MIKE GREEN: Mike Green.
I'm here for Real Vision in Los Angeles, and I'm sitting down with Chris Balding, who most
people that watch Real Vision probably have heard something about you either on Twitter
or in the news, but you and I came into contact over Twitter.
Your background is as an economics professor who was based in China, and started talking
very openly about it.
First, how did you end up in China?
CHRISTOPHER BALDING: The first time I ended up in China was one of the greatest stories.
My wife had a job here in LA doing homes for rock stars.
She had a very bad job she wanted to get out of and so I actually pretended to be her sending
out her resume.
She got a US-based headhunter that offered her a job on Wednesday, and she had to be
in Beijing to start Monday morning.
I still remember the conversation telling her, "Honey, I might have found you a job.
It's in Beijing."
That conversation did not go super well the first time, but we ended up going to China
for 9 years and had a great time.
MIKE GREEN: When you went over, initially, you went over as a bit of a China file?
CHRISTOPHER BALDING: Actually, no.
I actually went over really knowing even then, after a couple of months in China, knowing
very, very little about China.
As a junior professor, I was focused on knowing the very standard, turn out journal articles
and academic books and things like that.
That's really what I did for the first, probably almost 5 years of my career there at PKU.
MIKE GREEN: What started the change at Peking University?
What led you to start speaking out and writing about some of the concerns that you had in
terms of-- whether it was China accounting issues, or whether it was China's behavior
on a national account basis?
What was the trigger?
CHRISTOPHER BALDING: The first couple years, I would say really 3 to 5 years that I was
there, I really felt like I knew so little, that I was just really learning and asking
questions and everything like that.
I remember-- and I don't mean to pick on this guy, but I remember Joe Biden coming to China
and writing an article in The Washington Post or New York Times about how China was the
future and the US needed to emulate them.
At that point, having lived there for-- I forget the exact timeline, 4 to 5 years, I
was like, well, this is what's being written in the US press and this just isn't matching
what you're seeing on the ground-- whether it was inflation data, or whether it was all
the underlying problems that weren't being addressed.
That was really the first time I started just blogging.
At that point, I think it was just my mom and a couple of her friends that were reading
what I wrote.
MIKE GREEN: Your mom obviously liked it, you kept writing.
Did you encounter blowback in China immediately, or did that build over time?
CHRISTOPHER BALDING: Honestly, without any hesitation, I can say I never had the school
really push back on anything I wrote about China.
I'm sure that people at my school got phone calls about what I wrote.
I can honestly say I never got any pushback.
The only time that I know of that I got pushback about things that I wrote about China was
really involving China only tangentially and that was when there was a case where there
was a gentleman in Singapore that hung himself and here was some question as to whether or
not it was potentially Chinese military that might have been involved in his death, we
still don't really know to this day.
He had told friends that he was being pressured to work for Chinese military in high grade
I had written about Singapore, and I knew some of the cast of characters that he was
involved with, and they were Chinese military industrial companies that their armor, their
weaponry is really involved in really almost any hotspot in the world.
I mentioned them in passing about with this Singaporean death.
Other than that, honestly, nothing I wrote in China did I get any real official or unofficial
request to take anything down.
MIKE GREEN: When you ultimately decided to leave China-- so you worked at Peking University
until late 2017, early 2018, and then you came back here briefly, what was the decision
process in terms of the decision to leave Peking University?
CHRISTOPHER BALDING: The decision went like this.
In this late summer of 2017, I had started a petition about Cambridge University Press
censoring some of their articles on China and I had created petition for foreign universities
and academics to just reevaluate their relationship with China.
I was scheduled to start teaching in November 2017 and the way it worked at our school was
they would open up the registration system for students to register for classes about
a week to 10 days beforehand.
I had been in touch with the school in the spring, summer, and early fall about my class.
When they opened up the registration system, I started getting emails from students.
I was going to take your class, Professor Balding, but it's not listed.
I emailed the school, and they said, oh, well, we'll check into that.
Mind you, this was roughly a week to two weeks after Chairman Xi was reelected for life,
and the next day after emailing the school, the school informed me that I was no longer
teaching in all of 2017-'18 and my contract would not be renewed at the end of the year.
I suspect, I don't know that that was, for lack of a better term, a decision that was
taken outside of the school to terminate my contract.
The school and I had had, like any normal working relationship, there've been issues
over the years, I don't think there was anything there that had been significantly outside
of ordinary or anything that was unresolvable.
MIKE GREEN: To the extent that you and I have talked over the years about some of these
dynamics, one of the sources for a lot of your information on a lot of the questions
that you delved into were your students.
You had it sounded like you had a very good relationship with most of your students and
were well respected certainly as a teacher.
When I looked up your reviews at Peking University-- I'm joking, I didn't look it up, but it did
feel like this is a fairly sudden acceleration in terms of your relationship with China more
CHRISTOPHER BALDING: Yeah.
I think one of the things that even for me, I think it was very informative.
You really begin to feel China change in 2012.
When I first arrived in 2006 and 2009, in relative terms, China seems-- looking back
now, almost open in freewheeling.
Things really began to change in 2012 when Xi was there and I think those changes really
began to accelerate in, let's say, 2014-'15.
