As the macroeconomic situation changes around the world, companies are looking at ways to relocate some operations to friendlier or closer countries, reorganize their supply chains to minimize disruptions, or even to sell all or part of their firms. Here's how banks are helping, and what the economy has in store next. In this live virtual interview, American Banker Editor-in-Chief Chana Schoenberger discusses these questions with Michal Katz, Head of Investment and Corporate Banking, Americas at Mizuho, and Reva Goujon, senior manager at Rhodium Group.
Transcript:
Chana Schoenberger:
I'm Chana Schoenberger. I'm the editor-in-chief of American Banker. Thanks for joining us today. I'd like to first introduce our two distinguished guests to talk about deglobalization and corporate banking, how banks and their clients are dealing with the move to a less connected world. So first we have Michal Katz, who is the head of investment in corporate banking at Mizuho Americas. And we also have Reva Goujon, who's a senior manager at Rhodium Group. Thanks for joining me here, everybody.
Reva Goujon :
Glad to be here with you, Chana.
Chana Schoenberger:
Great. So, let's just kick this off. We have about 45 minutes to talk about the total state of the world and US foreign policy as it affects banks. So it's a, it's kind of a broad remit. The world is becoming increasingly less tied together economically. So is globalization over or is it changing into a new form? Reva, you want to start that one?
Reva Goujon:
Sure. I'll start off. Um, you know, it's, you hear the term de-globalization a lot, uh, and you know, if you look at overall trade volumes, uh, and of course the pandemic disrupted a lot. So you, you kind of have to take, um, some of the more recent data with a grain of salt. But overall, it's not that trade is slowing down appreciably, um, it is getting reorganized, right? And there are geopolitical motivations behind that. That is gonna create disruptions that is gonna create, you know, new, uh, types of business calculations, um, and risks and added costs. Um, and so all sorts of implications flow from it. But, you know, in terms of, of trading less, I don't think that's a, a direction that we're moving toward. In fact, the more regionalized your supply chains get, um, you know, the more trade activity, uh, that you, you have occur.
And from a geopolitical dynamic, you know, we're no longer in a unipolar world where it's, it's clearly the US is dominant. Um, and, uh, of course now we have China as a major peer competitor, but we're increasingly moving to a multipolar world. And in that kind of geopolitical climate, middle powers are constantly trying to hedge, eat each other's lunch when one country tries to impose restrictions on another. Um, and so all that kind of activity, those sort of like defensive mechanisms that get thrown up actually leads to a lot of trade activity. It just looks a whole lot different.
Chana Schoenberger:
That's not as scary as I was expecting you to say. Michal, what's your perspective on this?
Michal Katz:
Yeah, so first of all, thanks for having me on this program and I'm really excited to talk about this topic because I think it actually impacts beyond trade. It really impacts almost nearly every aspect of our lives. Um, I think that when you listen to the rhetoric and the recent actions that are being taken by governments across the board, um, the public sentiment for globalization has certainly waned because of what I think is like a broader mistrust of institutions and politics. And when you look at, uh, governmental policies that are blamed for failing to, um, protect labor, uh, when they were displaced through offshore offshoring or automation, or the response to the recent pandemic or climate change, what have you. But as Reva said, the facts don't support the fact that globalization is ending. Yes, sure, some areas are definitely plateauing or reversing, but I completely agree in terms of global trade continues to grow, foreign direct investments is flowing across geographies, um, perhaps at a different, uh, pace, so to speak.
But I also wanted to mention like on the geopolitical front, like we've seen Ukraine trying to actually become more integrated with Europe. Finland and Sweden have filed an application to join nato. The west has rallied to support Ukraine during, uh, you know, for the Russia aggression. And, and I think that's what's really we have seen during this, the pandemic, is that our economies and businesses are so highly interconnected and integrated. And so it's really hard to reverse it. Um, and globalization as a whole has brought significant, um, economic and social benefits, right? We seen lower cost of goods, which benefited consumers, benefited economies, benefited corporations and their shareholders. And on the social front, um, you know, it lifted hundreds of millions of people out of poverty and, you know, the sharing of cultural dynamics. So I do think that globalization is kind of getting reshaped, but it's not ending. Um, that's, I'll pause there.
