C (3:28)

Yeah, well, I'm excited to start this kind of once a decade tradition of being on syneca.

D (3:35)

Absolutely. Thanks for having us.

B (3:36)

Many decades to come.

D (3:39)

Yeah, we're excited about the partnership and being part of the network. Kaiser.

B (3:42)

Thanks, Andrew. Yeah, yeah. So here's what's going to happen today. We're going to chat for a little bit and then I'm going to ask these gentlemen about so what's happening? What's coming up on the political calendar in China. We'll talk a little bit about the outlook for the year and some other issues. We'll keep that quick because then you will hear the Trivium podcast itself which you can either subscribe to at the link, which I'll drop in the show notes, or listen to it on the Sitica newsletter. If you're signed up, it'll be free for listeners and we'll have transcripts and the whole work is available to you on the podcast page. And of course we will get recommendations in. But let's start with Trivium. You guys tell us the backstory of how this advisory forum got started. I mean, Trey, I remember you used to write this great newsletter where you were basically following the leadership round, saying, who are they meeting? What are they doing? What are they talking about? It was super useful for those of us watching. How did this morph, if indeed it did morph into what we now have with Trivium?

C (4:37)

Well, Andrew and I got to know each other when we were both in Beijing. I was doing consulting, government relations, consulting for multinationals. Andrew was doing economic analysis for multinationals. And I think we tended to spend a lot of time just kind of swapping notes. And I think we both respected each other a lot. Respected each other's Kind of analytical capabilities and thought that there was a lot that we could kind of bring to the table if we were to join forces and try to do this for ourselves. So it took a few years, but we, we eventually roped in a couple of our other friends, Ethereen and Kendra Schaefer to join us. And we founded Trivium in 2017 and started off as a few people in a two person office and now we've got four offices around the world and 25 people. So, yeah, it's been a great ride so far.

B (5:28)

Yeah, fantastic. Andrew, what kinds of clients do you typically serve? And what would you say sets your approach apart from some of the other shops that are out there?

D (5:37)

Yeah, well, before I answer that, Trey just gave you the official version of how it happened. But how I remember it is we met in 2013, went to, you know, El Nido in the Hutongs, had a few too many beers, and the very first night we met each other, said, we're going to start a business together. And then everything that Trey said happened, happened. But that was the true origin is as far as my memory goes. But on the client side, we mostly work with multinationals, you know, big multinational companies that everybody would know. Not just American, but, you know, companies from Europe, companies from Australia, Japanese companies, you know, kind of a mix from all over the place. And, and then we also work with investors, so hedge funds, pension funds, people, you know, looking at Chinese assets. That's kind of changed over the years or the nature of the work has changed. When we started the business 2017, we were helping those companies bring more money into China and align with Chinese policy and, you know, you know, find and make the most of opportunities in the China market. Now we work with those same companies, but it's all about, you know, risk mitigation, you know, thinking about how we can, you know, build in some redundancy to supply chains outside of China. How do we compete with Chinese companies and third country markets? And increasingly, how do we deal with US Policy associated with China? So that's been a big change over the past eight years.

B (7:12)

Right, right, right. I mean, that's a change a lot of shops have seen recently. I remember talking to a lawyer in Beijing not too long ago and he basically told me that their biggest business right now is in HQ relocations out of China and in basically just getting rid of assets that they have in China. Just basically bankruptcy and then, you know, shutting down. Pretty sad. Maybe you guys could introduce the listeners to some of your other colleagues. I mean, just now Trey, you mentioned a couple of people, one of whom I think cynical listeners will have been familiar with. She's been on the program before, your partner, Kendra Schaefer, who is, for my money, just one of the strongest tech analysts out there. Just a lovely person. So, yeah, tell us about who else is on board and who we'll be hearing from on on Sinica through the Trivium podcast in coming months and years.

C (8:08)

Well, as I said, We're 25 people and I would say pretty much every, every one of those are a really superb China analyst. I'm a little bit worried because I, I don't want to name all 25 of our analysts and take up all of our time, but I'm also afraid to only only name three or four and then have 21 of them feel like they've been given short shri. And I'll just say that, as you said in the intro, we cover Chinese policy across a wide range of issue areas and sectors. And I think some of the analysts that are going to be on the show in the near term are certainly Corey Combs, who leads on our critical minerals and resources research, which obviously has become an incredibly kind of hot topic in recent years, I think is only going to going to get hotter. And Kendra Schaefer, who you mentioned and I agree, is one of the finest minds on China technology and technology policy in the world. So I think at the risk of sowing dissension in the ranks, I'm just going to leave it at those at those two, because I know that they're lined up for the podcast here in the coming weeks. But I'll, you know, I'll let the suspense build because we do have a whole range of talented people that I hope to be on the podcast.

B (9:25)

I look forward to hearing from all of them. So you guys, like I said, let's keep this short. So let's jump right into this. You guys are known for tracking politics, regulatory changes and the way that legislation affects the economy. We've got the two meetings taking place this very week, the npc, the National People's Congress and the cppcc, the Chinese People's Political Consultative Conference. The NPC started on March 5. The CPPCC the day before. We're taping actually the Friday the previous week. So I'm speaking in past tense, even though it's still actually future for us. But let's give the listeners a sense of what they should have expected. It's a weird subjunctive kind of tense. And they can read a newspaper and see Whether you guys actually knew what the hell you were talking about. But Andrew, go for it.

D (10:12)

Yeah, well at the risk of talking about things that currently are in the future, but by the time people listen to it will have been in the past. I mean there's three big things on the macro side that people look at. That's the GDP target. What is China trying to achieve achieve on overall economic growth. There's the inflation target and there's the fiscal targets. And so the fiscal targets are really how they achieve the GDP target. And the inflation target is sort of also obviously related to those. So we think what's going to happen is the GDP target is going to be set at around 5% which is what it was in 2024. They limped over that last year. But we can get into this in the next section. We think they have a, a better shot at decent growth that they will definitely surpass 5% real GDP growth this year then the inflation target. This is an interesting one because unlike most of the developed world, China's struggling with deflation or at least disinflation. So they're actually, last year they had a 3% consumer price inflation target. They will likely drop that to two this year because they missed it. I think inflation came in right around 1% so they really missed it. And so they're having this issue with very low prices and even falling prices in some areas and they want to, they want to get that up so that nominal GDP growth is better overall. So we're looking for them to like likely move the inflation target down a bit and then the really interesting stuff will be on the fiscal targets and that's how, how much money they're going to commit to not only the traditional infrastructure spending, all that kind of stuff, but to education, to elder care, you know, try potentially to even in a roundabout way get some money in consumers pockets. And so we look at three things. One is the budget deficit, the overall budget deficit. That's interesting because for years Chinese leaders have been very wedded to not breaching 3% of GDP budget deficit on an annual basis. The reason they do that is because basically years ago the IMF I think said a prudent country, prudent developing country never breaches 3% on its budget deficit. So China said okay, well we want to be a fiscally prudent country. So they basically never breach 3% officially and instead they do all this other off balance sheet borrowing that I'm sure a lot of people will know about. But this year the reporting that we have at least is that they may go as high as 4%. So last year it was 3% and then they supplemented it and ultimately it came in at 3.8%. But this year, 2025, they may come out of the gate with a very punchy three and a half, 4%. And that would be a big signal to people and investors like, hey, we are really trying to support the economy this year. We know we need to put in some extra oomph to get to our GDP target. And then there's two other parts of the fiscal package which are special treasury bonds which are spent by the central government. That's sort of an off, it's on balance sheet, but it's off book. It's a way again for the Chinese central leadership to say we're remaining relatively fiscal prudent, but we're just using this other vehicle to add maybe 1 trillion extra renminbi or 2 trillion extra renminbi to the fiscal pot. And then there are special purpose bonds and those are the ones that local governments use to spend on infrastructure and increasingly to support their local real estate markets. So that will be interesting as well because I'm sure as your listeners know, local fiscal situations have been very dire over the past few years.

