Why Chinese Bond Yields Have Collapsed | Louis Vincent Gave’s Bull Case For Chinese Stocks and Chinese Property Bonds
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Very happy today to be joined by Louis Vincent Gov, founding partner and chief executive officer of GovCall Research. Louis joins us from Hong Kong. Thanks so much for coming on, Louis. Welcome to Monetary Matters. Thanks. It's a delight to be here. Nice to meet you, Jack. Thanks for having me. You too, Louis. I want to start by talking about a bull market that very few have

talked about. That is in Chinese government bonds. While the Chinese equity market has struggled a lot, Chinese bond markets has rallied like crazy. And I think it's

been the best performing bond market for four years in a row. The Chinese 10-year government bond yield now at 1.66% and the US 10-year treasury now at 4.62%. There's nearly a 3% differential between what US treasury yields and what Chinese government bond yields. So what is going on? Louis, why has the Chinese bond market rallied so much? Is it because the Chinese investors or investors in Chinese government bonds are pricing in a severe

recession and deflation in China? In the land of the blind, the one man eye is king. So yes, Chinese bonds have done well. Western bond markets have done terribly. I don't want to sound like I'm correcting you. Last year, Chinese equities actually did do fine as well. You said Chinese equities have been disappointing. A few people realize this. It's actually funny. But if you look at the major markets,

And, you know, the biggest ETF on China is the FXI. The FXI actually outperformed the SPX by about 2.5% last year. So last year, if you look at 2024, Chinese stocks did better than US stocks. And Chinese bonds did much, much better than US bonds. It wasn't even close. And as you point out, in recent weeks, that spread has opened up by about 160 basis points in about eight weeks.

And yeah, I think most people look at this widening of the spread and they say, oh, well, U.S. bond yields are going up because the U.S. is awesome and growth is going to be strong and make America great again and deregulation and tax cuts, et cetera, et cetera. Meanwhile, Chinese bond yields going down must mean that essentially China is going down the path of Japan. And that even though the government is now stimulating, even though you've got great policy visibility on both the monetary and the fiscal front,

that the market just doesn't buy it. I think there's other alternative explanations. One possible explanation, the simplest one to be honest, and in my mind, perhaps the most likely, is that once Trump was elected,

you know, the Chinese policymakers probably told Chinese pension funds, Chinese insurance companies, sovereign wealth funds, et cetera, hey, guys, we don't know what this Trump guy is going to do. Better sell your treasuries and bring the money home. And so you get sell off in U.S. treasuries and big rally in U.S. in Chinese government bonds because, you know, the move became very, very pronounced right after the U.S. election. So that could have been a potential catalyst.

I think there's another perhaps more structural explanation to what has been happening. And it starts with the fact that China today is running trade surpluses of roughly a trillion dollars a year. Now, you know, no economy has ever run trade surpluses this big. This is a complete anomaly. Logically, what should happen with trade surpluses this big is the guys making the shoes for Nike or the Tupperware for Walmart or

we're selling the cars to Saudi Arabia and Mexico and wherever else, they should be bringing the money home and reinvesting it at home. And so doing pushing up asset prices and also pushing up the exchange rate. But instead, what's happening is, you know, if you're earning dollars, if you're earning euros, if you're earning money, all you keep hearing about is the US is going to do 60% tariffs and Europe is going to do 60% tariffs.

And so if you're a Chinese entrepreneur today, you operate in a world with maximum uncertainty. You really literally do not know what tomorrow is made of. Now, most entrepreneurs just want to know what the rules of the game are, and then they decide to make the investment or not. They want to know the rules, and then they get on with it. The big problem for a lot of Chinese businessmen today is both domestically and internationally, they feel, I just don't know what the rules are.

Therefore, yes, I'm making a lot of money because I'm super competitive, but I'm going to take all that money and just keep it at the bank. And so you've seen bank deposits go through the roof. The banks get all this money. There's no demand for loans because of this uncertainty. And the banks have nothing to do but to buy government bonds. Now, for the banks, it's still a winning trade.

you know they borrow money at zero percent you know they buy bonds that yield two and a half then two then 1.6 they're still making money and which perhaps helps explain why last year chinese bank shares were amongst the best performing bank shares anywhere in the world a big explanation for the strong performance of the fxi where the chinese banks were super strong which is another sign actually that china is not being japanese japanese because

If you go back to Japan when bond yields were collapsing, so were bank shares. Economies that go through big balance sheet recession, deflationary busts, the banking systems implode, the bank shares collapse. You are not seeing this in China today. Bank shares have had a monster 2024.

you know, because yeah, they get to make free money on the yield curve. So Chinese bankers are riding the yield curve, borrowing at close to zero to, you know, earn 2% and now 1.6% on the Chinese government bond market. That is profitable, but that can be a little dangerous because the U.S. banks did that in 2020 and 2021. And, you know, there's some

damage there, some implosions there. Louis, what about the property sector? - Hold on. I'll stop you right there, Jack. There was damage for the banks that funded themselves on money market funds. So banks like Silicon Valley Bank that essentially didn't fund themselves on deposits but funded themselves on money market funds,

to basically go out, lever up and go out and buy bonds. All of a sudden, when the money market fund rate went up, found the business model imploded. If like the Chinese banks, you fund yourselves on deposits, the risks are totally not the same. Because most people change banks less often than they change spouses. You put your money in a bank, you keep it there.

And if the bank continues to pay 0%-- in fact, the banks that blew up-- like JP Morgan Chase didn't blow up. My son goes to college in the US. He started a year ago, a year and a half ago. I went to bring him to college. I opened an account at Chase for him. And back then, short rates were wherever they were, 4% or something.

And I asked, I said, okay, so we're opening this account, we're putting some money in it. What interest rates is he getting? Zero. Like Chase was literally paying zero, even though the short rates were at four.

Chase was and yes, as a result, I came out of there thinking I got to buy myself some more JPMorgan Bank stock. If they get to get all this money at zero and they get to play the yield curve. And that's all the Chinese banks are doing, because when you fund yourself on a massive base of of customer deposits, it's actually super sticky, super stable. The problem with all the banks that blew up in the US was they were funded on money market funds.

So, Louis, on all topics, especially all due to China, I defer to you. I would never dream of disputing with you. But when it comes to banks, I know Silicon Valley Bank a little well. I think they did fund themselves with deposits, but those deposits, they thought that they were sticky and they had a very long duration and they were very reliable in 2020 and 2021.

But I think a lot of the companies that had deposits with them were venture capital backed companies that almost by definition were unprofitable. So they had a cash burn. Go ahead. Go ahead. So you said companies. They funded themselves on corporate deposits. You want to fund yourself on and corporates do move around. You have a CFO whose very job is to say, oh, I get five here, 525 there. Let's move over there. That's the job.

Your retail client does not do this. Your private client is the very best way for a bank to fund themselves. Now, I'm not saying that people don't move. And I know that when it came to Silicon Valley, I do know that people, to your point, some of the founders, et cetera, they went shopping around for better interest rates.

And they weren't happy with a zero. But what was interesting is actually all the guys who left Silicon Valley, once the run started, they left the Silicon Valley that was actually paying five to go to Chase that was paying zero. The bottom line is the Chinese banks fund themselves on enormous, enormous amounts of retail deposits. China has the highest savings rate in the world. And

You know, they're one of the reasons their share price is going up is they get to play the yield curve, finding themselves at zero. And and the deposits keep on growing very, very fast, because when you've got running a trillion dollar trade surplus, that's a lot of money coming into your country that pays for a lot of past mistakes. And that allows you to basically not implode, even though for the past for the past 10 years, people have been telling you China was on the verge of implosion.

