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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: This podcast was recorded for publication on Thursday, the 18th of September 2025 by HSBC Global Investment Research. Analyst certifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Welcome to Under the Banyan Tree from HSBC Global Investment Research. I'm Fred Newman, Chief Asia Economist. And I'm Harold Van der Linde, Head of Asian Equity Strategy. So the Fed's rate-cutting cycle has begun in the U.S. and that's got us thinking about a lot here in Asia.
Speaker: But it's a different picture in this region. We're here to tell you why. From inflation to interest rates, central banks to stock markets, China, India, Japan and beyond, let's get the conversation started Under the Banyan Tree.
Speaker: Fred, the Fed is dealing with an interesting sort of dynamic, right? So they're cutting rates in a time when there's also actually inflationary pressures. So that's a sort of an interesting balancing act. But the story seems to be almost the opposite here in Asia.
Speaker: Central banks talking about cutting rates, but we don't really have an in inflation problem. Is that correct? That's right. There's a much cleaner story, if you will, for Asia in terms of the outlook for monetary policy. Now, as he just said, in the U.S., yes, the Fed is poised to cut more in the coming quarters. Certainly, we already saw a rate cut there.
Speaker: But the issue in the U.S. is that you have very sticky inflation pressures. And so there is a weakness in the economy, and the Fed might react to that. But also, there is a sticky inflation. So it's a bit of a hard hard thing to square for the Federal Reserve. That's right and And I guess that's a sort of tariffs being priced in sort of story. Tariffs, the labor market. there's There's a lot of dynamics where by just inflation has actually been sticky for a while already. But why don't we have that in Asia? what What's going on here? in Asia, we have, first of all, we don't have tariffs So the economies didn't really impose enormous tariffs on the imports of goods. So that's one thing.
Speaker: Secondly, because we really sell goods to the rest of the world and if the rest of the world buys fewer goods as a result of the US tariffs, then that slows down growth and that means more disinflation, if you will.
Speaker: um So, there is a lot of excess capacity building up in Asia, notably in China. yeah And that's that's holding goods prices down. But there are two other factors that matter enormously for inflation in Asia.
Speaker: One is that oil prices are down and obviously energy big contributor to Asian inflation because Asia is – generally very energy intensive in terms of the GDP, much more than other economies, by the way.
Speaker: And then the second factor is food prices. Food has a much higher share in people's consumption baskets, particularly in lower developed economies.
Speaker: And what we have seen is really a decline in food prices. So in China, for example, pork prices are down by some 16% year-over-year, and that drives down food costs. But also in India, we see ah declining food prices. Rice prices in Southeast Asia are actually down in many economies, and that's holding down inflation in general. So bottom line is that in Asia, we face a much cleaner story of lower inflation, whereas in the U.S., yes, inflation is a bit stickier, but the Fed's still cutting. So it's not quite as clean a monetary policy story. Okay, so pork prices, I take that from you, they're down, rice prices are down. But isn't there this anti-involution policy that's going to take a sort of capacity out?
Speaker: So the overcapacity problem is... over. It's not... So anti-involution. We should actually explain that term i know exactly because every time i I say it, I have to wrap my head around it. So essentially, it means anti-excess competition policy. So this idea is that prices are falling and the government comes in and says, it's too much competition. Let's kind of put a floor under prices and reduce competition and reduce excess capacity a little bit so that prices don't fall, that they actually have a chance of rising.
Speaker: That may very well be the policy that was recently announced. It's being pushed now. But at at the moment, it hasn't had yet a noticeable effect on prices. In fact, ah the latest CPI numbers, that is consumer inflation numbers, again, show deflation in China.
Speaker: The producer price index is still falling. So most indicators suggest that as of now, there's still deflation. And really, it's an open question whether the anti-involution policy really changes that. Yeah.
Speaker: Which means, yeah, prices still falling, but probably continue fall, maybe not quite as quickly. But that means that the central bank in China actually has still room to cut interest rates because there is no inflation. yeah And similarly, in other Asian economies, in many Asian economies, there's just is very, very little inflation. And so central banks can clearly Cut interest rates. And and and that is, I think, still the expectation of financial markets. Now, for for you, Harold, the question, and that is that you know you're an equity guy. Yes. Through and through, I have to say. youre you You breathe in equities day and night. I like the world. Yes. So ah help me with this, because low inflation in many ways for an economist actually implies very little demand relative to supply, which means less profits for companies, presumably less pricing power because everybody's just struggling to maintain market share. that we So why would I buy equities in this world?
Speaker: Well, before I tell you that, I'll buy your equities, therefore, because I think there's a positive spend to this. We should say this is not investment advice. and I don't own any equities, nor does Harold. So we're just hypothetical.
Speaker: So why would this be constructive? Or let me let me ask, ah why are equity prices in China still going up if I have deflation? That seems, as from an economist's perspective, perspective so contradictory. Yeah. absolutely right. So for the companies to make profits, yeah, if you can't raise your prices, that's not very nice. If you want to make more profits and grow your profits, and if you are in intense competition, your margins creased, that's bad news. And that's exactly what's happening.
