A lot of gloom and doom over what is clearly a worrying trend on the Chinese economy. How much fear do you think investors need to harbour? How many red flags do you see, without any pun intended, but how much fear should investors factor in right now, looking at these macro trends that are emerging in China?
Listen, I agree things are not as great as had been hoped. I think gloom and doom is perhaps overdoing it quite a bit. There are clearly headwinds and challenges that most people in markets had not expected. I think against that, however, there are signs emerging, including the easing that you mentioned that policymakers in China are beginning to react. And maybe the reaction has not been as forceful as some would hope. But I expect that it seems likely that there will be more stimulus and more easing to come as the slowdown in the recovery unfolds. I think it is important to say that the recovery in China is very different than the recovery in many other countries that have come out of COVID with a much more intense rebound than has been the case in China.
And I think that is because the Chinese approach to the lockdown itself was very different. Unlike in the West, unlike in many other emerging markets, China lockdown much more intensively, much more repeatedly, and for much longer, and as well did not provide as much fiscal and monetary support going through the lockdowns as took place in the West and many other emerging market countries right. So I think as a result of that, that we have not seen quite the intensity of rebound that the markets had hoped for and I think that goes a long way to explaining why household savings rates are elevated rather than coming down.
It is also the case that the property market has been a challenge, and also the stock market has not performed very well and so household balance sheets have been under much more pressure than in many other large economies. And that probably helps to explain the confidence effects and indeed the response of households to keep saving or indeed in many cases to save more, rather than to spend more coming out of the lockdown.
That said there has been a services recovery. Against that there is a slowdown in the goods economy because, of course, most of the world was importing very heavily from China when it was all about goods and services were shut in most of the world economy and now the rest of the world has flipped around significantly.
So I think really what the Chinese authorities need to do is to stimulate household confidence and to stimulate consumer spending some more than they have been doing so far.
And I think that is sort of the trend that is starting to emerge, not an extreme stimulus where we would start to worry about the debt ratios and where we would start to worry about the sustainability.
So in terms of the measures that the Chinese administration could bring in, we are seeing already on the policy front as far as the fiscal policy is concerned but looking at the real estate problem, as it were, traditionally the Chinese have betted big on real estate and that is where the problems are emerging. How much of a spill over do you see of the real estate sector problems on the financial system in China and this at a time where we are seeing a lot of downgrades coming in on American banks as well? How much of a fear would there be about a contagion now?
I think contagion is unlikely, is probably overstating it right, because it is a very different system. It has cordoned off the financial system in China. It has cordoned off through capital controls and it is much more of a closed loop. So I think the issue of contagion is unlikely. I think also if you look around the world, housing starts in the US. House price has been somewhat resilient even though rates and yields and mortgage rates in the US have gone up so significantly. So I do not really see a kind of financial or real estate contagion problem sort of the like of 2008.
I think also the Chinese financial system is relatively safe right. Savings very high and again, there are capital controls. Most of the large banks are state owned or state controlled or state near. So I do not really see a kind of that kind of a confidence crisis or financial crisis the way many people have expected for many years that has not materialised in China. It is much more of a gradual situation.
But in the near term, do you possibly perceive a shakeup in the commodities market, especially in oil or in metals? These are crucial as far as global economy is concerned. When Chinese demand goes down, how much of a shakeup do you see in the commodities universe?
Look, I think if Chinese demand does go down that would be a problem. But I think it is important to stress here that there is still growth that there is still heading for something like 4.5-5% growth for the year as a whole. It is not, we are not talking about a significant hit to the level of GDP or the level of consumption or the level of demand. What we are talking about is slower than expected or hopeful growth. So I suspect that that means that we will have some volatility and turbulence in various kinds of markets, including the stock markets, including commodity markets. But I do not think we are talking about a kind of crash scenario. I think it seems pretty unlikely to me. I think we should also bear in mind that there is a lot of long term support for various kinds of commodities coming from the green transition in both the West and in China itself, as well as many emerging market countries other than China.
So I think we are still not in a kind of, I do not think we should be thinking of this as a crisis kind of situation but more as a kind of adjustment and a headwind type of a situation.
And the possibility of stimulus measures by the Chinese government looking more likely now and what form do you think these are going to come in?
I think we are probably going to see more monetary easing, more easing of the fiscal constraints, maybe some more easing of the constraints of the real estate sector. I do not think we are going to see another big binge in investment spending, whether it is in real estate or infrastructure or other kinds of sectors that would make for a big bang kind of growth acceleration. I think we will see more gradual stimulus, and I think that is largely because the Chinese authorities, I think very rightly or very keenly aware of big build-ups in debt that have taken place when after the global financial crisis in 2008, they went for a big infrastructure investment process.
And then in the middle of the last decade, they went for a big real estate investment process. There have been these big bangs of investment led growth strategies in the past.
Now I think it is about a more gradual kind of effort to reaccelerate the economy more sustainably and more gradually rather than kind of ratcheting it up in order to hit very high growth targets. I think the growth target of 5% is high, but in reach with that kind of gradual adjustment. If it underperforms slightly well, I do not think that is going to be such a terrible thing. I think they have been gradually moving away from these kind of very heavily focused growth targets that they have had in the past. As they say, it is more about the quality of growth than the quantity. And I think that is largely about financial stability and sustainability.