So, yeah, Louis, but if China had to do what the U.S. did in 2022 of raising from zero, or I don't know if Chinese overnight rates are at zero, you correct me, but raising from very low rates to 5% or 5.5%, that trade of the carry trade could end badly, right? But Louis, on the asset side, tell us. I think any economy where you have a very short term rate,

a rise in rates of 500 basis points, that's going to very likely create some dislocation, very likely create some problems. But why would you think China is about to raise rates 500 basis points when they're in deflation? They're not raising rates 500 basis points. I mean, unless you want to argue that inflation in China is about to go from zero to seven,

But that seems, I'm not going to say that's even a tail risk scenario. That seems like completely improbable to me. Right. I'm not making that argument. Louis, tell us about the real estate loans on the Chinese bank balance sheets. I know there were a lot of high profile bankruptcies in 2022 with China Evergrande and the like. How are those loans, how much have they impacted the Chinese banking system? So I think actually you've got to,

To understand really what's happened in China, you got to go back to 2018. And in 2018, there was a huge shock to the system when the

when the US said, look, no more sales of semiconductors to anyone in China, no more sales of semiconductor manufacturing. We're going to basically prevent China from growing by preventing it to have access to high-end semiconductors. Now, the government's response to this was to say, okay, it's semiconductors today. Tomorrow, it could be chemical products. It could be car parts. It could be tires. It could be one of any things.

So we need to be self-sufficient in every single industrial vertical. And so the word was given to the banks, and I can send you the chart, but the word was given to the banks, look, banks, no more loans to real estate. That was back then. No more loans to real estate. From now on, you're just lending to industry. Now, you know, most of the banks are either state-owned or province-owned in China. And so it just makes sense to do what the government tells you.

So you see an absolute starting in 2018, you see an absolute collapse in real estate loan and you see a vertical shooting up of industrial loans. Now, for the past six, seven years,

I think every Western analyst that looked at China looked at it through the lens of the real estate bust. And there were two reasons for that. The first reason was that for 15 years, growth in China was linked to real estate. So everybody saw real estate rolled over and said, "Oh, it's going to be terrible. This is the end of the world." I think the second reason is that we ourselves in the Western world went through a bad real estate bust in 2008.

and in Europe again in 2012. And so everybody felt, oh, I've seen this movie before. Maybe if I put on the right trades, Michael Lewis will write a book about me this next time around. And so

everybody thought the trade is going to be short the renminbi or it's going to be short the the chinese bond market that's going to have to melt down etc now funnily enough like the real estate sector completely imploded but michael lewis isn't writing a book about anybody because nobody's made a fortune out of that enclosure meanwhile while everybody was focusing on this everybody missed up the massive ramping up of industrial loans

And here we are today, sort of five, six years later, and suddenly the Western world is waking up to a new world in which China is the most efficient auto producer out of nowhere. And China produces all the solar panels in the world and the wind turbines and the nuclear power plants and the railroads and the telecom switches and on and on and on and the industrial robots. And China has now leapfrogged the West in industry after industry.

And not by producing cheaper products, but very often now by producing not only cheaper, but also better. Now, when it comes to the banks, where does that leave us? The banks have benefited from massive regulatory forbearance, which is always the case in China. Because remember, once again, most of these banks are either fully or partially owned by various government entities at the municipal level, the provincial levels, or the national level.

so they benefit from regulatory forbearance and you know you can sweep your bad rug your bad loans on real estate under the rug and you say oh look you know my loans to byd are growing fast and they're growing grades etc i'm also making lots of money on the yield curve and you know you do this for six seven eight years and you know over time you plug you plug the holes that that you've built on the real estate side especially you know

There's two big differences. There's many differences between the Chinese banking system and the Western banking system. Regulatory forbearance is one of them. The state of ownership is another. The third is they typically actually operate with a lot less leverage than banks in the Western world. Big problem of Lehman Brothers and others was that they were 40, 50 times geared. So that doesn't leave you a lot of room to maneuver when things start going wrong. Same story with Silicon Valley Bank, actually.

And so you have that. But again, and I mentioned it earlier, but the biggest difference of them all is in their funding mechanisms. The Chinese banks essentially fund themselves on the biggest deposit base in the world because Chinese consumers, Chinese savers don't have the options. They live in a world of capital controls. They don't really have the options of pushing cash abroad.

They can buy domestic equities, but domestic equities have a terrible 20, 30 year track record. So the enthusiasm for that is limited. You can buy gold and people do that. You can buy property. And for 20 years, people did that. But that's obviously been no good for the past six, seven years. So, you know, these guys earn money and all they do is put it at the bank because they

You know, it's properties being worse, equities have been worse or put in government bonds. But there again, you're now, you know, government bonds were decently attractive when they were yielding for now that they're yielding 1.6. You know, what, what, what do you do? And so all this to say that, you know, the all the nightmare scenarios that you read of Chinese banking system is going to implode. Chinese banking system is

It was taking, I think, a Western approach or like it was assuming that the Chinese banking system is similar to the Western banking system, which it just isn't. It's a completely different method of funding, amounts of leverage, ownership structure, regulatory structure.

And so unsurprisingly, you end up with a completely different outcome. And where do you think we are in the property cycle? Do you think prices have bottomed? Do you think defaults have bottomed? If there was a basket, an equal weight of Chinese property bonds, would you be a buyer of that? Yes. I think most of them are trading at very distressed levels. Yes. So bonds, definitely. Even the equities, to be honest.

Have we bottomed? Look, I think if you look at the past, you know, we had six years where literally every month the number of transactions and the prices were going down, like literally month on month, every single month for six years. We've now had three months, which really corresponds to when the government started slashing interest rates and also slashing the rules regarding unification.

you know real estate ownership rules such as you know you can only own one and now you can own two you can own three also rules such as you need to put 30 equity down you know narrowing it down to 10. so you know if if you think of it this way property prices have probably gone down and most cities have gone down anywhere from 25 to 40 percent the mortgage rates

Essentially, you've gone from six to three. The affordability ratio has improved dramatically in just the past few years.

All this to say that now you've had three consecutive months of both the transaction numbers and the prices essentially flatlining. I'm not going to say it's rebounding. It's sort of, you know, you went through six years of down every month and now you've got three months where you're sort of you're kind of flatlining.

And, you know, you could say, well, yeah, sure, they are really, you know, interest rates have fallen a lot. And, yeah, I think that's exactly right. To me, the situation we're in in China today reminds me a lot of where we were in the U.S. in 2009, 2010. If you remember in 2009, 2010.

A lot of people were going around saying, oh, you know, it's the Japanification of the U.S. It's the new normal. We're going to have low interest rates forever. We've built so much excess real estate in Nevada, Arizona, Florida. We might as well turn it into chicken coops. And that was, you know, people were saying this back. And then you turn around like three years later and all these places are sold and occupied.

And now the other thing to think about China is, remember, they basically stopped the lending to real estate in 2018. And it free fell after that. So the amount of construction of finished goods coming onto the market has fallen off a cliff. So five years into the consolidation, again, lower prices, lower interest rates, lower supply. Have we seen the bottom drop?

One of my favorite sayings is that the only thing you get from picking a bottom is a smelly finger. But, yeah, I think we're close to a bottom.

