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What China's weaker-than-expected economy could mean for U.S. markets

China Beige Book International Managing Director Shehzad Qazi discusses a slide in Chinese equities amid pessimism around a slower-than expected rebound for the Chinese economy.

Video transcript

[INTRO SOUND]

Tesla shares are higher this morning, as CEO Elon Musk meets with China's foreign minister in his first trip to the nation in three years. His trip happens to coincide with that of Jamie Dimon. He's back in the nation for the first time since 2019, for JP Morgan's China summit. And the visit by two greatly influential US business leaders is all the more noteworthy as it comes at a time of stasis for US-China relations.

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Then there's the economy. A key index in Hong Kong briefly slipped into bear market territory this morning. The move notable, considering investor expectations around the big reopening for the world's second biggest economy. Investor pessimism has really taken hold down to a toxic cocktail of geopolitical tensions, a weak Yuan, a COVID resurgence, and weakening economic data.

Joining us now for a deeper dive into China's economic outlook is Shehzad Qazi, who is China Beige Book International Managing Director. Thanks for being here. This really struck us today, Shehzad, as we see Elon Musk and Jamie Dimon in China at the same time for example, that China has rebuffed a US offer for the two defense chiefs to meet. So what do you make of these two tracks, if you will.

SHEHZAD QAZI: Yeah. I mean, these two tracks are telling you conditions there are today, which is that on the political side, there's still ongoing tension, despite the fact that the Biden administration is now trying to really calm down some of the controversy surrounding its export order, restrictions. It's also been unable to work through its outbound investment executive order. Which should in theory actually give markets some pause for calm.

But we're not seeing that play out. I think you're getting a lot of tension in markets because of the geopolitical ongoing crisis, if you will. On the other hand, corporates are doing what they're supposed to do. They're trying to look out for their bottom line and work around the two nations as they continue to compete with each other.

- We heard at the outset of this year, and great to see you Shehzad, that the IMF and the broader forecasts were that China and India would really lead growth over the course of this year in 2023 for international GDP as a whole. Where do we stand within some of those targets, and are we off, off base of some of those projections.

SHEHZAD QAZI: The expectations at the beginning of the year were wildly unrealistic, especially as far as China is concerned. And not just the IMF, which just parrots what I think a lot of other research suggests, but a lot of the Wall Street research that was coming out was suggesting that as soon as COVID 0 would be over, you would get this surge in economic activity. And we were publicly pushing back on that pretty aggressively, that was wildly unrealistic.

Q2, although, was a much more realistic time to expect signs of a recovery. And if you look at China Beige Book data that have come out in May, there are signs of consumer spending strengthening. There are signs of manufacturing actually holding on and doing better than was expected by anybody. So I think economic data may be on the cusp of turning, right when markets have just completely soured on the Chinese economy.

- Well, that sounds like a good buying opportunity, if you're looking at, that's correct and we're looking at that formula. So what can we expect then going forward for the second half of the year out of the China economy.

SHEHZAD QAZI: I think June data are going to be critical. We have to see over the summer if consumers continue to spend, and if we get this robust recovery on the consumer spending side. I think property markets, and if you're commodities trader, don't hold your breath. It's going to be a mixed picture through the rest of the year.

Manufacturing, I think we get some headwinds building up there because of slowing Western demand, signs of that already in the latest CBP numbers that have come out. So, so all around not that bombastic picture that a lot of folks were promising at the beginning of the year. But I think conditions will be better than some believe today.

- One of the interesting parts of this too, over the course of this year, is the relationship between China and companies, some of the largest entities within the region. Look no further than Alibaba, and its announcement and now move to not just split up into six units, but also have one of those units go public and perhaps other pieces of that company that have been split up go public.

All of that to say, are there other entities that you believe China could be looking at for similar activity where there is this type of split up that is either forced or at least discussed and then comes about.

SHEHZAD QAZI: Yeah. I think the process is not as clean, and I think some of those things become hard to predict. Alibaba was unique in how big it's gotten. If anything, other companies have probably taken that as a lesson. Specifically as a lesson in what parts of the economy and what sectors to stay out of. And certainly to keep your mouth shut on policy matters.

- [LAUGHS] Yeah, indeed. Thanks so much. Shehzad Qazi, China Beige Book International Managing Director. Shehzad, great to see you this morning. Thanks for taking some time.