Investors are closely monitoring a Fed pivot, but there's another pivot they should have their eyes on: leadership turnover in China and the UK. Shuli Ren and Adrian Wooldrige on those stories. And Alexis Leondis discusses another type movement... a physical kind. State migration in part motivated by high taxes.
Welcome to Bloomberg Opinion. I'm Vonnie Quinn. This week we have a period of writing taxes and squeezed expenditure as we moved towards an election. He will start cutting taxes. Adrian Woodridge on newly minted British Prime Minister Richie suonacs plans to stabilize UK markets and the economy. I will deliver on its promise that embraces the opportunities of Brexit where businesses invest, innovate and create jobs. We'll also speak with Alexis Leanders on stage shopping for tax purposes. That is first though to the sentiment shift in China markets this week. Stocks dived Monday, the un weekend, and foreign investors dumped everything, such that rebounds on subsequent days paled in comparison with Monday's moves. I spoke with Bloomberg Opinions Shulely wren So Shui what changed exactly post Party Congress. We didn't get a reversal of COVID zero, but by last week we weren't really expecting that anyway. Global markets have been questioning china Is so called investibility since late last year, when they Ching's regulatory crackdown on big tech and real estate companies whipe trillions of dollars off of investors books. But this time they are really worried because it does seem like President she Jinping is solidifying his power and packing the future Chinese leadership with all his long time aids, and they're worried that she's so called new economic development model. It's just not good for financial market. And the last few months we've seen investors look at various parts of the China market very differently. So each time there was a crackdown on internet gaming, for example, or on education stocks, they sold off for the rest of the market held up. That's not happening this time around. The whole market is selling off as one. Is that warranted or should investors be taking a pick and choose approach here? I think it's interesting. It's really a verdict um the entire Chinese political landscape, right, It's no longer spector specific. So so yeah, I think the market has spoken. Chinese companies traded in the US are now trading it under six times forward earnings, so somebody and that many people are valuing these companies really cheaply. Are these valuations are founded right now. That's the thing. Chinese companies are cheap, but do you want to buy in too? Sometimes you know, things are cheap for a good reason, right Like do you want to buying to cheap goods? Do they have good shelf life? That's the big question right now. So you're talking about my do dot Com, Pendo, Door, JD dot Com. I mean it's not just one type of company. These are across the board. Yes, Actually they tend to be consumer tech companies that e commerce, social media. And the problem is that these companies they are no longer favored by Beijing. Beijing these days they want to develop so called industrial teching, aerospace, easy supply chain or like trip manufacturing, quantum computing, and all these companies that are in consumer tech, they're just not in it and also shooting things. Likes to talk about this slogan of common prosperity, basically to broaden the middle class and narrow the world scap. But global investors associate the phrase common prosperity with wealth destruction because the phrase was coming out late last year during the crackdowns, so they get scared when this phrase gets mentioned again. At the Party Congress, you mentioned a moment ago that she has solidified his power, and he has also packed the Standing Committee with allies. I don't want to make too much of a comparison, but one of the things I do, and Wildridge mentioned when talking about the UK, is that markets will like Rigi Sunac because he's no nonsense and he'll run number ten and his chancellor will run number eleven very well. Obviously, not to make a directing merison, but you do mention in a recent piece that financial markets tend to prefer a focused administrative team to in fighting and competing objectives among politicians. Surely that's a positive and not a negative in some ways. Yeah. Interestingly enough, financial markets don't mind dictators. They think it's good to have a focus at administrative team. And actually they liked it in twenty twelve when she first came into tower and seventeen when he flexed his muscles to solidify his power. But this time around they're worried that his vision is wrong. So they're worried that his age, long time age, are just going to drive China's economy and the financial markets to the ground. What's the basis for that, Because yes, narrowing the wealth gap and the role of the state and the economy is paramount to see. But that doesn't have to spell financial market trouble, does it. Well. The problem with the financial markets these days is that they are packed with companies that are not in policy priorities. For instance, Ali Baba pintot So. These stocks which used to be well loved by global investors because they were played directly to China's rising middle class. These stocks are getting dumped. And another problem is that after the party reshuffled, basically the economic team is being hollowed out. We know that China will have a new central bank governor, a new banking regulator, and a new finance minister. We don't know who is going to run the national team, so that is not reassuring to financial markets. Will she have been