Transcript
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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to Under the Banyan Tree, where we put Asian economics and markets in context.
Speaker: My name is Fred Newman, HSBC's Chief Asia Economist here in Hong Kong.
Speaker: My name is Harold van der Linde, HSBC's Asian Equity Strategist.
Speaker: I look at stock markets and we're here today to talk about what is going on in the Chinese stock market and the economy, are there green shoots and things as such.
Speaker: And we have great three speakers for you today.
Speaker: First we have Steven Son, actually our head of research at ABCN Tianhai Securities over at the border, coming here today to Hong Kong.
Speaker: And then we have Michel Kwok, our head of equity research in Hong Kong.
Speaker: And we have also Frank Lee, who is our global head of tech research and semiconductors.
Speaker: And so we're going to ask you guys a series of questions.
Speaker: And of course, I think, Harold, the place we need to start really is China and the equity market.
Speaker: Absolutely.
Speaker: So we've got Steven Son here.
Speaker: Steven, just put a little bit of context.
Speaker: What's going on?
Speaker: What's happened in Chinese equities?
Speaker: You've been a busy man over the last couple of weeks, right?
Speaker: Well, thanks for having me, Harold and Fred.
Speaker: When you're invited by Banyan Tree, you know you're popular and in demand, which is good after two and three years.
Speaker: So basically, the market has done really well.
Speaker: We do think that although we don't know the details in terms of size,
Speaker: in terms of scope, also the timeline on the fiscal stimulus, but that actually can keep the hope alive.
Speaker: And we do believe as time goes on, we'll get more details on that.
Speaker: Stephen, let me challenge you here.
Speaker: And I know Harold gave you a softball question being a fellow equity strategist like you always, you know, equities, equities, equities.
Speaker: I'm an economist.
Speaker: I'm by nature very skeptical.
Speaker: Tell me, tell me, how much does that stimulus really make a difference?
Speaker: How much is really coming into the economy?
Speaker: Are you really surprised what they're putting in?
Speaker: Are they doing what it takes or is this just more cosmetic?
Speaker: I mean, a few interest rate cuts here and there, a few trillion RMB, is that going to make a difference?
Speaker: Well, I think this should be actually a question for you, right?
Speaker: And to listening to Jing Liu, China is no stranger to fiscal stimulus, right?
Speaker: Since 2008, they have done five rounds of fiscal stimulus.
Speaker: There are occasions where they're more successful when that can be translated into a credit impulse.
Speaker: when you have the key sectors kicks in, such as property, and then the fiscal stimulus can get that multiple effect to drive credit cycle.
Speaker: When you have the credit cycle start to work, and then that helps to stabilize the economy, and as a result of that, better market performance.
Speaker: Have we seen already earnings being revised upwards?
Speaker: Do you see that the analyst community at large is actually getting a little bit more positive, or is that too early yet?
Speaker: There's usually a time lag, two to three quarters.
Speaker: So I would say, you know, probably have to wait until first quarter next year or second quarter next year.
Speaker: But directionally, I think that's quite clear.
Speaker: Also, I think there's a couple of other factors that are quite important, right?
Speaker: I mean, mainland Chinese markets are quite sensitive to low interest rates in the U.S., but there's a lot of cash on the side as well in China.
Speaker: Is that right?
Speaker: Exactly.
Speaker: That's the piece of report you published.
Speaker: Are you plugging your own report here on a podcast?
Speaker: Well, if you want me to answer the question, it is something maybe to highlight.
Speaker: There is 20 trillion.
Speaker: That is 20 trillion with a T.
Speaker: US dollars in deposits in China, mainland China alone.
Speaker: And in Hong Kong, there's 1.2 trillion, again with a T, US dollars that just sits in demand deposits.
Speaker: That's the money that you and I have in the bank.
Speaker: That is money that people have put into a deposit that will come out in one month, three months.
Speaker: And to add to this, we're talking US dollars, 20 trillion.
Speaker: That is actually double from 2019.
Speaker: So it's a large number, but it's double from what we had in 2019.
Speaker: So how do you think about this?
Speaker: Does that mean, well, there's a lot of liquidity sitting on the sidelines and this could be ultimately maybe find its way in the market?
Speaker: Or is it saying, hey, despite everything went on, nobody wants to buy equities?
Speaker: Exactly, yeah.
Speaker: Well, you know, for every single bull market, definitely you need participation from the Chinese household.
Speaker: But, you know, this time around, we have seen the retail interest coming back very strongly.
Speaker: The key question is how do you prolong the cycle, right?
Speaker: If it's a very sharp and sharp bull market, which quickly fade out, and those Chinese households could be trapped.
Speaker: Certainly that's not what we want.