Chana Schoenberger:
Yeah, that's good. I mean, it would be pretty scary if all the work that had been done to build institutions and build trade links and, and other sort of connections between countries were just suddenly over. So it's, it's good to hear that you both think that it's just reshaping. So, um, when you look at, there's been a lot going on in the last three years, the pandemic, there's the war in Ukraine, there's the ongoing China trade issues, supply chain disruptions. What did we learn from all of this about how countries and how companies will work together? And Reva, you were just telling us some interesting things before we started here about the latest salvo in the China trade war.
Reva Goujon:
Yeah. Um, I am sure for anybody who's related to technology companies on the line, your morning has been just as bananas as mine has with the new controls that have dropped this morning. And, um, a lot of this were things that, you know, we had seen kind of bubbling up that were in the policy discussion, but this is a pretty big bang approach. Um, and we're seeing this in the strategic technology competition arena in particular where, uh, the US has been trying to, you know, play this cat and mouse game of let me throw more entities on a list and, um, create more restrictions. But that's frustrating, right? It's an ex an exasperating game. You can't, regulation can't keep up with that, uh, especially in very diffuse party state, uh, corporate ecosystems like in China. So you are seeing a more strategic approach on the one hand, a more defined approach as well, where the White House is saying, Look, these are technologies that I care about, right?
Advanced semiconductors, quantum computing, AI. Increasingly you're seeing also, uh, biomanufacturing included in their high capacity batteries, which has big implications for EV supply chains. But essentially like these are the things that, you know, we wanna kind of put up the, the guardrails around. But then there's a question of how, uh, and where, uh, national security advisor Jake Sullivan a couple weeks ago, um, he gave a really striking speech where he said, Look, sliding scale no longer is, is really the approach that we're gonna take to ex export controls. In other words, we're not gonna keep evolving the control with the technology, we just need to draw a line in the sand and try to, to freeze China in place. Um, and, you know, for, for technology supply chains, overall semiconductors in particular, that's, that's really bold, Um, and can create a lot of ripple effects.
So, uh, what we're seeing in the controls that drop today is an attempt to do exactly that, freeze China in place. Um, but it also shows a, a broadening of objectives as well where the US is feeling a lot of angst over where China's growing its market share, for example, in areas like advanced memory chips. And so we're going after the US is going after Chinese entities that are growing in that capability, very directly denying them the, the machinery equipment they need to make those chips. So this is taking things to an, an entirely new level, um, kind of going for the jugular. Um, and we really do need to consider how China can respond. Um, it's very vulnerable in many areas, uh, and so doesn't necessarily want to shoot itself in its foot when it's so dependent on US origin inputs. But, uh, you know, this is hard and it, there are some long arm provisions that reach into us, uh, partner relationships as well that could really undermine some of the cooperation we've seen so far. Um, in some cases others will, will just need to follow the US' lead, which I think was one of the big assumptions going into this, uh, to these new controls.
Chana Schoenberger:
So does this tip over to the point where you think there's going to be some sort of like a larger foreign policy impact on that goes, moves out of the business realm and into something maybe more military or otherwise strategic?
Reva Goujon:
So what I worry about, um, is, you know, you, you can understand the policy objective here, right? Of these are the technologies we need to protect. These are things that could end up in military and use, There's, there's a lot of reasoning behind all of this, but when you create new rules, adapt rules, um, you know, put everything under the umbrella of national security, how those measures are applied, as we've seen from, you know, recent years, that can vary a lot. Administration from administration, right? And, and if you take a more blunt approach to just basically trying to cut, uh, a major power like China off from critical technology supply chains, you have to wonder are you putting your adversary in an existential position to where they feel compelled to respond? And how do they respond? Right? Is it export restrictions around critical inputs, right? China has big leverage on raw materials and, and rare earth, um, uh, elements in particular, um, and Taiwan, right? Like there, that's another, uh, area that's on an escalatory ladder. We've seen throughout history cases where powers will, will escalate for frictions as, as a negotiating strategy as well, right? In a kind of sue for peace approach. We're not there yet, but the trajectory is, is concerning.
Chana Schoenberger:
Yikes, That's terrifying. Michal, what do you think?