surprised by the market reaction enough to cause him to do something to come or support markets in some way? I think she doesn't care about how much money investors have lost. I don't think he cares. I mean he didn't care about optics right and if he did, he will pack the politeberal with just one woman. Right now, there is zero or like help cooking. How his predecessor to leave the congress in the nicer way, but like he didn't seem to care about the optics. But I think at some point he will care because China still needs the financial markets to be open to finance the fiscal deficits and to raise funds for companies such as Evy and chip manufacturing, which he will need in order to support young people coming into the labor market as well. Surely, for those who hadn't seen it or hadn't noticed, just explained the hoosion to how episode that happened at the Party congress. It was extraordinarily surprising, and we'll never fully know what happened, as Kara Ferra Marquez says in Bloomberg Opinion, but will you explain to us what happened? It seems like coaching how. He didn't look very well. He looked quite freel and somehow two men were trying to escort him out of the big Hare and one of the politicians Leach and Shue, he used to be president, shooting Kings chief first stuff, he's retiring. He tried to stand up and aid hooching how and shooting Kings strategist one who in basically padded le chansu and they stand down, it's none of your business. Just don't get involved. And then shooting, how God escorted out and Shi King just look down, didn't say a thing, and on his way out hooching, how had likud chongs shoulder and Li Ku Choun looked like he almost recoiled. So it was a very very strange scene. And I guess my take is that it's just a real glimpse into China's top political circles, how rigid and nervous all the politicians are. Now we learned that before we got the execuities and you and Slump, the Foreign Exchange Regulator and the BBOC vowed to maintain the healthy development of the country's stock and bond markets and keep the new unstable. Obviously they weren't expecting this kind of reaction. Just you know, a day or two later, what can they do in order to stabilize the bond markets on the un Well, that's a very good question because if you read the p BOC statement that the pledge to stabilize the markets is not at the friend and center of their statement. It's like weigh in the back and then like the friend and center is all about that. In present, she's fought following the party's leave, and I just feel like there's so much power, vacuum and uncertainty that bureau quests are not doing anything right now, They're not going to do anything for while it's really quite phenomenal. Suddenly the market thinks that China is completely opaque, and seemingly a few months ago it seems to think it was transparent. Okay, so let's move on to what she does have in terms of economic priorities. He has a new development model, and you go into this in your column. First of all, tell us what you think common prosperity will turn out to be. So she actually wrote about what common prosperity is and it's not late last year he basically said that it's not egail and terrnism, and then you know, he wants the whole economic pipe to be bigger and everyone to be richer. But he did one against the exorbitant wealth that's collected by a few people at the top. So what the market this is that she will at one point launch a major wealth redistribution, perhaps taxing the very rich at a much higher rate than before. And they feel that common prosperity is just a nicer name for wealth redistribution. You have some suggestions for what season things could do in order to make China quote unquote investable. Again, this has been such a watchword over the last year in terms of Wall Street notes and so on. But at the moment, I guess the market things China is uninvestable. What are your suggestions. I think optics mended. President Shimki needs to show what common prosperity is not, so one thing that he could do is to invite those type billionaires such as Ali Baba's Checkma tens for Migma and made one launching to Beijing, not to summoner, but to invite them to attack conference to talk about how the private sector can help push China's take front here, just to show to the world that China is not against entrepreneurship or self made billionaire. That's one thing. And another thing is that I think global investors are worried that China is closing herself to the world because President Sinking. He has another economic slogan called duo circulation. Basically, he wants to boost China's domestic economy and explort goods and services that are of higher value adds such as eb supply chain, and along with three years of COVID zero and the close borders, people rightfully think that China is closing herself to the world and it's going back to chain dynasty. So one thing that Beijing could do is to reopen the border as soon as possible, lower the number of quarantine days for foreign travelers so that foreign business can come to China to see for themselves what China is like, and overseas Chinese to come home to visit their families. I mean, it has been three years. So these are the optics and gestures he can make to stabilize the market, and they would be pretty cheap gestures in many ways. So the other thing is COVID zero is going to get reversed at some point. Wall Street is talking about March of next year. It's not that far away. I mean, investors could possibly hang on until March. If COVID zero was suddenly reversed, would that make a huge difference. I think if COVID zero