Okay. That's close to a bottom. Yeah. I'm just looking at a basket of Chinese property bonds. And it's interesting. It appears to have bottomed in October, 2023. And it's just every, you know, been inching higher every month for about 15 months or so. So that's, that's interesting that, you know, I asked, would you be a buyer of Chinese property bonds? You said yes, you know, very quickly with apparently a lot of confidence. No, I did. Now the property, the Chinese property bond markets,

has some particularities to it. One of them is that, and we're very involved in that market, so I know it decently well. So what happened, if you remember, so again, the property bust starts in 2019.

uh in 2018 you know by 21 22 you start having by 21 you start having all the big companies go bust the evergrands the country gardens so all the bonds basically by that point they're trading at like 30 cents on the dollar right

so it's it's already you've already had like huge losses and then then what happens is a lot of hedge funds like 30 cents on the dollar a lot of distressed debt funds like 30 cents on the dollar that sounds attractive you know yeah i should maybe i should get involved start looking start buying and then russia invades ukraine in 22 and and in february and march 22

And as soon as Russia invades Ukraine, obviously all the Western money invested in Russia is frozen. And so all of a sudden, you know, if you're running a pension fund in Europe or an insurance company in the US or whatever, and you've had assets frozen in Russia, you think, okay, I can't have that happen to me again. So you,

you look at your book and you're like, get China off the book because that's the next one. They're going to invade Taiwan or I can't take that risk again because if it happens to me twice, I'm going to get fired. So basically, everybody put in spring of 22, summer of 22, everybody put in the redemption order for every China distressed debt fund, every China hedge fund.

And everybody just wanted to liquidate their China positions. And there was literally nobody on the other side, like nobody whatsoever to the other side, because in the old days, investment banks such as Goldman or Morgan Stanley or something would have said, I'll buy, I'll make you a price for this. You know, my price, I'll make you a spread. You can drive a bus through and I'll put this on my book. But investment banks can't do that anymore. They're not in the market making game any longer. And so

they can't warehouse risk in the way that they used to. In the old days, we're like, I'll take this on my book for two months and I know I'll make money out of it over the next six months.

And so these things went from 30 cents on the dollar literally to 3 cents on the dollar, fell absolutely like a rock and then for like six or nine months. And now they're sort of grinding back higher. As AI demand surges, nuclear energy is making headlines, driving tech's biggest companies to turn to nuclear power to meet growing energy needs. The VanEck Uranium and Nuclear ETF, ticker NLR, has provided investors with comprehensive exposure

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Thanks for listening. Let's get back to the interview. That chart, Louis, that you referenced earlier, the chart of the year-over-year growth in bank credit loans,

one, to the real estate sector and two, to the industrial sector. In 2018, lending to real estate sectors in terms of year-over-year growth peaked and it declined sharply now to the extent that it's actually negative, whereas industrial sector loans, commercial and industrial loans has skyrocketed. And I think, Louis, that could be a visual representation of

I mean, you talked about three Chinas. One is the authoritarian China, two is kind of the deflation-depression China, and three is the industrial superpower. I think those two charts show the second and third China. One, the deflation-depression China of the real estate contraction, and third,

the industrial superpower. That's the loans that has skyrocketed to the industrial sector, right? Absolutely. And the chart that you refer to, when I give presentations, I usually tell people, "Look, if I can leave you with one chart seared in your brain, it'd be this one." Because it's a perfect picture of what the Chinese economy has gone through. And the collapse in real estate loans is pretty dramatic.

And but I think that part everybody's familiar with because it's made all the headlines. You know, you've got all the articles in The Wall Street Journal and EFT and The Economist about it, etc. And again, the other part, the other side of that coin that everybody missed out on, partly because nobody was visiting China during that time. You remember it's COVID and then, you know, China's helping Russia. So they're uninvestable. So for five years, nobody visited China.

And so people missed the sort of leapfrogging that happened on industry. And now you've got people like, you know, in September, the CEO of Ford went on a big China trip and he came back, he gave a full page interview to the Wall Street Journal where he was like, I mean, if you read between the lines, it was essentially we're screwed. Like, you know, he was saying, look, our task is now, he said, I mean, I'm loosely quoting, but

Our challenge is now to produce to the same level of quality, speed and price as the Chinese. And it's going to be very hard. I'm paraphrasing, but that was essentially what he said. He also mentioned, I mean, it blew my mind in that interview. He also said that he bought himself while he was in China, a Xiaomi car.

that he had shipped over to the US and that he'd been driving his Xiaomi to work every day and that was his favorite car he'd ever driven. Like, I mean, to me, that's crazy. That's like the CEO of Pepsi saying, you know, I have Coca-Cola for breakfast because it's so much better.

It's like for a CEO of a car company to say, oh, the other guy's making a much better car than we are. So I'm driving that to work. To me, it blew my mind. Yeah. The CEO of Ford, Jim Farley, no relation to me. But number one, I think he probably shouldn't be driving another car other than a Ford. And number two, he should never say that publicly. His PR team should get him in line. What is he doing? But Louis, so I think very visibly Chinese exports of

regular internal combustion engine, as well as electric vehicles. I know it has skyrocketed. The poster child for that is BYD. Is it just BYD or are there other companies that are also leading the charge? And can you just give us maybe some statistics or anecdotes just about how much China is dominating in the electric vehicle sectors in terms of the quality, but also the affordability and the productivity?

You don't want to put a coin in that machine because I'm going to be talking about this for hours. Too late. Too late. You put the coin out. Now suffer the consequences. Okay. So I think the auto industry is actually a great example of how Chinese capitalism works and how different it is from Western capitalism. So essentially what happens is you have a guy like Xi Jinping at the top that says, hey, guys, electric vehicles are the future. We need to be the best at electric vehicles. And that's all he says.

Now, imagine that you're the mayor of a decent sized town or provincial governor or party secretary of a province. You hear Xi Jinping make this announcement. So the first thing you do is you call your local bank and you say, hey, big man on top said we need to produce electric cars. So you need to give a loan to my electric car producer of my town, my region, my province. And so before you know it.

You now have, and this is the number right now, you have 130 car companies in China, all very well funded through bank savings. And you enter what I've like to call in my podcast and videos and what else, what I like to call the Hunger Games stage of Chinese capitalism. And imagine you've seen the Hunger Games movies where they just go at each other until there's basically one left alive.

And this is what happens. You got 130 guys knowing that three or four get to survive. Now, the problem for the rest of the world is that the rest of the world doesn't even know it yet, but they're actually playing in the Hunger Games, too.

They get dragged into the Hunger Games and they're nowhere near ready for it, nor are they funded for it. The Chinese companies are well funded by domestic savings that is being captured through capital controls. The rest of the world doesn't have that luxury. Most of the rest of the world doesn't have that luxury. So you've got this Hunger Games that start off. And yes, to your point, Jack,

The ones winning the Hunger Games right now are BYD. But the real winner is actually the Chinese consumer. The Chinese consumer who gets to have better quality cars at a much cheaper price because that's the only way you get to win the Hunger Games. You either have to produce an exceptional car or a much cheaper car.

It's a completely different way of doing the subsidies, right? And what we do in Europe, in the United States, we say, oh, we'll give subsidies to consumers to buy cars. And so all the subsidies go basically to Tesla or they all go to Volkswagen. And, you know, the guy who owns Tesla gets to be a billionaire. And, you know, for the longest time, you don't know. And in the United States, you want to buy an electric car. It's going to cost you $50,000 or $35,000. While in China, an electric car is going to cost you less than $10,000.

And so, again, it's a completely different way of conceptualizing now. Who's the loser? In the United States, in Europe, it's the consumer. In China, actually, I think that the consumer is the winner. The loser, meanwhile, are the banks. They funded 130 guys, and knowing that only five will survive, and politically, they don't have much choice but to do this.

And so you go through these cycles where every 10 years, you know, you rack up the bad loans and then you, you know, you put them together in a sort of bad loan bank and to an asset management company. You clean up the balance sheet, you recapitalize the bank and you go again. And, you know, this is how Chinese capitalism has always worked. And this is how it keeps on. It keeps on working today.