B (13:53)

That's right. So are these super long term bonds.

D (13:56)

That we're talking about, the special treasury bonds, the ones from the central government are the super long term bonds. The special purpose bonds are the local ones. The latter, which are the. The local ones.

B (14:07)

Right, right, right. So I mean, obviously last year in October there were, you know, it was a sort of a trickle of new stimulus that was, that was rolled out across the months of September and October. Was this enough to really move the needle on consumer confidence? Do we see, are we going to see evidence of that in the coming. Yeah, I mean, it looks like I'm watching. You're shaking your head, so.

D (14:31)

No, I mean, so what I always say, I try to bring this home, I guess, at least to listeners in the US about China is the number. So a couple of things. One is I'm in Washington D.C. and there's this narrative here that like China's economy is totally screwed. The, the development model is broken and can never be fixed.

B (14:50)

Yeah, cytophrenia, they're both taking over the world and collapsing at the same time. It's amazing. Schrodinger's country.

D (14:57)

Yeah, totally. And so that's not true. And one of the ways you know it's not true is because Xi Jinping and the leadership in China aren't panicking. If the economy was truly in freefall, they'd be in panic mode. They'd be pumping a ton of credit into the system, they'd be saving it that way. They're not doing that. And so, so I always say China's economy is, is doing better than we think. It's not doing great, but it's doing better than the general narrative out of Washington and the US Generally. But there is the same disconnect in China between pretty solid actual economic data and how people feel about the economy. Right. We had that in the US as well. Right. Where I remember in the run up to the election, the Biden team was saying kind of to the American people, like, why don't you people appreciate how good this economy is? And that's because everyone was saying, well, there's so much inflation. Yeah, we're still spending, but it's, it hurts. We're, we're having to spend more and more and more. It's a similar situation in China where it's like, the numbers are good, but you talk to your friends in China, they're like, you know, I'm not sure where my job prospects are. I definitely am not going to quit my job because I'm not sure if I'm going to get another one. If you're a young person out of university, you're like, where do I fit into this economy? So it's a very similar vibe where the manufacturing sector, the industrial sector, the exports, they're going along swimmingly, but households, individuals are saying they're still holding back, they're not super confident, and because of that, they're not spending.

B (16:27)

Trey, I want to turn to you now. Something that's really moved markets on both sides of the Pacific is Xi Jinping's recent meetings with a whole. It's a WHO school of the Chinese tech sector and modern industrial sectors in a wide range. Basically everyone who's doing the so called quality productive forces thing, right? Jack Ma was there, apparently now out of the doghouse and back in the good graces of the party. The markets really seem to like this. There seems now to be a sense though, of almost tech triumphalism in the air, what with the deep seek coming out two months ago and all that. What does all this mean? What does this look like? And how does this fit into what's being talked about right now at the two meetings?

C (17:07)

Yeah, well, I'm a little bit more of the kind of, I don't know, the grumpy old man on this meeting. So we've been having a robust debate within Trivium since this meeting happened. I think now on the day we're recording, it was about 11 days ago, where a lot of, a lot of my colleagues, especially the ones in China, are, you know, just feeling really pumped about this, right on the back of Deep Seq, which I think really kind of aroused some enthusiasm within the Chinese tech sector in particular. And then having this high profile meeting with Xi Jinping, there is a lot of enthusiasm, but I, I'm a little bit more skeptical. And that's because, you know, we have seen this movie before. I mean, Xi Jinping did, did almost the same thing in November of 2018 where he called a lot of these same tech titans in and said that, you know, we're here to support the private sector. And obviously, you know, the most striking thing about what happened to the private sector in the years after that meeting was that there was a massive crackdown on, you know, not just the tech platforms with some other parts of the.

E (18:13)

Private sector as well.

C (18:15)

So, you know, as far as, you know, when I put my analyst hat on, I don't see that a meeting with Xi Jinping with, you know, private sector businessmen necessarily equates to support for the private sector. And I think, you know, you said that, that it did move markets, but actually, if you look at the markets, they are actually now down again. This is, this is February 28th, but they are down from where they were before that meeting. So all of the gains.

B (18:43)

Right, but that, that's, that's in reaction now to the new, the tariffs that have just been announced.

C (18:47)

Yes, I mean, obviously, but I still think it's worth noting that, and at a minimum, that meeting was not enough to, to buoy spirits, to, to be resilient enough against the bad news coming out of, out of the US and, and again, I think just to make the pessimist case a little bit more, you know, what was notable for me as well, you know, what we do is look at the policy, right? What, what is the Chinese government actually doing? Where are they actually spending the money? And again, Xi didn't announce any new policies. What he said, he reiterated, you know, they, they came out with a very kind of high profile and robust private sector support plan in July 2023. And it's really disappointed because it hasn't been implemented forcefully. And so Xi Jinping came out and basically repeated, basically said, you know, hey, we're going to do everything we told you we, we were going to do, you know, almost two years ago. And I Think, you know, in the absence of really new measures, I think I'm one that's a little bit more skeptical. But I do acknowledge that, you know, mine is probably a minority view and it's certainly positive that she met with these people. But I'm a little bit skeptical as to how this is going to translate into actual government support for the private sector.

B (20:11)

Andrew, what do you make of the optics around this though? The fact that they did this in such a high profile way and it was just given so much media coverage. This isn't like the support for the private sector measures that were announced in 2023. There wasn't a ton of fanfare around that this time. This is something that everyone in China is aware of. Will they be held to it more as a result of this? I mean, I think this was a very deliberate move. Right, Andrew, what do you.

D (20:40)

Yeah, so I was going to say I'll take the other side of the debate that we've been having internally and we can just reflect that on the pod. I think the optics were definitely a big part of it. What concerns me sort of along the lines of Trey, is that over the past few years, specifically during the tech crackdown, the party has had a history of having these high profile gatherings, whether it be with the private sector or with stock markets and investors to try to imbue some positivity and then not followed it up. And so the markets will roll over afterwards. And so that's happened several times. But I actually, in this instance, I do think there is more there and I do think the optics are important. You know, I try not to do analytics of the gut, but it does feel to me just from all the flurry of activity that's happened in the wake of the deep sea revelation that senior leaders up to and including Xi Jinping, I think we're going to look back six months from now and see the deep sea revelation as kind of the moment that, that senior Chinese leaders understood that there is a real place for private sector Chinese companies in realizing China's tech ambitions. I think they're looking at it and saying we can't do this state led alone. We need the deep seats and we need some other companies like that.

B (22:11)

Yeah, yeah, I'm all about the gut and I.