was suddenly reversed earlier the next March, it will make a huge difference, right because the investors are still trying to figure out whether they should stick around or just sell everything. But next March it's still quite a few months away, and COVID zero is very very expensive. According to Morgan Stanley estimates, COVID zero costs the Chinese government to trillion un this year alone. And how that's going to be sustainable. It's a big question market, and it's going to create a huge track on China's fiscal deficits right now. We also had, of course, the delay of some economic data. Speaking of economic data this week and GDP then finally came out and it was actually better than forecast. It was, you know, an anemic enough in China terms at three point, but we don't have the full years GDP figures yet. Even that wasn't enough to cheer the market. What does the market want to see in terms of China growth? See, that's the interesting thing that the rosier economic data is just not going to cheer the market, right Like the GDP data is better than expected, but investors to brush that away. Housing numbers starting to take up a little bit, they still brush that away as well, and I think they're just more worried about optics. You know that Shi Jinking is going to do wealth destruction, and that he's going to close China to the rest of the world, and possibly he's even going to invade Taiwant. They're just worried about those big picture topics. Yes, the time. One question is death early on investor's minds, and if that were to happen, I guess investors would completely flee China, right, yes, correct, So right now they are trying to figure out what to do because China is cheap and if there's a rebound, it could be a very very big one. Right. But on the other hand, if Taiwan conflict play us up a lot of investors, they will have no choice but to sof And then we have seen that with Russia exactly. And as you say, China may not want to close itself off, but some of that is not China's choice at this point. Obviously we're seeing a lot of export controls from the United States and so on that's also having an impact on China's choices. Yes, absolutely, that actually ends the investing China story as well. Is there anybody understanding committee that we should be aware of? I think Lee Chiang is interesting. He's already number two of the standing committee. He used to be shinking ship of stuff when she was party secretary at Georgian Province. He is currently Shanghai's party secretary and he's going to be the future premier. Another person that I think global investors don't look at it enough is one who Yan. He is basically the Stebandon of China. He he is basically president, she's strategist, and he is very left leaning. It's interesting to see what he's saying in public because he appears to influence. She's thought quite a bit. Give us a rundown of what we know about how he thinks. Well, he basically didn't like United States America and he is very eloquent. He was on debating as early as ninety nineties and actually he was very very talented. But that he's very very left leaning, and he thinks the US democracy is not working at all, and that the US is in decline and what will it mean for china domestic policies. It's interesting because now she is talking about, like her, China offering an alternative path to modernization. Perhaps she was being influenced by one winning thinking that US is in evitable decline and China has a past towards being the top global economy, so that perhaps gives drinking a lot of confidence. Shuley ran, there, don't forget. We're also available as a podcast on Apple, Spotify or your favorite podcast platform, and do get in touch. We love to hear from you. I'm at Vanni quent on Twitter or email vequin at Bloomberg dot net. People moved states mid and post pandemic for lots of reasons, but one reason people consider moving even in non pandemic times is obviously state income tax. But what evidence do we have that people move to say Florida or Texas primarily because those dates don't tax at the state level. Well, Bloomberg Opinions, Alexis Leander's has been looking at some data. We do have to figure it all out, So, Alexis, we all noticed when a hedge fund or a big investment firm moves Alliance Bernstein for example, moving to Nashville back into thousand eighteen, which is obviously nothing to do with pandemic. It was pre pandemic. Citadel announced this summer it's moving it's HQ to Miami from Chicago, which was a big deal. But what about individuals? Right? It feels like you can always find research supporting one side or the other. There was a recent report from the Tax Foundation that actually did provide some pretty compelling evidence that not only do just wealthy people move for tax reasons because they are The evidence seems to be a bit clearer. If you really pay a lot in taxes, then perhaps you are much more conscious of where you're living, and especially if you're retiring. But across the board, we are seeing that taxes, especially as of late, are driving people's decisions to relocate. What are the states that are accepting incoming A residents. The most popular states right now seem to be Florida, Texas, and Arizona. And that's true at all income levels. And I should say that the tax Foundation data is based on I R S data, So this is some of the most comprehensive data we're seeing. This covers, you know, hundreds of millions of taxpayers their returns, and it also includes their adjusted gross income. The tax Foundation, we know is right leaning. I guess it's fair to say, but this data steaks for