And now China's gone so competitive so quickly, partly thanks to a dramatic improvement in its human capital. You know, China's gone from graduating 1 million university students 15 years ago per year to today graduating around 12 million university students.

It's absolutely mind blowing. You know, China today graduates more engineers every year than the rest of the world combined if you exclude India, because India also graduates a lot of them now.

And if you go to the rest of the world, incidentally, you go to MIT, you go to Carnegie Mellon, to Caltech, to any one of these places, you walk into a classroom, chances are it'll be all Chinese and Indians in there anyway. So like, you know, and those are counted as American engineers, even though half of them might be Chinese and the other half Indian. So the bottom line is, you know, the improvement in

the human capital, the improvement in the physical capital, i.e. the infrastructure, the trains, the railroads, the improvement in technology has been such that, yeah, now we've essentially been leapfrogged

again in industry after industry. What I found fascinating in December, when Chinese bond yields were collapsing, it was like, oh, the economy's imploding, the economy's imploding. At the same time, China was literally announcing that it was doing 6G telecom,

that it had managed to do a stealth fighter that was six generation stealth fighter. It was releasing a train that was doing 450 kilometers an hour. And you're like, okay, that's not what you expect of an imploding emerging market. An imploding emerging market, you have rising bond yields, not falling bond yields. And you don't come up with a bunch of technological breakthroughs.

The reality, you know, it's like when you visit the Chinese factories today, when you visit the country, it's hard to walk away not thinking this is where the future is happening. I mean, literally, they're coming out with flying cars. Yeah, no, but they are. They are like, you know, you can look it up on YouTube. They'd like, you know, some of them are even starting to be commercialized. So, yeah, I mean, this is where the future of the autonomous driving will happen. This is where you'll eventually get flying cars.

It's all happening. And so there's, let's say, three parts of the economy. There's the investment part of the economy, which is both real estate, but also exports, investment in

producing things that you then export. Then there's the consumption part. And the reason you have to export is because the Chinese consumption market, people would say a lot more, you know, a lot more than me, has been so weak. But exports, they have a ceiling, don't they? In terms of percentage of GDP, because the rest of the world is not going to put up with

Chinese exports as a percentage of GDP, slowly marching up towards 50% or 100%, right? And aren't you going to see a backlash in the form of tariffs against China so that it can't export its way out of its move from a real estate driven economy?

Okay, so I think this is fascinating. There's no doubt, there's two different things. There's no doubt that China's production, productive capacity today is stronger than China's consuming capacity because

Again, otherwise, it wouldn't be running a trillion dollar trade surplus. So it's producing more than it can consume, no doubt about it. But I think from that fact, to conclude that China is not consuming, I think it's actually a logical fallacy because China is actually, you know, okay, let me give you just a few numbers. But last year, 140 million smartphones were sold in the U.S.,

440 million smartphones were sold in China. So China basically bought three times as many smartphones as the United States. It was the biggest smartphone market in the world. Last year, 15 million cars were sold in the US. 26 million cars were sold in China. So China was the biggest smartphone market. It was the biggest car market.

You know, if you look at more basic stuff like steel and cement, most of which like most of the cement in China is used in domestically. China produced and roughly consumed 22 times as much cement as the United States, 12 times as much steel. So, you know, when you look at the consumption numbers and the GDP numbers,

you know some of the big anomalies come from the fact that for example china only spends roughly five percent of its gdp on health care the united states consumes 18. so one of the biggest pulls of consumption in the united states is is health care that's 18 of gdp but you know china now actually has better outcomes than the united states it's got a longer life expectancy so should should china consume 18 of gdp like this we say oh look it's consuming as well

and, you know, pump people full of unnecessary drugs and make them die earlier? I don't know. You know, as a country, China today consumes twice as much meat and eight times as much fish as the U.S.,

Now, the eight times as much fish is a real problem for our planet because the oceans are going to be starved of fish. So the idea that telling – when you talk to people at LVMH or at Hermès, et cetera, and you tell them China doesn't consume, they laugh in your face. Like, what do you mean they don't consume? This is where all my business is going.

So I think the idea that China doesn't consume is a fallacy. It's when I visit, you know, they consume more and more. And, you know, there was no car market 15 years ago. Now it's the biggest car market in the world and so on and so forth. Now, to your question of, you know, can it exports all its excesses? I think this is a fascinating question because, yes, at some point you start hitting hurdles.

But for now, what you're seeing is a dramatic shift in China's export mix, whereby if you go back 15 years ago, 10 years ago, China's business was essentially selling plastic toys, shoes, cotton underwear to the US and Europe.

China doesn't care about that business anymore. And that's why I think it's not really that fussed, like the leadership isn't that fussed about the threat of tariffs. Because what China cares about is selling cars to Saudi Arabia, selling earth moving equipment to Chile, selling telecom switches to Indonesia, selling railroads to Russia or to Vietnam. And when these deals happen, they actually happen in large size. And China's growth into emerging markets of trade

keeps on accelerating because the demand for industrial robots, for ports, for railroads across the emerging markets remains very, very high. So today, China now exports more to emerging markets than it does to developed markets.

And the margins of its sales to emerging markets are higher than the margins to the developed markets. And that's a brutal shift of the past 10 years because all the emerging markets are buying the high value added products. What we're doing in the Western world is we're saying, look, as long as you were producing cotton underwear, we're happy to buy that from you. But now that we're producing cars, we don't want to deal with you anymore. We don't want to deal with you anymore because we want to protect our car industry.

So what we're doing in the Western world is by putting up tariffs, we're turning ourselves into a Brazil or into like whoever embraces tariffs eventually loses their competitiveness. It makes the domestic producers inside lazy. It makes them worse. You know, productivity goes down.

The history of protectionism everywhere, of developed markets that embrace protectionism is not a happy one. Developed markets, but emerging markets can put a tariff on and still be productive like China, right? Yeah, to emerging markets, when you look through the development of Korea, of Japan, post-World War II, of Taiwan, of China, you get different stages of development.

And when you're starting from a very, very low base, the idea of, okay, I'm gonna put up tariffs, I'm gonna do capital controls, I'm gonna keep my money inside to build my industry,

and to build the sort of industrial base that I need to develop, I think there's a lot of history that shows that actually that can work. But by the same token, once you have that industrial base, if you say, okay, I'm going to protect that industrial base from outside pressures, outside competitive pressure, invariably what you end up doing is that industrial base over time falls behind. And that's been the experience of Brazil that was,

Frankly, the experience of the entire Eastern Bloc, you shelter yourself, you don't develop, you fall behind, and within 20 years, you disappear. So I want to go back to, you said the idea that China doesn't consume is a fallacy. And I'll first recognize that the year-over-year growth in Chinese consumption, I'm sure, has been fantastic. And I'm sure current

Chinese consumption in 2024 versus 1994 or 2004. I totally yield to you, grant you that the growth has been remarkable. But as a percentage of GDP,

It is true, right, that it's far smaller, Chinese consumption is then in most other countries, particularly the United States. And if China is going to continue to put up, you know, four, five, six, seven, 8% growth numbers, you know, ultimately the growth will have to come from consumption and Chinese consumption as a percentage of GDP will have to budge up. Do you disagree with that idea? I don't disagree with it because it's the path of every modern economy to gradually move towards more consumption.