Michal Katz:
I, listen, these are all like various, um, hypotheses of where these thing can end up. I'm trying perhaps be a little more balanced about what does this new globalization mean? It will start kind of, um, we're already doing the defensive part of it. Uh, meaning we are looking to build supply chain resiliency, uh, creating redundancy, diversifying vendors and suppliers reassuring. And, and there was a McKinsey study that said that, uh, over 90% of businesses are, have already taken steps or taking steps to improve their supply chain resiliency, like increasing inventories, the dual sourcing, et cetera, et cetera. But I think that, um, what RVA was talking about, I kind of also viewed as opportunity to be more proactive or maybe more kind of go on the offense and maybe reclaim a leadership in key sectors and, um, in technology, which you just talked about. So, uh, may perhaps lessen the nefarious part, but just ensuring our supply chain, ensuring our businesses, particularly in the semi and electronic sector and, you know, public policies like the CHIPS Act, which pretty much dedicated, you know, called 50 billion or so committed 50 billion or so to subsidize like US semi manufacturing.
And on the heels of that, we've seen Intel, um, committing to it this past week. Micron committed a hundred billion dollar of investments just yesterday. IBM committed $20 billion of investments in the Hudson Valley in terms of, of building, you know, fab facilities. So, um, you know, I do think that there is this opportunity to perhaps, um, in also in regionalization, um, which we talked about earlier, can it benefit economies like Mexico, which could serve the US market or other, um, you know, Eastern Europe could serve western Europe better or maybe South East Asia, um, serve Japan and other affluent countries in Asia better. So I kind of try to think about the fact that there is an opportunity, and if you think about, you talked about some of the raw materials that are very much housed in China, does that propel the renewable sector? I mean, you have wind and solar everywhere, and it does require different components and different, um, I would say commodities and elements, and they can be regionalized too. So I don't know, maybe that's a glass more half full. Um, but I do view it as an opportunity for us, um, to perhaps, uh, escalate or accelerate some of the investments which have been lagging for, for a couple of decades now.
Reva Goujon:
Yeah, I, I completely agree. I mean, there is a lot of activity that is flowing from these policies and in a positive way, right? Um, and creating that manufacturing, um, it's, the timeline here matters a lot as well, right? Um, to, to bring these fabs online, for example, you know, that that's gonna take several years. And so, um, that's where it's just important to look at where, where we are in those gaps, right? As we are bringing new capacity online, um, it's a great time for incentives, uh, you know, to invest across us and partner countries. On, on the other side of this, what I'm watching for as well is, uh, you know, as, as China is looking at all this friend Shing, um, you know, effort, uh, underway and where, uh, deal making comes into play, you know, for mergers and acquisitions, um, around, uh, sensitive supply chains where the US wants to coordinate tighter with its partners. Um, this is also where we have to watch out for extra territorial measures, right? Um, and, and where you can exercise long arm provisions, for example, on anti monopoly grounds to, to try to disrupt some of that. So something more to look ahead, but completely agree. We're seeing some very interesting investments. Even, um, Japan, for example, the government is subsidizing to some degree, uh, micron producing in Hiroshima. So you're, you're even seeing that level of, of collaboration on, on bilateral level among the US' closest partners.
Chana Schoenberger:
Interesting. Um, so when you, when you say a word like extra territorial, it makes me think of what's going on right now in Ukraine, which is, of course, it is not a business dispute, obviously it's just a flat out political war, but how is that situation going to affect what goes on in the rest of the world, and especially in places like Europe?
Reva Goujon:
Well, it's, it's one of the big lessons, you know, as we're thinking about retaliation, right? Um, every major power has to assess what's their leverage. Right now, the US has leverage in technology inputs. This is why the US is, is growing more aggressive on those controls, uh, right. It it sees a window, um, to create a bigger lead. And it's assuming that others, its partners will follow. Um, so we'll see that hypothesis tested, um, as new investment comes online and as, as restrictions also come into place, um, Russia's leverage energy right over Western Europe. But is this in any way going to incentivize, uh, Western Europe to become, to remain into integrated with Russia as a critical energy supplier? Of course not, right? I mean, the Germans were on board with Nordstream 2, for a very long time, much to the, um, exasperation of, of countries like, like Poland. Um, and, but now, you know, all the cards are on the table, and so you're seeing kind of a scramble now, right? To, to reorient, uh, US LNG is booming as a result of this. Um, so that's an opportunity, right? Um, food supply chains are becoming front and center of, of policy debates now. Um, so that idea of lessening dependency on your adversaries or potential adversaries in a hot conflict, that is one of the biggest takeaways that we've seen coming out of this, the war that is still very much active.
