Today's number: 82. That's how many years late a book was returned to the San Antonio Public Library last week. When asked what took so long, the returner said she was, quote, 'checked out.'
An awful joke to start the show. Welcome to Prof Markets. I'm Edson. It is September 10th. Let's check in on yesterday's market vitals. All three major indices closed at record highs. That's the first time since December 2024 that they have all achieved that milestone on the same day. Treasury yields also climbed from their lows ahead of key inflation data. The producer price index will be out today and the consumer price index will come out on Thursday. Apple stock fell 1.5% after a lackluster debut event for the iPhone 17. And finally, Oracle stock popped more than 20% to a record high on stronger-than-expected cloud growth projections. Okay, what else is happening?
It's been a huge week for China and a new world order is coming into view. We've seen the country look beyond the US for growth. In August, China's exports to the US declined 33% while those to Africa grew 26%. This shift extends to cars. BYD's European sales increased more than 200% in July, and it's aiming to have 1,000 stores on the continent by year end. But it's not just business. China is also flexing its military muscle. Last week, of course, it staged a massive military parade with Vladimir Putin and Kim Jong-un in attendance. And on the diplomatic front, the Shanghai Cooperation Organization summit drew more than 20 non-Western leaders, including India's Prime Minister Narendra Modi on his first visit in 7 years. We have been covering these developments a lot lately on the program, but there is so much to unpack here, so much to get into. So, we wanted to check in with someone who has actually been on the ground in China recently. So, let's bring in our favorite China economist, Alice Han, to take us through what's happening. Alice, great to have you on the show again.
Thanks, Ed. Happy to be back. A little bit jetlagged, but happy to be back and tell you what I saw in China the last few weeks.
We're very excited. And by the way, I just want to say welcome to the ProfG Media family. For those of you who don't know, Alice recently launched a China-focused podcast with Prof, and you can check out that pilot episode on the Prof Pod. We can discuss that later. But first, Alice, Scott and I discussed this military parade on Monday's episode, with Vladimir Putin in attendance, Kim Jong-un. They all walked down the red carpet together. You were in China leading up to that. Can you just tell us a little bit about what you saw and what you think this military parade really means for China?
Thanks very much, Ed. I was actually in Beijing during the week of the parade and left just as the parade was happening. What struck me was the optics of it. It was very clear that China was trying to strike two notes. One, to deter the US on any issue related to military affairs, including Taiwan. They were pulling out the big guns, metaphorically and literally. We had hypersonic missiles, high-grade equipment, drones. China was clearly showing the US and the rest of the world that it was ready for business and that it shouldn't be meddled with. Number two, I think it was very important not just that Putin and, as you mentioned, Kim Jong-un of Russia and North Korea were there. You had a good showing of Southeast Asian leaders, and I think this was an important follow-up from what was happening at SCO, as you mentioned, Ed, in Tianjin, in the sense that China wanted to show that it had many friends that it could rely on on trade and national security-related issues. I think it was important that you had a big showing of some of these Southeast Asian leaders, including leaders from Indonesia, to again show the rest of the world, including Washington, that China wasn't alone and that it was actually increasing its diplomatic clout within the region and globally. I think those were the two important notes that they were striking. And last but not least, I would say on the domestic front, we shouldn't discount that this was again showing muscle domestically and stirring nationalistic feeling. I think it was important to note, and I don't think this was covered in the Western media, that it was strongly encouraged by all Chinese companies, within even private organizations, that employees would take time off from work to watch the parade. Again, a sign of nationalistic pride that the Party and Beijing is trying to stoke.
To what extent was this new behavior? I mean, we know that they've done these military parades before. We know that there's a lot of nationalistic pride in China and they try to celebrate their heritage as much as possible. But from my understanding, this combined with the summit and all of the leaders that we saw there was a little bit more of a message, at least in terms of their connections and their alliances with other nations. I mean, what part of this was new compared to previous celebrations?