So, no, I don't disagree with that. I think that the idea that China is ever going to go back to 6%, 7%, 8%, that's not going to happen. It's not going to happen because demographically, China is now aging. So the demographic hurdles to go back to 6%, 7%, 8% growth

are now long gone. You know, the days when China was growing at such high numbers were days where you had 20 million people leaving the farm every year for the cities and that required, you know, real estate investment. But also when you transform farmers that were producing goods worth 500 bucks a year into factory workers that were producing goods worth 20,000 bucks a year, you know, you get a huge productivity gain and that was what was driving the growth.

you know that that demographic transition that moving people from the countryside to the city it's not 100 done but it's you know it's well advanced and there's not a lot of low-hanging fruit there anyway so you know the path for Chinese growth you know is for to go from five down to four down to three down to two and it's not to go from five to six but to your point you know

you know a bigger a bigger composition of that should be indeed consumption now having said all this I

GDP numbers are extremely flawed to begin with. You're adding government spending onto private sector spending, onto investments. I think it's a complete mess. And the GDP numbers, frankly, don't mean much. And they especially don't mean much when you compare country by country. I mentioned how in the US you've got 18% of GDP to

to healthcare. I'm in China, you've got five. If tomorrow, let's say there was a horrible epidemic and the US went from 18% of spending to GDP to 21% of GDP, would that be great news? GDP would say this is awesome, but it wouldn't be awesome. It would be absolutely horrible. By the way, the US going from 12% over 20 years, from 12% spending of GDP on healthcare to 18%,

while having absolutely no improvement in life expectancy. Now, you know, that has driven GDP growth higher, but is that a good thing? Not sure that it is. I agree with you. Okay, so that second narrative of basically China is doomed to go the way of Japan because of the three Ds, debt, deflation, and demographics. Why is that not true? So I'll start off with demographics. You know, I think...

People saw bad demographics in Japan and they saw the deflation and they equated the two. Now, I think that was a complete logical fallacy, once again, drawing a link where there didn't need to be one.

Russia over the same period also aged and they had massive inflation. Now, conceptually aging, which leaves you in a society where you have still a lot of consumers, but fewer producers. So fewer producers, more consumers should be inflationary, not deflationary, especially if you live in a world in which the government has made a bunch of promises to

to retirees that can only be funded through ever bigger budget deficits. And incidentally, this is where we are now in the rest of the Western world. As Europe is aging, as the United States is aging, you're finding a welfare state that's more and more expensive. The only way you can circle the circle is by running bigger and bigger budget deficits, which invariably leads to higher inflation. So the idea that deflation and demographics are linked at the hip for me again is a complete fallacy.

Now, having said this, I think when you look at Japan, the real culprit for the deflation, you didn't have to look too far. There were a few culprits.

the biggest one was of course you had the biggest real estate bubble the world had ever seen like and this by a long shot you had a shop in ginza you know the cool district in tokyo you had a shop in ginza at the top of the market that sold for a million us dollars a square meter now yeah and this was back this was back when a million dollars this is in 1989 a million dollars was a lot of money in 1989 still is today but back then it was

yeah the entire land under the imperial palace was said to be worth more than the whole of california i mean it was just like completely completely stupid it was so stupid that every company was actually valued on the back of their real estate you might be a you know widget maker but it was like oh yeah but you know their building is worth x and so this company is super undervalued and you should buy it and so it impacted massively the stock market now

In China, we had real estate excesses, but nobody sat around telling you, "Oh, Alibaba is a great buy because, yeah, forget their online business. They've got all these buildings in Hangzhou. And these buildings in Hangzhou, that's the business you want to own." So these arguments were never made in China. So again, we had real estate excesses, but it was never really that bad. So the real problem in Japan, you had a massive real estate bust.

which included everything in society, you had massive overexposure of investors, both domestic and international, to the Japanese equity market. In 1989, Japan was 45% of the world MSCI with 18% of global GDP. So everybody was loaded with Japan. The real estate bubble went bust. The banks went bust. Everybody had to sell Japanese equities for 15 years.

And on top of this, against this backdrop, what the policymakers should have done is immediately, of course, cut interest rates, ease monetary policy massively, dump a bunch of money and ease fiscal policy. But they didn't. They actually hiked. If you go back to 1995, they hiked.

They hiked the consumption tax. They hiked the inheritance taxes. They hiked the corporate taxes. So they went on a massive fiscal tightening as they were going through a balance sheet recession. So that was Japan. And, yes, it was a misery for 15 or 20 years. So now you look at China, you could say, yeah, well, you've had a real estate bubble in China. I would say, sure, fine, nowhere near as bad. The banks haven't gone bust.

Like I said, this year, they were the best performing banks. They've continued to lend. China, unlike Japan, Japan in the mid-90s, if you wanted to go out for dinner, you had to check your bank balance before you went out for dinner.

Today, you go to Beijing, you go to Shanghai, you can stay at the Four Seasons for $200. I'm calling you from Hong Kong today, but people in Hong Kong on a Friday night, Saturday night, they all cross the border to go to China to go to the bars, the restaurants, and nightclubs because it's a fraction of the price. And Hong Kong is already good value, but across the border, it is now so cheap. Obviously, cheap cars, cheap phones, cheap everything.

So China today is super, super competitive, which is why they have their trillion dollar trade surplus. Their banks on bust. They're six years into their real estate consolidation. So the situation is, I think, actually quite different. Now, I think, again, to me, it's much more akin to what you saw in the US in 2009, 2010. The setup is more similar to that than what it was in Japan. I think the reason...

Most Western investors like oh, it's just like Japan. It's like oh, you know, all the Asians are the same Yeah, they all have black hair. They all have you know, tiny eyes and they all have yellow skin So yeah, it's all the same Japan China put it all in the same bucket and and and forget about it One last thing on the demographics one key difference people always tell me Oh, yeah, but China's gonna get old before he gets rich etc. One key difference is that

In our Western democracies, we've promised our elderly medical care, pensions, lots of things. You know, you're an older, you're a retiree in Germany, you expect to go to Mallorca during the winter for a holiday. You expect to go to the Canary Islands, same story in the US, you expect to go to Florida. In China, when you're old, you haven't been promised anything. And you won't be disappointed because you're going to get nothing. You haven't been promised anything. And the government

It also doesn't have to listen to your complaints. It's not like you're the biggest voting bloc, which you are in the Western world when you're old. In China, nobody votes. So the whole they're going to get rich before they're going to get old, you say, yeah, so what?

they get old they die thank you for that louis and you you talk about the anomaly of the massive chinese trade surplus you talked about how unlike japan in 1995 china things are cheap part of the reason is you know very low inflation slash deflation in china the competitiveness also it's it's the week you want that you know there's a reason that's so cheap to you know 230 hotel in in china

So why, year after year of massive trade surpluses in China, why hasn't the Chinese Yuan strengthened? Because you've got a table about how that typically happens. A country runs a large trade surplus, their capital inflows into the country, the currency strengthens. In this time, the people, the businesses, and the corporate executives who are earning all of these US dollars and Western currencies and foreign currencies, non-Remnant B currencies as a trade surplus,

Why aren't they putting that into, you know, Yuan assets and the Yuan is strengthening? Why are, to quote you, are entrepreneurs lacking the confidence to reinvest in their domestic stocks or property? I think it's a combination of many factors, but the biggest one is that local entrepreneurs over the past five, six years have, I would say, you know, lost faith in their own leadership and their own political leadership.

And, you know, this was the confluence of many different events. But I would say that, you know, you could say there's been a real estate bust and there's been the tech crackdown and there was the education sector crackdown. But I think really what broke a lot of people's back, a lot of people's confidence was the COVID lockdowns.

And the fact that China stayed locked down for two years longer than anybody else. And here, I think you put yourself in the shoes of a Chinese entrepreneur for years and years. If you were doing well in China, it was also pretty easy to believe that our leaders are doing a great job. Hey, they must be. I'm doing well, making money.

