In a recent discussion with Cris Sheridan on FS Insider, Louis-Vincent Gave of Gavekal Research shared his insights on the current state of global liquidity, central bank policies, and China's rapid ascendancy in many strategic areas. As Louis explains below, just in the past five years, China has leapfrogged the US in advanced manufacturing with clear implications for inflation, the global economy, and investors moving forward.
For podcast audio, see Louis Gave on China’s Rapid Advances in Strategic Industries.
The Current State of Global Liquidity
Gave opened the conversation by highlighting the unprecedented levels of global liquidity flooding the markets. He noted, “If you look around the world, you’ve got the ECB cutting rates... the biggest three central banks in the world, China, Europe, and the U.S., are all cutting interest rates.” This coordinated easing reflects a significant shift in monetary policy aimed at stimulating growth amid various economic challenges.
He pointed out that this liquidity expansion is occurring at a time when energy prices remain stable, creating a supportive environment for growth. Gave remarked, “If you have low energy, easy fiscal, easy monetary policy, things are usually pretty good.” As a result, equity markets are experiencing renewed highs, buoyed by these favorable conditions.
The Chinese Economic Landscape
Delving into China, Gave emphasized that the country has recently shifted from a contraction in monetary aggregates to a more accommodative stance. “Up until, well, two minutes ago, Chinese monetary aggregates were shrinking year on year... the appetite for loans was very, very low,” he explained. This lack of credit demand prompted the Chinese government to adopt a more dovish approach, aiming to reignite confidence and consumption.
However, Gave cautioned that the current stimulus is unlike past initiatives that heavily relied on real estate and construction. “This time around, I think the stimulus is taking another form,” he noted, indicating a strategic pivot towards boosting consumption and asset prices rather than inflating a real estate bubble. He anticipates that this shift will prevent further economic deterioration and may help achieve the government’s growth target of around 5%.
The Future of Chinese Equities
With the Chinese government signaling its commitment to support equity markets, Gave expressed a bullish outlook on Chinese stocks. “I think we’ve started a bull market on Chinese equities for sure,” he asserted. This optimism stems from the government's increased focus on stimulating asset prices and enhancing consumer confidence through policies like encouraging share buybacks.
Gave explained that the transition from real estate-driven growth to a more diversified industrial approach means that “big parts of the economy... are actually humming along and doing great.” He believes this could lead to a significant re-rating of equities, especially as investor sentiment shifts from pessimism to a more optimistic outlook.
Commodity Supercycle Sees Partial Revival
As China shifts its focus to stimulating asset prices, Louis Gave highlighted the nuanced effects on the global commodities market. Unlike previous stimulus efforts that heavily targeted construction and real estate, the current approach is more diversified. “This time around, it’s not all geared to construction... there’s no doubt that all else being equal, China stimulating is better for commodities than China not stimulating,” he explained.
Historically, China's robust demand has been a cornerstone of the commodity supercycle, driving prices for everything from oil to base metals. Gave observed, "A lot of commodities were priced for China to be in the complete doldrums." The latest stimulus measures have eased fears of prolonged deflationary pressures from China, leading to a noticeable resurgence in commodity prices.
Moreover, Gave emphasized that even though the nature of this stimulus differs from past initiatives, it effectively removes the negative sentiment surrounding Chinese demand for commodities. By alleviating concerns of a prolonged economic downturn, the renewed confidence supports a rebound in commodity markets, signaling a more stable and optimistic outlook.
Industrial Leadership: China's Leapfrog in Critical Sectors
One of the most compelling aspects of Gave's discussion is China's strategic investment in key industries, positioning the nation as a global leader in several high-tech and sustainable sectors. From electric vehicles (EVs) and batteries to industrial robotics and renewable energy, China has made significant strides that could have lasting implications for global competitiveness.
Gave points to the transformation in China's industrial credit growth over the past decade. "What you see is starting five years ago, growth of bank loans to real estate and construction collapses, while at the same time bank loan growth to industry goes through the roof," he notes. This reallocation of credit towards industrial and technological sectors has enabled China to leapfrog in areas traditionally dominated by the West. "Companies like BYD are making massive advancements in battery technology," he adds, underscoring China's dominance in this critical component of the EV ecosystem.
The rapid development is not confined to consumer goods. Gave highlights sectors like solar panels, where China now manufactures approximately 93% of the world's supply. "Ten years ago, China basically didn’t have a solar panel industry. And I think something like 93% of the world's solar panels are now made in China." This dominance extends to industrial robotics and other advanced manufacturing sectors, reflecting a deliberate strategy to build a robust, self-sufficient industrial base across numerous critical sectors.
The Geopolitical Implications of Energy Strategy
Gave also touched on China’s energy strategy, particularly its investments in nuclear power. “Right now, you’ve got 32 nuclear plants in construction... roughly half of the world’s nuclear plants under construction are in China,” he noted. This focus on diversifying energy sources is not only about meeting domestic demand but also about enhancing national security in the face of geopolitical tensions.
He explained that China’s vulnerability in energy supply routes has prompted a strategic pivot towards self-sufficiency in energy production. “if you're China you think, okay, great so it's semiconductors today, but it could be energy tomorrow so I have to do whatever I can to diversify my sources of energy as quickly as possible,” he stated, underscoring the urgency behind these investments.
Global Inflation Bifurcation
Finally, Gave discussed the implications of these developments for inflation and global economic dynamics. He noted a bifurcation in the global economy, where countries that embrace trade with China will likely experience deflationary pressures, while those that erect barriers will face higher inflation. “The world is splitting between the countries that will happily trade with China and those that reject trade with China,” he explained.
This division could have far-reaching consequences for monetary policy and investment strategies in the coming years. Gave warned that U.S. policies aimed at re-industrialization, if pursued through protectionist measures, could lead to significantly higher inflation rates and structural economic challenges.
Conclusion
Louis Gave's insights provide a comprehensive overview of the current economic landscape shaped by global liquidity, China's strategic policy shifts, and the implications for investors. As we navigate this complex environment, Gave’s analysis underscores the importance of understanding these dynamics to make informed investment decisions. With China taking the lead in critical technologies and industries, the global economic balance is poised for significant changes that investors must carefully consider.
For those looking to stay informed on Louis' research and views, go to www.gavekal.com or follow him on X @gave_vincent.
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