Chana Schoenberger:
Although the scary thing is you don't always know who your adversaries are, right? So 10, 15 years ago, people would've thought that Russia was a safe place to get energy because they were all very tightly integrated. And of course, now it is not.
Reva Goujon:
Yeah. And, and Russia really enjoys playing spoiler status. Um, and so it, it would assert its leverage. Um, it did this during the, the orange, uh, revolution in Ukraine first, um, and really showed that it can make, uh, Europe suffered during its winter months. So this goes way back, right? Um, and, and Europe has seen the writing on the wall, uh, but you can argue that there's some, some complacency that that bigger powers would actually go to war to realize what seemed like, um, you know, kind of outdated nationalistic claims. But we're, uh, you know, there hasn't been a century where there hasn't been major world conflict. So I don't think this century is immune to that either.
Chana Schoenberger:
Yeah, it's kind of too bad that we haven't outgrown that, but clearly we have not. That's a bummer. Um, so when you look at, at industries, which industries do you think are gonna be the most vulnerable to these sorts of changes, both for manufacturing and for M&A and just overall?
Michal Katz:
Uh, so I think for, let's just touch on manufacturing first. So when we kind of take a look at, um, various sectors, we try to look at the vulnerabilities across each sector's supply chain. So what is the length of the supply chain? What are the number of intermediate cross border steps? Uh, what is the geographic distribution? Um, you know, what's the access tooma materials, access to labor, What are the skill sets, et cetera. So for example, um, the auto industry supply chain is incredibly long and integrated. And then, like in contrast, you have pharma, which is relatively short. Uh, the chips and electronics, which we've kind of talked about quite a bit, is not quite as long as autos, but it's incredibly concentrated. Um, I think I saw the stats at 14 economies account for 80% of it, and look at food, right? Like, especially Ukraine.
And, you know, during this crisis, food is a relatively long, uh, supply chain. Uh, but some agricultural inputs and commodities are very concentrated. Russia and Ukraine account with 30% of the, uh, global wheat exports and 15 plus percent of the global, uh, uh, world corn exports. And so when we look at sectors across the board, like the US manufacturing sector is deeply, deeply linked to the world economy and is reliant on international trade for production and for sales. Um, but as I said before, I, I kind of try to think about, well, what are the opportunities that come across from that? So yes, oil and LNG have really have been the top commodities that are traded globally, and we've all seen the impact of the disruption from the Ukraine, Russia crisis, and particularly on energy prices. But I do think that renewables could be a really interesting place, um, uh, for that.
And then from the banking side, you mentioned M&A before that, I mean, we may see increased M&A activity as corporations look to, uh, for more vertical integration, uh, of the supply chain. I mean, that could be on any sector that may have been impact of demonstrated vulnerabilities, um, during, uh, the crisis. But I do wanna talk about like m and a for just a quick second. Cause I think also Reva alluded to it before, we've just come off like a record year. Uh, 2021 was, I think globally 5.8 trillion of M&A volume. It's down globally, 35% down in the US, uh, 45% probably, you know, smidge more. And the current macro backdrop, and it's away just from globalization, it's the rising cost of capital, increasing interest rates. It is the, uh, prospect of slowdown both domestically, you know, in, in the US and globally, and the regulatory environment.
And I think that, um, we, we touched upon that just a bit, but to me, what's really, really interesting in some recent transactions have been in the market, the willingness of governments to actually intervene. And we, even when the companies that are transaction are not, don't have any presence in the geography. So I think about the Illumina Grail transaction, 77 billion trade, which, um, actually got clearance, um, in the US and then got, uh, regulatory scrutiny in Europe when there is no presence or operations in Europe by the eu. Um, similarly we've seen that with, um, the meta Facebook's, um, uh, Giphy transaction. It's a small deal, 400 million or so. Uh, but yet, um, has gotten scrutiny around it's anti-competitive stands for, uh, online advertising. So I think that companies looking to transact in m and a have to deal more with more than just shoring up their supply chain, dealing with a more, uh, perhaps de globalized sentiment, but also there is that regulatory intervention. Um, and that has been going on for some time since the Biden administration has come to power. Um, the, both the FTC as well as the DOJ have been very vocal. Jonathan Kanter and Lina Khan have been incredibly vocal about taking a much more aggressive stance, um, in review of M&A transactions. So that's just something else to think about.