C (22:14)

Well guys, I'll, I'll give us something all to watch as we, as we come into the two sessions because one thing that we're expecting to be on the agend the two sessions is a private economy promotion law. Right. Which is, which is being rushed through the legislature. And the previous draft of that law was kind of widely panned by the private sector as not going far enough being too vague, not, you know, having enforceability for all of the provisions to safeguard the rights of private companies. So I think that will, in, you know, that we'll see the final version of that law in the next two weeks. And I think that will give us a first indication of, you know, how serious is the government or the authorities writ large in, you know, kind of putting their money where their mouth is and, and doing tangible things to improve the environment for, for private companies.

B (23:10)

Yeah, well, we'll keep a very close eye and see what, what sorts of revisions made their way into the actual proposed version that comes out from the npc. Hey, so before we move on, of course we need to talk about the fact that this is all happening against the backdrop of a lot of international turmoil. I mean, Trump's Volt Foss on long standing American support for Ukraine. I mean, I get tired of reciting all the things that have happened just in the last couple of weeks. I mean, you wouldn't believe how I've had to rewrite this damn speech that I'm giving this afternoon so many times just in light of everything that's happened. I'm still just kind of in shock.

D (23:41)

Shock.

B (23:42)

I mean, this is just topsy turvy. Listeners all know what I'm talking about. How is this all looking from Beijing?

D (23:49)

Well, that's a good. So, and I will note I have to constantly remind myself we are just over a month into the new administration.

B (23:57)

It feels like a lot longer.

D (24:00)

I think everybody kind of feels that way. I would say, and I'm glad you brought this up because we talked before the pod that, you know, one of the things we focus on at Trivium and that you guys focus on, the Seneca that we love, is thinking about China's reaction function to these things. A lot of people look at what's happening in the Trump administration, what's happening the US There's a lot less really analytical firepower put behind thinking through really what is Jongnan High thinking about these issues. And so I'd say there's a few things. One, is there definitely better prepared for the chaos than they were last time around. Just like everybody, right, Everybody, we've seen the movie before and so we're sitting for the sequel and they're much better prepared. And you see that through their reaction to the first 10% tariffs that were put in place in February. Right. They had a, they had a Kind of a five pronged reaction. Used a lot of their newly developed economic weapons, we don't have to get into that, but the unreliable entities, this, they used some export controls, anti monopoly investigation into Google. So they're, they're being more creative and they're more prepared. And meanwhile, my strong sense is like a lot of people, they are preparing for the worst and hoping for the best. We, the one thing that we know about Trump is that sort of all options are on the table and things can spiral terribly between America and China for or not spiral, but, you know, spiral further, I guess, or maybe Trump wants to make a deal with Xi Jinping and everyone's talking about the deal. That is a possibility. So I think they're kind of positioning to see if they can get into a negotiation and they prefer for something to happen. The last thing I'll say on it is I consistently hear out of my contacts in China, the one big roadblock to that is that they don't know what a quote unquote deal is. They don't know what the ask is out of the White House. 4:10. Right. So is it the trade surplus? Is it, do we want more investment into the U.S. from China? Do we want less investment into the U.S. is it fentanyl? So, you know, I think that's the big question mark on the Chinese side is what can we offer that will, you know, placate Trump to potentially back off a little bit?

B (26:22)

Do the Chinese feel like they have a go to person right now in the new administration, somebody who they can reliably count on to actually channel Trumpian intent?

D (26:34)

Not as far as. Yeah, go ahead.

C (26:35)

I was just going to say not as I think this has been one of the big frustrations, frankly. It's been so much has been happening in the past few weeks that, who knows, maybe things have changed. But I think certainly during the transition and in the early days of the Trump administration, I had heard very clearly that there was frustration on Beijing's side because they were having trouble finding that kind of Jared Kushner like conduit that they had that they were able to establish in the first administration.

D (27:01)

Right, right, right. Well, and the question is, sorry, just to throw this out there and again, we don't want to get into the analysis of the Trump side, but does that person exist is my question. It does seem like Trump 2.0, he's going to make a lot of the decisions and sort of, you know, he, he's always been the decider, but maybe even more so this time. Around, so that it may just be that it has to be Xi Jinping and Trump working it out directly.

C (27:27)

Well, and I also think also to that point, in the early days, you know, the Trump administration still is getting in place, and they have a lot, you know, I mean, we always forget. But I think Donald Trump spends probably about 2% of his time thinking about China, maybe less. You know, this is not top of mind for him and for the broader administration, it's also not top of mind. Even in the realm of foreign affairs, it's at best the third priority after Ukraine and Gaza. Right. So I think that's, that's also part of, part of the reason is that, you know, there's, there's nobody on the Trump side to talk to because the people aren't necessarily in place and the, and the administration isn't really focused on it, on making somebody available at this moment because this isn't really where they want to spend their, their time.

B (28:16)

All right, well, don't want to steal any thunder, so let's go on and listen to your maiden show here on the Seneca Network. I'm really excited to listen to it, but first, let's do a couple of recommendations. This is a part of the show that I cannot dispense with, even in an abbreviated version. What's a good book or a film or TV show or something each of you guys have been into recently that you like to share with the audience?

C (28:43)

I think on the China front, somebody that has really impressed me of late is the Sinification Newsletter, which.

B (28:52)

Oh, yeah, Tomar Daguerre. Yes, Tomar Daguerre gets it. Yeah, he's fantastic. He's this Anglo, French guy, really good Chinese, just translating. Fantastic. His selection of what he decides to translate is, I think is superb.

C (29:09)

Yes. So I, I, yeah, I have a pretty high bar for reading about China because I read so much of it just during, during my, in, through the course of my work. But that is one of the few things that when it comes through my, my inbox, I'm always sure to, sure to check out.

B (29:29)

So, yeah, 100%.

C (29:31)

I'll go with that one. I'll have a thought if I can think of anything more interesting while I hand it over to Andy.

B (29:36)

No, no, that's a great one. I think that that's one of the ones that Sinica recommends on its substack, and I have no hesitation in recommending that. And yeah, completely heartily endorse that. Yeah, Tomah is great. We've been in communication a few times. I find he's got really good sensibilities. All right, Andrew, you're up.

D (29:58)

Yeah. So when I'm not thinking about China, Trey and I both have a business to run and so I spent a lot of time thinking about entrepreneurial issues. How are we running our business? How do we do it better? How do we grow our business? And so I read a lot of things in that realm. One of the ones I've been reading recently is called Clear Thinking by Shane Paris. It's, it's by Shane Parrish. It's not a business book per se, but it's about sort of how you make decisions and sort of being able to analyze your own decision making process so that you give yourself the best potential outcomes in any given situation. And he's pretty well known. It's not like a self help book, but you know, he comes from a national security background. So a lot of his examples are in very high pressure situations where it matters. The decision making process both collectively and individually makes, makes a big difference in their real, serious, real world outcome. So anyway, I definitely recommend Clear Thinking by Shane Parrish for people who want to kind of get inside their own heads and make sure they're making decisions in a way that is going to give themselves the potential for the best possible outcome.

B (31:12)

You find surprisingly good analysis of cognitive processes and things like that in some business books?