I remember just some of the incidents, I had a journalist call me up some time, I want
to say it was 2016 or so, saying, hey, I need a pro-China commentary on this specific issue.
This was something that would have been pro-party, pro-Beijing, this wasn't looking for an activist
position and I called up a couple of colleagues saying, hey, there's this journalist, would
you mind doing this?
The couple of colleagues that I called up said, no, I'm not going to comment.
You can't comment in China today.
Don't ask me again.
It was very interesting to me that there was such even-- and this was a couple years, this
was probably two years before I left-- of how much the environment in China had changed
that people didn't even want to say pro-party things publicly.
MIKE GREEN: Well, one of the things that you and I have discussed somewhat ad nauseum is
the dynamic that began to emerge with Xi's ascension, I would phrase it as, in particular,
there seems to be an obsession with the decline of the Soviet Union and the advent of Perestroika
and the opening up that occurred in the Soviet Union prior to its dissolution roughly 1990.
From what I understand and from what we've talked about, that seems to be a very key
focus in terms of the CCP and in particular, Xi.
Is that consistent with how you think about it?
CHRISTOPHER BALDING: Absolutely.
I think that is probably one of the biggest things that is missed in everything that's
being discussed about China is Xi is almost, in my estimation, singularly focused on not
just the collapse of China, but the accompanying numerology that is there right now.
One of the ones is-- and I might be wrong on the name of the plan, but I believe leave
it was the Soviet Union was on its 13th 5-year plan, and China is in the middle or near the
end of its 13th 5-year plan right now, and the Soviet Union did not see a 14th . Xi is
singularly focused on not just having a 14th, but on making sure that he does not replicate
what he sees as the errors of the Soviet Union that led to its demise, specifically, opening
MIKE GREEN: That's consistent with the discussion we've also had, which is my contention is
that this is also very true that Xi is very focused on this dynamic of 13th to 14th plan,
the mistakes of 1989.
The way I look at it is that if you were working assiduously to avoid the mistakes of 1989,
you're almost guaranteed to repeat the mistakes of 1936-'37, which was when Stalin was made
Emperor for life or appointed for life as both head of the party and head of the Politburo.
The equivalent cultural reformation that accompany the time period in which the Soviet Union
withdrew from the West and '36-'37 ultimately culminating in the Ribbentrop, do you see
it similarly, or do you think there's a different dynamic at work here?
CHRISTOPHER BALDING: No, I think you're seeing a very similar dynamic play out.
One of the things is the people I continue to talk to in China is you hear things about
how much sentiment there is to retake Taiwan.
You hear about, well, Hong Kong should be grateful to China.
You hear all of these types of things.
Well, we're just turning Xingjian into China.
We have to do this.
There's this cultural imperative to make China great again, for lack of a better term.
I think there's a very similar dynamic.
I don't think, when we talk about the US or other countries working with China, I think
there's a very static understanding of how China views itself domestically and how China
views itself in reasserting itself and taking its place as an equal or looking down upon
the United States.
Part of that is this like almost cultural cleansing that they seem to be going through
right now to elevate China again.
MIKE GREEN: Yeah.
Unfortunately, I see these dynamics playing out very, very similarly.
One of the alternate takes, so I would argue two primary narratives.
One is China's the future.
This is the Joe Biden articulation, which is difficult to square with many of the facts
on the ground, but certainly remains, I would argue, the consensus view.
The second one is that no, China is not the future, but it's going to manage it similarly
to Japan, that it's going to have a step down in growth, that it's going to age and therefore
have deflationary pressures, and probably an appreciation of the yuan as they seek financial
power and global power in terms of the financial sphere as compared to the manufacturing or
Then the third one is the China collapse model.
What do you think about that middle one, the idea that China can gracefully go the route
CHRISTOPHER BALDING: I was talking to someone a couple years ago in Beijing, and I was talking
about the debt pressures that China was facing.
I was unconvinced that Beijing even understood the severity of debt problems.
I asked this person I said, do you think they understand the severity?
He said, absolutely, they understand the severity, but you're looking at it as if there's a problem
there to be reformed.
I was like, what do you mean, of course, they have to reform?
He said, no, no, their goal is to just become Japan, not Thailand.
I think internally, in the bureaucrats' minds, debt is not a problem as long as they can
essentially always stay one step ahead of a plate that might fall off.
However, that is becoming even the Japan model, more and more difficult.
Not to say that they're going to become Thailand, but the greater the debt pressures become
both on domestic debt and on foreign debt, you have to elevate it one step above Japan
if you're going to make sure that you don't become Thailand and what that requires is
almost going the DPRK model of financial repression.
I think more and more, that is what you are seeing is that level of financial repression.
Just as an example, we're seeing a lot of evidence that there are essentially price
mandates on real estate prices.
Just this week, we're seeing-- just over the past couple weeks, we're seeing evidence of
financial repression with regards to pork sales and subsidies, and you need identity
cards to purchase pork.
I think what you're seeing is for- - they're realizing it and it's going to be more and
more difficult for them to even become Japan and if they do that, to make sure they don't
become Thailand, they have to become more financially and socially oppressive at every
step of the escalation.
MIKE GREEN: Well, it's also interesting, because I think there's a bit of a misunderstanding
of what Japan is.
