Transcript
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist here in Hong Kong at HSBC.
Speaker: There's really just one story on the street here in Asia this week, and that's mainland China, where markets are trading again after the Golden Week holiday.
Speaker: We've already seen some steep ups and downs as investors get to grips with stimulus announcements from Beijing.
Speaker: My guest today is Greater China Economist Aaron Shin.
Speaker: Let's get the conversation started here on Under the Banyan Tree.
Speaker: Let's start with a quick recap of the picture in mainland China.
Speaker: Last month, the government surprised everyone with a raft of stimulus measures designed to shore up the economy, and investors liked what they were hearing.
Speaker: Trading then paused for the Golden Week holiday last week, which was followed by a big rally when markets reopened again.
Speaker: Thank you for having me.
Speaker: So, Aaron, let's put some context around here.
Speaker: Let's put markets aside for a little bit.
Speaker: Up until late September, how would you characterize the economic trajectory in China?
Speaker: What were the high frequency data telling you about really where we're going?
Speaker: Was it strengthening?
Speaker: Was it weakening?
Speaker: What was the momentum like?
Speaker: How would you characterize that?
Speaker: Yeah, so there's been downward pressure on the economy for some time now.
Speaker: We had a miss in Q2 GDP growth.
Speaker: We also saw from some of the higher frequency monthly data that consumption has started to lose some of its legs.
Speaker: So that was starting to show economic pressure on the economy.
Speaker: And some of the other high frequency data like continued contraction for about five months in a row for the manufacturing sector.
Speaker: The services sector also saw its first contraction since December, highlighting some of that urgency that's come through with the recent policy stimulus.
Speaker: So broader deceleration in economic growth, even over the course of the year.
Speaker: And of course, there was worry that maybe the government would not necessarily reach its around 5% growth target on that trajectory.
Speaker: Before we get to the stimulus measures, what lies at the heart of the slowdown in China?
Speaker: Because actually, over the past year, we've had always a bit of easing here and there.
Speaker: Exports are doing well.
Speaker: So in your view, what's the main drag on the economy?
Speaker: What's sort of pulling down?
Speaker: You mentioned consumer spending not doing well.
Speaker: Now, suddenly, services are also contracting.
Speaker: What's at the heart here of that slowdown?
Speaker: I think it's definitely related to consumption.
Speaker: So following the reopening, we had those tailwinds from revenge consumption.
Speaker: Services is still relatively strong compared to goods demand, but over the course of the year, we've seen that that momentum has been fading more, even in the services side.
Speaker: So I think that that's been reflecting in the data, kind of highlighting some of the concerns about that spreading out further into the economy.
Speaker: I think the other thing is that some of the tailwinds that have been coming through from, say, export side, there's some uncertainties there.
Speaker: Things like new export orders index, those are also starting to show signs of contraction from the global scale.
Speaker: And then, of course, when we look at the property sector, that's been a continued drag, hasn't really stabilized despite some of the property easing measures that we got back in May.
Speaker: So there you have it.
Speaker: You have a slowdown economic growth.
Speaker: It's actually broadening, right?
Speaker: It's not just properties, also now consumption and services and some question marks over exports.
Speaker: So markets, of course, were a bit jittery over the last few months, to say the least.
Speaker: Now, late September, here policymakers come out and boom, we get these fireworks in the markets.
Speaker: Tell us what in just in its very plain words, what did they announce?
Speaker: What did the market suddenly like that they sort of said, wow, something is changing here?
Speaker: So I think there's some misconception about what's actually been announced and what hasn't.
Speaker: And I think it's really important to take a moment to clarify what's been announced.
Speaker: So in the September 24th meeting, they had interest rate cuts, they had RRR cuts, they had these new monetary tools.
Speaker: The RRR cuts are reserve requirement ratio cuts, which inject liquidity into the financial system.
Speaker: Yeah, so interest rate cuts and liquidity injections.
Speaker: Yes.
Speaker: So those, you know, those were a little bit larger than we typically see.
Speaker: But what was more interesting is that they had these new tools for the stock market.
Speaker: So those would be swap facilities, as well as the relending tools for stock buybacks.
Speaker: So this is just sort of in layman terms, this is essentially a way to provide liquidity or lending capacity to people who are investing in equities in order to help buying power on the equity market in a nutshell.
Speaker: Yeah, but the thing is, these facilities, they've been announced, but they actually haven't been implemented yet.
Speaker: Those details aren't out yet.