So the overall narrative in China for 15, 20 years was our leaders are the smartest guys in the room. They've got their stuff together. And this narrative was really amplified post 2008. 2008, when the Western world hit the skids and again with the European crisis,

12, I think if you were Chinese, you looked at the rest of the world and you're like, oh, you know, geez, I'm glad I am where I am, where my leaders, they've got their shit together. You know, these other guys, they're my leaders are the smartest guys in the room. And I really do believe that was the core belief for the longest time.

And, you know, in such an environment, you reinvest at home and you project yourself forward, etc. And then, yeah, they were hit by a number of things back to back to back. Now, remember, most people in China have a lot of their wealth tied to real estate because for 20 years that was the big bull market. Because I think in a lot of emerging markets, you know, real estate is the default. It's, you know, it's like gold.

It gives you comfort, right? You can see it, you can feel it, you can touch it. When you buy bonds, when you buy stocks, at the end of the day, you're buying zeros and ones in a computer.

And in emerging markets, stocks and bonds have higher volatility. Real estate, you don't really have to market to market. So a lot of reasons, but basically, people had a lot of wealth tied up into real estate. And so government goes after real estate, big real estate crackdown. So they're like, "Okay, this doesn't work, but tech is doing well, so I'm going to put my money in Alibaba and in Tencent and in JD and in Baidu."

And then, you know, then there's a tech crackdown. So it's like, oh, great. Just got out of real estate where I was getting smoked. Now I'm getting smoked in tech. And so and then, of course, COVID comes in. And COVID, I think, really broke the back of people because remember, a lot of the successful Chinese entrepreneurs very often will have their kids.

at foreign boarding schools or at foreign universities because the Chinese educational system is so cutthroat, so pyramid-like. They're like, "I don't want to impose that on my kids. I'm going to send them to boarding school in Canada or in the UK." And this meant that for a lot of these guys, they didn't get to see their kids for two or three years. So that builds up a lot of resentment towards the leadership. And I think we're still working our way through that. Now,

That's for the domestic. And then throw on top of that all the trade uncertainties. Is there going to be tariffs from the US? It's like, oh, I'll just wait in cash at home or just buy gold and I'll just wait it out. And I think that's been the default mode of most people. But it's also why if there is an improvement in the US-China relationship,

I think the Chinese market could really take off like an absolute rocket. So with all the money that China is making from the rest of the world and a trade surplus, I'm aware that's kind of a simplification, but they're not deploying that necessarily into the businesses or the stock market. They're buying Chinese government bonds or they're buying gold or they're parking it in the bank and the bank is buying Chinese government bonds or gold. So would you say there's a bubble in Chinese bonds? And do you think that

Yeah. Tell us about your views on the stock market. As you say, FXI, the Chinese large cap stock market up around, let's say 40% for 2024. I believe if you look at a basket of domestic equities, that's the type of thing, let's say that the stocks that David Tepper or other Western American hedge fund managers don't own, that that basket is up far less than 40%, i.e. the stocks that Chinese people are more likely to own than David Tepper.

Was that, is there a lack of confidence or crisis of confidence among Chinese stock market investors? So I think when foreign investors, and I don't want to pick on David Tepper, who is obviously an absolute genius investor. I think when most foreigners think I'm going to buy China, you know, their first stop is always Alibaba. And incidentally, most people didn't realize FX cited better than SPX last year because Alibaba was no good.

And so, you know, for most people, they start and they stop at Alibaba. It's like, I want to buy China, I buy Alibaba. And if I don't, you know, it's so now, interestingly, Alibaba is obviously, you know, it's a very China centric business, but every year it becomes a little less China centric. It's really growing fast in other emerging markets, both on the supplier side and on the client side. It's really becoming a pen emerging marketplace, which is, you know, I think quite an interesting facet to the company.

But I think because Western investors have had such great experiences owning large-cap US tech stocks, it's like, "Oh, I've done so well with Google and with Facebook and with Amazon and with Microsoft that I want to replicate that experience in China." But of course, the market there is quite different.

And so, you know, what did do well in China last year? You know, we mentioned the banks. But, you know, to your point, no Westerners. Like what Westerner wakes up and says, I'm going to buy Bank of China or I'm going to buy ICBC? You know, nobody does that. Because if you do that, you know, your client's going to say, why am I buying a state-owned enterprise in China that basically does what the government tells them? You know, this makes no sense to me.

so foreigners definitely don't don't buy the banks they don't buy the soes now the soes actually did you know i think amongst the the big major oil companies last year petrochina was one of the best performers but again you know who wants to have petrochina show up as their top five holding and you know you know get told by the client well does the does the management of petrochina respond to you or does it respond to the chinese government and i think we both know the answer to that question so

So you're absolutely right that the stocks that did well last year were the stocks that Westerners by and large didn't own, which is why most people don't realize that actually the Chinese stock market in its aggregate was pretty decent. And Louis, a lot of the outperformance of the Chinese market was in that late September, early October moment when the People's Bank of China and other parts of the Chinese government

unleashed a lot of programs of stimulus measures. The one that comes to mind the most is lending to municipal governments or regional governments, I should say, so they can buy back unfinished property or land. And then also through the banks, through the commercial banks, lending to companies to buy back their own stocks. And that sounds incredibly bullish. I mean, Alibaba trading at a price to earnings ratio of 14 and lending money to Alibaba at 1.6% so they can buy back their own stock. That sounds super bullish.

Explain how much of those programs have actually been used, how much of the stimulus from the People's Bank of China really matters. I learned from this excellent book by your partner

partner and also a Gopkal, Arthur Kroeber, China's Economy, What Everyone Needs to Know, that the People's Bank of China is actually really, really low on the totem pole of it reports to an agency that reports to an agency that reports to an agency that reports to Xi Jinping and the Politburo, unlike the Federal Reserve in the US, which nominally and in my view, reality is very independent and

you know, can be pretty much do what it wants. Yes. In fact, you know, going back to, you know, the fact that there's like many layers between the PBOC and Xi Jinping, one of the signals that things were changing, I think it was in August or maybe in September, Xi Jinping had a very well advertised visit to the PBOC.

So sort of to your point of removing the sort of whatever the three or four layers between them, he was coming in, which was a sign that, okay, things are on the move and the PBOC is about to act big. So yeah, I think what you're highlighting is indeed one of the challenges

of investing in China and Chinese equities in that Chinese equities have this tendency to do nothing for six months, 12 months, a year, two years, three years, and then to like pop massively to just, it's like when you look, it looks like stairs, right? It's like do nothing and then it pops.

And it's immensely frustrating, right? Because you sit around for months and you're like, oh, this isn't going anywhere. And the returns are very, very chunky, which is why it's a market that actually most foreigners have decided over time, I just don't want to be involved with this anymore. It's just like too much heartache, too much headache, too much indeed driven by messages like, oh my God, Xi Jinping is visiting the PBOC. Does this matter? Does it not?

And it's so yeah, it's a very, very challenging market. Having said that, here's what I do know today. I know that you have equity valuations that are pretty low. You have pretty decent equity momentum. You have very clear policy support on the fiscal side and the monetary policy side. And you have interest rates that are super low, as you point out, if the companies can borrow money at 2% to buy back their shares now that they're trading at

eight times cash flows, nine times cash flows. And not only that, the big change in policy is that for years and years doing share buybacks was really frowned upon. And now it's actually actively encouraged.

So you put all this together and you're like, okay, this is a pretty decent setup. If I don't buy stocks when they're undervalued, when interest rates are low and falling, when I've got policy support, when the economic data seems to be showing a bottoming and a picking up, when am I going to buy it? Again, to me, it really reminds me of the US in 2009.