D (31:21)

Well, I mean, not to. The part of the reason I love economics is, is it really is the quote unquote science of how and why people make decisions right at sort of a macro aggregate level. And, and you know, that's what the, you know, the whole field of behavioral economics is, is really zeroing in on that specific aspect of it. And that's what I find fascinating, right? Not just like what is gdp, but how does that affect people's lives?

B (31:51)

Okay, great. I mean, that's fantastic. My recommendation is I'm going to do another one, another Chinese television show I've been watching. It's on Netflix actually, and it's subtitled in English. So this one's very accessible. You remember Robert Van Gulick's Judge D mysteries? Have you ever read those? He was this duck.

D (32:12)

I like it. Do you remember that? Yeah, sorry, but no, no, I'm just saying because it sounds to me like a classic Kaiser, very obscure reference. Like, hey, do you guys remember that?

B (32:26)

No, no, it's not obscure. These are super popular. I mean, even in the West. There's this guy, this Dutch Sinologist, he wrote this series of books set in the reign basically of, well, they take place in Tang, but really in the reign of Empress Wu Wu. And they're called the Judge D mysteries. Di Renjie is the name of this Sherlock Holmes of the Tang dynasty. And this Netflix series is actually the showrunners are actually two Brits. And it was a co production between China and I think it was Yoku or something like that. But just fantastic, fantastic show. It's called Judge D's Mysteries in English and in Chinese it's called. And they're fun. The production quality is very high. The acting is really good. It's funny. There's a lot of action. I mean, in the original books, he's got a couple of these sort of bruiser sidekicks who do all the fighting, and Judge D kind of doesn't. But now in this new version of it, Judge D himself is quite the formidable martial artist as well. So it's kind of silly, but if you want to get your mind off of politics and just do sort of, it's good. They're political, They've got murder mysteries to solve. In every couple of episodes, it wraps up a kind of it's a series, but it's great. Good comic relief, too. Check it out. All right, you guys, all right, on with the show, as they say. Right? So let's hear what you guys have. And I really encourage cynical listeners to subscribe directly so that you get this in your podcast feed. And please enjoy. Thanks, guys. Really enjoyed talking to you.

C (34:20)

Yeah, thanks, Kaiser. Really excited to be part of the network.

D (34:23)

Absolutely. Thanks, Kaiser.

B (34:24)

All right, take care.

D (34:33)

Hi, everybody, and welcome to the latest Trivium China policy discussion. I'm your host, Trivium China co founder Andrew Polk, and I'm joined today by our head of markets research, Denny McMahon. Denny, how you doing? Good, Andrew.

E (34:46)

Pleasure to be here as always.

D (34:47)

Yeah, it's always great to have Denny on the pod, but today it's especially great to have him because we are going to break down all the key pieces From Lee Chang's 2025 government work report, which was delivered to the National People's Congress, or npc, on Wednesday morning in China. For newbies, we'll get into a little bit more detail on what exactly the NPC is in just a minute, but for now, we'll just say that this is where senior Chinese officials announce key annual economic, governance, and social targets each year. So we'll look at three headline targets from the government, the 2025 GDP growth target, inflation target, and the budget deficit target. Then we'll discuss some broader elements of fiscal and monetary policy goals for the year that were laid out in the report, as well as some efforts to boost consumption this year. Finally, we'll dive quickly into the latest retaliatory moves on the trade front that China put in place on Tuesday, March 4th in response to the second 10% tariff increase on Chinese imports from the Trump administration. So lot to cover today and suffice it to say that it's been a big week for China related developments. So we'll pause quickly here for our customary vibe check. Denny, what's your vibe in this action packed China week?

E (36:07)

Frankly, I'm feeling a bit deflated. It felt as though there was a lot riding on this NPC and particularly what Li Qiang was going to lay out in this work report. China achieved its economic growth target last year, but people really didn't think feel it. It didn't feel like a 5% growth. It was strong growth, but it didn't kind of come with the increase in wealth or the general sense of well being. The economy still clearly underperforming and so there was a sense that, you know, what kind of got delivered today would set the tone for the year and kind of give us a sense of how Beijing was going to kind of right the ship and we'll get into it, but I don't really think there's that much there to get excited about. So yeah, let's say I'm feeling deflated and I was hoping for more.

D (36:51)

Well, I'll try to inflate you with this discussion. We can have some good back and forth. Sorry to hear you're deflated. That's comes with the territory of being a China analyst, right? Just slogging through every day. What the Chinese government is saying and doing can often be deflating. But we'll reinflate you. I have strong hope. So always that's my goal. That will be my goal for today. So that's my vibe is inflationary. Right? All right, so before we get into the meat of the discussion, a couple of quick housekeeping notes up top. The first is really exciting. We are delighted to announce that with this episode we are officially becoming a part of the Seneca Podcast Network. We're very excited about this new partnership and as I'm sure a lot of our listeners will know, Seneca is run by the excellent OG of China, podcasting Kaiser Guo. And in fact, this discussion today, my talk with Denny will precede another discussion that listeners can find after this, which is a brief discussion between myself, my trivia China co founder Dray McCarver and the man himself, Kaiser Gool to officially kick off the partnership. So this will be a nice way to sort of also gut check our forecasting policy on China because we recorded that conversation with Kaiser last week and so either way it was before the NPC started, but we talked about the NPC and I said what I was expecting and now we have had the NPC and we'll talk about what came out of it so listeners can see if I was right. But then we also talked about a lot of other interesting China related things that I think will be of interest to listeners. So stay around for that and going forward. Our podcast can be found on the Seneca Substack page, so we'll be doing some cross promotional work. You can find our podcast there. We'll be having some discussions with Kaiser on this POD and we'll be making some triggering work available on Kaiser Substack. So that's really exciting stuff and we're glad to be a part of that network. Otherwise, before we get really jump into it, just two other quick things. First is quick appeal. Please do subscribe to the podcast and your POD feeds. Rate it, share it with everyone you know as well. And finally, if you're a corporate executive or investor who needs ongoing research and analysis of China policy, please do reach out to us at HQ trivium china.com HQ trivium china.com as we have a fully fledged China advisory business behind the pod. We're not just podcasters, we do work with companies and investors on all this stuff. So please reach out to us. All right, housekeeping out of the way. So let's get into it. Denning so on Tuesday, the big annual Chinese meetings kicked off. The meetings are where officials announce a slew of policy objectives for the year and they are officially known as the Two Sessions. Or sorry, not officially, but colloquially known as the Two Sessions. The first session is a plenary session of the Chinese People's Political Consultative Conference, or cppcc. And the second is a plenary session of the National People's Congress, which is China's legislature, otherwise known as the npc. And the NPC is where really most of the action is for our purposes. The CPPCC officially kicked off its session on Tuesday, March 4, but the big day was on Wednesday, March 5, when the NPC started with Premier Li Chong delivering his government work report for the year. So the two sessions will run for a week. They should wrap up on March 11th. I believe there will be other announcements throughout the week, likely some personnel movements and some key laws will be passed. And we talk about one of those laws in the conversation with Kaiser later. But we'll be covering all, all of it at Trivium, both in our ongoing products for subscribers and clients, as well as on the podcast. So kind of getting those basics out of the way. Demi, can you give us a little bit more background on the two sessions and why they're so important?