itself, right And they looked at three different factors when they were trying to figure out is their correlation and the first thing they looked at is their top marginal tax rate. They're also looking at the struct sure of the tax code in that state. Is it considered, you know, very complex and difficult or is it more straightforward? And then they're also looking at the state and local tax collections per capita. What is the state's total tax coffer, the income tax they're collecting, the property tax they're collecting, the sales tax that they're collecting, divided by the population. So across all three of those boxes, it seems as though the states that score well in terms of being low tax having good tax structures, have low state and local tax collections per capita, those are the ones that seem to be attracting the most taxpayers. Aside from the Tax Foundation data, I looked at some of these other ways that other groups kind of assess the overall tax picture for each individual state. And when you look at a state like Texas, and I actually had a reader email me after reading my column to say that she had moved from New Jersey to Texas partially because of taxes. Texas obviously has no income tax, New Jersey has one of the higher rates in the nation. And she said, but with property taxes. She's really feeling as though it's not just like a win win on the tax front, right exactly. So you may not occlude all of the savings that you think you might accrue just because you're not paying the state tax. Right. And look at a place like Florida where, unfortunately after Hurricane Ian, now homeowners down there, especially if they move from New York, thinking they would save on taxes, but maybe they're paying more on things like insurance or you know, damages now from this hurricane. So it's it's really something to think about and not just be motivated by the tax picture. Now, have we seen states try to change their rate of income tax in hurry post pandemic. We actually are seeing lots of states do things, and most of them are cutting their income tax rates. They're either moving to perhaps just a flat tax. They're cutting their rates. Twelve or thirteen states have moved in the last year or two to change their rates, and it will be very interesting again to see for the states that don't make any kind of moves, will they see more people leaving? And for the states that do cut their rates, will they see more people coming there? And some of the tax Foundation data also looked at just because you have taxpayers leave, that doesn't always mean that the adjusted gross income goes up or down exactly. And I'm sure it's not always the case that states want an influx of people. They want an influx of rich people exactly right. And some of the Midwestern states, they saw that in the data that we were looking at, showing basically that while more taxpayers moved there, their a g I didn't necessarily go up because probably what was happening if those people were coming from high tax states, they were being paid more. When they moved to the Midwestern state, they may have been paid less, and as a result, there the a g I overall went down. And it's really corporations that they want to attract more so than probably individual residents, although I guess if you go to micro level, municipalities may want to attract residents or what have you. Well, I can understand that it might be easier for people to move to the next door state, right, So contiguous states can maybe buy with each other for different people. What are you noticing in terms of individual states and outliers. South Carolina is a really good example, So that was the state that was number five for attracting wealthy taxpayers, and I believe taxpayers overall, but it still imposes a graduate individual income tax rate that tops out at seven percent, which is relatively high. And on the flip side, Virginia lost a lot of high earners, but it has a relatively middle of the road run of the mill top marginal rate of five point seven. They were always going to be states for which, you know, the weather is, you know, a bigger attraction, or there are other things that are driving people to move there. I mean so many times obviously with moving it's based on a personal decision. And wonder what it could be from Miami. I guess we won't know until we see more of these studies come out, but you know, you have to wonder do people move and then sort of reverse their decision. It's not easy to move, especially if you have families, so it's obviously a major decision. But I guess you can undo it if you want to as well, and I'm sure that happens. It's such a great point. So because there was an extension for taxpayers to file their return in the midst of the pandemic, you didn't have to file in April you had until July. So you're seeing that these addresses capture some of the moves that happened early on in the pandemic up until July. But obviously so many people didn't move right away. So I think it will be really interesting to see what ORI Statis shows in the coming years. Number opinions. Alexis Leander's UK markets stabilized this week after Richie Soonak moved into Number ten Downing Street and appointed a cabinet. I will place economic stability and confidence at the heart of this government's agenda. This will mean difficult decisions to come. I spoke with Bloomberg Opinions Adrian Waldridge on what to expect. So Adrian the FT's opinion page is questioning so next competence and I wonder what you think about that he was Chancellor under Boris Johnson and maybe embraced policies he didn't particularly believe in. Does