Meanwhile, I contrast this with the US where you've got stocks that are in the top 10% of the valuation band, an extremely, extremely concentrated market around really 15 names, massively overrun. The US is 4% of the global population, 25% of global GDP, 30% of global profits, and two-thirds of global market cap.

And to me, that reminds me of Japan in 1989. China, meanwhile, is roughly 18% of global GDP and 3.5% of global market cap.

So, you know, the the the setup now, to be very clear, if you'd like your stocks to be overvalued, to be concentrated, if you'd like your interest rates to be high and rising, then the US market is the right market for you. Personally, I like my stocks to be cheap, to have decent momentum, to have policy support.

and to have low and falling interest rates. I tend to believe that low and falling interest rates is an extremely, extremely potent force for a lot of asset re-rating. We're starting to see it a little bit in Chinese real estate, and I think we're gonna see it, we've started to see it in equities and we're gonna continue seeing it.

What was interesting last year is as interest rates fell, all the high dividend yield stocks started to get bid up. And you could see that Chinese savings were starting to be rotated away from basically by now low yielding products into buying high dividend yielding stocks. And it's fascinating because the gap between dividend yields in the US to bond yields is

That gap in the US is at a 20-year low, and in China, it's at a 20-year high. So

I don't know. I'd rather own the one at a 20-year high than the one at a 20-year low. Just that point about how Chinese equities can do nothing for a long time and then they act really, really quickly. I'm just looking at BYD, electric vehicle giant in China. From 2014 to 2019, the stock did almost nothing, even though as they invested massively and grew their revenues a ton. Then from 2020 to 2021, the stock went up six times.

incredibly, so 500%, over 500% very rapidly. And then from 2021 to now, the stock is basically unchanged. Actually, it's slightly lower, even though the revenue has doubled. So you're not really seeing that correlation between revenue and profits growth and share prices. But of course, the logical conclusion of that is that BYD could be undervalued as well as the entire Chinese stock market. So on a long-term scale, I understand you're bullish, but

But, you know, investors, short term traders are looking for a catalyst. What do you think? Could that be that catalyst for the bull market in Chinese shares? Or do you think we've already had it with the September, October stimulus announcements? No, I think there's still a lot of room to run for Chinese equities.

Now, having said that, I don't own BYD. I think it's a terrific company. I think it'll be the biggest car company in the world. I could go on for hours. It's an amazing, amazing company. I don't own it because it's part of that Hunger Games I was talking about. Now, I think it will come out winning of the Hunger Games, but if you don't have to participate in the Hunger Games as a capital allocator, you probably don't want to. You come out of there with a lot of PTSD.

So, you know, the way I invest in China, for better or for worse, but the way I look at it is

One of the big problems in China is there's always the success of capital, right? All the success savings, we're talking about all this money at the bank, etc. So as a capital allocator, if you come in and say, "Hey, I've got money for you," more often than not, they're going to say, "Get in line, buddy. I can borrow from the banks." And so you don't get super high returns in that kind of environment on your returns on capital if there's so much sloshing of it, so much of it sloshing around. So if you want to invest in China,

You either have to do it at very deep distress valuation, and we discussed the property bonds. That's one example of one part of the Chinese economy that's today completely capital starved. So you either have to take a very deep value/contrarian mindset. That's one option. Or the other option is you say, you know what? I'm going to invest in markets that are regulated enough that

The level of competition isn't going to absolutely drown out my returns. So, you know, there's a few subsectors where you know you're not going to get 150 competitors. So Macau casinos is one of them. The life insurance industry is another. A lot of the commodity businesses for me is a third where, you know, a lot of these are state-owned or region-owned and they're

you know, there is, you know, you're not going to have 200 copper producers in China and you're not going to have 200 oil distributors and, you know, so forth in China. But, you know, these businesses, of course, tend to be very cyclical. So you got to keep that into account. Incidentally, the education sector is now a sector that used to be a complete free-for-all. And since the education sector crag down is now being heavily, heavily regulated, you're down to a duopoly of two players.

who now make pretty fat margins and who are growing their business by double digits every year.

All this to say that I love BYD. I think it's an awesome company, but I'm not a shareholder. And so as to your question, you know, what's the next catalyst? The obvious one is if you get an improvement in the US-China relationship, I think that that would be an awesome catalyst. Another catalyst is if you get another three months of improving real estate data. Like I think by the time you get six months, the market starts to say, OK, we've seen the worst. The worst is behind us, etc. So that's your second possible catalyst.

I think a third catalyst is if the US dollar rolls over for whatever reason, that will provide a huge breath of fresh air for a lot of emerging markets, including China, that have struggled as the US dollar has risen.

So it could be one of many. Now, if you put my feet to the fire and you say, well, just pick one, I would say for me, the most likely catalyst that could be really quite powerful is an improvement in the US-China relationship.

And how are you handicapping those odds of an improvement in US-China relationships? Going back to 2016 or 2015, I guess, it was Trump who first was talking tough on China. But the Biden administration, which ends today, we're recording the Monday of January 20th, has been quite tough in terms of tariffs and sanctions or just general financial restrictions, let's call them, on China.

So Trump obviously continues to talk very tough. But do you think that maybe he won't be as tough or that US and China could have a better relationship than is priced in maybe? Look, obviously, I hope so. What I like to say is that as money managers, we're not paid to forecast, we're paid to adapt. And

And I would say that Chinese politicians live the same. Now, you know, Chinese politicians lived in a world up until 2018, where they thought their relationship with the US was one thing. In 2018, they realized it was another when the US imposed semiconductor constraints on them. And since then, the US, the Chinese leadership has done everything they could to cushion their economy from possible US attacks. And I think sort of eight years down the road,

They've actually done a pretty good job at that, at cushioning their economy from U.S. attacks. And so I think what's the creeping realization in the U.S. is that maybe the ability of the U.S. to put pressure on China is now much more modest than it was even just five, six years ago. And, you know, which is a healthy thing, because if the U.S. can't bully China, I think it increases the odds of a deal.

It increases the odds of the US not overplaying its hands. I think one of the most dangerous situations in international relations

is, and I think we just saw that between Russia and Ukraine, to be honest, is when one side massively underestimates the other side. Like when you look at Russia, Ukraine, Russia thought Ukraine was a regime hated by the population. It thought that if it came in and pushed it around, the regime would crumble. And meanwhile, in the Western world, we thought that, you know, Russia as a gas station masquerading as a country,

We thought that we would turn the ruble into rubble, that if we just push back economically, Russia would crumble. So we in the West underestimated Russia, Russia underestimated Ukraine, and result, pick your number, 600,000, 700,000, 800,000 dead, a country devastated. So the big mistakes in international relations occur when sides underestimate each other.

Now, I think the US underestimated China six, seven years ago. They thought, "Oh, we'll squeeze them and it will collapse." And for six, seven years, people have been told China's about to collapse, China's about to collapse. And then again, we turn around and it's like, "What do you mean they're about to collapse? They're kicking our ass in cars. They're kicking our ass in trains. They're kicking our ass in nuclear power plants. They're building better fighting jets than we have. They're not collapsing at all. They're building 6G telecom networks."

they're absolutely not collapsing. And so I think all of a sudden, there's a realization that actually, we're not going to make China collapse. So we need to deal with the reality on the ground. And the reality on the ground is a China that's stronger than anybody anticipated. So do you think Trump will escalate the tariffs on China and also the restrictions? No.

I don't partly because it's actually interesting, you know, since he's come in, since he was being reelected, sorry, since he's been reelected, he's, you know, gone out and bashed Europe and he's bashed Panama and he's bashed Mexico and he's bashed Denmark of all places and he's bashed Canada. He hasn't bashed China.

