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Under the Banyan Tree – Getting the boring stuff right
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Herald catches up with Chief China Economist Jing Liu as Beijing gears up for its fourth plenum, where the economic agenda for next five years will be set.
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Transcript
Introduction and Overview
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:14
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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show.
00:00:24
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This is a podcast from HSBC Global Investment Research recorded for publication on Thursday the 16th of October 2025.
China's Economic Strategy and the Fourth Plenum
00:00:32
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Analyst disclosures and disclaimers must be viewed on the link attached to your media player.
00:00:47
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Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Harold van der Linde, Head of Asian Equity Strategy here at HSBC. Now, it's that time of the year when China gets ready to lay out its economic blueprint.
00:01:02
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The fourth plenum gets underway in Beijing next week, with policymakers outlining their macro agenda for the next five years. What's in store and what should markets be keeping an eye on?
00:01:13
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Let's get the conversation underway with my guest, Chief China Economist Jing Liu, under the banyan tree.
00:01:28
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Hello, Jing. Welcome to the podcast. Thank you, Harold. Good. Well, we have you here because in not too distant future, I think it's next week, we have the next announcement of the next Chinese five-year plan.
00:01:41
Speaker
Yes, next week, 20 to 23rd October. Then they will announce the outline for the new five-year plan. So a five-year plan is by definition a plan that goes over the next five years. So I presume near-term issues that the market sometimes obsesses about, which is so at the moment, for example, tariffs and trade, is not going to be at the forefront of this, right? It's really about where do we want to be by, say, give or take 2030. So where do they want to be?
00:02:11
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Well, um actually, it may sound a bit boring. China just ah want to do the rebalancing. It will
Comparing China and US Consumption Strategies
00:02:19
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continue. Rebalancing from what in terms of what? Rebalancing its economy to consume more that um China has produced and also try to tackle the so-called evolutionary competition where we have overcapacity and then...
00:02:38
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the deflationary trap, et cetera, et cetera. So this is actually a very big thing, right? Because China has always been a sort of supply side economy.
00:02:48
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ah We want to produce so many widgets of this and we want to produce so many widgets of that and we want to have market share and this. That's always about what do we produce that we sell into the rest of the world. But now you're saying it's they try to do something different, which is we want to stimulate consumption.
00:03:05
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Yeah, exactly. um During the old days when everybody believes in globalization, China joined the WTO for a while. ah China actually focused on export-driven growth. Making stuff and exporting, yeah.
00:03:19
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Yes, and then we see um China focus on investment-driven growth. And now we're entering the stage, probably, ah fair to say, a re-globalization process.
00:03:30
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where China need to think about how to rebalance its economy while at the same time, US is also calling for reshoring. So if you will, that is a mutual rebalancing.
00:03:42
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Yeah, so you can put this in a global context and in historical context. Globally, in terms of there are imbalances globally, the US is consuming too much, China is producing too much. So China needs to consume more, the US needs to produce more, and this is what we're doing at the moment.
Expanding China's Domestic Market
00:03:57
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Secondly, in a historical context, you're right. They entered the WTO, 2001, if not mistaken, it was. Then they were kind of a producer of everything, the workshop of the world. They exported.
00:04:09
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Then they invested the proceeds of that. That was the next sort of stage from 2010 to 2020, if you want to roughly say so. They invested that into infrastructure that led to overcapacity.
00:04:20
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And now it's the era of kind of more consumption. Yes, exactly. If we look at three key components of GDP, ah we have tried the export-driven growth and then investment-driven, and now we are coming to the consumption.
00:04:36
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And exactly because China has now ah about 31% of global production capacity. yeah That's crazy, right? It's enormous. Yes. So it is at the stage where it needs to expand its domestic market to consume more.
00:04:52
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So how do you do that? I think ah short term basically give subsidies for durable goods. But in the longer term, I think the key rest in, first of all, how to boost the disposable income and also the income outlook.
00:05:08
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Secondly, whether there's a way to enhance ah household wealth so people feel rich and feel happy to consume. Yeah, you're right. Giving out vouchers is nice and it boosts consumption for the moment, but that's temporary, right?
00:05:23
Speaker
That's not a five-year sort of plan. So how can you raise income levels and how can you boost that wealth? What but can they practically do to get there? Right. We have seen ah this ah new urbanization being talked about. The idea is that right now China is going to provide the public goods and public services based on permanent residence rather than where the household registration is.
00:05:50
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yeah so basic Very quickly, for people that don't know, you have hukou, you have... You are registered somewhere, so you have the rights. Let's say you have it in the city of Beijing. You have the right to go to the hospital there if you're sick and these sort of things. But if you are an arrival in Beijing, but you don't have a registration there, not a hukou, then you can't make use of the city's sort of facilities. You can't go to the hospital and these sort of things.
00:06:11
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Correct? Yes, indeed. That is why for many years, a large population, around 300 million migrant workers, they work somewhere in the country away from their hometown. yeah They wouldn't be able to enjoy the same kind of public health, public school, or even ah social housing, etc.
