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.
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Speaker: Hello and welcome to Under the Banyan Tree.
Speaker: I'm Harold van der Linde, Head of Asian Equity Strategy at HSBC Global Research.
Speaker: And I'm Fred Newman, Chief Asia Economist.
Speaker: We're back on the airwaves after a successful global investment summit here in Hong Kong and ready to get back to our day jobs, putting Asian markets and economics in context.
Speaker: Today we'll be looking at why stuff is getting cheaper in the world's number one manufacturing economy, that's China.
Speaker: Not only that, there's a spillover effect.
Speaker: That means that some prices are also falling in the rest of the world.
Speaker: Let's get the conversation started right here on The Banyan Tree.
Speaker: Fred, I was reading one of your reports recently.
Speaker: I do read your reports, by the way, sometimes.
Speaker: You're the only one, Harold.
Speaker: I know.
Speaker: I think your assistants read your reports as well.
Speaker: They pretend to.
Speaker: So you've got four or five readers.
Speaker: That's good.
Speaker: But this one I found interesting.
Speaker: It was titled China and Prices.
Speaker: And I picked it up because, you know, you talk about deflation in China.
Speaker: That means that prices are coming down.
Speaker: And I thought that's interesting because...
Speaker: That's kind of good for me, right?
Speaker: Because I can buy stuff cheaper.
Speaker: So is there deflation in China?
Speaker: How bad is it?
Speaker: And is it bad?
Speaker: Well, you're right.
Speaker: So there are signs of deflation in China, which is that prices are falling rather than rising.
Speaker: And that's because people are not buying a lot of products, right?
Speaker: Demand is weak and these sort of things.
Speaker: Demand is weak and we have strong supply.
Speaker: Yeah, yeah.
Speaker: Oversupply in many industries.
Speaker: So we have an imbalance between supply and demand and that obviously can create, you know, can lead to prices falling over time.
Speaker: Now, if you look at the overall economies, not all prices are falling, right?
Speaker: There is service prices are rising, for example.
Speaker: I'm going to go to Fuzhou next week and I need to buy train tickets or plane tickets and they're expensive.
Speaker: They've gone up.
Speaker: Yeah, demand has gone up for travel, but the supply hasn't kept in place.
Speaker: But there are areas, though, where we see prices falling.
Speaker: And that's, for example, if you buy an electric vehicle today, anywhere in the world, the prices are coming down.
Speaker: Yeah.
Speaker: And it's partly because there is quite a bit of capacity in mainland China.
Speaker: Other areas are solar panels, for example.
Speaker: So there are parts of the manufacturing sector where actually there is much more supply than there is end demand.
Speaker: And therefore, prices in those areas are falling.
Speaker: Now, you have asked, is it a good or bad thing?
Speaker: Of course, if you were a consumer and you're shopping for an electric vehicle, that's great news because you get cheaper electric vehicles.
Speaker: But as a consumer, I also think if it's falling, why should I buy now?
Speaker: Because it's cheaper now, but maybe next month it's even cheaper, right?
Speaker: That's right.
Speaker: And so when you have deflation, you have consumers deferring their spending decisions.
Speaker: They decide to buy later and wait for even cheaper goods.
Speaker: And that can be, if that lasts for a long time,
Speaker: and really becomes ingrained in people's psychology, like it did in Japan, that could lead to lower growth going forward.
Speaker: That's why economists generally recommend that we shouldn't really sit idle when there is deflation.
Speaker: We should try to get the economy quickly out of deflation.
Speaker: And so there's demand for stimulus, stimulus, stimulus to get the economy, to get demand up.
Speaker: Demand up, people get more jobs, and they say, oh, let's buy that kind of thing.
Speaker: Anyway.
Speaker: Okay, but that's kind of what happens in China, right?
Speaker: But if you can't sell your product in China, then you can say, well, I'm just going to export it, right?
Speaker: That's right.
Speaker: So we have domestic disinflation and maybe deflation.
Speaker: So there's a subtle difference here.
Speaker: Disinflation means prices are not rising as fast.
Speaker: A deflation is that they really actually come down.
Speaker: They actually come down.
Speaker: And so you have a mixture between the two, right?
Speaker: Some disinflation, some deflation in the economy.
Speaker: And that's because ultimately demand is not growing as quickly as supply is in the Chinese economy.
Speaker: Now you might say, well, that's a problem for mainland China, but actually it does spill over into the rest of the world.
Speaker: Because remember, China is by far the largest producer of goods anywhere in the world.
Speaker: People think, well, there's a trade war, there is restrictions on China's exports, but actually China has continued to expand its share in global trade, in global manufacturing recent years.
Speaker: So what happens in China doesn't stay in China.
Speaker: It actually affects if you shop in the U.S. for a toy, for an electric car.