Speaker: So if you look at the first quarter and the first half results of from many Chinese companies, particularly internet companies, they have not done so well. There are pockets where things are okay, but that's kind of related to industry dynamics, but don't have to go into that. But broadly speaking,
Speaker: In large parts of Asia, China is not an exception, the overall profit growth is not so good. So you say that's not so good for for equities. That's absolutely right. But equities is not only driven by profits. It's also driven by what happens with interest rates. Now, very quick question. If you put money into a Chinese bank, what would you get now on a time deposit?
Speaker: If I was a Chinese saver, say around 1%, maybe. Yeah, and i'm lucky and yeah. And you're telling me that the central bank in China is going to cut rates. So six months from now, that could be below 1%, maybe even, right? Yeah.
Speaker: So at best, say 1%. So if you wait one year to grow your money by 1%, But you can put it into an equity that pays you dividend that pays 5%. Then you think, that's not too bad, right?
Speaker: And this is now the trade-off that has taken place. People say, well, that's fine. So maybe the growth is not so good. But these companies still pay me dividends. And that's another driver of equities. But but I still struggle with this, Harold. And you know I've struggled with equity all my life. But what you're telling me is essentially that, yes, companies may not see their profit grow because as much. and maybe it's actually disappointing because they see deflation. There's not enough growth.
Speaker: But – Investors can still buy equities because the interest rates keep falling. But how sustainable is this? Doesn't at the end of the day, don't you need to see some growth coming through in profits for equities to do better? So think about it as a tug of war. You have on one hand your team growth and that pulls and you have the team interest rate that pulls.
Speaker: If the earnings are strong, then it goes in one direction. Yes. And the team interest rate doesn't pull too strong. That's good. Then that's fine. It go into one direction. Now, we have that the team interest rates is is actually not pulling so strong. Although the growth is not so good, it means that team interest rates is really slacking at this moment. So team growth still can do it.
Speaker: But you're right. At some point in time, this is going to change. If, for example, interest rates would rise. ah But for the moment, it just means that because team interest rates is not doing so much, team growth can still win in that target war.
Speaker: So, Harold, that's why I love you know listening to you because equities do well when there's growth and inflation. And they may also do well when there's deflation because interest rates go down. So actually, that is right. But let's also be frank. There will be a time whereby, for example, growth is weak and interest rates go higher and then equities can perform very badly. We saw this, for example, in the us s not so long ago, right? The growth was was weakening and they had to raise interest rates, which is why interest rates are so high at the moment.
Speaker: So then the equity market can come down. so Let's talk about India because a lot we discussed now sort of relevant to to China, whereas really you have evidence of deflation, at least in some of the indicators, and you have a central bank that's still poised to ease further gradually, but but probably that's the bias.
Speaker: What about India? Because Indian equities actually – The interest rates have come down, but Indian equities haven't done that well. Exactly. What's going on there? This is actually great example of this tug of war again. So you have the growth team and you've got your interest rate team.
Speaker: The interest rate team has actually not done so much because interest rates have come down. Like in China, they slacked a bit, if you want to put it like that. ah They're not pooling so hard. But the growth team just dropped the rope.
Speaker: Growth numbers, earnings growth had to be seriously downgraded. So despite the fact that the interest rates... were kind of, that team wasn't really pulling too much. The growth team didn't do anything at all. So they won.
Speaker: So what we've seen is that the equities were dragged lower because growth was the overriding driver. Now that balance will shift at some point in time, whereby interest rates, for example, might even might go higher, but at the moment probably not, ah or maybe stay where they are in India.
Speaker: But if the growth starts to return, they pick up the rope again they start to pull, then they can win. And then then the equities can maybe perform again. We're not really there yet. We don't know when we're going to be there. But um ah but that's the sort of dynamic. So so sos it's interesting. You you kind of described that tug of war. yeah um One is the interest rates, kind of that low interest rates help equity markets. yeah But on the other hand, you want growth because you want earnings growth.
Speaker: Now, if you look at the current equity markets in Asia, it's really around the world. There's a third element, I think, and that's a tech sector and AI boom. It's sort of this belief that maybe interest rates and current growth rates don't matter because we're building up this...
Speaker: yeah Right, future artificial intelligence and so forth. And so is there so a third guy pulling the rope here somewhere unseen that that the equity market can actually do well regardless because there is sort of this new paradigm, if you will, new you know technology coming through is Is this in play here as well? Absolutely. But this is more in play, I would say, in Korea, Taiwan, Japan.
Speaker: And I think we should talk about Japan a little bit more because it's different today there. But, so yeah, you have in markets like Korea and Taiwan the belief is that whatever happens with interest rates, that team, it doesn't matter anymore because you've got basically bodybuilders on the earnings team.
Speaker: They are going to pull – that is AI and the earnings are going to be enormous. And therefore, that team is going to win. So all the center of attention there is on the growth is going to be fantastic. The question is, is that really the case?
Speaker: But for the moment, the market says, the interest rate team, it doesn't matter. Whatever they do, the earnings are going to be phenomenal in AI. And that is the key driver. So we have a tug of war. We've got bodybuilders on the field as well.