Chana Schoenberger:
Yeah, we see this a lot in the banking sector. There are a number of banks that are trying to do deals that have either been announced and then they couldn't get regulatory approval or that they, you know, people had talked about doing that just didn't come to fruition because the regulators wouldn't allow it. And it, it does seem to be as sort of an administration strategy that they are, are really not gonna let banks get together very often.
Reva Goujon:
Yeah, I think it's interesting that at the same time the supply chain disruptions that we've seen over the past couple years are compelling that kind of vertical integration. Um, but also there are, um, you know, anti monopoly, um, policies, uh, under debate, right? That are designed to focus exactly on that right, vertical integration. So it'll be interesting to see that sort of push and pull as that plays out in the, the policy making world. And as those, you know, businesses are just trying to reckon with their supply chain realities, um, and, and trying to streamline their own processes as they reorganize trade. Um, overall though, I, I come at this question from a more of a China angle given, uh, where, where Rhodium's core expertise, and we look a lot at two-way FDI flows. And it's, the trends are really interesting, right?
Like flows are at record lows. Um, at currently you can look at us inbound to China and, and reverse flows, Uh, and it's also getting more concentrated. Like on the European side, the top 10 European investors make up some 80% of overall investment activity in China. So it's, it's really like the picture is changing a lot. And so then you have to ask yourself, okay, like, where, where is that investment going? What are those hot sectors? Um, and you know, there are some, some bright shiny spots in the Chinese economy, amids the, this, this bigger slowdown that's underway. Um, and you know, of course you look at green technologies and, and the EV space in particular, um, cloud infrastructure, all, all of these, uh, different areas and there is still a lot of opportunity there. Um, lots of manufacturing capacity, lots of ability to scale, um, but also again, vulnerability, right?
Um, as we're seeing, again, with these defensive measures, the US just recently passed, uh, and kind of took the world by surprise with its inflation reduction act, which was very cleverly named. But, um, in essence, it, it really, um, imposes very tight restrictions around, um, you know, bringing supply chains, uh, to North America. Again, creating opportunity, but timing matters here. So to purge China, for example, from EV supply chains, by end of 2024, not not realistic, right? From mine to vehicles. So now you're, we're in this kind of cleanup phase of, okay, what carve-outs are necessary, What waivers are needed, how, where's the friend in friendshoring, right? When, when South Korea comes to us and says, I thought we were coordinating on this. Japan comes to us, the Europeans, et cetera, right? So we're, we're, we're putting out policies, we're getting reactions, and then we're cleaning up. It's a bit messy. Um, but, but the direction, um, certainly does create a lot of opportunity in that just reorientation of trade overall.
Michal Katz:
Um, yeah, maybe I would just add one more thing just in terms of use the word opportunity. And I would say that we kind of haven't talked about it, but the conflict itself does rate the specter, like what is the efficacy of finance? And, you know, finance has clearly been, uh, try to be used as a weapon in, um, you know, in, in the west efforts to counter some of the Russia aggression. And I think that's, while it's really hard to disentangle the sanctions are working. So there are signs that the Russia budget is under strain, and Russia will need to eventually decide what do they want to fund? Do they want to fund their economy? Do they want to fund their war? And so, um, the where the opportunities, I mean, I know a lot has been talked about, um, you know, the influence or the continued influence of the US dollar, uh, which has really been the dominant currency over the last six decades.
And sure, it has come under pressure, no doubt about it. But, um, I do think that, uh, the conflict has demonstrated that at least the dollar remains a major global currency, uh, even in, in a landscape that potentially would bring about some fragmentation where we may see just, um, other smaller currency blocks, so to speak. And, um, you know, there's also been a lot of hype around, you know, the digital finance and cryptocurrencies and whether it be central, you know, stable coin, central bank currencies, et cetera. So that industry's still very much in its infancy today. So again, do you view it as an opportunity for some type of international payments? Um, look, to date crypto has not proven to be, uh, a most reliable store or value, to use that moniker, which is often put out there, um, to be a replacement to the dollar. But I do think that it could be an opportunity, uh, further down the road.