Speaker: But of course, because they are focused on the equity markets, there's been a lot more interest, a lot more sentiment turnaround in the related equity markets over the course of this.
Speaker: But then shortly after that, I think the other shift in tone was in the Politburo meeting a few days later on the 26th.
Speaker: And there was a lot more urgency, really calling for a step up in countercyclical support from both monetary and fiscal side.
Speaker: Fiscal is the last shoe to drop, and that hasn't been announced yet.
Speaker: So we'll get to fiscal in a second.
Speaker: So the Politburo, of course, is one of the highest, the highest committee that decides really the broad direction of economic policy.
Speaker: And that's why it was so, I guess, important, because these guys signaled, we are actually concerned about this.
Speaker: We want to have more support for the economy, right?
Speaker: So...
Speaker: There was a lot of signaling in the package, which the market liked.
Speaker: But then we went away on holiday.
Speaker: Everybody enjoyed the golden week kind of holiday.
Speaker: The stock market was closed.
Speaker: And then we came back.
Speaker: The market reopens in China, and there was fairly positive momentum.
Speaker: But then we had an important meeting by the planning agency in China, and that was a bit disappointing.
Speaker: Why?
Speaker: Yeah, so the NDRC, the National Development and Reform Committee, that was the first policymaking meeting that was held right after the holiday.
Speaker: So there's a lot of expectation that perhaps some of this fiscal stimulus, which hasn't yet been announced, that that would be where they would come through with that.
Speaker: I think that some of the expectations around this NDRC meeting were a bit misplaced.
Speaker: Which is that planning committee?
Speaker: Yes.
Speaker: So this meeting, there's been a lot of expectation building up in the markets that there could be a fiscal package anywhere from 2 to up to 10 trillion RMB.
Speaker: So that's 1.6% of GDP to 8% of GDP.
Speaker: That would be quite sizable.
Speaker: Yeah, that's quite a lot.
Speaker: But perhaps, you know, the way to look at it is the NDRC is not in charge of, you know, the Treasury.
Speaker: So I think that we shouldn't necessarily have had this high expectation that the fiscal stimulus would come through then.
Speaker: So what you're saying is investors were a bit impatient and expected a big fiscal package.
Speaker: But just because it wasn't announced doesn't necessarily mean it wouldn't be announced in the future because, of course, the decision around fiscal policy is actually done by the standing committee of the National Parliament, National People's Committee or the Ministry of Finance, and that will happen later this month.
Speaker: Now, we have a lot of monetary stimulus measures, and now we're waiting for the fiscal part.
Speaker: As an economist, how important this
Speaker: is the fiscal part, that second part of the stimulus.
Speaker: Is this just the icing on top or is this the actual main part of this package that you would need to kind of get the economy going again?
Speaker: I really think that fiscal is quite crucial.
Speaker: Partly, fiscal can be allocated more directly.
Speaker: It can come through much quicker.
Speaker: Monetary policy, the way that the PBOC moves, it tends to be in smaller steps than you might see in other central banks.
Speaker: And then there's also a lag time for that to feed through into the real economy.
Speaker: I think that we've already seen that some of the fiscal policies already announced this year have been seeing some successes.
Speaker: So they have these trade-in programs and they've allocated about $150 billion for consumer upgrading.
Speaker: And we've actually seen pretty strong results in the sales of things like home appliances or EV vehicles and such.
Speaker: So I think that if they can further expand that by rolling out additional fiscal stimulus, that can really get us closer to those annual GDP growth targets.
Speaker: So clearly fiscal policy is one of the key ingredients of the stimulus package, but you also hinted at some of these measures being aimed at consumers.
Speaker: And that seems to be a new tack maybe because in the past, of course, mainland China has had fiscal stimulus packages, but most of them were usually aimed at infrastructure or other types of grand projects.
Speaker: This time we see a bit of a hint, don't we, that we're going a bit more towards consumer help.
Speaker: Is this really just around the edges or do you sense a structural shift in the way China thinks about implementing a fiscal stimulus?
Speaker: There is definitely much more emphasis on consumption spending.
Speaker: That shift in tone has been visible over the last few months.
Speaker: We've seen that in the third plenum, also in the recent Politburo meetings.
Speaker: There's an emphasis on expanding consumption.
Speaker: I think that it's not to discount that there would be further stimulus on investment.
Speaker: I think that that still will play an important role.
Speaker: But just that ratio is probably going to, we're going to see a much more even ratio between consumption and investment.
