Transcript
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Speaker: Hello from Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, head of Asian equity strategy here at HSBC.
Speaker: On the show this week, what can the recent Dragon Boat Festival tell us about the state of consumption in mainland China?
Speaker: And off the back of a top-level policy meeting in Beijing, how do Chinese leaders plan to further grease the wheels of the economy?
Speaker: Joining me with the answers is our Greater China Economist and good friend of the podcast, Erin Chin.
Speaker: Let's take the conversation under the banyan tree.
Speaker: Let's kick off with a few takeaways from the long weekend in China.
Speaker: The famous Dragon Boat Festival took place from the 8th to the 10th of June and like all national holidays it gives us a chance to read the economic tea leaves.
Speaker: Daily travel numbers were up nearly 13% compared to the same period in 2019.
Speaker: Not too bad, right?
Speaker: And domestic tourism was up more than 6% year on year over the three day holiday.
Speaker: So also pretty good, you think.
Speaker: But what about spending?
Speaker: That's a question I want to put to Erin, who joins us here in the studio in Hong Kong.
Speaker: Erin, before I'm going to ask you my first question, I want to congratulate you.
Speaker: I understand you've recently been engaged.
Speaker: Yes, thank you very much.
Speaker: Okay, now so the whole world knows now.
Speaker: Here you go.
Speaker: Erin, it seems like a lot of the problems that China faces come from the fact that they produce a lot.
Speaker: There's a lot of oversupply, but there's not a lot of demand.
Speaker: So there's oversupply in nearly everything in China.
Speaker: So I want to delve a little bit deeper into this, but we had these consumption numbers over the Dragon Ball holiday.
Speaker: What are you reading to those numbers?
Speaker: Yeah, so as you mentioned, the headline numbers do look quite positive.
Speaker: The Dragon Boat Festival holidays have actually been fairly similar to what we've been seeing in previous holidays so far this year.
Speaker: So what that means is that at the aggregate number of trips taken, as well as the total amount of spending, those are higher than pre-pandemic levels.
Speaker: So that's quite positive.
Speaker: Yes.
Speaker: But on the other hand, there's always a but.
Speaker: What we've seen is that the per trip spending is still not quite at 2019 levels.
Speaker: We're still down about 10 or 11 percent from that 2019 levels.
Speaker: And that's similar to what we saw in the previous May Day holidays.
Speaker: I remember.
Speaker: So basically people travel more, but they don't spend as much.
Speaker: Yeah, I think there's probably two key considerations for why this we were seeing that such a phenomenon.
Speaker: One is perhaps there is some change in that spending patterns.
Speaker: They are taking shorter trips, spending a little bit less per day.
Speaker: trip.
Speaker: But the other thing is that consumer confidence hasn't fully picked back up yet either.
Speaker: And there are pressures in the economy.
Speaker: We see that from weakness in the property sector.
Speaker: There's still areas of labor market pressure.
Speaker: And I think that this does play into why the per trip spending is not quite back to that.
Speaker: So like all the data that comes out of China, we can look at it very positively and say, hey, spending is up.
Speaker: But on the other hand, we could also say, well, actually, it does not show that there's a lot of confidence or maybe that are changing shifts in consumption patterns as well.
Speaker: But still, we are stuck with this position, therefore, that there is oversupply.
Speaker: So let's assume even that consumption is picking up.
Speaker: There's still too much being produced in China, right?
Speaker: So what are Chinese corporates going to do about this?
Speaker: Yeah, so on the consumption side, yes, there's a mismatch between services as well as just overall retail goods, services performing much better.
Speaker: But when we think about oversupply or kind of tensions around exports and things like that, it's kind of on the same vein, right?
Speaker: You have oversupply when your domestic demand is just not able to fill in that gap.
Speaker: So we are seeing that domestically consumption, it still needs to pick back up.
Speaker: On the other hand, globally, because China is competitive, it does lead to it being able to export perhaps at lower prices.
Speaker: We've been seeing that the export prices index, that's actually been falling by about double digits year on year, while export volumes have been increasing.
Speaker: Yeah, I was in Shanghai and Beijing over the last two weeks and all the companies that we met there and also investors and stuff, they were talking about, oh, yeah, China is going to go global.