Reva Goujon:
Well, I was just to, to play off of that, I think that's a really, um, important point in one, especially relevant as the US is kind of reevaluating many of its strategic relationships in like the petro dollar relationship, for example, with Saudi Arabia. Um, so yeah, I think the, the most important thing, um, to remember is that power is relative, right? And that's what this experience has shown is that the dollar and, and the US and everything that it still has to offer, um, is still, uh, you know, more appealing, right? Uh, compared to other, uh, you know, economies, uh, with currencies that are in more trouble, <laugh>, right? I mean, Europe is in a lot of trouble right now, um, just, and it has a war on the continent at the moment. Uh, China is in deep trouble. So yes, there's a lot of hype also about red b internationalization, but China's economic, uh, it, it's, it's structural, um, economic issues are catching up to it.
It's, it's kind of reached the, the end of its credit cycle. Um, and, uh, this is gonna be a prolonged painful slowdown. And the more economically insecure, insecure China becomes, the more, um, it will, you try to tighten its capital controls, right? That doesn't make the un any more appealing, um, to even the Russias of the world, you know, who, who may be forced, behold more, uh, more run B, So, so yes, I, I totally agree. The US dollar, um, remains paramount. And I saw that there was a question related to opec, which I think this is interesting, um, as we're seeing also just the relative influence as of the US also on, um, relative decline as well. And we should acknowledge that, right? Like the US can't just go to the Saudis anymore and say, Hey, I really need you to increase output, uh, so we can mitigate in inflation, um, concerns over here.
Um, you know, the, the Saudis want to fetch a higher price per barrel, and they're looking at their, their future and decarbonization age. Russia's in the broader OPEC, um, you know, consultations and certainly wants to complicate Europeans plan for, for sanctions and a price cap coming this winter. So what did we see this week? A 2 million barrel day cut, that was pretty massive. Um, and so there are geopolitical reasons behind it. There are economic reasons behind it. Um, but yeah, this is where we should be watching, right? For where that geopolitical motivation actually does lead to, um, you know, arrangements for, uh, for example, Ren b you know, transactions in, in certain parts of the energy trade, um, uh, with, with like-minded middle powers, something to be tested still, but it's not really a good time to hold on.
Michal Katz:
You know, one of the comments I would make about China, and I would concede that Reva has incredibly more knowledge that I do in this, uh, on this area. But one thing that I keep on, like kind of scratching my head around is like, China has been a huge beneficiary of this hyper globalization, right? We talked about like lifting a billion people out of poverty. It's been a huge driver of its growth. So, and in many ways it's gotten a free ride on this openness of trade and has taken actions, you know, that has been viewed to very much, uh, to be counter to the openness of globalization, whether it be the policies it adopted to subsidize its own industries, whether it be control of its own currency exchange, putting restrictions, you know, and, and controls on just capital movement across the board. Um, the blocking of the, ANT financial IPO, um, last year.
So, you know, I think that there's gotta be, you know, perhaps some reckoning on their end as well. Um, and so perhaps I feel like I'm like the glass house full today. Um, yes, there's a, you know, certainly a lot of, um, would say a lot of incendiary particles have been put into this fire, uh, whether it be from, from both sides of, of, um, I would say on of the table. But it's something that we need to keep in mind because the same way that Russia, um, by isolating itself is really impacting its own economic, um, its own economy. Similarly, that could happen with China, because sure it's the second largest economy and that counts for, you know, 20% of global GDP. But they are very much facing slowing GDP growth, um, and very much dealing with aging population. Um, while it's not a global finance issue, the real estate sector problems that they've had, I mean, real estate depending on how much you account for it, you know, goes anywhere between 15 or 30% of their economy. So no, it's not a global financial issue, but it is very much a China growth issue. And so I kind of tend to look at it holistically and say, yes, there is a lot of rhetoric, there's a lot of policy out, there's a lot of uncertainty, but they need to be watchful as well as to, um, um, with the impact that they would have. Because similarly to the US they're very much integrated into the world trade.