Speaker: And then that's why,
Speaker: you would have to have fundamental improvement in order to prolong the cycle.
Speaker: It does look like coordinated, right?
Speaker: All the announcements that have come through.
Speaker: But I wonder if we should ask Michelle here if we actually see improvements coming through, if people start to feel comfortable.
Speaker: Is some of that money going into property for itself?
Speaker: We should say Michelle, of course, is head of Hong Kong equity research, but also an expert on the Chinese property market.
Speaker: Indeed.
Speaker: And a lot of stimulus measures that we saw related to property, and of course property matters, are we really seeing the green shoots there in property?
Speaker: I'm really really excited.
Speaker: I mean the last month since I would say probably dating back to May that was the first shot of stimulus that we had when we have the down payment ratio of first home being cut.
Speaker: September was the very significant second shot and then we have the stock market stimulation.
Speaker: So all of this is really added up to a massive stimulus in China real estate perspective and in fact we're already seeing data
Speaker: surging in terms of transaction volume.
Speaker: We've seen second-hand home price in a way somewhat stabilizing.
Speaker: And so I think there's a lot of room to really imagine.
Speaker: You say you're really, really excited.
Speaker: Sorry, I had to process that.
Speaker: Really excited.
Speaker: I think the first time I hear this about Chinese property in four years.
Speaker: In about four or five years.
Speaker: Somebody's really excited.
Speaker: Yeah.
Speaker: Now, what is one of the key data points, number one data point where you say, wow, I didn't expect this to happen in Chinese real estate?
Speaker: Is it Beijing, apartment prices surging?
Speaker: Or what's really the key number one data point you point?
Speaker: It's all about the volume.
Speaker: You actually hear, depending on what data you look at, volume-wise, some cities you've seen a surge in volume, depending on what period, right?
Speaker: Two times or three times, 100%, 200%, 300%.
Speaker: secondary volume as well.
Speaker: And in fact, I would say one data point that everybody missed and keep challenging me about this, is there even housing demand in China today?
Speaker: Of course there is.
Speaker: If you look at the secondary volume, it's been generally quite stable despite the crisis that we've had the last four years.
Speaker: Well, I have to say, Michel is coming strong out of the gate here.
Speaker: How does it work with the equity market?
Speaker: Property is huge in China.
Speaker: Equity market is, of course, quite large as well, but not as large as the property market.
Speaker: Would a recovery in the property market be good for equities, or does it mean that all the money you talk about, liquidity, then goes back in the property and you're still left with equities hanging in there?
Speaker: Yeah, property is critical.
Speaker: You cannot stabilize the economy without stabilize the property sector.
Speaker: and the key difference whether you want a fiscal stimulus to create that multiple effect.
Speaker: Uh you would have to go through certain sectors and property is the most important one.
Speaker: So when you have that multiple effect and then you will get the credit cycle started kicking in and then that's
Speaker: the foundation for a good economy and good equity market.
Speaker: Also, you got 20 trillion US dollars, right?
Speaker: You keep saying that, Harold.
Speaker: We've done a lot of work on that.
Speaker: Is that your research?
Speaker: That's actually our research.
Speaker: Thanks for reading it, Fred.
Speaker: But there is so much money there that it can go either way, right?
Speaker: It doesn't have to be one versus the other in that.
Speaker: in that sense.
Speaker: If people would buy property, what are they going to do?
Speaker: Is it going to be new property, higher-end, lower-end?
Speaker: Is it going to be the main cities where people are going to do it?
Speaker: Or is it going to be in third-tier cities where maybe property is cheaper?
Speaker: What is the nature of demand you think is going to come through?
Speaker: So at the moment, markets still look at the secondary market, so still buying older flats because they're cheaper.
Speaker: And also you don't run the risk of actually not getting delivered, right?
Speaker: Yeah, that's right.
Speaker: But price has actually come down in the secondary market, and that has actually driven the surge in volume.
Speaker: But what we see is actually gradually that should shift in the primary market, the new home market, because new home prices are now coming down.
Speaker: And so once we reach that equilibrium, then it becomes much more meaningful to look at the primary market.
Speaker: So let me ask you, so you're also head of Hong Kong equity research.
Speaker: So maybe a final question.
Speaker: Green shoots in mainland China in terms of stimulus, people feel a little bit better about the equity market, property market is looking maybe a bit better.
Speaker: How does it help us here in Hong Kong?
Speaker: We had a bit of a rough ride.
Speaker: How do you think about the spillover to Hong Kong in general?
Speaker: When China does well, mainland China does well, Hong Kong does well, we have seen when we have the housing policy measures completely taken off in February, we've seen a surge in sales volume.
Speaker: We have seen the mainland Chinese participation had a very sharp surge, and we have seen the latest round of government policy also benefiting alongside the U.S. rate cut.
