they've underperformed a long time up until about six months ago. And they should benefit from this accelerating Chinese liquidity and growth. For those that for political reasons, don't want to be involved in China, you should be okay. In em X, China, you'll give up a little bit of the upside. But you know, if there's constraints on your preferences, then you won't, you'll be able to capture most of the upside. And then if we look at the Chinese economy, overall, it should remain strong. If we use that 5% target, we should go beyond that, because that's what's needed for the necessary employment growth. within China, there's, you know, some some new sectors specifically related to technology that are needed for self sufficiency. So that would be things like semiconductors, AI, genomics, Evie, etc. So maybe we look for some new winners in those areas. And for the next couple quarters till you know, the Chinese economy is kind of at sustainable cruising speed. Yan really doesn't see policymakers backing off and intermediate term. You know, maybe they won't be full fledged towards, you know, deregulation and opening of the economy. But it'll be more, you know, of a balancing act. And the geopolitical risk is is real, but doesn't see a hot war as likely in the next few quarters, or the next few years. Did I miss anything in


Yan Wang 48:27

Nothing, you did a really good job of summarizing our conversation.


Joseph Abramson 48:30

Okay, great. So, um, if anyone has any follow up questions, please feel free to reach out to myself or Arthur and, you know, we can contact Yan. Beyond that, have a wonderful day. Thank you, and have a good Cheers. Thank you.


SUMMARY KEYWORDS: China, Boom, EM, EV, Ai, Chinese Growth, Policy Change, War


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