Japan became rich, flirted with the idea of do we want to become a global superpower?
Do we want to challenge the United States?
They somewhat rationally looked at it and said, no, and therefore chose a path that
allowed them to benefit from the assets that they had accumulated abroad, somewhat of the
cost of domestic production.
They seated share but gained income.
That seems to have changed under Abe, and so there's this debate about whether Japan
still looks like Japan under that context, I would argue, Japan is one of the countries
that has the most exposure to China in terms of the value of the Japanese yen that seems
underappreciated on the street.
That does seem like a really difficult path for a country that is fundamentally quite
China has $3 trillion in reserves, but that's $2,000 per person.
It's just not that much money.
If they're looking at that type of difficulty, where they think it's really hard to become
Japan, do you think they go the DPRK or North Korean route?
CHRISTOPHER BALDING: I think if you just look at the evidence right now of where Xi is taking
them socially and financially, I think you have to believe that yes, that is the direction
If you just take one example, I think there's pretty strong evidence that over the past,
say, year or so, they're working very, very hard to lower their import bill.
Specifically, one example of this would be-- a lot of their import bill comes from two
primary areas-- imports for processing and imports for natural resources that they use
One of the areas where they seem to be working very hard to lower their import bill is in
How they're doing that is they're essentially shifting to domestically produced iron ore
that is let's say anywhere from 10% to 20% premium, but at this point, at least, they
don't have to expend FX reserves.
I was talking to someone, they actually ran the calculations, well, if China has enough
cobalt reserves, turn out batteries, what is the payoff period for them to essentially
go all electric with batteries and lower their import bill through lower oil purchases?
They said within five years, it's not crazy to think that that is on their to do list
to essentially shift away from international transactions in oil, because we see that happening
right now with iron ore.
If they can essentially say, we're going to cut our natural resource import bill significantly,
it's not crazy to think that they are essentially going to that model in the international trade.
We see that happening already in the social realm of how much they continue to tighten
up and control speech on financial matters.
I stay abreast of Chinese language, IB research, and even a lot of the IB research has censorship
mandates about they can and can't say.
That DPRK model is clearly something that they're at least trending towards, even if
they don't go quite that extreme.
MIKE GREEN: It's interesting, because this is the thing that you would expect to see
and it can have two outputs.
Over the course of 18 months, if you decide that you're going to deemphasize imported
iron ore, seaborne, primarily, and emphasize domestic production, the immediate reaction
from most purchasing managers is I'm going to buy as much seaborne ferrous with higher
iron or content, the 62% plus stuff as fast as I possibly can so I get ahead of these
It shows up as a positive impulse into the global iron ore markets.
We saw this, we saw the prices rise, and now they've been falling as this import substitution
The other thing that's interesting about that type of behavior is it ends up increasing
pollution, destroying productivity, because you can't run the higher technology, steel
foundries, with lower iron ore content, lower purity domestic sources.
They've depleted their highest iron ore content, ores, and now they're using lower and lower
which leads to tremendous amounts of slag build up, et cetera in their product, they
just can't do it.
Paradoxically, they're going to end up in a less productive, weaker position through
this choice, but it is a choice for autarky basically, they want to reduce that import
CHRISTOPHER BALDING: Yes.
I think that seems to be the direction that they're very clearly moving.
I think fundamentally, the backup issue is that they're quite worried about their foreign
exchange position because even as reserves have essentially stagnated for a couple of
years, money has continued to grow relatively significantly, such that if there's any problem,
that is going to put a real dent in their FX position, especially with all the foreign
denominated debt they have coming down.
MIKE GREEN: Well, when you say money has been growing, what you're really referring to is
the broader credit system, not the actual currency in circulation, per se?
CHRISTOPHER BALDING: Yeah.
The currency in circulation has been growing in the low mid-single digits and credit has
been continuing to grow, let's say at 11% to 13% range over that time.
MIKE GREEN: 13% seems right.
When you think about where there's an endgame here, what can cause a reckoning in China?
CHRISTOPHER BALDING: The way that I always think about a reckoning is people always talk
about-- well, they can keep printing money and this type of stuff.
I think of it less as a direct credit type of event.
What I mean by that is, they can always print more money, and they can always close themselves
When you talk about what is going to do that, you're typically looking for-- and I hate
this term, but some type of Black Swan event, types of things that we're not expecting.
When you think about China, the types of scenarios that you would say, okay, what would be an
unexpected type of event?
The types of things that you would not expect is people say, well, real estate is heavily
overvalued, and that's an accurate assessment.
But generally speaking, the loan to value ratios on those accompanying loans, unless
you've bought within the past 2 to 3 years, are such that it's not going to cause a banking
Any significant fall in real estate, however, may prompt people to take to the streets,
but it's not going to cause a banking crisis.
People have such faith in real estate that they just expect it to go up by double digits
every year, no questions asked.
When I lived in Shenzhen, the apartment I lived in would have sold for probably $2.5
It was roughly 1500, 1400 square feet and the average wage of the person who lived there
and worked for the electrical company as the developer was probably capped out at $20,000
to $30,000 in official terms, so you can do the math from there at what is that roughly
100 times down.
That is an astounding-- that's an absurd ratio.