Reva Goujon:
For sure. Um, and, and that I think is a really important question on, on like a five, three to five year timeframe, right? I mean, the good news out of all of this, in some ways I don't think Beijing would see it this way, is the severity of the crisis, right? Um, we would argue Rodd that we're already in in year two of, of China's, uh, economic crisis at this point. Um, and if you look at, as you just referenced, you know, the property sector, um, and what needs to be, you know, filled in for that gap to, to generate growth as the, the, the property sector continues to unravel, um, there's no easy solution to that. You can't just grow new sectors overnight. Um, and they're already getting kind of hobbled by all these different controls and, um, heavy, um, kind of regulatory, uh, measures on, on both sides.
So, you know, it is the crisis going to be severe enough in China to where you see a reform pivot. We've seen that before in history. It is certainly possible and we need to be very open minded about that. And this is where we work, um, with companies on scenarios a lot. Um, because you have to, you have to really embrace that cognitive dissonance to see, okay, this is what the current reality is, but what would have to be true three years from now, five years from now, right? For these other distinct outcomes to manifest. And the, I mean a lot of, um, people, businesses, investors are, are kind of waking up to, to the new reality, right? This wasn't a covid issue. It's not just zero covid lockdowns, Um, these are structural issues, demographics, property sector unwinding, all of these different things that are going to impair the Chinese economy, um, and are gonna require some real reform measures that will also be painful and that will also require banks to take on losses, right?
And things like that. So, um, yeah, this is where the, the economic models are, are really just barely catching up to reality. You see, downgrade after downgrade consensus view on China for growth this year is still, you know, hovering around 3%. Um, we would argue it's more like around one and a half percent for this year. Um, wow. Census for next year is around 5%. We would argue it's around 3%, right? So if you just kind of look across the different drivers of growth, um, a lot of these costs are already baked in and that's, uh, something that I think everybody will be catching up to in their modeling and their projections.
Chana Schoenberger:
So what happens to the Chinese real estate sector? Because you have all these millions of people who have invested in, you know, urban apartments that either aren't being built or are not worth even close to what they thought they were gonna be. And they have sort of banked on these as being where they'll raise their families, leave them to their kids, have it in retirement. What happens now?
Reva Goujon:
Good question, right? I mean, the government is trying to pump the sector with stimulus again, right? Trying to keep it afloat. But credit demand is soft, right? I mean, there's, there's just a lot of risk in play. So if you don't have new construction activity, you're not going to see property be the growth generator that it once was, right? And so you are, that, that's where you, you see this, this massive gap that that has to be filled. Um, so watching for defaults, you know, local government financing vehicles, um, are, are a key focus, um, uh, uh, of ours right now just looking at the fiscal health of the provinces, um, and how those, those effects ripple through. Um, but yeah, this can result in a lot of cascading effects just given how integral the property sector has been to China's economic growth overall. Um, so on the business investment side that's, that's in trouble, um, and you, you would need some, some big changes to change that outlook. Um, consumption is probably the biggest variable moving forward, um, if we, if we see a boost from that.
Chana Schoenberger:
Yeah. Um, to return to something we, we talked about a few minutes ago that this idea of crypto, so the, the, the crypto crypto sort of being adjacent to all these financial issues is so interesting because it's really, it's a system that that is growing up basically to, to take finance and move it out of the realm of regulation. It's like, what can we do that we're already doing in exactly the same way, but so that the government can't touch us. Not necessarily that the government can't see what we're doing, but that they're not, they're just not regulating it. They're going to leave us alone. And there have been a nu a number of interesting administration moves to, to step towards regulation. We've spoken to a number of banks and bank lawyers, bank lobbyists who generally say, please regulate us, we just wanna know what the rules are. But right now there really aren't that many rules and I sort of wonder how this is going to play out internationally because there are a lot of, I mean, mostly companies that are seeing their accepting payment and crypto now, like that's mostly a publicity stunt at this point, but you can see a world in which crypto becomes a bigger thing possibly, or maybe crypto just vanishes and it's just serious, you know, blockchain, um, ways of, of using the financial system that are actually what companies do, which is totally different from crypto.
Michal Katz:
No, I, so first of all, I agree the, the blockchain technology I think is, it is about like the decentralized, you know, decentralized finance. I don't know if they, you know, the, the crypto was not put out there to necessarily, to avoid regulation, but to perhaps avoid the chokehold that traditional banks may have had. Um, the challenge is that I do think that when you think about any type of interaction, it does require the trust factor, um, being able and what we have seen with the erosion of the value of the various cryptocurrencies, um, lacking the backstop, lacking that stored value, which was very much advertised. And so an enormous amount of, uh, I would say equity has pretty much been eroded, um, over the last couple of months, probably year. And so a couple of things. One, there have been a lot of various startups, um, we're seeing already consolidation of that happening.