00:06:31
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So we are entering the stage where we're going to have more kind of equalized um access to public goods and the services.
Boosting Service Consumption and Job Creation
00:06:40
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If that happens, imagine a migrant worker might actually settle down with his or her family in a city, and then if certain public goods and services are covered, they would have the spending power for other things.
00:06:55
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Yeah, but also I can understand if you're a migrant worker, you go to, let's say in our example, you go to Beijing, you can't go to the hospitals or something happens. What you do is you save money. You save because if something goes wrong, you're on your own.
00:07:09
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But if you can make use of public services, you can go to the hospital or your children can go to school, then and you say, okay. but Okay, I can share in the wealth so I can also spend a bit more, right? So that have an impact on consumption. Yes, exactly.
00:07:21
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Another way to raise income levels and therefore consumption over time is, of course, to create jobs that pay more money. Higher income levels for the jobs, right? Yes, indeed. i think ah right now China is still facing some challenges on the job market, especially there's ah potentially industrial consolidation, etc., which creates ah extra pressure.
00:07:44
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So I think ah there's a lot of focus on boosting the service consumption. Even it's a voucher… if Service consumption is like restaurants, travel… These sort of things, right? Gaming. and Yeah, exactly. So if it's a voucher for durable goods, you can buy a um a computer this year. You don't buy it every year. But if it is a voucher for you to eat out with your family, you can eat today, tomorrow, and many days after as well. Yeah, yeah. So, okay, so that's another thing that they can try to do to stimulate consumption. And I guess we have to wait and see what other alternatives or ideas they've come up with to do so. Pension reform, I guess, fits into this little bit as well.
00:08:25
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Right. i just Just one ah quick comment on that. The ah service sector is also labor intensive. So boosting the service consumption naturally will bring more jobs. yeah um Pension, yes, I think China is also at the juncture of thinking about ah kind of more meaningful pension reform.
Retirement and Pension Reforms
00:08:44
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We see last year China finally announced that they're going to delay the retirement age. um It's not in the same kind of format as in many other advanced economies because in China, a woman working in the private sector used to retire at age 50. So now they aim to
00:09:03
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ah delay that until age 58. Still relatively young. So that means there could already be some pressure on the funding gap.
00:09:14
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And given that China's pension system is still largely reliant on the pay-as-you-go benefit scheme, that means the aging population, the declining interest rate, all pose extra pressure. Major fiscal costs, yeah. Somebody's got to pay for that, and presumably it's going to be the government. So...
00:09:31
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Pension reform, urbanization and registration sort of issues, all, of course, creating jobs in the service sector and higher paying kind of technology jobs would fit into that as well.
00:09:42
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All are efforts in order to boost consumption over the longer run, because that's what a five-year plan does, right?
Global Investments and Trade Tensions
00:09:48
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um I wanted to move to a second issue and that is at the beginning we said, listen, if you took this in the global context, China needs to consume more and the US s maybe produce a little bit, consume less and produce more.
00:10:00
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um China's also starting to invest into the rest of the world. So instead of the rest of the world investing in China and setting up factories here in the past, it's moving in the ah opposite direction. Is that fair to say?
00:10:11
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Yes, exactly. That started to play out several years ago when some of the companies, including Chinese companies as well as multinationals, they tried to navigate the different ah tariff levels and tried to mitigate the punitive tariff U.S. s imposed on China.
00:10:30
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So we see... um China plus one or China plus n strategy becoming very popular. But now um I think a different kind of driver is behind that. um Exactly because ah within China there's this concern on kind of disorderly competition. yeah Some of the manufacturers, they start to think about, what if I expand my footprint globally?
00:10:55
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Would that make it easier? um So that is ah the first driver. And on top of that, I think if we look at the history, um a strong exporter oftentimes may encounter the scenario where there's more trade tension with partners. And then historically, we see many countries actually eventually end up doing more outbound direct investment. When you build factories closer to your end consumers, you start to create jobs and churn GDP numbers yeah for the host country.
00:11:29
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That can mitigate the tension quite a bit. So I think both drivers start to push China down that road. Yeah, know actually over the last two weeks I was on a holiday in Uzbekistan out of all places. Beautiful place, old cities and stuff. But one of the things there is Chinese investments. So it's one of these countries in Central Asia where Chinese go to invest. Car factories are being set up. But I saw medical equipment somewhere and some other names as well.
00:11:57
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They're investing there and use that as a base to provide these goods to Central Asia. And of course, that will be replicated in Africa and Southeast Asia, Latin America and all sorts of other places around the world,
Market Focus on Tariffs and Equities
00:12:09
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I guess. So that's a new sort of trend, Chinese investments that are coming through as well.
00:12:13
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So just to put this all little bit together, we're going to find here a plan coming up. The market will probably obsess about what are they going to do with the trade tariffs and these sort of things because... That's what markets do. But presumably, they're going to keep on talking the stuff that that seems to work, which is that long-term strategy.
00:12:29
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What drives up consumption and how can we further stimulate it investments in that sense? Right. That doesn't sound very exciting. But I have to say some of the, you know, quote unquote, boring stuff may start to work.