Speaker: For if you're in Europe and you go to the supermarket, you know, you buy apparel, for example, you're actually going to be affected by that as well.
Speaker: That's right, because it's such a big player in the global economy that it exports a lot of things.
Speaker: But there are certain products where you already highlighted where prices are rising and other ones as well.
Speaker: So there must be sectoral differences here as well, right?
Speaker: There are.
Speaker: And so the most well-known are solar panels, for example.
Speaker: We have electric vehicles, for example, where prices are coming down globally for consumers.
Speaker: And they're being exported around the world.
Speaker: And they're being exported.
Speaker: But there are many other sectors as well.
Speaker: So, for example, chemicals, petrochemicals, steel.
Speaker: We have this in furniture.
Speaker: We have it in home appliances.
Speaker: Furniture and home appliances, for example, because housing demand in China is down.
Speaker: So people buy fewer...
Speaker: furniture, home appliances, but the capacity is still there.
Speaker: And the sofa's got to go somewhere.
Speaker: The sofa's got to go somewhere.
Speaker: And so there is now essentially an opportunity for Chinese companies to export that capacity, that is, provide cheaper goods to the global economy, which is great if you're shopping for a sofa right now.
Speaker: In Luxembourg.
Speaker: Or Costa Rica.
Speaker: Or in Costa Rica, absolutely.
Speaker: That's right.
Speaker: I think we're taking a break here, Fred, and then I really want to come back and talk about this, how that impacts all these other economies and also what the impact is on markets, actually.
Speaker: That's the stuff I look at.
Speaker: Sounds good.
Speaker: So Fred, we've been talking about deflation, the fact that prices are falling because the Chinese are making a lot of product in a lot of different areas, EVs and steel and solar panels, but domestically they're not buying it, so they have to export it, and that impacts people around the world, given that China is such a large producer of many products.
Speaker: So this must impact your economic forecast, right?
Speaker: So this is impacting the whole world.
Speaker: It does.
Speaker: And there are a number of ways you can think about it.
Speaker: One, the most obvious effect is inflation.
Speaker: So as you know, over the last 18 months, the world has grappled with a surge in inflation.
Speaker: As a result, the Federal Reserve and others have raised interest rates.
Speaker: Now, if China is exporting cheaper goods, then that obviously reduces inflation.
Speaker: may not need to outright deflation, but it does reduce price pressures for consumers the world over.
Speaker: And so you could argue that China is doing its part to help bring down global inflation, right?
Speaker: Now, that is the good story for global consumers.
Speaker: There is a slightly more complicated situation if you are a business and you're competing with the Chinese in the global market space.
Speaker: So if you are a furniture maker out of Indonesia, if you are an electric vehicle maker out of Korea, if you are a chemical producer in Germany,
Speaker: you have to then compete with Chinese companies who can actually lower prices faster than you can.
Speaker: And so that hits your profit margin, that hits your employment.
Speaker: Now, that's part of the disinflation process.
Speaker: But of course, it's not always welcome in some economies.
Speaker: No, that's right.
Speaker: So there will be maybe in certain instances demand for politicians to step up and protect their industries and these sort of things.
Speaker: And I think we see this in certain industries already, in the auto industry, for example.
Speaker: And I haven't seen it with sofas yet.
Speaker: That's one of the risks, right?
Speaker: And that's a natural political reaction.
Speaker: Because China is so large, it has quite a disruptive effect potentially in global trade.
Speaker: Now, you see a little bit of that protectionist kind of whispers coming through.
Speaker: Some economies louder, others more faintly.
Speaker: But that's certainly there.
Speaker: One key thing to remember here is that China's export basket or the types of goods that China exports...
Speaker: have changed over time.
Speaker: So let's say 20 years ago, China was very competitive in apparel, in plastic toys.
Speaker: And that lowered prices in these categories, and it didn't really affect large manufacturers in the Western world.
Speaker: They were still selling their cars into China.
Speaker: They were happy about this process.
Speaker: What is now happening is that China is becoming more competitive at higher-end goods.
Speaker: Where they are competitive.
Speaker: Where they're competitive.
Speaker: And so they're starting to be more competitive against Korean producers, German producers, Japanese producers.
Speaker: The auto industry is a great example.
Speaker: The auto industry is a great, but it's not just auto, right?
Speaker: It's when we talk about chemicals, very advanced chemicals that China is exporting.
Speaker: When we talk about
Speaker: you know, specific steel products, when we talk about semiconductors, actually, not the higher end, the lower end as well.
Speaker: So the story now is different than it was, say, in the early 2000s when China was the workshop of the world and did that as well.
Speaker: And the big, big question is whether that will have different political implications and therefore a different type of or stronger demand for protectionism in other economies.
