Name: Eastworld Spotlight: China’s path to economic recovery
Uploaded: 2020-05-21
Duration: 16 min 25 s
Description: Andy Rothman of Matthews Asia and Fortune’s Clay Chandler discuss.

 CLAY CHANDLER: Restarting the economy will be the top item on China's National People's Congress which convenes in Beijing today. China's GDP collapsed last quarter by 6.8%, its worst performance since Mao's Cultural Revolution. How quickly can China recover? How will it cope with rising unemployment and increased trade tensions with its most important trading partner, the United States? Has the global pandemic transformed the Chinese economy, and in what way? For the answer to these and other questions, we're joined today by Andy Rothman who is the Investment Strategist for Matthews Asia. He's joining us from San Francisco and he has lived and worked in China for more than 20 years, and is one of the savviest China hands we know. Andy, thank you for joining us. ANDY ROTHMAN: Thanks, Clay. Great to be here. CLAY CHANDLER: Here in Hong Kong, we're all watching the movement of the government in Beijing as they convene for the National People's Congress. What's your take on the health of China's economy as they convene this policy meeting? ANDY ROTHMAN: I've been calling this the worst economic numbers since the Tang Dynasty. [LAUGHTER] And the recovery has been considerable. China's economy clearly is not back to normal and probably won't get back to normal this year, but we're in the early stages of a V-shaped recovery right now. And I think the real challenge is going to be for the last 20%. How long is it going to take us to get back to normal? So it won't be a complete V. I think the last part of the upper section of the V is going to be a bit of a struggle and might not come until next year. But you know, things are picking up at a really good clip, much better than I would have expected a few months ago. CLAY CHANDLER: Do you have a target for the GDP figures for the end of the year? What sort of range are you looking at? ANDY ROTHMAN: No. You know, I really don't care. I've been arguing for years that the GDP growth rate in China is not only the least accurate economic statistic but also, especially for investors, the least important statistic. You know, if you were to tell me what the real GDP growth rate is going to be three quarters from now, that wouldn't change the way that I think about the economy or the way that we invest. So I'm much more focused on the more micro numbers-- what's happening to consumer spending, fixed asset investment, industrial production, housing sales, auto sales, things like that. CLAY CHANDLER: So let's talk about some of those numbers. What are you seeing in each of those categories? ANDY ROTHMAN: Well, what we're seeing is the Chinese consumer is back and we are well on our way towards a pretty broad consumer recovery. And I think on a relative basis, compared to the rest of the world, China is going to continue to be the world's best consumer story. So let's take a look at autos, for example. We had a really steep collapse earlier this year, but it's come back dramatically. In fact, autos are the one category where the growth rate in April was actually faster than it's been for about 18 months. New home sales are not back to normal, but pretty close to that. Those are big-ticket items. That indicates that the middle class and wealthy Chinese-- which is a big part of the country-- have not only enough money to buy a new car or a new home, but enough confidence in the future that they're willing to make a purchase like that. And on top of that, less expensive things like smartphones. Sales really picked up in April and we're up about 20%, I think, year over year. CLAY CHANDLER: You know, there's a lot of political debate about pulling out of the Chinese market and decoupling in the United States right now, but can multinationals afford to just sacrifice the growth that they could get in China? ANDY ROTHMAN: No. [LAUGHTER] This whole conversation about decoupling is, in my mind, just nuts. We're talking about the two largest economies in the world decoupling? How does that make sense for either economy? How does that make sense for any company that's going to be asked, for political reasons, to do that? I mean, if a company is in China, they've done it for business reasons. Isn't that kind of a bedrock foundation of how we work here in the United States, that companies should make decisions based on what's good for business? Now, if you talk about investment by major American companies in China, the vast majority of them are investing in China to produce goods to sell to Chinese people. So if they bring that production back here, what does that do to them selling, let's say, cars for GM? Which, by the way, sells more cars every year in China than it does in the United States. Apple produces in China, both to sell around the world, but also in China. So I think that decoupling is just not a realistic option. CLAY CHANDLER: Let's talk a little bit about investors and what this all means from their perspective. Do you see any sentiment among investors that it's time now to pull back from China? ANDY ROTHMAN: Over the last decade, every year on average, China has accounted for about one third of global economic growth. That's a larger share of global growth than from the US, Europe, and Japan, combined. The vast majority of American investors are, I think, significantly underweighing