One of the things we've seen is cities and provinces that have been instituting essentially
price floors, where they won't let transactions take place if it's beneath a certain price
That gets to the really the societal fear, even if there's not a significant financial
risk for most of the broader economy is that they don't want prices to fall, because that's
going to create, for lack of a better term, a real societal risk.
There's people that track where riots or conflicts take place in China and one of the more common
reasons that riots or conflicts take place in China is a developer will sell 50% or 75%
of a development and then they'll lower the prices for the remaining 25% of units or something
The people who've already bought come out and riot asking for the same price cut.
Those are the types of things that keep Chinese technocrats and Chinese politicians up at
night is if they ever have to announce broad based falls in asset prices, like real estate.
MIKE GREEN: When you think about something like that you think about that type of environment
in which that's a risk and levels are 100 times income, the United States put it in
contrast in an urban environment, you're typically going to see 8 to 10 times with much lower
levels of homeownership.
It tends to reflect a wealthy individual in New York City or Los Angeles being able to
afford a home when many people can't and therefore live 50 miles away and commute in.
When you talk about a place like Shenzhen in those types of multiples, what's enabling
What's allowing that to be serviced at this point?
How do people actually afford to do this?
CHRISTOPHER BALDING: What you will typically see is that basically, families or extended
families, et cetera will basically pool their money to purchase an apartment.
I had a student that he and his fiancé were pooling their money, and then their parents,
each parents on each side were pulling their money.
This all went into purchasing an apartment for this new family.
This actually generally matches household wealth data that we see because even though
in China, there's this fabled myth that household have a 40% savings rate, the implied rates
are actually much lower.
Actually Chinese household savings rates, they have household liquid financial wealth
numbers that are much more in line with Mexico, Brazil, Russia, which have significantly lower
household financial wealth numbers, and have also seen lower rates of return over time.
Either China is saving much less, or the rates of return that they're seeing on financial
assets is much lower, you simply can't reconcile this 40% savings rate number with the rates
of return that they've claimed unless that number, unless those financial assets are
being consumed in household savings.
MIKE GREEN: Well, this is one of the things that I think people struggle with, and the
difference between household accounting and national accounting.
In a household accounting basis, you and I think of our savings as the dollars that we
don't spend, that we put into the bank or into another investment account.
In a national accounting system, it's really a solution set for how much money has been
spent on investment, in particular, capital investment, but other forms as well.
By definition, in national accounting terms, savings equals investment, and therefore,
the Chinese are saving a lot because investment is give or take 40% of GDP.
Is that a fair characterization?
CHRISTOPHER BALDING: Yes, I think that's a fair characterization.
MIKE GREEN: If I were to look at the actual cash flow dynamics of an individual Chinese
household, what would you guess the actual savings rate is?
CHRISTOPHER BALDING: I think, if we can take like a little bit of a range, I would say
that the number is probably somewhere between about 15% and 25% of income.
You really can't justify based upon other implied data that it's any number really above
25% and it's difficult to argue that it's, let's say in the high single digits or low
To take a range, I'd say 15% to 25%.
MIKE GREEN: When we stop, and we think about, again, their system of national accounting
and the way we account for it here in the United States, we don't include in our savings
numbers things like social security or Medicare, which is money that is theoretically being
taxed and set aside for future consumption, i.e. savings.
It's invested in the form of government bonds that are purchased by a government entity.
These are actually very similar levels.
If I take the US 6%, and I add roughly the 15% Social Security and Medicare burden combined
between households and corporate sector, they're basically like us.
CHRISTOPHER BALDING: Very, very similar, yes.
Because one of the things is, is that in China, even though they have a technical guarantee
of medical care, that really provides for very little.
There's a lot of pre-emptive savings, where a lot of that savings is essentially set aside
for cancer or other medical care, things like that, other transitory shocks being out of
One of the one of the reasons why those household financial asset levels are much more in line
with your Mexico's and your Brazil's, is because there's a lot of consumption of that preemptive
savings for medical care, Social Security, et cetera, et cetera.
MIKE GREEN: When we think about-- so there's more vulnerability at the household level
and as you're saying, where we've seen incidences of effectively writedowns, developments, that's
been a cause for demonstrations and an attempt to get the developer to refund the difference
or to rescind the price decreases.
CHRISTOPHER BALDING: Yes, that's correct.
MIKE GREEN: How had the state responded to those types of events?
CHRISTOPHER BALDING: In most cases, they urged the developers to try and negotiate and there's
typically some type of arrangement where everybody gets a 10% discount or something like that.
There's also cases where they call in the riot squad and clear it and everybody that
had a contract is forced to buy and they just delay those sales of those additional units
for another couple of years when people are already locked in or something like that.
However, generally speaking, it just goes on a case by case basis as long as the problem
MIKE GREEN: When we think about some of the developments that are currently in play, so
the African swine fever has resulted in pork shortages, we're seeing this in wholesale
price, pig prices beginning to surge in China in advance of the Chinese New Year and I guess,
the traditional time for making pork soup, which is turning into an issue.
How do they think about the capacity of the population to rise up similar to what we've
seen in Hong Kong, or the increased resistance we're seeing from Taiwan?