Um, so getting scale is something that matters. Getting that backstop financing matters, establishing a trust factor does, but it does not, um, address what you talked about, which is regulation in order to build that trust regulation must exist in order for folks not just to believe that their, the value of what they deposited will be there the next day, but also the long term viability and sustainability of the institution. And I think that's very much missing and that's where tradition, I may sound like I'm singing for my own kind of a, you know, him and all song sheet, but that's where traditional banks have and continue to offer. So, um, I really do view a lot of the next gen technologies as being incredibly interesting in terms of enabling, um, financial transaction, particularly amongst small businesses. Um, and where a lot of fees have been generated by some of the global banks. Um, and, and therefore, uh, a lot of the crypto would provide a lot of efficiencies, uh, both in terms of cost as well as uh, speed of execution. But I, you know, I do believe that regulation is necessary and you're hearing it directly from the industry.
Chana Schoenberger:
Interesting. Okay.
Michal Katz:
Because you need to build that trust, that trust has eroded.
Chana Schoenberger:
Yeah, well I mean it's, it's hard to look at what's going on in crypto now and what happened in the spring with the, the market just collapsing and say, this is a safe place to put my life savings. You know, I can't imagine that Americans or American business leaders would feel that way right now,
Michal Katz:
But it is being used potentially diversified asset class by which to, if you're managing a portfolio, but you're right for the, you know, mom and pop, um, who are looking to put their savings in a safe instrument, that would not be my instrument of choice.
Chana Schoenberger:
So we have about a minute left. Um, just so we don't end this on too much of a downer note, tell me each, please tell me one bright spot that you see in the international financial world.
Michal Katz:
I think a bit, a bit of the glass half full. So I don't think that globalization is over. I do think that there's retrenchment and reshaping of its sort, and I don't think it's necessarily a bad thing. Um, I hopefully that new globalization hopefully takes into account some of the public policy issues which were not addressed before, which I talked about, you know, how labor is being treated now. There's the human rights issues, immigration, the income inequality. So I'm really looking at this new globalization as an opportunity to not rewrite the rules, but actually create new rules and new dynamics to address some of the bigger social issues that we are talking about. We haven't talked really about, you know, security or cyber security. There's a lot of spaces where I think investments are available. So, um, cyber, um, data privacy are huge area of investments, new place to create a resilient supply chain very much exists there.
Um, we talked briefly before and the reason I used the word vertical, not horizontal integration is horizontal integration is very much being scrutinized by the regulators, but the caseload doesn't support the type of scrutiny that we're seeing around vertical integration. So from an m and a perspective, capital raising to support the investments by the various companies that are committing to building not just stop facilities, but just resiliency across their supply chain. I do think that there is opportunity coming out of the pandemic despite the regulation and rhetoric that's out there for companies to, um, to prioritize workers put money to work in NextGen technologies and, um, yeah, just kind of keep that, keep the benefits that we saw out of globalization alive, the flow of people, flow of information, flow of social engagement and all of that and trade.
Reva Goujon:
Yeah, that's key. Yeah, and, and I mean as we can see here, like who would've expected Senator Joe Manchin to come out and support, uh, you know, what, what is very much, you know, climate driven, um, legislation, right? So you're seeing all these pressures create reactions and many of them like create policy momentum in the ways that arguably they need to be going. So, so yeah, it's all about momentum. Momentum, right? Like building on like the energy and security, food insecurity, how to drive technology innovation, what partners can we work with, you know, who's at the table with Japan, Korea, Taiwan, the, which of the Europeans are, are signing up, right? Like, this is an important time to really understand the geopolitical map because it's constantly shifting. Um, and, and this is where I think we, we need to be most alert to and just understanding where those trends are moving, where that coordination is happening, also where those defensive measures are coming into play. Um, because we are dealing with a more fragmented space overall, but that, that does leave open a lot of pockets of investment opportunity.
Chana Schoenberger:
Great. Great. Well thank you so much both of you, Michal, Reva, I appreciate you coming on with me today. And that's it. Thank you.
Reva Goujon:
Great to be here. Thank you.