Speaker: There's going to be a lot of exports.
Speaker: We are making a lot of electric vehicles, is the example.
Speaker: But we'll sell them into the rest of the world.
Speaker: What do you think about that?
Speaker: Yeah, so I mean, for China, it's both addressing the domestic demand, I think long term, they want to be more consumption led.
Speaker: But at the same time, exports has historically been a driver for its growth.
Speaker: And there's been emphasis on trying to tap into where China can potentially grow its markets.
Speaker: But this goes with a backlash, right?
Speaker: Yeah, I think that also causes tensions.
Speaker: We've been seeing in the recent months that the U.S. has increased the tariffs on Chinese imports to the U.S. on specific imports.
Speaker: And then most recently, the EU is increasing the tariffs on Chinese-made EVs that would be exported.
Speaker: So it's not going to be an easy story.
Speaker: And I think that is part of the story that grabs the headlines.
Speaker: But let's take cars.
Speaker: You need to have a brand.
Speaker: You need to have distribution networks.
Speaker: You need to have after-sales service.
Speaker: You need to have insurance place.
Speaker: So it's not that easy for a new company to emerge.
Speaker: And
Speaker: So then we go back to China.
Speaker: You have oversupply.
Speaker: You can't maybe export all of it.
Speaker: It means that prices got to fall.
Speaker: This is a deflationary economy, right?
Speaker: And that probably means interest rates got to come down.
Speaker: And that's got implications maybe even for the currency, right?
Speaker: So I would say in China, the inflationary pictures, it's relatively benign, but it isn't something to be overly concerned about.
Speaker: And I think part of that is because some of that strength has been coming through from the services side.
Speaker: But yes, there is ongoing pressure from domestic consumption as well that leads to downward pressure in prices of goods as well.
Speaker: and some of that spilling over into the exports market.
Speaker: But the implication is that that does give the PBOC to keep an accommodative stance for monetary policy.
Speaker: Meaning they can lower interest rates, right?
Speaker: Yes, they can lower interest rates, and we are expecting that lower interest rates could come through in the second half of this year as there's a little bit more space once the U.S. Fed also starts to move.
Speaker: Okay, so you guys see rate cuts coming through in the second half of the year.
Speaker: Yes.
Speaker: What would that do maybe to the currency then?
Speaker: So I think that the currency is also a consideration for monetary policy.
Speaker: And that's also why they haven't been quite as aggressive in moving the interest rate and instead choosing perhaps to use more liquidity support.
Speaker: But, you know, the overall stance around the exchange rate is to keep it fairly stable, no rapid one-sided movements.
Speaker: And so I think that that's also a consideration for why the interest rate perhaps would come through in the second half of this.
Speaker: Okay, good.
Speaker: Now, we've talked about oversupply.
Speaker: We talked about that this is not so good for prices in general.
Speaker: Interest rates can come down and stuff.
Speaker: Then we have the policymakers got to do something about this.
Speaker: And there's this plenum on a yet to be identified date, I believe, in July, the third plenum, where the policymakers will come together and presumably make some announcements.
Speaker: Is that going to be a big thing?
Speaker: So the third plenum will be very closely watched.
Speaker: And the reason why is because it focuses on economic policies, economic reforms for the coming five years or so.
Speaker: We don't have a lot of details as of yet.
Speaker: We don't know the exact date, but they did say it would come through in July.
Speaker: That was announced in the April Politburo meeting.
Speaker: Now, in terms of perhaps what topics they might focus on, I think they have kind of been continuing to focus on transition growth.
Speaker: So I think that that's a good place to start in terms of thinking about what areas they would focus on.
Speaker: It's the new high-end tech they want to go into and these sort of things, right?
Speaker: Yeah, so on the one hand, it's building higher quality growth from things like technology, innovation, green development, but also thinking about more equitable growth, building out your social safety nets.
Speaker: And that goes hand in hand with thinking about consumption led growth.
Speaker: So in that sense, if something like that could come through and build confidence among households, that could therefore be quite important in that sense.
Speaker: Yeah, I think that it would give the broad policy direction.
Speaker: Of course, implementation would probably come through at a more department level.
Speaker: But I think we are watching it quite closely to see if that can give us a stronger policy boost to come through.