Is it more will come to an accommodation, or is it more, we're going to bring out the
water cannons or the actual cannons?
CHRISTOPHER BALDING: This is just speculation on my part, nothing more, but they are very
smart in Beijing.
One of the things you have to keep in the back of your mind as a possibility is that
they know that the economy has been stressed for a couple of years, since 2015.
They know that there are significant stresses in the economy, and so one of the things that
you have to consider is that they have been building up this surveillance capacity.
They've been building up this censorship capacity for preparing for exactly these types of scenarios.
So whether it's pork, whether it's real estate development, whether it's making sure that
news about Hong Kong is sold in the way that Beijing wants to be sold, you have to consider
that they've been preparing for exactly these types of scenarios, so that they can keep
any types of dissent from getting out of hand.
And if it does, they can respond in almost real time to a gathering of people in this
part of town, a riot in this part of town, complaints about the price of pork in this
WeChat group so that they're ready for all those types of scenarios.
MIKE GREEN: This is a theme that I've expressed as well.
The deal since Deng Xiaoping has been don't protest don't complain, we'll make you rich,
the natural conclusion from that is if you conclude, you can no longer make people rich,
you need to install the surveillance systems that prevent them from protesting.
It feels like that's what much of the development that you're referring to has been focused
It's a realization that things are going to be less good going forward and so you need
to be prepared with crowd surveillance and instantaneous response.
CHRISTOPHER BALDING: Yes.
I think, even for us, living in China, we always knew that we were going to be monitored
and expected that and we never posted pictures of Tiananmen Square on WeChat, for instance,
but I think even in the last year we were there, my wife comes home sometime in the
spring of 2018 and there was this intersection where she would take my son, and she'd get
on the bus-- and my son liked getting on the bus.
She comes home one day, and she's like, oh, my gosh, this bus stop, which is not even
in a major intersection.
She's like, they put up a massive bank of security cameras so that it basically just
on one corner, everything on the intersection from 10 different angles would be covered,
and of course, it had facial recognition and could zoom in on different people.
Just even within the past, let's say two years, the level that they have gone to, I think
by any standards, even by Chinese standards, is quite surprising.
MIKE GREEN: When you think about the local reaction, your wife, obviously, as a foreigner
is attuned to this, the local reaction from your students, from others that you were in
contact with, how did they think about this rise in surveillance, or is it it's just something
they can't escape?
CHRISTOPHER BALDING: It's something that they can't escape but I will say I think there
are people-- I think there's a good number of people in China that are worried about
this, because I think they've always known that they lived in an authoritarian state
but it also is not lost on anyone that they are just barely ahead of the DPRK in being
able to access information.
I was talking to someone that I would consider in China, a relative political and financial
elite and this was in the spring of 2018, I was at a conference.
This was somebody that was in the system.
They weren't a party member.
I was talking to them, and they said there's a lot of worry about the direction that China
is heading and they went to one of the elite schools in China, and they said at a recent
reunion, this dominated the conversation about people being worried.
If you go to an elite school in China, you are part of the system to some degree.
You may not be a party member, you may not be an elite civil servant or vice minister,
but you're in the system to some degree.
You're vested in the system.
To hear people talking like that definitely gives me some hope that there is some valid
concern and I'll give you one more story.
About 18 months ago, I forget the exact timeframe, a senior Chinese tech official made a joke
on WeChat that the CEO of WeChat could read all of his text messages.
It prompted quite the outpouring of concern all throughout China, it's like a damn released
all throughout China about people talking about being concerned that basically anybody
at WeChat can read their messages at any time, and the government being able to read what
This is definitely something that's bubbling under the surface of people having this concern
about privacy, whether it's on WeChat, whether it's out in public, and so I wouldn't call
it let's say, I wouldn't call it a hot button issue.
It's definitely bubbling beneath the surface that people are very aware of.
MIKE GREEN: It's one thing to be bubbling and aware of.
Is there a prospect of it boiling over?
Is there a realistic prospect of anything challenging the direction that it seems to
CHRISTOPHER BALDING: I don't think in reality that that is possible yet.
We haven't had one of those events within China that we know of.
We haven't had one of those events.
The way that I think helps me think about it is there's definitely enough bubbling discontent
about Xi and the CCP that you will hear people talk very privately and quietly with phones
stowed very far away but it's still not anything that people will say with any degree of public
The word that I would use to think about it is, there's a lot of very fragile support
for what's happening in China, so that as long as there isn't a significant downturn,
as long as there isn't that event that makes Xi look weak, for lack of a better term, there's
going to continue to be support for Xi and the CCP.
If there is, for instance, a 25% drop in real estate prices, if there is a significant downturn
in the economy, something like that, that could change very rapidly.
However, I would not expect that to happen anytime soon.
MIKE GREEN: A historical example I believe we've talked about is the German stock market
under the Nazi regime, which was viewed as a point of national pride.
It was perceived as bad.
Some other administrations might think this as well, if the stock market went down, and
so a rule was put in place between 1933-- I think it was actually '34 that it was put
in place-- in the end of World War II in which transaction could only occur at an all-time
The German stock market only went up in a similar fashion.
What you're describing is something identical, where they're basically saying, the only transaction
that can ever happen is one at a higher price, and so we'll see falling transaction numbers.