Now, I think perhaps what's interesting is when he says, I'm going to put 25% tariffs on Canadian oil and Canadian electricity, you're like, how does this make sense? You're going to crush the competitiveness of your own industry. But what you're doing is actually hurting businesses. If you put in tariffs on China, you're actually hurting the consumer. Now, I think Trump knows that deep down, Trump got elected because you had a 16-point swing

of voters who earn in the US less than $50,000, a 16 point swing from Democrats to Republicans. And pretty much when you asked, when you pulled these people, all of them said their number one issue was inflation.

So, and that, of course, is a huge difference between today and Trump's first mandate. You know, Trump's first mandate in 2017, the big concern everyone had was deflation. Everybody was still running around saying, oh, my God, it's going to be deflation, deflation, deflation. Today, you know, like inflation is a political issue.

kryptonite. It absolutely kills your political career. And I think whether you like Trump or not, one thing we can acknowledge is that he's very good at feeling the popular pulse. He's very good at feeling how people feel.

And so you saw him go 180 degrees on TikTok. It's like, oh, TikTok is terrible. It's a tool of China propaganda. To now, like, I'm the biggest TikTok defender and I'm going to make sure that they can stick around. Well, he has TikTok and he has a lot of followers now. Yeah, for sure. And Gen Z. And perhaps it helps him pump Trump coin. You know, without TikTok, can you pump Trump coin? The bottom line is...

He's definitely changed his tone on China. He's changed his tone on TikTok. So I think the odds that you get some kind of deal are decently high. And what's interesting, I mean, just before you and I got on the phone, just scrolling through the news, there's a story on the Wall Street Journal right now about how Trump is going to set up a commission to possibly study the impacts that tariffs on China would have on the US economy. So, you know,

setting up a commission is quite a departure from I'm going to come in and tariff everybody which was what people were anticipating just a you know a few days ago and on the back of this you know right now the renminbi is up one percent today and the yen is up one percent so yeah let's you know if we go down the path of let's have a commission to study something Etc that means nothing gets done

Right. And needless to say, we're recording on Inauguration Day. If a day or a week from now, Trump or a Trump official comes out with a very, very aggressive statement,

tweet or a claim, that doesn't mean that Louis will be wrong. What will prove you wrong is the actual tariff rate. So just to keep that in mind, Louis, you talked about the renminbi strengthening. What is your view on the Chinese yuan or the renminbi relative to the dollar? Are you bullish or bearish on the Chinese yuan and why? I'm very bullish. Look, it's one of the most under, like the place where I get a trillion dollar trade surplus. You go to China, you can't spend money if you try.

The reality is the US dollar today, you travel anywhere outside of the US and things feel cheap, very cheap. And I would say the further east you go, the cheaper it gets. Like China's cheap, Korea's even cheaper, and then Japan is just crazy cheap. So yeah, like for me, one of the big anomalies in the world right now is how undervalued the Asian currencies by and large are.

Maybe with a couple exceptions here and there. But yeah, most of the Asian currencies or at least the Asian currencies that matter, i.e. yen, Korean won, Chinese renminbi, like those are just crazy cheap. My final question is, what do you think about the status of the US dollar as a global reserve asset?

It has very, very slowly declined from around 75% of global FX reserves to just under 60%. But I believe that chart includes gold. So if you exclude gold, it still does not have a major competitor. The euro, nope. The Chinese yuan, nope. I think the major increases has been in gold as well as very marginal currencies like the Norwegian krona or something like that. So are you still a believer in the US dollar as a global reserve asset?

I don't know. Now that Trump coin has been launched and Melania coin, it could all change. I've often made the point that currencies are like computer operating systems.

you know you use microsoft i use microsoft everybody in our industry uses microsoft because everybody else in the industry uses microsoft and and for you and i to switch from microsoft to something else we it would need to be something else that's much much better because or either microsoft stops functioning and then we have no choice or you know you need something that's much much better or microsoft says i don't want to sell to you anymore which is of course what the u.s did with russia now

This brings me to the important point is that really the biggest threat to the U.S. dollar comes from the U.S. itself. The more the U.S. weaponizes the dollar, it'd be like Microsoft going around saying, you know what, I don't really like Goldman Sachs, so I'm not going to sell Goldman.

Microsoft to Goldman Sachs, and then I'm not going to sell it to Morgan Stanley either. And, you know, before you know it, people start looking for alternatives. And, you know, and then they're like, you know, they're like, Okay, well, this US dollar isn't the greatest thing after all, and so on and so forth. So the biggest threat really to US supremacy is first and foremost, the

this tendency that the US has to, you know, what this growing tendency because it didn't used to be like this 20 years ago. For me, the big the first big shift happened when the US find BNP. I can't remember the exact amount of something stupid like $12 billion, like a huge amount. They find BNP, you know, $2 billion. I can't remember, but two for for doing a deal in Sudan. And, you know, the more the US weaponizes the dollar, the more

Obviously, if you have no choice, we'll start looking for alternatives. So that is really the threat to the US is that through poor policymaking, through virtue signaling, the US ends up basically sowing the very branch on which it sits. Now, I tend to think that under Trump, that risk is a lot less than under Biden.

The level of virtue signaling that you got under a Biden presidency was very, very high. Trump has many faults, but virtue signaling isn't one of them. He's very mercenary and thinks very much about what's in it for the US and what's in it for me.

And the reality is, you know, financial sanctions undermine the U.S. Louis, my final question for you is, tell us about the state of venture capital in China. I've seen two reports, both of which I think are from the Financial Times, that investment in Chinese venture capital has utterly collapsed.

as well as venture capitalists are going to founders of businesses that they've invested in that are not going so well and demanding their money back. Just how bad is it? Is it as bad as we read about in the Western media or I read about in the Financial Times?

So it's not good. But that article in the Financial Times with that chart, there was a whole debate and the FT had to publish something to apologize for that chart because it was absolutely ludicrous and the data was completely wrong. You can look it up. But the situation is bad, but it's not as bad as you're reading. But it all goes back to what we've been discussing for the past hour or so.

you know, the lack of business confidence in China is sky high. So yeah, like, you know, number of startups has collapsed and number, you know, it's, yeah, it's been a very, very tough environment for VCs, no doubt about it.

Well, Vincent, it's close to midnight your time in Hong Kong, so we so appreciate you being generous with your time and insights. You've written many books, the most recent of which is Avoiding the Punch: Investing in Uncertain Times. Tell us about Gavcall, Gavcall Research. Where can people find you and what services do you offer? Yeah. So thanks for having me. We're a financial group headquartered in Hong Kong, but we do really three main things.

We have an institutional research arm for institutional investors around the world with different products, some heavily focused on China, some more global macro. So that's one part of our business. We have an institutional money management arm where we manage funds mostly into Asia. And then we have a private wealth arm, one part of which is in the US based in Bellevue, Washington.

And the other based in Mauritius, in the Indian Ocean. So yeah, really three separate divisions. And the best way to find out about us actually is simply to go to our website, gavkl.com, G-A-V-E-K-L. I myself, I'm on Twitter. I post things every now and then. To be honest, mostly jokes and the like. And so yeah, people can feel free to

to follow me there, but expect more dry cynicism than any massive investment wisdom from my Twitter account. Yeah. You on Twitter are at Gov underscore Vincent. I'm on Jack Farley 96 on Twitter. People can find Monetary Matters, not just on YouTube, but on Apple Podcasts, Spotify, wherever else they get their podcasts. Thanks again, Louis.

My pleasure, Jack. Great to see you. Thanks for watching. Remember to check out vanEck.com/NLRJack to learn more about the VanEck Uranium and Nuclear ETF. Thank you. Just close this door.