Speaker: Well, I'm glad that you watch it closely because I can watch you closely to see what you think of it and figure out what the implications are for us in markets.
Speaker: But I suggest we take a quick break here.
Speaker: And when we come back, maybe we can go a little bit deeper on one or two points.
Speaker: Aaron, we can't really talk about the Chinese economy if we don't talk about property.
Speaker: All sorts of different divergent views on that.
Speaker: How do you look at it?
Speaker: So I would say on the one hand, the policy stance does seem to be stronger.
Speaker: We've been seeing that there's been more policies that have been undertaken in order to try to bring back some confidence into the sector, as well as this new tool where they're saying that they want to provide funding for state enterprises to directly buy current commercial properties to turn it into public housing.
Speaker: Yeah.
Speaker: So on the one hand, I think it's clear that that policy stance still stands.
Speaker: Recently, they had a state council executive meeting and the premier reiterated that we need to think about tools to think about the de-stalking situation.
Speaker: And on the other hand, it does seem that we haven't really had that turnaround yet.
Speaker: Some of the high frequency data, it's still slowing a little bit in terms of housing sales, both in primary and secondary.
Speaker: Part of that can be due to the holiday.
Speaker: But the other indicators from the property side are still quite weak.
Speaker: So that's real estate investment, property sales.
Speaker: So I think that more does need to be done.
Speaker: We're not out of the woods yet.
Speaker: We're not out of the woods yet.
Speaker: What about things in your realm?
Speaker: How do Chinese equity markets look right now?
Speaker: What's been happening?
Speaker: Well, Chinese equity markets have had a real good start of the year.
Speaker: And I think what has happened is that we know that publicly pension funds last year stated we want to reduce, U.S. pension funds, that is, we want to reduce our exposure to China.
Speaker: That was last year's story.
Speaker: They sold down whatever they had.
Speaker: It seemed that by the end of last year, December,
Speaker: early january most of that was done and then from february onwards everybody thought hey if we only have a spark of positive news and some of that came through that you mentioned right on the property sector maybe i should go closer to neutral maybe i should buy a bit more and not be so light on chinese equities
Speaker: And that's what happened.
Speaker: We've seen a repositioning.
Speaker: Also has to do with some of the other markets in the region being less attractive.
Speaker: So money flew in.
Speaker: That was really February, March and April that started to taper off again as well.
Speaker: And the funny thing is, when I was in China, all the questions we get is, what do you think the farm funds are going to do?
Speaker: Are they going to buy Chinese equities?
Speaker: And the moment you're outside of China,
Speaker: They're saying, are the Chinese confident to buy?
Speaker: So everybody seems to be watching each other in that sense.
Speaker: But I think what we need is some clearance on policies and growth and these sort of things for confidence from either foreign and domestic investors to come back.
Speaker: So, yeah, we'll have to see.
Speaker: And it comes back to what I mentioned earlier on.
Speaker: We're going to watch you, what you see in Beijing coming out of these policy announcements.
Speaker: That's going to be important for us.
Speaker: Hey, Aaron, a very last question to me.
Speaker: I want to go back to the export story.
Speaker: We talked about how the Chinese companies want to export their way out.
Speaker: One product China seems to be exporting again, but was importing quite recently, is panda bears, right?
Speaker: Yeah, so when US-China tensions were fairly heightened, China had taken back some of their pandas.
Speaker: Historically, panda diplomacy has been a way for China to build goodwill with other countries.
Speaker: So now we are seeing that the pandas are going to be sent back to US zoos.
Speaker: And that's probably a reflection of some of that improvement we've been seeing in US-China relations over the last year or so.
Speaker: That's good news, but it's not going to move the needle, I guess, in terms of export numbers or oversupply in China.
Speaker: But at least it's a very positive note on which we can finish off this podcast.
Speaker: Thanks for being on the podcast, Erin.
Speaker: Thanks for having me.
Speaker: And that's about all we've got time for, folks.
Speaker: Thanks, as always, for joining us under the banyan tree.
Speaker: And don't forget to stay up to date with our latest global macro series by tuning into our sister podcast, The Macro Brief.
Speaker: We'll be back again next week.
Speaker: Take care.
Speaker: Till then.
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