But prices remain elevated, and nobody has a cause to believe that their property is
worth any less.
Does that feel accurate?
Is that what you think is happening?
Because we are seeing transaction volumes fall fairly sharply, even as prices remain
CHRISTOPHER BALDING: Yeah.
If you take the example of real estate, and I haven't looked at this in about six months,
but there were cities that were at, by my calculations, 100-year turnover rates, and
their prices were still going up.
MIKE GREEN: Just to be clear, when you say 100-year turnover rates, that's a measure
of turnover relative to the stock of housing?
CHRISTOPHER BALDING: Yes.
Basically, if you had 100 units of housing and you started with unit one and went down
the line, and then started back at the beginning, it would take 100 years to psych to it before
you got back to the first housing unit.
In like 2007, I think that number was like at six years in the United States.
You had very high turnover rates.
100-year turnover rates is just absurdly high.
The lowest number that I found in China, I think, was at roughly a 30-year turnover rate,
which is still quite high.
This gives you an idea that there's just not the transaction volume even though prices
continue to go up.
MIKE GREEN: That's one of the things that happens under our command economy.
In a market economy prices, higher prices signal higher activity.
They encourage new supply, they encourage people to take their existing properties and
In a command economy, perversely, you end up with a bimodal outcome, where prices are
set at an unsustainably high level, demand is much, much lower, and therefore there's
very little clearing between the two effectively, activity stops.
Is there anything that could force liquidation?
CHRISTOPHER BALDING: That's part of what they appear to be stopping and they seem to be
trying to address in a couple of ways.
For instance, one of the things is, is that even though the Chinese household supposedly
saves almost 45% of their income, they're now one of the most indebted households in
They're more indebted than US households.
It presents a real paradox, how does a household save 45% of their income and simultaneously
become one of the most indebted households in the world?
That's a real puzzle.
One of those things, it's very difficult to believe that both of those things are true
On the flip side, we've seen a real clamp down on transactions that don't meet city
or provincial levels for price for instance.
One of the other things on that command economy is you're now looking at a housing market
in China where 25% of apartments sit empty and the one sector in China that is continuing
to grow at double digits is real estate and steel inputs to build those apartments.
It seems quite paradoxical that they're continuing to channel credit to a sector of the economy
which is at 25% unused and is essentially deadweight at this point because of population
they're never going to fill.
MIKE GREEN: Well, it seems paradoxical until you break it down and say, wait a second,
the sale of land to developers and the building of those properties is the only way you get
It's also the only way you generate financing for local governments.
This is the 19th century variant of the United States where the funding for local municipalities
came from the sale of public lands.
CHRISTOPHER BALDING: If you look at whether it's households or corporations, virtually
all of their security in loan documents is related to physical assets, primarily either
land or real estate.
If you have that, even if the value, even if nobody lives there, you can very easily
go and get a loan on that unused apartment.
I know a couple people that found themselves in situations where they would go rent an
apartment, and then at some point, they would be living in that apartment and they would
come back, and then there'd be police tape across the door.
They'd go to the landlord and say, oh, well, I have to roll over my loans.
Come to find out, what would happen is they would have an apartment free and clear and
they would go to a bank and they would get a loan on that apartment.
They would take that loan, go purchase a second apartment, either free and clear, or maybe
with a 10%, 25% loan on that apartment.
They would then go to a separate bank and get a loan on that apartment.
They would until they had 10-- MIKE GREEN: Effectively laddering their positions.
CHRISTOPHER BALDING: Yes, until they had 10 apartments on essentially one underlying asset.
That is essentially what you frequently see, because people are very, very-- financial
institutions in China, very happy to lend out on a specified physical asset.
MIKE GREEN: Ultimately, there's another variant of this, which is multiple rehypothecation.
We tend to think of China as this extraordinarily organized and disciplined bureaucracy but
as I understand it, there's no Uniform Commercial Code, there's no centralized database of who
owes money to whom, that assets are multiply encumbered.
This is stuff we've talked about in the past, do you think that still continues to hold?
CHRISTOPHER BALDING: I've heard multiple stories, so it's very, very difficult to pin down what
exactly is happening with regards to purely financial credit.
What I mean by that is, if this is one reason why people use different banks.
I can tell you, there's even been court cases in China, where there's been actual recognized
financial bank fraud as a source of conflict.
For instance, there was a case in Shenzhen where there was going to be a purchase of
a real estate asset, the price that was listed to the bank was different than the actual
transaction price, and there was going to be a kickback.
There becomes this dispute, and it goes to the courts.
Even though the courts recognize that there was actual bank fraud that took place, nobody
was actually prosecuted for the actual bank fraud, because there's such paucity of documentation
between the bank and the listing that gets recorded at the city.
These are the types of problems that-- that's why you go into title and you sign all these
different documentation, signed the loan documents, you signed the title documents, et cetera.
Everybody, there's transparency in that transaction and it doesn't happen that way in China.
MIKE GREEN: Well, that's one of the things that I think people tend to forget is that
the systems that have grown up around credit accommodation in the western regime or the
developed market regime, things like title insurance.
Those, by and large, don't exist in China.