he do a you turn now and go back to things like small state policies for example. I think that the question is competence is very questionable. I think he's been extremely competent in every single job that he's done, and even when he was working for Boris, he may have overspent a little bit and he may have undertaxed a little bit. Actually, I mean there is a problem with the balancing of the books. That's more because Boris was edging him in or pushing him in that direction, and he ultimately resigned from his job Deciety because he disagreed with Boris on questions of spending. So I think he's a competent person, and he has a very competent person next door in number eleven as his chance with the form of Jeremy Hunt. So I think my presumption would be competent rather than incompetent. Well, are we looking at austerity for written now? Though? As a way of getting inflation under control? I think we're moving towards a position of austerity, not out of choice but out of necessity party because we have to get inflation under control, and partly because we have this enormous black hole at the heart of the economy which we need to deal with. So we have a period of writing taxes and squeezed expenditure which will produce a bit of austerity. But this is not elective austerity in the way that we had under David Cameron and Osborne when we could have had a more expansionary policy. I think it's absolutely necessary austerity because without it we will lose the comfort of the markets. You know. To restore the confidence of the markets, we have to try it very hard to live within our means. Well exactly now, so far, guilty heels are back at prey mini budget levels, the pounder is around. Is all calm or is the market just waiting to see what he unveils. I think the presumption is that the market will be pretty calm. I think they have a lot of confidence in Sunac, Jeremy Hunts and beneath that, I think they will tend to be confident rather than lacking in confidence. In the British economy. It took a lot to shape the markets, you know, in the British Coldom, we had Boris with his very chaotic leadership and people the markets basically accepted that. Then we had, you know, this extraordinary event with Liz Trust and quasi quating camiccasi budgets, and that did shape the markets. But I think they will be happy with this mixture. And it's not just the matter that he's pursuing broadly sensible economic policy. When it comes to taxing and spending. But he has a very calm, sensible, well organized manner down in the streets has not been you know, the half of British government has not been well run for a very long time. And you know, you now have somebody who fit to go on his record in their treasury runs things very well. You know, there won't be partying in in Downing Street as there was in the partment. He's you know, he's a techc he's a teetotaler. It would be a very sober atmosphere. The Sinek was a leave proponent. He's actually the first real believer given the trust was at a commeron and Johnson even too. What will his pro growth policies be? I think at the moment we won't be thinking about pro growth policies at the moment. The most important thing to do is to stabilize the economy, reassure the market, because without a stable economy, without stability, without a reassured set of markets, you can't have any growth whatsoever. Actually, what's interesting about all of this is that in the long term he is a person who believes in lower taxes and the states as a smaller share of GDP. You know, he has mentioned the figure of about of GDP as being about the right amount. His quarrel with this US was not about where they wanted to go, whether the growth was a good thing, whether shrinking the state was a necessary way or eating to hire growth in the long term. It was about timing, and it was about whether you can actually cut taxes and raised spending is exactly at the same time. So I think as we move towards an election, he will start cutting taxes again, which is always what he wanted to do as chance to a chance for his argument with Bolas agains about speed and paste and timing. Narianna Cartacola says also in Bloomberg Opinion that markets didn't always trust the Bank of England did, and that's in a way the case. Right there was a standoff between Quasi quarteng and Andrew Bailey. What will the relationship between SUNAC and Bailey be. We haven't heard from Bailey yet. Um I don't actually agree with that. I mean I I do think that this sudden financial event, sudden budget which basically said let's spend more money on energy and cut the top rate of taxes and lots of other taxes did suddenly send a shock and it was the conver nation of the government saying let's putting the foot on the accelerator and the Bank of England putting the foot on the brake. It was this stop me starting sort of thing that really messed things up. I think that the relationship between the Treasury and the Bank of England will be good. I think, but soon. Act knows Bailey, he worked with him, you know, closely when he was at the Treasury, and he is a technocrat. He's a person who loves the language of economics, the language of macro financial management, in the long term economic policy. He loves talking about all of that. But as Bailey does, so they're both professionals, they're both technocrats, and they're both not political German. So I think that we have we established I hate the fans are optimistic, but we have re established sensible people at the heart of the British government that we have. As he said that we have got lots of problems ahead, but I don't see the Bank of