Speaker: I think that's a great time to take a quick break. And when we come back, we should maybe talk a little bit about Japan because that is a bit of an outlier here That's correct.
Speaker: Fred, one country that we already mentioned beforehand is Japan because it's a bit of an outlier, right? What is going on with interest rates and inflation in Japan? So Japan is an outlier. Most of the world is really poised to lower interest rates further yeah because inflation has come down most places. In the U.S., is not so much inflation, but the economy is weakening. So there's a case there for rate cuts.
Speaker: Japan, though, is going the other direction, is actually looking to raise interest rates. At least that's the bias of the central bank at the moment. It's really a question of when it will raise rates. and not talking about cutting interest rates. And the reason for this is that Japan is seeing...
Speaker: for the first time in decades, really, an acceleration in inflation. um It's partly because the labor market is very tight. It's partly because food prices have actually risen in Japan. Rice prices, for example, tried inflation. Yeah, I know people lining up. pictures of that. They're lining up. And, know, Japanese, they like Japanese rice, and there's only so much you can grow in Japan. They don't want other rice than Japan. And they had a bad harvest in 2023, and we still feel the effects in rice prices and inflation today because of that.
Speaker: And so what the Japanese Central Bank is looking at essentially is, oh, inflation is running probably ah above our target. But just a quick question. um Japan exports a lot of products to the U.S. They are being tariffed. Wouldn't you expect growth to be much weaker in in in Japan? What's driving that growth? Yeah, you you would eventually. um But, ah you know, exports are important for Japan, but it's still a large domestic market. And and actually we had in the second quarter – Again, numbers coming through. The Japanese growth has actually been expanding for for several quarters in a row and and as a price on the upside the second quarter.
Speaker: And yes, there's some risk on the U.S. side, but generally speaking, it shouldn't derail the overall expansion. Yeah. But the meantime, we're left with high inflation. And the risk is actually that if we don't address high inflation as a central bank, then households become nervous about rising prices. And they think, oh, the central bank dropped the ball on inflation. And so i need to save money because price is only going to rise. so That's the opposite what happened in Japan over the last 20 years. That's the opposite, yes. yeah yeah yeah So there's almost – in order to help growth, you need to be seen to be on top of inflation. And so from that perspective –
Speaker: Yeah, it looks like the central bank will still raise rates and they might do it as early as this year. That's what the market is pricing. So you would think the yen would strengthen on the back of that because it's more interesting put your money and in Japan than in than in the U.S., example. Well, that's where currencies not always necessarily follow that um nice. They don't always follow nicely where central banks raise interest rates or low interest rates because it's also about… the real interest rate, which is the inflation-adjusted interest rate. And because – What's the amount of goods you can buy with something? Over time, Yeah, because you can say it's cheaper to buy. It's better to be in Japan. But if the price is right, then you can't – have high inflation. Yeah, then you can't buy as many bags of rice. So you don't want to necessarily put your money in Japanese yen because it loses real purchasing power over time. So that's why sometimes –
Speaker: It's not as clean a translation from interest rate policy to exchange rates. But coming back to you because you know we talked about, okay, look, equity markets can still you know be fairly resilient in environment even if inflation is going down because interest rates might come down and that might actually help equity markets. But what about Japan? Because I'm looking at rising interest rates. um And is that going to be a headwind then for the equity market? Or is that the opposite of what we just discussed? So that actually because of high inflation, earnings are rising. And so there's still an argument to be made that that equities can actually be quite resilient. Yeah. So first of all, when you said, well, you know, the export sector is not so big. It's mostly largely domestic economy. That's correct. But actually for the equity markets, it's the other way around.
Speaker: 60% of the earnings in the stock market are generated by exporters. ah Those are the car exporters and the companies that make servers and chips and and these sort of things. So it's actually, from an equity point of view, it's an exporting economy.
Speaker: And therefore, a strong yen is not good for them, but a weak yen is good because then, as an exporter, you can sell your products cheaper into the rest of the world and gain market share. So what we've seen is actually a weaker end recently for some of the reasons that you just mentioned.
Speaker: That's been supportive to the equity market. In addition to that, the higher interest rates helps the banks because they can lend out money at high interest rates and it's good for them. And that's a larger segment of the market as well. So this is a nice example where, again, the composition of the stock market is almost the opposite of what the composition of the economy is.
Speaker: and Therefore, the conclusions that we draw is very different than the conclusions you would think if you just look at the economy. The stock market is not the economy in this case. So, it's interesting. So, we had the Fed cutting this this week. And obviously, in Asia, we also have most central banks biased towards rate cuts. In Japan, that might be an outlier. But the rest of Asia is cutting interest rates. And really, how that impacts financial markets, equity markets in particular,
Speaker: really depends on a host of factors, yeah not just the interest rates, but the inflation expectations, growth. But what I took away from you is that even if you have an environment of falling prices and less robust earnings growth, actually lower interest rates can help.
Speaker: Absolutely. Well, that seems like a good place to end this week's episode. It's been a great discussion. A pleasure as always having you with us. And do be sure to join us again next week.
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