E (40:44)

The reason it's so important is this is really where the party puts, or the government really puts its money, where its mouth is in terms of what to expect for the year ahead. So you kind of take the NPC for this year. We've been getting signals for months now that Ministry of Finance intends to spend more money to borrow more this year, spend more to support the economy. We've been in signals how important consumption is for the year ahead. Fantastic. But it's all well and good for government officials to be saying how important things are, and it doesn't really mean anything until they put a figure to it. And that's what happens at the mpc. We get a sense of just how fast they want growth to be this year, and they give us some pretty specific numbers on just how much money they are willing to borrow and spend to get there. So ultimately, in addition to that, you know, they give us those numbers and they then they lay out in a bit more detail what their priorities are, you know, in terms of the economy, but also more broadly, sort of social issues and, you know, China's place in the world and whatnot. But at least for the context of this particular discussion, the reason we find it so interesting is, is because we currently get a sense of just what Beijing wants to achieve with regard to the economy and what sort of fiscal resources it's going to bring to the table.

D (41:55)

Excellent. Appreciate that sort of context. That's super helpful for listeners. So let's get into the key targets that were announced at the government work report today, which is Wednesday. So today in China. So first, the Chinese leaders set their annual real GDP growth target for 2025 at around 5%, which was in line with expectations and the same as last year's target. Next, the inflation target was set at around 2%. So that's specifically consumer price inflation, and that's down from 3% in 2024. The decrease is sort of showing that policymakers are acknowledging ongoing deflationary or at least disinflationary pressures. We'll talk a little bit about that. And then the government budget deficit ratio was raised to 4% of GDP for 2025 from 3% in 2024. This is the highest GDP deficit, or excuse me, highest budget deficit as a percentage of GDP in over three decades, signaling that Beijing seems to be ready to commit a little bit, at least more stimulus to support the economy. So, Denny, let me stop there with those three headlines. We'll go through those one by one. What do you make of the around 5% GDP growth target? We'll start with that.

E (43:07)

There's no surprise there. Back in 2020, Xi Jinping set a target and said he wanted to see GDP per capita double by 2035. So the 2035 level of GDP per capita would be twice that of 2020. Now, you break that down and that comes out as an average annual GDP growth rate of 4.0 0.74%. Now, perhaps the best description I've seen of what's happening is that probably China wants to front load that growth and so it can kind of peter off a little bit towards the back end or even that it tries to front load the growth now just in case unforeseen circumstances means that in coming years it's not able to meet that sort of annual 4.7%. So, you know, either way, it makes sense for Beijing to kind of go for a 5% growth target now if it wants to hit that doubling of GDP in another 10 years. And of course, it's all the more important that it continues to do that now given that in those initial years of this 15 year period of doubling GDP per capita, we had Covid and so China struggled to hit some of its GDP targets. So I think that's exactly what's happening. There's no sort of real crystal ball gazing here to kind of get a sense of just how Beijing feels about the economy. Is this a 4.8% sort of year? Is it a 4,5% sort of year? It's just a lot more straight down the line than this. Should you set a target? The best way to hit that target is to deliver 5% growth, at least for the next few years. End of conversation.

D (44:39)

Okay, so you're saying that GDP growth target's sort of less important than it was for as in terms of a signaling device over the past few years or the past, you know, 20 years. And I think I generally agree with that. But quick question is, do you think 5% or around 5% is going to be harder or easier to hit deb than last year?

E (45:01)

I think we're going to be looking at pretty much all the same problems. We've got a fiscal hole that's been left by the property housing slump that despite the additional spending, Beijing's flag this year, it doesn't really seem to want to do anything about fill in dealing with increasing trade headwinds, despite which is all the worse given that trade is, you know, increasing exports, and particularly exports of manufactured goods is an increasingly important part of its growth model. So I think all the problems are still kind of there from last year. So, yes, maybe marginally more difficult because of, of, you know, Trump is now back in office and we've kind of got two new role, two new rounds of tariffs. But I think more or less that the basic dynamic of how China is trying to achieve growth and the headwinds facing it basically are the same.

D (45:51)

Right. Okay. Yeah, I think I largely agree. I think that's a good way to put it. We're looking at pretty much the same growth drivers, same growth profile this year as last year. And I guess in that context, maintaining the same GDP growth target sort of makes sense. So next we'll go to the inflation target of 2%. Again, that's consumer price inflation, down from a 3% target in 2024. What do you make of the inflation target?

E (46:17)

This is a case of when the target meets reality. I mean, posting another 3% inflation target for this year, it's like, frankly, who are they fooling? I mean, they barely managed to eke out, what was it, 0.2% CPI inflation growth for the last two years, the economy has delivered, what, 27 consecutive months of producer price deflation. I mean, we're nowhere near 3%. I mean, frankly, we're nowhere near 2%. But at least this is an acknowledgement that they're really struggling with generating any sort of inflation in the economy. And at least this is, I guess, I don't think that they're going to be able to deliver it, but at least it kind of brings the target closer to the realm of reality.

D (47:02)

Yeah, it's an interesting one because we've talked before. We always acknowledge that real GDP growth in China, because it's a political target, is somewhat meaningless anyway. A lot of people do their own alternative estimates of gdp. There are lots of flaws with those estimations as well, but generally all of them show GDP growing more slowly than the official number says. I just tend to look at nominal GDP growth and last year nominal GDP growth was 4.2%. So definitely lower than the real target. That obviously raises a bunch of issues. First of all, it shows the economy wide deflationary pressure that, you know, nominally the economy grew more slowly than it did on a real basis. It also shows you, I mean people experience the economy in a nominal way. Your wages are paid on a nominal basis. Your revenue as a company is paid on a nominal basis. Taxes are assessed on a nominal basis. And so it just shows you that even though they did officially hit their 5% target last year, it didn't feel good to people because they were feeling at best 4.2% growth. And so the fact that they're kind of acknowledging disinflationary or deflationary environment, we'll see if they make any policy moves to actually try to get inflation up. Because actually, even though the target came down, the new target's still above inflation last year. Right. So it still implies they're going to try to do more to get prices up. And we'll talk about in a minute. It also has some interesting potential implications for credit growth and credit policy because basically they target nominal GDP target, which is real GDP plus inflation target. So that's 5 plus 2 is 7. Well, welcome to your math lesson for the day. So they are targeting 7% on overall credit growth, down from 8% last year. And we'll get into why that matters and what some of the ramifications will be. But next let's go ahead and look at the budget deficit. And as well, when we look at that, I want to talk about the wider fiscal package that officials announced. I know you've got a lot of thoughts on this to me. So we've already talked about the deficit set at 4% of GDP, way up from 3% last year and the highest in in several decades. Officials estimate that this move will unlock an extra RMB 1.6 trillion in deficit spending, which is about an extra 1.2% of GDP in spending. So it's not nothing. Officials also committed to issuing RMB 1.8 trillion of special treasury bonds. So these are bonds issued by the central government that sort of off the official central government balance sheet. And that 1.8 trillion is up from 1 trillion of special treasury bonds last year, 500 billion or half a trillion of that STB special treasury bonds STBS issuance will be earmarked for Replenishing banks Tier 1 capital to shore up bank finances. But because that's going into the banks, it won't have any real stimulatory effect. And we'll talk about the implications of that. And then around RMB 300 billion is earmarked for supporting the consumer goods trade in program and that's double the amount that was committed to the consumer goods trading program last year. So that is more stimulatory. We've talked about some of our reservations about the consumer goods trading program, but it is showing at least some level of officials looking to genuinely support more consumer spending in 2025. And then finally, officials increase the quota for special purpose bonds. So those are the local government debt instruments mainly used to finance infrastructure investment. They raised that to RMB 4.4 trillion, up from 3.9 trillion last year. So also a pretty hefty bump there. Half a trillion renminbi increase. So overall officials think these moves combined with other expenditures that will be facilitated through increased tax revenue and other sources, we'll see total spending rise by RMB 3.6 trillion this year. That's 9.3% year on year growth for total fiscal expenditure, way up from 2.7% growth in fiscal spending for 2024. So there's a lot of different takes on this. I think that's a pretty decent package. Denny, I think you're a little bit more skeptical. What do you think of it all? Walk us through your thinking here.