exposure to that driver of global growth. In terms of how investors are looking at it now, we're coming off a year, last year, where the Chinese economy and Chinese-listed companies in general performed really well. And this year, the Chinese stock market has been significantly outperforming the S&P. And so, I think a lot of investors are taking another look at whether they or their clients have enough exposure to that engine of global growth. So I have two recommendations for investors. First is you really need to probably spend a little bit more time understanding the dynamics of the Chinese economy beyond what's in the headlines. Because even if you or your clients don't own any Chinese equities, what happens in China has a big impact on your portfolio because companies like GM, Apple, Tesla, Nike, Nvidia, Qualcomm, Intel, Dolby-- it's a long list-- get 20% or more of their global revenue from China. So understanding that support. If you want to understand what Jay Powell is going to do next, understanding what's happening in China is important. So that's the first point that I emphasize. The second is, with China accounting for about a third of global growth every year-- and that share might well go up right now because of what's happening with the pandemic-- do you and your clients have enough exposure to that driver of global growth, especially to what I've been calling for, like, a decade now the world's best consumer story. CLAY CHANDLER: Let's talk for a second about these trade tensions because they seem to be heating up again. Is there a risk that the trade agreement will come unstuck as a result of all this? ANDY ROTHMAN: Let's go back to mid-January when the trade deal was signed. At that time, it was clear that this was more of a political deal rather than a trade deal. It was a political deal in the sense that, in President Trump's campaign to win the presidency, he made a big deal about reducing the deficit, and this was all about trying to focus on those numbers. Now the deal that the Chinese government signed in January had purchasing targets from the United States that were completely unrealistic from the get-go, even if the pandemic had not come. The increases that they were agreeing to make were totally unrealistic. And now with the pandemic, there is absolutely no way they could get there. If you look at the data so far this year, it's really clear-- to me, at least-- that Xi Jinping really wants the deal politically to work. He has significantly increased Chinese purchases of agricultural products from the United States. Pork, soybeans, cotton, for example, are up significantly over last year, and up over 2017, which is the base year. So I think this is a message from the Chinese side that they'd like this deal to work as best as it can in the current circumstances. And I think those numbers give the President optionality. He can say, yeah, OK, because of COVID-19 they weren't able to meet the targets but they've been doing their best. Or he can say, they're not even close to meeting their targets and therefore I'm going to break the deal because they haven't lived up to their end. CLAY CHANDLER: And do you have a sense of which of those two options he's likely to choose? ANDY ROTHMAN: It's difficult to predict. I'm a little bit nervous because a few weeks ago was the first time I heard the President express some doubts about the deal, but he hasn't gone beyond that. So what I'd be looking for is what the President says and what he tweets. I'm especially going to be keeping an eye out for whether the President speaks harshly about Xi Jinping as an individual, because right now Xi is one of the few world leaders who, I think, hasn't gotten a kind of schoolyard dictate from the President so far. CLAY CHANDLER: [LAUGHING] Yeah. ANDY ROTHMAN: If that happens, that might be an indicator that things are not going well on the trade deal. CLAY CHANDLER: Unemployment has to be somewhat of a concern right now for Xi Jinping. The latest numbers from the Statistics Bureau indicated 6% for urban unemployment. That figure isn't very representative, obviously, of the full picture in China. It doesn't tell us what's happening with all these migrant workers. What's your guess as to what the actual unemployment rate is now in China, and how many people are out of work and not able to find a job? ANDY ROTHMAN: Yeah, unemployment is a significant issue. And, you know, there are two things that I worry about as risks which could derail the economic recovery that's in its earliest stages now. One would be a second wave of the virus. And I was much more worried about that, actually, about six weeks ago when they started opening up. But over that period of time, they've been able to manage to keep the number of new cases and deaths quite low. So that seems less of a problem. The bigger problem right now is unemployment and especially what's happening to very small, privately owned companies, which are the engine of growth in China just like they are here in the United States. The unemployment problem has been significant. I think, my best estimate is that back in February at the peak of the virus outbreak in China, there were probably 70 to 80 million urban workers who had either lost their job or were unable to return to their job. So that's an unemployment rate of close to 20%. But I think today that's come down by about half, so maybe 35, 40 million unemployed or unable to return to