England and the Treasury moving in in in different directions. It will be difficult as ahead, but there won't be chaos of the heart of government. Well, in terms of who soon like appointed and fired, it was a little bit of a purge. You got rid of anyone who wasn't a supporter all along and appointed or reappointed supporters, for example, Suella Braverman. Now slightly off topic to markets, but how should we think about the fact that he reappointed someone accused of a security breach which had called her to resign. Well, I you know, I was very disappointed by the appointment of Braveman, partly because of the security breach, partly because I don't think she's a very distinguished or successful government figure. I don't think it's got a very good career. I think a lot of her rhetoric is is rather appalling. Also, you know, she's been making a huge amount of the frog about Indians overstaying their visas, which has enormously annoyed the Indian government because it seems a very she's she's tingling them the house. And a's a time when Anglo Indian relations to net as the first Hindu prime minister in the origin prime minister retor, it couldn't be better. It seemed unnecessary. So it wasn't as though she's share a towering talent or towering figure within the party that he had to appoint hers. So you know, I don't know what deal was concocted between the two of them. It maybe the price, but he had to pay for the right of the party that Brexit right is the party being queercent or acquiescing, but it's it's it's not the best start. He's got rid of people who need to be got rid of, either because they're weird or because they're not all that good. Chloe Smith and it was all that good she's been got rid of. I think be Small was eccentric and toxifying. He's got rid of. I think all of that is good. It's not the perfect administration. That it's better than it was. Well the segue from there, Michael Gove, Secretary of Stage for leveling up Housing and communities, I mean, which community is a rich Ta has a different, slightly different set of beliefs about leveling up from his predecessor. He thinks that, you know, the North of England is a sort of a nascent patch right country, that what it needs is not an enormous amount of money being spent on it, but a removal of some of the restrictions to economic growth. He's always said that the North of England has coming to Patrism a bit late, but it's coming to Tachrism. It was really people who would have voted for Mrs Sacher in the who came to Tachrism more recently because of a legacy of cultural dislike for the Conservative Party. So he I think he won't be as much leveling up about spending. He'd be more leveling up about creating enterprise and encouraging enterprise and encouraging entrepreneurial classes in the North of England. But I think that that is a policy which leveling up, as Boris Johnson conceived of it was a policy that required a lot of public spending and we just don't have that much public money to spend at the moment. Well, that's the other thing. He doesn't have a war test. So for how long do you think Adrian is the UK now politically stable? Is just more than two years enough time for Sunach assuming he stays to engineer a popular Conservative party again, um, there are two different questions there. Whether we have um stability. I think that um, I think that we have a stable person in charge, whereas we've we've had unstable people in charge. We have somebody who has supporters right across the party, on the left and the right party, which we didn't have before. We have something who was actually a prexiteer, you know, he as you said, he's supported Brexit long before his trust came around to the idea. So I and we do have a general election coming up, so I think that you know, he is well positioned to stabilize the Conservative Party. Whether that's enough to get rid of the memories of the absolute absurdities of you know, the Tory Party destroyed its reputation for economic competence. It looked like, you know, it was turning the country into a complete laughing stock. Um and you know it's been changing its leaders without having a general election. So I think all of that, I would presume that we'll have a Labor party, you know, a labor government next time, even if he can stay babilize things. I mean, the other question is who will emerge as the anti Sunak Conservative leader in parliament, mingled Boris Johnson or Liz trus or any of the previous leaders play a significant roles from here. That's a very good question, But I think that people are really sick of these um people, you know, grandstanding. They recognized that the country is in direstration that needs a period of stability, and a lot of Tory MPs realize that if you've got some rebellious faction and that rebellious faction shakes the government tries to bring it down, it might mean that the party is completely wiped out in the next election. So even if it's just a case of limiting the losses of the Conservative parts in the next election, I think that's a powerful way in which MPs will be disciplined and will discipline each other. So I don't think anybody would be very popular if they decide to cause yet more trouble over the next two years, although it must be said that the Conservative Party's appetite trouble has been quite extraordinary. We're gonna nian's Adrian Wooldridge there that doesn't for this week's opinion. Do get in touch though. We love to hear your comments and opinions. I'm at Bonney Quinn on Twitter or email v Quinn at Bloomberg dot net. We're produced by Eric mollow Till next time on Bloomberg Opinion