Speaker: And so I think the dynamics in mainland China and Hong Kong, basically high correlation.
Speaker: That's true, but interest rates here are still much higher.
Speaker: Mortgages are much more expensive here than in mainland China, right?
Speaker: So that what I mentioned, that positive carry, getting these rates down to where it made sense to buy and rent it out, that will probably take a bit longer in Hong Kong, is that fair to say?
Speaker: Exactly.
Speaker: So I would say that at this moment we're still observing, but the market is already feeling good.
Speaker: A couple of weeks ago when we actually arranged a Hong Kong property to
Speaker: or slot to refill by Hong Kong needs, Hong Kong investors.
Speaker: So Hong Kong investors all of a sudden interested in looking at property again.
Speaker: So I would say that when US rates come down more, when the cost of carry started to make more sense, the Hong Kong market generally should benefit a lot.
Speaker: That sounds great.
Speaker: I'm just worried about my rent in the coming year if I hear your story about that.
Speaker: But anyways, Frank, we've got to come to you because there's one story that really was driving global markets in the last, what, 18 months, and that is AI, AI, AI.
Speaker: And a lot of these players based in Asia, the hardware stuff, the guys who built the machines around this,
Speaker: Are we looking a bit peaky here?
Speaker: I mean, have we exhausted ourselves?
Speaker: Or is there just, are you remain optimistic that the demand for hardware will continue at this pace for very much longer?
Speaker: Yeah, so I think, Fred, that's a great question.
Speaker: I think you're right.
Speaker: The last 18 months in a tech space,
Speaker: every day all you hear about is AI, right?
Speaker: So I think there's been this hope that the AI story can become a bigger story because to date, AI has only helped probably a very concentrated group of companies, right?
Speaker: You know, it's mainly US companies, some companies that manufacture chips and AI, but it hasn't been as full-fledged recovery in tech.
Speaker: So if you look at
Speaker: overall, it's still very muted right now.
Speaker: So you see, you know, there's no real strong recovery we're seeing in PCs or smartphones, although every six months it seems like people hope there's some sort of recovery and you don't really see it.
Speaker: So what continues to drive the story is what was we saw in the beginning this year, which is, you know, it's still about initial infrastructure investment.
Speaker: It's driven largely by these big hyperscalers in the U.S. that drive this investment.
Speaker: Hyperscalers being of course very large data centers, right, which require the chips and the servers.
Speaker: I'm going to push back a little bit here.
Speaker: So all these companies are investing in data centers and these sort of things.
Speaker: We even see them now buying nuclear power plants to make sure that they can run these data centers, have the energy right.
Speaker: But if I think about myself, what have I paid?
Speaker: What have I consumed in AI?
Speaker: Actually, I've signed up for an app that's free, and I've signed up for a 30 US dollar open AI thing back home on my computer.
Speaker: So the consumer doesn't seem to pay for it, at least I am not.
Speaker: And all these guys are putting money into it.
Speaker: What is the killer app that right now where companies can actually make money, or do we not know yet?
Speaker: This is probably the million dollar question, right?
Speaker: Because there's been about, if you like collective capex of these big hyperscalers, there's $200 billion a year annually, right?
Speaker: And almost all of that is going into AI infrastructure and investment.
Speaker: But the question is, it's a fair question, is, well, what's the monetization angle?
Speaker: How do these hyperscalers collect money?
Speaker: And the answer is they haven't really given a good answer to the equity markets.
Speaker: I think the message is still pretty much that we can't afford to not keep investing.
Speaker: So you continue to see that the investment cycle remains very strong in terms of
Speaker: ultimately how you monetize.
Speaker: That is a fair question, but that's also why the multiples for some of these AI names isn't that high.
Speaker: Because all these stocks rallied last year when we talked about it, it was very strong until, what was it, April, May this year.
Speaker: So, and then it all faded, right?
Speaker: So, the market is questioning, is there really demand for all these investments?
Speaker: Have there also been regulatory issues with regards to AI?
Speaker: I mean, regulates come out on privacy or so?
Speaker: Nothing we've seen anything significant yet, right?
Speaker: But I think the bigger question, though, is like, you know, how pervasive is AI when it comes to, you know, besides paying for it and monetizing, is there another angle when it comes to...
Speaker: cost reductions and efficiency.
Speaker: So I'll give you an example.
Speaker: TSMC makes the chips now, right, for AI.
Speaker: Well, they're using AI itself to improve on the design of the chips and manufacturing the chips.
Speaker: So in a way, you're seeing them using AI to improve their own manufacturing.
Speaker: But the costs are rising, right?
Speaker: I mean, I see companies not buying nuclear power plants to secure supply of power to run these data sets.
