Stiglitz's China Whiz Says Excavator Demand Shows Growth Isn't Overby
Amundi economist says China is biggest global driver, not U.S.
Mo says infrastructure pipeline signals stability through 2018
Surging Chinese demand for excavators shows that the current of fiscal stimulus running through the nation’s economy has a long way to go.
That’s according to Mo Ji, chief economist for Asia ex-Japan at Amundi Asset Management, who called a bottom to China’s slowdown in late 2015 well before it was a consensus view. Now, Mo’s using high-frequency data sets -- like sales of construction equipment -- to form her view on the economy’s underlying trends.
Mo has been working with Joseph Stiglitz on China’s economy for the past 12 years having first met the Nobel laureate when she studied under him for a doctorate at Columbia University. She went on to work for Deutsche Bank AG in Hong Kong alongside Ma Jun, now the chief economist of the People’s Bank of China research bureau, and she later was global chief economist at Azentus Capital Management. Mo also holds degrees from two of China’s most elite schools: Renmin University and Peking University.
In October 2015, she spotted a turning point amid signs China producer prices had stabilized, and less than a year later PPI climbed out of deflation for the first time in four years. She remains confident that the infrastructure construction pipeline means the economy will remain stable through the end of next year, forecasting 6.5 percent growth for this year and for the yuan to trade 7.2 against the dollar at year-end.
Growing up in Qiqihar, a rust belt city in the northeastern province of Heilongjiang, Mo witnessed firsthand how economic and societal change followed major reforms in the 1990s, when there were mass layoffs at state-owned enterprises.
Here are excerpts of a recent conversation:
Question: You have long been influenced by Stiglitz. When did you first start to read his work?
Answer: I still remember, it was wonderful to ride my bicycle to the book store in Zhongguancun in Beijing and see so many of Joe Stiglitz’s economic books and bring them back to the dorm to read them. They were just so wonderful.
Question: Later, in 2005, while you were at Columbia, Stiglitz asked you for a report on China ahead of his visit there. How did you subsequently come to work with him?
Answer: I sent the report to his office and happily left for my Spring break. I didn’t even see him. Two weeks later I checked my email and I was totally shocked. I received one email from Stiglitz. I’m like, oh my god, what’s happening. When I clicked I saw he was back from China and could I go to his office.
Question: You’ve been working with him since and were with him in 2015 when he advised Li Keqiang to not only focus on supply side reforms, but the demand side too. Did it make a difference?
Answer: We had a transcript already approved by the State Council that he would read out, but we thought we could make some modifications and stress some things even further -- if you really want to transform your economy you have to move away from debt-financed to tax-financed. The meeting was very fruitful. Premier Li listened very carefully and I think he noticed there were changes.
Question: What was the reaction from your peers?
Answer: When I was back in Hong Kong, local economists were calling me asking "what’s happening, why are they now talking about supply and demand?" We got them to strike a balance between the demand side and supply side. They totally agreed with Joe. That’s when I thought, I was proud of my contribution for China to be a better China. Supply and demand side is an example of where they do listen.
Question: China’s economy and markets were on a roller coaster in 2015. Why did you call the bottom that October?
Answer: Suddenly PPI didn’t go down further, it stabilized. That gave me the biggest conviction that China was bottoming out because in my logic I was thinking: this is a surprise indicator.
Question: Why do you have faith in price data?
Answer: Price indicators are always much more leading than volume indicators. That is why I felt prices in the over-capacity sector were stabilizing, such as steel, coal, cement etc. That is the best news for China, for emerging markets and also for the global economy.
Question: Why is capital expenditure so important in your outlook?
Answer: When private capex expansion is widespread across the sectors, that means they can do business, make a profit, and have a pipeline of orders for the next two to three years. This gives me the biggest comfort and conviction that this stabilization will continue. Public capex expansion means infrastructure and construction. If they don’t have a pipeline order for the next two to three years, why do they want to buy machines?
Question: Is that why you watch excavator imports?
Answer: I focused on excavator sales to see how much further it can go for construction-related activities. Each month, it hasn’t stopped, ever since September 2016. Infrastructure and property are a very good proxy to see construction activity. Excavators are usually from Japan so for those people who don’t believe in Chinese data, this is real.
Question: What can we learn from excavator data?
Answer: They release the number of units they’ve sold, and operating hours, so that’s why for both sets of data you can really see if construction activity in China is better or worse -- and actually it’s getting much better. That’s a very important indicator to see construction activity in China given manufacturing activity in China is slowing down.
Question: How confident are you on your call that China’s economy will remain stable through 2018?
Answer: I have a very high conviction, 90 percent conviction it will work. It’s based on not just what I’m saying but on capex expansion.
Question: Many China bears wouldn’t agree.
Answer: China is actually becoming the core in terms of deciding where the global economy is going, it’s not the U.S. anymore. The key judgment for the market is always if the U.S. recovers there’ll be a global recovery, or a U.S. recession then a global recession. This is changing and never holds anymore. The correlation between the U.S. economy and global economy is not as important as before, it’s about China. The new logic is if China is stable, the global economy recovers. If China has a hard landing, then there will be a global hard landing. It’s shifting from the U.S.
Question: How will the yuan trade this year?
Answer: The yuan is moving from crisis to normalization. The yuan is a global currency stabilizer. By the end of 2017 the yuan will have moved the least of all the major currencies. It will have to depreciate. When the Fed is hiking and the U.S. economy is relatively better, there’s still pressure for the yuan to depreciate.
Question: You argue China needs demand-side reform such as a resource tax, carbon tax, property tax, capital gains tax and so on to raise new revenue. Will that resolve the debt buildup?
Answer: China is very pragmatic, solving the problem by delaying the problem. We have to delay the problem, but in the process we’re solving the problem. Growth cures it. If you really want to transform your economy, you have to move away from debt-financed to tax-financed.
Question: We hear a lot about the need for state-owned enterprise reform. What was it like to witness the fallout from shaking up government-owned factories in your hometown?
Answer: The changes in my city at the beginning were very shocking to me: Over 90 percent of people working in SOEs were unemployed. But the transition afterward was much smoother than the beginning.