E (51:35)

Yeah, so the amount of additional government borrowing, both at a local level and the central government level is going to increase 2.9 trillion renminbi this year. So it's an increase of additional lending over last year's level of 2.9 trillion. But that's a little bit misleading because at the end of 2023, the Ministry of Finance issued an additional 1 trillion renminbi's worth of bonds in November and December of 2023. But that money wasn't spent until 2024. So you had this strange situation where you got this additional fiscal spending in 2020, but the money was actually raised from the previous year. So if we're kind of looking at the allocation of fiscal resources, sure, we're going to have officially we're going to have additional 2.9 trillion worth of debt this year. But 1 trillion worth of debt that was raised in 2023 really, really was raised in 2024. So in terms of the additional spending, well, we're kind of more looking at 1.9 trillion. Now it's a question of just how stimulatory or how much of an impact this is going to have on the economy. Now as you pointed out, half a trillion 500 billion of this is going to be recapitalizing the big six banks. So that's not really stimulatory. We've got an additional special purpose bond quota for the, for the local governments an extra 500 billion, which is great. I mean that's a pretty significant increase. From 2023 to 2024 it only went up by 100 billion. And so this is a big leap. But that money is supposed to be used for things like what was the list? It was some of it's for infrastructure, but it's also for land purchases and it is for buying housing inventory. So this is great on one level because this is money that's explicitly going to go towards buying land back and buying inventory, unsold inventory from developers which they'll then be able to use to complete unfinished housing that they've already pre sold to people. So that's kind of going to feed into the, you know, to construction a little bit, which is great. And then, you know, we've got another what? Another one, probably another 900 billion where we don't quite know how the government's going to spend it yet, which is great. I mean, presumably this is. Maybe it's going to be for industrial upgrading. I mean, as you already said, 300 billion of this is going to be for consumer subsidies, whatnot. The reason I'm a little bit disappointed is because there is still a massive funding shortfall for local governments that this doesn't really deal with at all. For all intents and purposes, what we're seeing at a local government level, and we've seen it since the housing market peaked, but it's been getting progressively worse, is a form of kind of Chinese style austerity. It's not like great austerity or UK austerity where kind of at the highest level of government there's a decision that everyone has to tighten, tighten their belts. We're going to spend less money. You know, we don't have the resources, therefore we're going to spend less money. In China, it's more a case of we are going to continue increasing expenditure, but we are not going to fund that expenditure out of tax or even official sources of debt. So you've got this situation for local governments where they're expected to keep increasing spending. If you look at the change in expenditure for local governments every year, it hasn't stopped just because there's been a complete significant decline in the resource they're getting from property sales or from property related taxes. They're still expected to spend more and more money every year. And the way that they're kind of squaring that circle is twofold. One on one level, they're withholding depending on where you are, they're withholding wages from certain state employees. They're not paying arrears to contractors and suppliers who provided goods and services to local governments. And the other big thing is that they are raising money through non tax sources of income. And that really is becoming a real drag, not just on local economies, but also on business confidence. Because when we're talking about non tax income, sometimes, yeah, we're talking about things like asset sales, but it's also significantly made up of arbitrary fees and fines that are imposed on the business community. The reason that's such a big deal is if you look at the increase in non tax income across the country, all levels of government, in 2024, it was 2.5 trillion renminbi higher than it was in 2021 at the peak of the property mark. And meanwhile government revenue being collected by local governments. But local, local government taxes actually declined the revenue they were, they were generating for taxes. So on one hand their ability to generate taxes has fallen and they've offset that by aggressively boosting fee and fine income. And that's taken a real toll on both business optimism and even just the health of local businesses. So that increase of about 2.5 trillion renminbi's worth of fines, I mean that crawl intents and purposes is Chinese style austerity. It's the local governments trying to find a source of income to cover increased expenditure when the money is not forthcoming from the traditional channels in the economy. And that's kind of why this particular budget worries me a little bit, because it's almost as though Beijing is playing, you know, the saying game. It's like, well, we're going to provide additional support for the stimulus programs that we've had in the past and we'll give some more transfers to the local governments and whatnot. But what's really needed is a big step to effectively bail out the local government's funding shortfalls.

D (57:17)

Yeah.

E (57:17)

And we haven't seen it. And the Ministry of Finance has made it clear that there won't be any bailouts. But until that actually happens, we've kind of got this lag on the economy at a local government level that Beijing doesn't really seem willing to fix as yet.

D (57:36)

Yeah, so that's pretty pessimistic. I mean, so the question is, does it need to be transfers to local governments or could it just be a larger overall fiscal package that sort of supports infrastructure, supports other things? Are you saying you want, you know, I mean, we've, we've seen like Chinese economists calling for 10 to 12 trillion renminbi and saying that's what it's really going to take to get us out of the funk. Is your reservation or your. Your concerns with the package more about how it's crafted, how it's put together, or is it just not big enough?

E (58:14)

No, I think it's how it's put together as much as anything. I think what we really need to see is some sort of mechanism which allows local governments to fund their expenditures without having to resort to shenanigans, you know, to be able to pay what they owe to both state employees and to contractors and suppliers, and to not have to go after the private sector or even state sector firms to kind of top up the shortfall in revenue. So what that really requires is transfers. It means that local governments need to have the revenue that matches their expenditures. And I have no doubt that this particular budget put forth at the NBC will involve more transfers. I mean, you know, Li Qiang said as much. But the sort of scale that we're talking about, I mean, it's. It's just not there, given the way that they've already divvied up all these resources.

D (59:05)

And what about how much of this will really impact, in a positive way, consumption? Right. So they've been talking about consumption forever. I think consumption was the number one, you know, issue in the government work report this year, was down at number three last year. And they talked a lot about it, and they talk a lot about it outside of the official, you know, meetings. They're just kind of saying we need to get overall domestic demand up. And the biggest chunk of that we're worried about is consumer spending. They didn't commit specific fiscal resources, but they said we're going to ensure migrant workers who have settled in cities receive equal access to education, housing support, and medical insurance. You've talked a lot about how really unlocking the consumption potential of migrant workers could be pretty huge. They also talked about introducing free preschool programs, expanding access to affordable elder care, which I always say is a huge one, because most working age people who are our age are caring for likely one child if they're married, one child and four parents. And so for people you have to care for, if suddenly you have to spend less money on that, that could be a big one. And then finally they said they'd increase basic pension and medical insurance payouts. So two questions. One, what do you think about that? I have three questions. What do you think about that? Two, what do you think the prospects are for genuinely getting consumption up? And this may be part of your Answer, but I'll just front run it. And the last one is, is this just a wish list? That doesn't matter because a lot of this would likely be funded at the local government level. And so it doesn't matter if you have this list, if you're not giving local governments more money to do it, as you have just been laying out. So go through some of that.