It feels very much if I'm digging into my financial history, or economic history, like
a 19th century variant of the United States where wildcat banks have no method of communicating
with other banks in terms of a property that they've lent money out against.
As a result, credit claims multiply relative to the underlying assets, which again, in
a system of national accounting, until everyone writes it off, shows up as positive savings.
CHRISTOPHER BALDING: Yes, absolutely.
I can tell you a story of a bank that they were on third position in a company that they
felt quite strongly was going to go under, and so if they being in third position, they
were behind two very large banks, they were going to face significant problems recovering
any assets, and they were going to wipe it out.
They actually went to their client and said, let's put together a deal where we can essentially
buy out two banks ahead of us, we can spin this off into a private equity type of entity
where it also goes off of our books and so they actually got one of the two banks ahead
of them to essentially participate in this "private equity offering".
Both banks ended up with the loan being officially taken off of their books, where their clients
participated in the private equity offering so they listed it as a financial asset, and
the loans went off of their books.
Technically, it's no longer in the financial system and both of these banks come out looking
The purpose of that is, is that the banks now are able to boost their overall balance
sheet even though they essentially are still backing these products and loans.
MIKE GREEN: This is a mortgage, what you're describing here is just a contingent liability.
It's the exact same underlying dynamic of structured products in the United States where
a large portion of it was sold off, a fraction of the asset was retained but there was a
contingent liability associated with fraud or anything else.
This is the same underlying dynamic, it's a thing to quote, Disney, it's a tale as old
When you face challenges, speaking, either to Western investors, or to global investors
who might have a different view of China, don't see it with the more rose colored view
of China is the future, it represents a pool of 1.4 billion possible consumers.
What's the reaction to your message?
CHRISTOPHER BALDING: The people that have been there for any significant amount of time,
they know all these stories.
I've never met anyone that hasn't been there for a few years and doesn't know all of these
I think in the West, you come to the United States, you come to Europe, and people have
some idea that some of this is happening but then you relay some of these stories, and
their eyes just get wide like this.
I have this friend in China, and he had this great line.
He's like, the problem with China is you tell people stories here, and they're so wild and
crazy that they don't believe you.
People just don't believe you at first until you've come over and you've experienced some
of what happens in China and you're like, wow, these things are actually are actually
I think especially for financial investors, this is why the largest flows that you're
seeing right now, are the passive mandate money, because the active investors I think
are a lot more, generally speaking, reticent now, having seen some of the problems.
There's a lot less activity in the active mandates to really dive in, because there's
so much concern about the unknown unknowns.
MIKE GREEN: Well, we're definitely seeing this on the corporate side.
Foreign direct investment into China in terms of primary has collapsed.
We are definitely seeing dynamics associated with things like MSCI rebalancings that is
pulling institutional money in.
They're looking to match an MSCI all country exUS passive benchmark, which requires them
to put money into fixed income, it requires them to put money into equity.
This is purely mechanical, it's contained in the 401ks of Americans, it's contained
in the pension plans and endowments of America and the rest of the world for that matter.
With no real analysis of the underlying other than it's big, it's a market and therefore,
we should have some exposure to it feels like that's the only source of capital that's going
in at this point.
CHRISTOPHER BALDING: Yes.
I think what is so amazing to me is-- especially on like the fixed income side, there's so
little understanding of China that people aren't even looking up the IPO prospectus
is and going through them and looking at the bond offering document.
Some of the things you've heard international investors take out with regards to provincial
bond offerings and things like that are just astounding to me, knowing where some of these
places are and hearing some of the things that they're going to be doing with this money.
To this day, it never ceases to astound me that you have people putting in this sum of
money into some of these places, they couldn't even find out a map.
MIKE GREEN: They're doing it for a very simple reason.
They don't know they're doing it.
What I'm saying is the marginal investor is somebody in a target date fund that has exposure
to a Vanguard, or BlackRock or capital that are just plowing money into an international
bond index or into an international equity index with no real knowledge, it just comes
out of their paycheck.
Ultimately, the fiduciary responsibility is offset by, well, we're just market, we're
As long as somebody else presumed somebody else is doing the work in setting the price,
it seems rational until you realize the scale of these flows that are unmanaged.
Let's wrap up and talk very quickly about what you think is going to happen with the
CHRISTOPHER BALDING: My expectation is I would be very surprised if there was any type of
deal before the election.
MIKE GREEN: Is that driven from the US in the intransigence of Donald Trump, or is that
driven by China in your view?
CHRISTOPHER BALDING: My primary complaint about a lot of the analysis that looks at
the trade war, that starts in the United States is not that we shouldn't look at Donald Trump
and all that comes with that.
I think there's too many people that are not looking at, okay, who is my counterparty?
If I'm in a negotiation, there's two people or two sides in a negotiation so I need to
look at, okay, who is my counterparty?
I think there's, there's a lot of people that are not looking at what is the Chinese side.
Let's just look briefly at the Chinese side, I think it's pretty clear for many reasons
that China is really not going to make any changes to their economic model of any materiality
If we look at just how they recentralized the economy, really over the past, let's say
5 years-- 3 to 5 years.
That's the entire focus.
I also think, fundamentally, Chairman Xi can't make any significance.