Speaker: That must be...
Speaker: It's not cheap to buy one of these things, right?
Speaker: Or at least do some kind of agreement with these companies.
Speaker: So the cost of running it should go up, I think.
Speaker: I think, I mean, the cost of, I mean, energy consumption is a problem because part of the reason is to, especially in the U.S., the grid system is so weak, right?
Speaker: And so I think part of that rationale, and that's where you're seeing most of this discussion, is there needs to be an infrastructure upgrade in the U.S., right?
Speaker: Just want to make sure they've got the power coming in.
Speaker: Yeah.
Speaker: On the tech angle, let me give us some examples about, you know, I think last year you told us about how much these chipsets actually cost.
Speaker: For an advanced chipset from one of the best known companies out there, you know, how much, if I wanted to start, you know, buying one of these chips, how much are they, how much would it have cost three years ago, how much would it cost today?
Speaker: Just give us a sense.
Speaker: Give us a bit of an idea how much these things cost from the bottom.
Speaker: What are we talking about here?
Speaker: Yeah, so I think the great analogy we think about is, you know, you take, for example, NVIDIA that everybody looks at.
Speaker: Three years ago, they were just selling their, you know, high-end gaming chips, $2,000 or $3,000 a chip, right?
Speaker: A year later, they were selling these chips for $25,000, so that's a 10x increase.
Speaker: But it didn't stop there.
Speaker: I mean, now they're pushing a new...
Speaker: whole server rack architecture which means you have to buy sometimes over 70 of these chips in one time so your total cost structure now is over two million dollars right so just imagine how much the pricing has increased in the last three years.
Speaker: Are other companies jumping into this because if the profits are so phenomenal for these chip makers there must be all sorts of other companies that are jumping in right?
Speaker: You do see companies trying to find a way to find alternative solutions, but it's just not happening at that scale.
Speaker: So as an example, all these hyperscalers we've talked about, they all are trying to do their own chip.
Speaker: They call them these application-specific chips, right?
Speaker: So they're investing and trying to do their own chip, but what you see is that
Speaker: these chips are still not as competitive.
Speaker: So at the end of the day, even though they're investing and trying to do it, it's not- So there's very high entry barriers to get into that industry.
Speaker: And by the way, producing these chips, you talked about the cost of running the data centers, Harold, at the nuclear power plants.
Speaker: I just learned that in Taiwan, we're of course building now a 2 nanometer fab, and that alone will consume up to 15% of Taiwan's energy production.
Speaker: Just running that one factory, just producing it.
Speaker: There is only one factory.
Speaker: So in Malaysia, the planned data centers, the power that they require is 40% of the total power consumption in Malaysia.
Speaker: You can see that these data centers are just enormously power intensive, right?
Speaker: I'll do you even better.
Speaker: Apparently, in 10 years' time, there is not enough energy in the world, theoretically, to run all the data centers that we're building.
Speaker: Okay, so something is going to break somewhere.
Speaker: It's either power or the data centers, or we're not even using the stuff and the whole industry.
Speaker: But then that goes back to the hardware question, because there's tremendous demand to make these things more efficient, energy efficient.
Speaker: Do you see any breakthroughs coming there?
Speaker: Are the chip companies talking about...
Speaker: just a leap in technology that could maybe reduce the energy intensity and kind of think about the green component here.
Speaker: Do we think of being more environmentally friendly or has that not yet kind of gotten into the AI world?
Speaker: I think what you're seeing is that just the computational power just keeps going up at a much faster rate.
Speaker: So for example, if you think about ChatGPT that I think a lot of people have used, right?
Speaker: Today you can't really use video in ChatGPT, right?
Speaker: But once you start putting video, which is where I think people are looking at ChatGPT 5,
Speaker: the demand computation is going to go up even more, right?
Speaker: And so it just seems like, you know, we're not at a stage where things are going to slow yet.
Speaker: You're talking about video.
Speaker: You're talking about make me a two-minute movie about five people sitting on a stage doing a podcast in Hong Kong and something like that will come out.
Speaker: Yeah, I mean... We don't have to do this again next year.
Speaker: We just do this by AI.
Speaker: Yeah, like replace all our jobs, right?
Speaker: Exactly, yeah.
Speaker: Well, this was absolutely fascinating.
Speaker: I think we're running actually out of time, Harold, for our live podcast recording.
Speaker: Of course, we want to thank our audience, our panel members, as well as the audience, of course, for joining us here on the Banyan Tree, where we put Asian economics and markets in context.
Speaker: And of course, another episode drops virtually every week.
Speaker: And you can subscribe to the Under the Banyan Tree podcast to everywhere we get your podcasts, including Apple and Spotify.
Speaker: Thank you very much.
Speaker: Thank you.
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