work? Let's say they're working for a restaurant that hasn't reopened yet because there aren't enough customers. So that's an unemployment rate of maybe 8% to 10%. That is significant. It's not so bad when you compare it to the rate in the United States right now. But it seems that the government's done enough to cushion the impact of that because we're not reading about social unrest, social instability. CLAY CHANDLER: Does this imply that China needs to embark on a very ambitious stimulus program that needs to ease monetary policy in some way? Or is it able to stay the course? ANDY ROTHMAN: I'm not expecting a dramatic stimulus because right now, the organic recovery seems to be holding up. The Chinese government's certainly capable of doing a dramatic stimulus but I think they won't do that unless it's really necessary. At the same time, they have to do a little bit more than they have been doing right now. CLAY CHANDLER: I wonder if we could talk for just a second about the tensions in the tech sector between the US and China. How do you see this standoff over national security and technology with some of China big tech giants playing out? Is there an endgame here where we reach a solution? Or does it just continue to get worse? ANDY ROTHMAN: I think it's likely to continue to get worse over the next six months, at least, through the US presidential election. CLAY CHANDLER: Mm-hmm. ANDY ROTHMAN: Frankly, I'm a little bit puzzled about what the objectives are here. From one perspective, you're right that China is very dependent on semiconductors either produced by American companies or with American intellectual property, IP. China imports, by value, more semiconductors than they import oil. So one question to ask is, is this actually a net positive for our national security in the United States for China to continue to be dependent on American semiconductors? Or is it better for US national security to force them into a rapid plunge, into building their own semiconductor production and design facilities? The engineers here in California who don't have an interest in Huawei way tell me that as long as Huawei gear and 5G is installed on the periphery of the network, and that Nokia and Ericsson equipment are at the central core, that the risks are not that great and can be significantly mitigated. Then you have to think about what the impact will be on American technology companies that are getting a significant share of their revenue from China. So Qualcomm, for example, I believe gets about 2/3 of its global revenue from China. Intel's is about 25%. TI's is a significant share. If they were to lose those markets, what would that do to the R&D budgets of those companies and their overall financial health? CLAY CHANDLER: Do you see one kind of impact of the pandemic being that it actually encourages Asia to trade more with itself and perhaps less with the United States? ANDY ROTHMAN: Oh, that's already happening. In the first quarter of this year, ASEAN became China's largest trading partner and the share going to Europe and the US went down a little bit. If I was a policymaker in Washington right now and I was worried about the race to global superiority in economic terms between China and the United States, I think the biggest risk of the US falling behind China right now is related to the virus. If the US opens too soon and opens without the same kind of preparation that is being undertaken in the Asian countries, then we risk a second wave or even a third wave, which is going to delay the economic recovery considerably. And that would give China time to catch up in some ways. And so, if I'm thinking longer-term, reopening in a smart way in the United States is probably more important to our economic competitiveness vis-a-vis China and the rest of the world than worrying about semiconductor sales to Huawei. CLAY CHANDLER: Although the virus didn't start in the United States, China has managed to cope with it in a more efficient way. And it's done greater damage than almost any of the things that we've been discussing about China in terms of undermining US competitiveness. ANDY ROTHMAN: Yes, I agree, and let me add two points to that. One is that, while China has done a remarkable job of containing the virus and dealing with it in general after January 23, which is when they locked down Wuhan. CLAY CHANDLER: Yeah. ANDY ROTHMAN: But this is not just the success of an authoritarian, one-party regime. Look at what South Korea has done. Singapore, New Zealand, Japan. So this can be done in democracies. The other point I'd make is that China did make major mistakes early on. There is compelling evidence of cover-ups by local officials in Wuhan and Hubei province in late December and early January. And at some point, there needs to be a reckoning for that, but that should come after the virus is contained globally. CLAY CHANDLER: Andy, I want to thank you for sharing your insights with us. This has been a fascinating discussion and very illuminating about some of the most important trends in the global economy today. We look forward to staying in touch with you and having further conversations in the future. Thank you, Andy Rothman. 

Eastworld Spotlight: China’s path to economic recovery 

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Andy Rothman of Matthews Asia joins Fortune’s Clay Chandler.

China’s path to economic recovery 

Andy Rothman of Matthews Asia and Fortune’s Clay Chandler discuss.