E (60:46)

Yeah, I mean, your last point is absolutely valid. This has got to be funded mostly at a local government level. There's lots of debates about changing the way revenues are reallocated so that it started a central level, but that's going to require tax reform, a whole reform of the fiscal and tax regime, and we're just not there yet. I think there is an inclination to see China talk about the need to spend more on these sort of welfare priorities and talk about the importance of boosting consumption and go, it's happening. What economists have been talking about for years, the need to restructure the economy, rebalance it towards consumption. They finally got the memo and they're moving towards it. The reality is that is not what is happening here at all. And the reason is Beijing does believe in spending more on welfare. It doesn't need to be convinced of the importance or the relevance. It is both central to its vision of common prosperity and of a more equal country. It is absolutely aware that if it wants to realize a vision of common prosperity by what, 2050 and make strides towards that by 2035, which is the other, you know, the other major date looming, there has to be some sort of redistribution of wealth. And the best way to do it is through welfare programs, particularly when you're talking about retirees and the elderly and you're talking about migrant workers. However, there is a major caveat, and they say it time and time again, that they are not willing to undergo a major expansion of welfare until the economy can support the expansion effectively. What they're saying is until the tax base is able to support an expansion of welfare, they are not going to do it. I think we're going to see is incremental increases in spending on welfare, such as support for fertility programs and anything that will sort of move the needle towards lifting the birth rate. You'll see incremental increases in spending on health, maybe even on pensions. But the sort of broad based expansion of welfare and public services which might be able to in a meaningful way boost the consumption of key groups in this, in society, is not going to happen until Beijing can do it from taxes to the extent that it has to borrow to do it. It's not going to do it because it sees it as unsustainable. It's not like investment, Right? Investment. You can borrow a discrete amount of money and build a highway and you're done. Right. It's odd. Whereas, and Xi Jinping explicitly said this back in 2020, the problem with welfare is if you expand it today, you are locked in indefinitely. You're spending that today and you're spending it next year, and you're spending it next year. And if that's debt, your debt levels are just going to keep rising and you're never going to be able to pay it down. They will do it once they have the taxes to do it and not beforehand. And up until that point, you're going to see incremental changes, but not the sort of big bane moment that I think a lot of people are hoping for. That's going to change. Change the narrative on, on consumption.

D (63:46)

Yeah, that pulls a lot of things together. I mean. Well, it really just comes back to the. Well, first of all, it's a chicken and egg problem, right? Because when the economy recovers, your tax revenues go up, right? So part of it's you want better growth so that taxes go up. Usually you can kind of kickstart that with more fiscal spending. So that sort of puts you in a little bit of a hole, but then hopefully you get it backed by more robust growth. Obviously that's not necessarily the path they're going down, but it does just kind of show the quandary that they're in. Secondly, it brings us back to this idea that fiscal reform is absolutely fundamental to adjusting the structure of the economy. And you know, there wasn't a lot about that in the government work report. You know, we'll see. Maybe there's something about it in the five year plan that should be published this year, but overall that's another one where it just keeps coming back to us like fiscal reform is absolutely necessary. So it's one we keep a close eye to see any movement on. And then finally I just say, you know, it sounds like you're pretty pessimistic on consumption, which to me would say really maybe they are going to have a tough time hitting the 5%. If you believe last year. Basically the way they got there is very heavy support and activity in the industrial manufacturing sector because there was consumer demand had to be sold abroad through exports. So exports carried the day last year. We been talking for a year plus about how that's unsustainable for geopolitical reasons. Now we're in a trade war with the US So it's almost more important than ever, or definitely more important than last year, even to get consumption up if you're going to offset what we'd expect at some point to be less growth in overall exports. So take your point that we have the same issues in 2025 that we had in 2024, and we'll kind of just see if there are any adjustments along the way or see if this fiscal package is ultimately enough to kind of change the narrative for households to get them some more confidence to go out and spend. But a lot of questions remain for sure. Quickly, though, want to move on to the monetary policy side, which looks to be mildly expansionary as well. In 2025, to help lubricate or facilitate some of the additional fiscal spending. Officials or Li Chong in his government work report said that they would quote lower reserve ratios at banks and interest rates at the right time. And then to provide support for the stock market and property sector, they said they would quote, refine and develop new structural monetary policy instruments to promote the sound development of the real estate sector and stock market. Any thoughts on the monetary stuff?

E (66:30)

Yeah, I mean, you're right. They're promising more loosening. I'm just surprised it hasn't happened before now because we've been hearing this talk for months that Pangongsheng was making these noises, what, back in November, October.

D (66:44)

Governor of the Central Bank Pang Kongsheng. Yeah.

E (66:47)

And so we've been expecting interest rate cuts. We've been expecting a round of more aggressive interest rate cuts. And it's kind of surprising that we haven't seen one so far this year. There's a lot of talk that maybe this has got something to do with pressure on the remnant. B, they don't want cuts to feed into a lower currency. Frankly, I'm not quite sure why they haven't done it. Maybe that is a factor, but they've certainly signaled that a loosening of monetary policy, and they did it months ago and I just haven't delivered yet. So maybe this is a currency thing, but they're still signaling loosening, so it's hard to say exactly what's going on.

D (67:26)

So do you expect, you know, more accelerated loosening of monetary policy in. In 2025 based on this? And then additional. I'll go ahead and add in the next piece, which is they did reiterate that they want credit growth to be in line with nominal GDP growth target, which is what I talked about earlier. So basically their official credit target, overall credit target growth has been reduced from 8% to 7%. So they're looking for the same amount of growth with less credit and sort of implies that's not really a looser credit environment, which typically goes along with a looser monetary policy environment. So put it all together for us.

E (68:08)

Yeah, look, at the end of last year, I was really expecting there to be multiple rounds of interest rate cuts this year. I thought given the rhetoric, that's what we were looking for. And on one level, it feels like a no brainer. I mean, you cut interest rates and all of a sudden you provide instant relief to a whole lot of firms that are suffering from deflation. Right. I mean, the real cost of borrowing or real cost of maintaining existing debts is far higher than the official interest rates because of producer price inflation. Secondly, Beijing clearly wants to get up the stock market valuations. I mean, there's, you know, they talk of this idea of a slow bull market where valuations gradually rise over time. One of the easiest ways to try and get that working is cutting interest rates. Because you cut interest rates and you immediately increase profits of listed companies, Right? You cut enough, maybe you can finally start breathing life into the stock market. On top of that, you've got heavily indebted local governments and local government financing vehicles and property developers that are struggling to find the cash to finish unfinished housing. Cutting interest rates again helps lower everybody's funding costs. So on one level, cutting interest rates seems like an absolute no brainer in this environment. I'm not the only one saying this. I mean, there are plenty of Chinese economists out there who advise the government who say cut, just cut and cut again and cut again until the economy hits a point where it's stable. So, but the fact that they haven't done anything yet and they are emphasizing this idea about how important it is to maintain a stable currency, maybe the priorities have shifted at the moment, but you know, given all the economic pressures, it's amazing to think that cutting interest rates in a meaningful way, it's just such an easy way to cut, kind of help them deal with so many of the economic pressures and priorities they have at the moment that the currency might trump all of that. But anyway, the short answer is I don't know anymore. At the end of last year, I was convinced that we were going to have multiple rounds of interest rate cuts. Now I think it's pretty clear they're going to cut. But just how aggressively, I don't know, maybe it won't be any More aggressively than it was last year. Some couple of rounds of what, you know, 10 basis point cuts.