Let's ignore the political side, it would be politically fraught for him to make any
But economically and financially, the Chinese economy is such right now that any significant
changes to that model could create very significant financial risks and I think they know that.
Whether it's the banks, whether it's the heavy industry that they're subsidizing, that they're
keeping afloat these other aspects, I think there's an enormous financial risk to Beijing
to making any significant financial changes.
I don't think you can expect Beijing to make any financial economic concessions.
If we zoom back out now and look at, well, how does that change how Trump is going to
If you're going in a negotiation and you can look at the other side and say, I don't expect
them to make any concessions really, or any changes to what that I would be asking-- and
the other thing is just politically, Beijing has said, look, we're great again.
You're going to have to deal with that.
That puts the Trump administration in no matter really, what they ask, is it's probably going
to be no.
Everyone talks about how Trump is going to cave or he wants agricultural purchases.
I'm not even sure at this point, China is willing to make those very low level basic
Because if it was, it would seem that maybe they've agreed to it, maybe they haven't,
but they certainly haven't followed through on those pledges that they're going to do
Regardless of what we have with the Trump administration, I think it's pretty clear
that China is unwilling to make any changes to their economic model of any significance.
MIKE GREEN: I lean towards there's probably a component of detente, and if there's going
to be, it's going to be in the agricultural purchases area.
I think China signaled something with the tariffs in particular, on pork at this point
It's the equivalent of Briar rabbit saying, please don't throw me into the Briar Patch.
We're going to prevent you from importing pork to China when the majority of people
are looking at it like well, wait, the African swine fever is destroying the Chinese pork
herd, the swine herd, and so they should be doing the exact opposite.
It feels to me that it's a very transparent move to say, this is something that's really
important to us to protect, and we're willing to take that much pain, when the reality is,
is that the imports that are coming in are from companies like Smithfield, which is a
Chinese company anyway.
They can very easily refund the tariff back to the corporate entity if they choose to
This is going to be a fascinating time.
I agree with you with the under explored part and I think it's in part because people are
so-- the media in particular is so negative Trump, that they're very focused on the CPI
impact, who bears the cost of the US tariffs?
They're spending very little time thinking about the implications of these tariffs in
the context of can China even accommodate any former tariff?
It feels to me like China is very close to-- the technical term is broke and any meaningful
change would just accelerate that process.
The easy answer is, let's say no, and push it off on the United States and say they're
the bad guys.
CHRISTOPHER BALDING: I think there's two broader themes here which seemed to be happening.
The Trump administration seems to be saying, I'm going to get material significant change
from China and if I don't get that, I'm willing to essentially decouple and essentially move
that manufacturing to other parts of the world.
In fact, what you've seen is that US imports from the world are essentially growing pretty
much on trends, a little bit lower this year than the boom year we had last year, where
there was maybe some frontrunning of imports, but they're growing pretty much on trend.
What this seems to indicate is that those imports that would be coming from China are
slowly being dispersed to other parts of the world.
That seems to be one of the gambits that Trump is making is, if I can't get significant change,
I'm at least going to cause the pain so that it has to go to other parts of the world.
China, on the other hand, I think what we're seeing which I think is an enormously underreported
area, is that people say global trade is slowing down because of the trade war.
No, that's really what's happening.
You're seeing imports into China across the board, regardless almost of product, regardless
of geography, imports into China are falling quite significantly.
What they seem to be doing is exactly what we talked about earlier, they seem to be saying
we need to, first of all, lower our import bill in total and we seem to be essentially
becoming more focused on self-determination, whether it's iron ore or whether it's chips
and we're going to do that.
You're seeing this entire trade slowing with all of Chinese trade partners, not just the
That seems to be marking a major shift in not just the trade war, but the global economy,
where China, in some cases, was responsible for 50% or 75% of global growth in trade in
some of these areas and that's essentially been cut off.
MIKE GREEN: Yeah, I see it very, very similarly and we're just to highlight that if that was
actually happening, paradoxically, it would be seen as a rising manufacturing surplus
It could be potentially perceived as China is winning, but the reality is, is that happens,
it's just the same description as a contract manufacturer has positive cash flow once their
business starts to die off, because they no longer buy any inventory, they run off their
working capital, they convert that into positive cash, and that seems like a real win.
It also goes to this idea that China is going to dump its Treasuries.
Going back to the 1936-'37 model, the Soviet Union held on to US Treasuries and any foreign
reserves that it could get very fiercely because they had no prospect of generating them through
efficient trade dynamics.
That was made easier because of the Soviet Union's raw commodity exposure.
It's much harder for a manufacturing entity like China.
As we look forward to the next year, you're going to be heading back over to Vietnam,
where you've been teaching for a while, we're going to get you back to the States so we
can check on this in 6 months to a year.
I'd love to have you back on.
CHRISTOPHER BALDING: Yes, absolutely.
I can tell you, in places like Vietnam, they are actually actively cheering on the trade
It's actually putting them in some industries bumping up against capacity constraints, they
still have port space, but some other things are being built out as fast as possible.
Yes, I'll absolutely be coming back in the next 6 months to a year.
MIKE GREEN: All right, fantastic.
Can we get you back on then?
CHRISTOPHER BALDING: Absolutely.
MIKE GREEN: Thank you very much, Chris.
I appreciate it.