00:12:44
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Yeah, that's a very very nice way of describing it. We're going to take a quick break here and then we're going to go back and talk about the market's impact of all of this.
00:13:01
Speaker
Well, Harold, um you just mentioned the market. So let me ask you, what does the market expect from the plenum? And what kind of impact do you expect? My suspicion is that that the market is going to obsess a little bit about, well, what are they doing with the tariffs and and um um how they're going to respond to that and these sort of things.
00:13:20
Speaker
And as we've just talked about, this is a five-year plan. So they're going to, I suspect, look well beyond that. But yeah, the market is going to look at that. But what we really need is some sort of concrete measures or ideas of where concrete measures are going to come on exactly what you've just mentioned. For example, ah what you going to do with household registration to drive?
00:13:43
Speaker
income levels up or transition the economy towards yeah more service based sort of economy and these sort of things. There will be talk about are they going to cut interest rates and are they going to do fiscal stimulus because the market always talks about that.
00:13:56
Speaker
But I think that misses the point to a certain extent. But I think the key issue with Chinese equities now is not necessarily all of that. What we're seeing is that Chinese households are sitting on an enormous amount of cash.
00:14:08
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Yeah, 22 trillion US dollars. Actually, it's a close to 23 trillion US dollars now. is the biggest cash power the world has ever seen. Part of that is money that they keep for their retirement. That's what we just spoke about, right? These migrant workers who keep cash because they need to take care of themselves.
00:14:24
Speaker
But if only a small part of that money can be unleashed or be used. be deployed, you could say, to invest in property or in gold or crypto, but also in stocks.
00:14:35
Speaker
That is helpful. And we think $6 trillion of that could be deployed. Now, if 10%, 15% of that goes into equities, we're talking about $600 billion. dollars
Innovation and Economic Confidence
00:14:44
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So there's cash. It's just the confidence that they need to have to invest that cash.
00:14:50
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So this is my my question back to you. Do we see that domestic confidence is is improving? Yeah, indeed. um a lot of dry powder. um I think this year we start to see the improvement for different reasons. First of all, China actually has announced quite some technology breakthrough, including the DeepSeq. Yeah, DeepSeq and AI and chipsets, Alibaba. and Right. And later we see the innovation drugs actually surprise the world.
00:15:22
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So that ah seemed to prove to the world China can innovate. And that's very important because the innovation capability will determine the economies of future competitiveness.
00:15:35
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um So that seemed to start boost the confidence, attract some investors. We see the tech sector actually seemed to get quite some inflow.
00:15:45
Speaker
And on top of that, um i think it's also important to note the performance of the stock market by itself probably will incentivize more allocation. Exactly. it That brings ah people feel more confident about this, right?
00:16:02
Speaker
Sort of self-fulfilling sort of prophecy, I guess. And the economy is on a slightly better footing. And ah the property market is is not as kind of bad as to Sideways. Sideways. But and in certain areas, we see a small pickup.
00:16:17
Speaker
So I guess confidence on the margin is not fantastic, but it's at least better than it was 12 to 18 months ago. That's right. And people observe that maybe the Chinese officials' positioning for stock market is changing as well.
00:16:32
Speaker
For example, there's this announcement of the quote-unquote national team. Basically, they can access the monetary tools created by the central bank, People's Bank of China.
00:16:44
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And if needed, they can actually help boost ah the market. So yeah essentially, there's a policy put there as well. Okay. Yeah, and this is interesting because in the past, very often policies were conceived to be confusing and therefore bad for markets. But now it seems it's the other way around.
00:17:01
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They try to be more supportive to that. They see that maybe a higher stock market this is is a sort of creation of wealth and helps them in this process to build out consumption as well, right? Indeed. Yeah.
00:17:11
Speaker
So maybe just to summarize this all is, as you very neatly said at the very beginning, the boring stuff seems to work. And maybe this is what we're going to get out of the plenum. And it means a gradual return of confidence. And as you say, the... There's a lot of dry powder, so that allows a slow reallocation of all that cash that they have into all sorts of other
Long-term Market Improvement
00:17:35
Speaker
assets. And that means you don't have a rapid sort of response with a lot of money flows into market and markets goes haywire, but a gradual grind higher from here in terms of markets, asset prices, economy in China.
00:17:49
Speaker
Yes, China is very good at playing chess, if you will. They have um very long-term planning, and they actually keep to their plan and consistently implement that.
Conclusion and Call to Action
00:18:02
Speaker
Yes, that's a very nice way of summarizing this all. Thank you very much, Jing, for coming on to the podcast. And no doubt we'll be talking to you in the near future to see what they've actually told us and what your response is to that.
00:18:16
Speaker
My pleasure, Harold. Thank you. Well, we're going to have to wrap it up here, ladies and gentlemen. A pleasure as always having you with us. And do be sure to join us again next week. Under the Banyard Tree is an HSBC Global Investment Research production, as is our sister podcast, The Macro Brief.
00:18:33
Speaker
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00:19:06
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.