(Bloomberg) -- Rising protectionism globally and a deeper trade war with the US may give China the much-needed push to bolster domestic consumption, said Weijian Shan, who chairs one of Asia’s largest alternative asset managers.
An escalation of trade conflicts would spur China to reorient its economy “away from investments and exports in the direction of private consumption,” Shan said in an episode of the Asia Centric podcast with Bloomberg Intelligence.
“I don’t think that a trade war is necessarily a bad thing for China for the long term,” said Shan, executive chairman of PAG, which oversees about $55 billion. “I don’t think, left to their own devices” that Chinese officials would make the shift on their own, he added.
Shan, who grew up in China during the Cultural Revolution before attending college in the US where he started his banking career, spoke as Americans head to the polls for the knife-edge contest between Kamala Harris and Donald Trump.
While both candidates have promised to act tough on China, Trump has threatened to raise tariffs to 60% on Chinese imports. Tensions are also flaring elsewhere, with the European Union imposing tariffs of as much as 45% on electric vehicles from China.
China’s share of global exports has risen in recent years, despite a wide array of duties imposed by then-President Trump. At the same time, export prices have fallen for a range of goods including steel and electric vehicles, contributing to deflation and exacerbating tensions with trading partners. Meanwhile, growth has slowed as a housing market collapse saps consumer confidence and weighs on the labor market, fueling calls from economists for officials to boost sentiment and spending.
Some observers and politicians have accused China of trying to export its way out of the current economic woes. In a podcast earlier this month, Trump said he would consider replacing income taxes with tariffs, arguing the US was at its wealthiest in the 19th century when it maintained higher import levies.
Shan said the trade war has neither achieved the goal of narrowing the US trade deficit, nor dented Chinese export capability and economic growth. Instead, it has only made the world economy less efficient and contributed to US inflation.
“If that is a track record, you can imagine that more tariffs is not going to achieve any further results than what we have seen already,” said Shan, whose PhD thesis adviser at the University of California Berkeley was Janet Yellen.
Bold Stimulus
Trade tensions aside, the Chinese leadership will need to take bold and consistent measures to reinvigorate the economy and shift market expectations, Shan said. In a March commentary, the veteran investor urged China to remove all home-buying restrictions.
It is too early to tell whether stimulus measures unveiled since late September will be sufficient to sustain a recovery in the stock and property markets and restore confidence. Additional policy measures are likely to be unveiled, Shan said. The National People’s Congress Standing Committee meets next week and is widely expected to announce details of fiscal stimulus.
“So I don’t think the other shoe has completely dropped,” he said. “In order to completely turn around expectations — which is the key — the measures will have to be bold. It has to be very big, and it has to be consistent. It has to be continuous.”
While the MSCI China Index has rebounded 15% since the first stimulus measures were announced on Sept. 24, the initial euphoria has waned as investors await more concrete measures, especially on fiscal spending.
China has more scope for monetary and fiscal stimulus than meets the eye, Shan said. The nations’ central government debt ranks among the lowest among major economies, leaving ample room to boost fiscal spending to achieve its 5% growth target this year, he said.
PAG’s businesses span private equity, real assets to private credit and liquid market strategies, including hedge funds. About 30% or less of its current investments are in China, said Shan, a former TPG Capital partner who founded PAG’s now $19 billion private equity arm in 2010.
Within China, its buyout business is focusing on leading companies that cater to rising private consumption, are protected by high entry barriers and enjoy a competitive advantage, Shan said. PAG led a consortium that agreed in March to take control of Chinese conglomerate Dalian Wanda Group Co.’s shopping mall unit.
While China remains an important market, PAG has been “very active” in Japan, Australia, India and Southeast Asia, he said.
Japan is one of the firm’s largest markets for investments now. Easy monetary policy has made leveraged buyouts an attractive opportunity, while corporate governance reforms have spurred companies to offload non-essential businesses to improve efficiency, Shan said.
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