Speaker: So there's a shift here, both in terms of just the magnitude or the sense of urgency that's coming through and stimulating overall, and then there's a shift in terms of the type of stimulus they're targeting a little bit at the margin.
Speaker: Three months ago, would you have thought we would be here in October talking about big Chinese stimulus programs coming through?
Speaker: Is this a surprise to you?
Speaker: So actually, if you look at our GDP growth forecast, we've held it at 4.9%.
Speaker: We actually had a little bit of resolve here because even as growth was slowing, the signaling from policymakers was fairly consistent.
Speaker: They still really wanted to meet those annual GDP growth targets.
Speaker: So I think we always held the view that there is that space for them to come through with more.
Speaker: Certainly this momentum that we've seen over the last few weeks has been stronger than we anticipated.
Speaker: But keep in mind, we don't have the final package yet.
Speaker: There's still some uncertainties here.
Speaker: But certainly if they do come through with something in the $1-2 trillion fiscal space, that would be enough for us to get to that around 5% GDP growth targets.
Speaker: Now, but that hints at really the fact that most of what we talked about is targeting this year's GDP growth number of around 5%, making sure we're in that ballpark range.
Speaker: How much do you think really it changes the narrative about 2025?
Speaker: Because financial markets at this point, we're talking about almost mid-October,
Speaker: Have we seen enough that really changes the overall trajectory for next year?
Speaker: Or do you think we would need to see much punchier policy measures still yet to be unveiled?
Speaker: Yeah, so I think that in terms of next year, if they do come through with a really sizable package over the course of the next few years, then that can certainly lead to more upside surprise.
Speaker: And I think that we do get some hints as well from the policy messaging.
Speaker: They're talking about more sustainable, longer term, high quality growth.
Speaker: And even though in the near term, a lot of the measures that have been announced are cyclically focused, very short term in nature, I think they are trying to align that more with the structural side.
Speaker: So thinking about China's longer term transition growth, and then thinking also about the allocation of where that funding can go, as we've been discussing, you know, more towards consumption, because the longer term growth for China is probably going to be more in that regard towards consumption based growth.
Speaker: So, what we're seeing here is also the making of structural policies, changing the structural composition of the economy, emphasizing more consumption growth going forward, which should ultimately help growth over the coming years as well.
Speaker: Now, a final question for you, and that is the property market, because we can't talk about China's economy without property.
Speaker: As we said, it's kind of the heart of what's kind of dragging things down.
Speaker: Property markets are partly about confidence and expectations.
Speaker: That's a large component in driving demand.
Speaker: Have you seen any signs that over the last three weeks there was a bit of a perk up in property demand?
Speaker: And if that is being sustained, could that mean we're getting to the bottom here of this big property deflation that you've seen?
Speaker: So there's still a lot of uncertainties.
Speaker: I think one part of the policy package we didn't really talk too much about is the property side.
Speaker: So they have come through with additional property easing measures, so reducing mortgage payments, lowering the down payment ratio thresholds, also extending some of the loan provisions for developers.
Speaker: And then actually just before the holidays, all of the largest cities in China, so we call them tier one cities,
Speaker: And these are Beijing, Shanghai, Shenzhen, Guangzhou.
Speaker: So these cities had actually eased some of their property restrictions in some form just before the holidays.
Speaker: So when we actually looked at the National Day property sales data, it was actually quite promising in these largest cities.
Speaker: But the other thing is that during the National Day, property sales usually are quite muted because people are on holiday and they're not shopping for homes.
Speaker: So I think we do need to look at the next few weeks, months to see if some of these recent policies are having a more sustainable effect.
Speaker: But if not, then certainly we do think that there could be more to come through to help stabilize the property sector.
Speaker: Yeah.
Speaker: So that's maybe a good note to end on is that sometimes in financial markets, you know, there's ups and downs and durations when you look at the equity market.
Speaker: But really,
Speaker: as a measure of how, whether there is improvement gradually coming through, maybe home sales would something that would certainly help the economy a lot if we see that gradual improvement coming through.
Speaker: And we need to be patient to see, really see whether these policies are working.
Speaker: Erin, thank you so much.
Speaker: I'm sure we invite you back very soon.
Speaker: It's a fast evolving story.
Speaker: Thank you for joining us under the banyan tree and discussing China's recent stimulus measures.
Speaker: Thank you for having me.
Speaker: And that's a wrap for this week's podcast.
Speaker: Thank you, Aaron, and thanks everyone else for tuning in.
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Speaker: For now, take care, and we'll be back again next week.
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