I think on two levels this was quite novel. Number one is just the sheer scale of it. The fact that you had this military parade where you had a sheer enormity of high-grade military equipment on display. The performances by the male and female military officials as well as the army. I think that representation on a symbolic and visual level was quite new. And number two, to your point, Ed, is the fact that they were able to bring these world leaders, a strong showing from Southeast Asia, but the fact that you had the first multilateral meeting of Russia, North Korea, and China in one domain and at a Chinese military parade, I think was pretty novel. It's worth also mentioning that this is the first time we've seen a North Korean leader come to China for a military parade, I think, since the late '40s. So in many, many respects, just from the sheer scale as well as the bringing together of these high-level officials, I think China was doing something quite new, and it was clearly doing this to, I think, again, project strength in advance of potentially future meetings between Trump and Xi.
Just shifting to markets, did any of this have any impact that we saw in terms of markets in China? I know the Hang Seng is doing very well right now, but I'm only looking at it on a year-to-date basis. What kind of impact did this have on the markets?
I would say it's a story of correlation, not causation. What struck me when I was in Beijing was the fact that virtually nobody was talking about tariffs. I was there in April just after Liberation Day and all the subject was revolving around tariffs. Everyone was talking about tariffs. This time around, they were talking about China's, quote-unquote, quiet bull market or even slow bull market. There was a feeling that the government since the beginning of the year has been allowing households to basically get more involved in the stock market and is trying to signal the right pro-private sector, pro-market messages to domestic investors and foreign investors. So we've seen a degree of Chinese household bank deposits being shifted into the stock market. We're also seeing more increased willingness on the part of foreign and domestic investors to get involved in the Hong Kong stock exchange as well as the mainland stock exchange. So in the end of August, we saw the stock rally on both the Hang Seng and the Shanghai Stock Exchange going up 30% year-on-year to date, rather. And I think that that has been a sign that people are trying to do two things. Number one, they're seeing China as being quite resilient to tariffs, in fact, shrugging off some of the tariff risk, and we've seen that in the export data. And number two, China as being a hedge against some of the risks they see in the US. And even on top of that, I would say as another bet on AI. I think what has become apparent is that it's a two-player field. Chinese valuations are extremely low compared to the Mag 7. And so for anyone looking to bet on AI's future, China seems to be still a lucrative, interesting space. And that's why we've seen a lot of the growth being driven by companies like Alibaba that are at the forefront of the AI revolution in China.
Yeah, we talk a lot about country risk, specifically with China. There is just this risk of it's a communist nation and you know that there's no guarantees that the CEO of a company isn't going to be disappeared from one moment to the next, and that is generally translated into lower multiples for all Chinese stocks. But as you say, up 30% on the Hong Kong stock exchange, which is, by the way, the best-performing index of the year so far, and you compare that to the S&P, which is up 11% year-to-date. I'm wondering, has the China risk conversation changed? Is there a reason why we're seeing higher multiples? Is that what is happening in terms of valuations right now?
I completely agree, Ed. I would also caveat, though, that Chinese valuations were at an all-time low last year. So we're recovering from, I think, a considerable degree of weakness in Chinese stocks. And number two, to your point that you're referencing, what struck me is that the US is becoming what China was, I would say, in the 2010s, when you had investors concerned about the centralization of power, a great degree of policy uncertainty coming from the central government, and that's mainly driven by, I would say, top-down dynamics where a leader is cracking down or injecting a great degree of policy uncertainty, and that has basically taken investors back. I think we're seeing a lot of the pathologies and patterns that we saw in China in 2020 in the US, and that's, I think, pushing on the margin investors to look at China more fondly. And it's helped by the fact that Xi Jinping and Beijing have made a concerted effort, I would say, since last September to again try to rev up the private sector, to rev up the markets, because structurally, and this is worth mentioning, Ed, even though I think cyclically we're entering a better cycle, we're entering improvement, structurally a lot of these problems still remain, whether it's local government debt overhang, whether it's underconsumption, overexposure to exports. I think a lot of these structural issues remain in play, but we've just seen an increased improvement in sentiment from the consumers and on the margin the private sector, and it's largely been driven by, I think, a top-down loosening.