Speaker: What I was also interested in is that you mentioned that this impacts what central banks are going to do.
Speaker: because they might not be having to raise interest rates or even could lower interest rates.
Speaker: So it could also be beneficial for that sector.
Speaker: It could be beneficial because central banks might be lowering interest rates faster than they otherwise would.
Speaker: But there is a subtle difference here in terms of the types of economies we're talking about.
Speaker: So if you are a big manufacturing export economy, think of Germany, think of Taiwan, Korea, then you are being more impacted in terms of your domestic inflation than if you are a manufacturing goods importer.
Speaker: So in the US, for example, most of the inflation is generated by services.
Speaker: Where the goods prices fall has less of an impact on overall inflation than if you were a German economy where most of your economies depend on manufacturing.
Speaker: So actually from goods to know, that's what it's sort of.
Speaker: And you have pressure on your profits.
Speaker: You have companies hiring for your workers.
Speaker: That has a much more potent deflationary impact.
Speaker: And so you might argue that China's having cheaper goods exports is good for global inflation, but it's an uneven impact, which could mean that the Fed might lower interest rates significantly.
Speaker: differently or less so than the European Central Bank.
Speaker: Exactly.
Speaker: And so how that plays out that we really need to see.
Speaker: But one thing I wanted to ask you here is from an equity perspective, are you concerned, for example, if you look at companies in Korea and Taiwan and Southeast Asia,
Speaker: that they might see their profit margins being squeezed as mainland Chinese producers come in?
Speaker: Yeah, so the impact on equities or companies comes in multiple ways.
Speaker: So first of all, we have the impact of the lower interest rates of central banks, where they to cut interest rates that's typically good for equities for all companies.
Speaker: So the stocks typically rise in such an environment.
Speaker: then you have companies that are competing with the Chinese and will struggle.
Speaker: So let's say you are a producer of an EV in Indonesia and the Chinese are coming in with EVs, then you'll have to compete with that and that means your profit margins come down.
Speaker: But then there will be companies that benefit from it.
Speaker: So, for example, there might be a local bank and the Chinese EV company says, we're going to employ 5,000 people here.
Speaker: They need a payroll and your banking services go up and the local convenience store operator will suddenly see that all these 5,000 people have more money to spend.
Speaker: So there will be companies that benefit from it.
Speaker: And local companies have sometimes distribution or brands that the Chinese say, listen, we go to Indonesia.
Speaker: I'm just taking Indonesian example here.
Speaker: But we really got to work with a local partner.
Speaker: So the impact on companies can be really different.
Speaker: So you have to really dig deep to understand what the impact is.
Speaker: It's not straightforward like, oh, it's all bad or good for companies.
Speaker: And that's why, of course, we come in as strategists or stock analysts to figure out what the impact is.
Speaker: And I think that's one of the key messages here.
Speaker: It's a very differentiated impact.
Speaker: It's not as simple as saying.
Speaker: That's one underlying theme.
Speaker: It's one underlying theme.
Speaker: It's really how it impacts economies, sectors, consumers versus producers, different types of manufacturers versus consumption product producers.
Speaker: It depends.
Speaker: The impact is very subtle.
Speaker: But it impacts everybody, but differently.
Speaker: And one last thought here is that in terms
Speaker: some ways this is just a natural process of how things work, which is that China is more competitive at the moment.
Speaker: That will need to add to competitive pressure in other industries that will just improve.
Speaker: This is just a normal... It's just part of the process.
Speaker: However...
Speaker: At the moment, we can think of this being a cyclical development.
Speaker: That is, at the moment, Chinese demand is a bit weak, so this is how it plays out in the world economy.
Speaker: And that's positive.
Speaker: That's part of the rebalancing of global growth.
Speaker: The big risk is whether that turns into a structural issue in China.
Speaker: That goes on for multiple years.
Speaker: That goes on for multiple years.
Speaker: And here, I think the verdict is still open.
Speaker: Because if China continues to
Speaker: double down on manufacturing investment, expands capacity faster than demand, then you could argue it's structural, and then it becomes a real problem.
Speaker: But on the other hand, some people might argue that actually this is only temporary weakness in Chinese demand.
Speaker: The demand is temporary weakness, and it will come back, and there you go.
Speaker: Exactly.
Speaker: And then ultimately the problem will sort of dissipate.
Speaker: But whether that will happen, I think we'll need to pick up in a future episode of Under the Banyan Tree, because as I said, the verdict is still out.
Speaker: And that's a wrap for this week's episode.
Speaker: Thank you very much, as always, for joining us.
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Speaker: And remember, you can also catch our London and New York-based colleagues every week on the Macrobrief for the key weekly talking points in global economics.
Speaker: It's been a great episode, and we'll talk to you next week for another one.
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