D (70:24)

I, I don't know. Yeah, when we first met in Beijing about 15 years ago, this was all a lot easier to predict. You know, they had a playbook, they went by it every single time. But having gone through most of the stuff in the work report, I guess the follow up question, because I do want to now pivot to the trade stuff that happened this week. But the question for you, maybe on the back of what you just said is there are a lot of people out there saying, suggesting, analyzing, that maybe Beijing is holding its fire on both the monetary and fiscal side in terms of stimulus until it has a chance to assess how bad the trade war is going to get and how much impact it's going to have on the economy. What do you think about that thesis?

E (71:06)

If that's what it's doing, it's cutting off its nose despite its face. Regardless of what happens with the trade war, China has very specific economic problems that it's facing at the moment which are unique to, to its own economy. Regardless of what happens with international trade, the local government debt, the fallout from the local government debt problem and the housing market slump is having a real impact and it needs to be dealt with in a meaningful way on a relatively large scale. Regardless of what happens with, with exports, the longer they wait to deal with it, the more protracted the drag on the, the economy will be and potentially it'll be harder, you know, when you kind of move to fix those problems, it'll be harder to, for the, for the measures to kind of have a real impact on getting the economy going again. What I mean by that is you take something like the arrears problem now. Li Dao Kuei, a professor at Peking University, and I think he is currently on the Monetary Policy Committee of the, of the Central Bank. He says that by his estimates there's at least 10 trillion renminbi or arrears owed by local government to contractors, suppliers, as well as what local governments owe to employees for unpaid wages. So 10 trillion renminbi, the longer that amount of money. So if central government turned around today, gave the local government 10 trillion renminbi so they could pay off those debts, that would be fantastic because all of a sudden you'd get a whole lot of firms and a whole lot of state workers who finally have got paid to something that done work they've done and have been waiting for ages and you would then think that would then flow into the economy. Firms will pay bonuses, maybe they'll go out and they'll invest in their business. You know, employees will go out and take that holiday that they were waiting for.

D (72:51)

Right.

E (72:51)

But the longer the government waits to pay off those people they owe, the less likely they will take that money and spend it. It is more likely they will treat it as a windfall, much like the stimulus checks in the United States where all of a sudden everybody's savings went up overnight and you had all of people, you know, playing with it on, on, on Robinhood. The potential is for them to treat it as a windfall because they've kind of had such a negative outlook on the, on the economy for such a long time. They've got this money, it's not worth spending it. The best thing they can do is save it. And they'll save it until things get better, until they're sure things are up there. And that's kind of what I'm thinking. Like the government ideally should move against these things now rather than kind of let them to leave them to, to sort of drag on. And so that's kind of where I sort of come down with things. They need to sort of ideally sort of try and deal with the issues sooner than later. And frankly, I've, I've completely forget where the question started now.

D (73:50)

Well, it was about whether they're holding fire. And I will say I do.

E (73:53)

Holding fire. There we go. Sorry, I got off my seat soapbox and completely. I don't think they're holding fire. I think they should be dealing with these issues one at a time.

D (74:03)

Yeah, so I was just gonna say quickly. I totally agree. I never thought that they're holding back because of the trade war. I think the trade war doesn't really impact their overall macro approach at the moment and so doesn't make sense to me that they'd be holding back. And it's interesting because as you pointed out, you referenced Li Dao Kuei. I was going to reference him as well. He's been kind of the, one of the people that's tapped to be out there sort of explaining China's approach to the trade war to Westerners. He had a eight minute, I think interview on Bloomberg that's been making the rounds. And in that interview he said I or we are not surprised by the 20% tariffs. It's actually a, we thought there'd be more by now. And so this isn't really worrying us all that much. And so we're not going to panic. And so I think also it's not feeding in so much into what they're thinking on the fiscal and monetary side as well. But let me wrap up quickly and just say, just to run through this because I feel like it's such a big deal, we got to make sure that we touch on it. Before the NPC started on Wednesday. There was additional round of tariffs on Tuesday. So the second round of 10% tariffs from the Trump administration went into place and China responded. They responded with an additional 10 to 15% tariff on some US agricultural exports in China. So chicken, pork, beef, seafood, corn, wheat, fruit, a few other things. They also responded with adding 10 more companies to China's unreliable entities list. All were defense companies. They said that Illumina, the company that had been put on the unreliable entities list on February 4th as part of reaction to the last 10% tariffs, they said they are barred from exporting their genetic sequencing equipment to China. And then they added 15 companies to their export control list, 15 US companies, which explicitly says that companies cannot export dual use equipment. They're fully prohibited from exporting dual use equipment to those companies. Then Chinese customs suspended the import of lumber from the US Saying pests have been found in, in lumber coming from the US and the Ministry of Commerce started an anti circumvention investigation on some optical fiber products from the U.S. and finally, three U.S. trading companies had their licenses to export U.S. soybeans to China suspended. So just quick thoughts on this to wrap up first is this very much mirrors the package that China laid out on February 4th in reaction to the first round of tariffs. It's multifaceted, it's pretty creative. And it looks to, instead of sort of doing a broad brush approach, which is what the, the U.S. side is doing, tariffs across the board, they affect everybody equally. They're taking very targeted pain points and trying to press harder because they can't respond on the tariff side because of course the trade imbalance, so multifaceted, pretty creative, asymmetric in that they go, you know, for maximal targeted pain, whereas the US Is going for broad based, less targeted pain. And then finally, I would say that this reaction surprised me a little bit because it was pretty, not timid. But most of these moves were symbolic. The, the 15 companies added to the control list were defense companies. The ten companies added to the UEL were defense companies. None of them have any business in China. None of this is going to impact any of their operations at all. Saying that Illumina can't export the gene sequencing equipment from the US To China is meaningless because Illumina produces most of this equipment in China for China. So it's being produced in China domestically. So it was a way, I think, very much to hit back, but in a de escalatory way. So to respond but not turn up the temperature. This is how China has approached the first trade war in the first Trump administration. So they're sticking to that general principle, although the playbook and the tools that they're using are much different. And I think it's just a way for them to say, we're not going to back down, we are going to hit you back, but we're going to hold fire because we don't want to ramp up tensions and we want to try to get to the negotiating table. And I think likely, unless Trump decides another 10% tariffs here soon, I think probably in the next couple of months at least we will, or a couple months soonest. But I think around that timeframe, we'll probably see ramped up efforts to get leader to leader talks going between Trump and Xi. And that that really seems to be from everything we're hearing, the Chinese are kind of looking to hang their hats on for a bunch of reasons which we actually get into in the conversation with Kaiser, between me, Trey and Kaiser. So that's a good place to leave it in the meantime. Denny, thanks so much. This was great. Always great to see you.

E (79:05)

Pleasure as always, Andrew.

D (79:07)

All right, everybody, and we'll see you next time.