Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, chief Asian economist here in Hong Kong.
Speaker: On today's show, we're asking, can Chinese consumers help offset the impact of tariffs from the US?
Speaker: What can spending over the Lunar New Year tell us?
Speaker: And could Donald Trump's policies be the push Beijing needs to give its economy a meaningful shot in the arm?
Speaker: Joining me to talk through all of this is our Chief China Economist Jing Liu.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: So Jing, welcome to Under the Banyan Tree here in Hong Kong in our lovely little studio.
Speaker: Thank you, Fred.
Speaker: Nice to be Under the Banyan Tree again.
Speaker: So lots of news with regards to China and of course the trade tensions with the United States.
Speaker: And we wanted to unpick that a little bit and also talk about the impact on China overall and what China may need to do to stabilize growth going forward.
Speaker: But let's start with a 10% tariff that the White House recently announced
Speaker: on all imports from China, that is, any good coming into the United States from China is now 10% more expensive than it was previously.
Speaker: That of course is, you know, might raise prices in the US, but it's also not necessarily good news for Chinese exporters because they might lose sales.
Speaker: So how big a deal really is that for the Chinese economy?
Speaker: Actually, we did analysis and our estimate is that this is going to trim 0.3 percentage point from China's GDP this year.
Speaker: And obviously, this is a near term change, which basically means some of the U.S. consumers might switch to a different importer.
Speaker: And that also means in the near term, maybe
Speaker: Some Chinese exporters are willing to cut prices, but not everybody has to.
Speaker: So all in all, this is 0.3 percentage point.
Speaker: So 0.3 percentage point, that would mean if the Chinese economy grew, say, by 5%, then we would say with these tariffs, they would only grow 4.7%.
Speaker: So that's kind of the magnitude we're talking about.
Speaker: And this is probably a high-end estimate, as you say, because...
Speaker: That assumes the United States consumers can switch to other sources.
Speaker: In many cases, they may not be able to because nobody else in the world can often produce the goods as cheaply as Chinese producers can.
Speaker: There was another news that made a lot of headlines.
Speaker: It's a little bit technical.
Speaker: It's called the so-called de minimis rule, which means sort of that any package coming into the United States that's worth under 800 U.S. dollars previously was exempt from tariffs.
Speaker: because the US Customs Service said, well, that's such a small amount and there are actually a billion packages coming in here every year.
Speaker: We can't go through all of this.
Speaker: So let's just say anything that's of lower value, below $800, we're not going to put tariffs on that.
Speaker: That rule was eliminated.
Speaker: That means any small package coming into the U.S. now faces essentially tariffs.
Speaker: You need to pay tariffs on these imports.
Speaker: So this is clearly a step up.
Speaker: Now, big question.
Speaker: Is this the end?
Speaker: Is this everything we expect from the Trump administration?
Speaker: Or could there actually be at some point even further tariffs?
Speaker: Certainly, because this 10% tariff is related to the fentanyl control that the U.S. would like China to step up with.
Speaker: It has nothing to do with a trade imbalance, which seems to be the core, the fundamental of the U.S. trade policy.
Speaker: So this may very well be just the beginning, and then there could be more tariff in the pipeline.
Speaker: So clearly the risk of more coming.
Speaker: Now, of course, we always hope for a grand deal before these tariffs are enacted, that the two sides can come to the table and maybe we can avoid some of these tariffs.
Speaker: But it does look like we're going to see potentially more tariffs being applied, at least for a while until we get to some sort of a grand deal.
Speaker: Now, that is important for the Chinese economy.
Speaker: That's really the heart what we wanted to talk about.
Speaker: And that is last year, China achieved around 5%, or actually exactly 5% growth according to the official numbers.
Speaker: And if you look in the details, a lot of that growth last year was driven by exports, which actually have been booming, record exports out of China.
Speaker: But a domestic economy was quite weak.
Speaker: So if we turn this then to 2025, if we have a slowdown in exports because of these U.S. restrictions, then there is very little cushion for the economy to fall back on because domestic demand is weak.
Speaker: So how important is that revival in domestic demand in your view?
Speaker: I think in general, China is more domestic dependent than the export dependent.
Speaker: The net export contribute about 20% to the GDP growth last year, one of the highest in recent years.
Speaker: But in normal times, the government still look domestically for the growth driver.
Speaker: And in particular now, when the trade tension, not only with the U.S., but also with many different trading partners, seem to be on the rise, I think we'd rather think about this external uncertainty being the catalyst for the government to implement more forceful policy easing.
Speaker: So let's talk about these policy implications in a little bit.
Speaker: I just want to put some context around what this really means, reviving domestic demand, because as economists, you know, we throw these terms around.
Speaker: And the way I think about this more intuitively is that you have huge factories in China that churn out export goods, and these export goods from toys to electronics to pharmaceuticals to chemicals, maybe their demand falls overseas because of tariffs.
Speaker: And so they need to sell somewhere else.
Speaker: And it's a Chinese consumer ultimately that should buy some of these goods and help essentially the economy weather these tariffs, right?
Speaker: So it's consumption in many ways.
Speaker: When we talk about domestic demand, we often mean really consumption.
Speaker: There's other components to it, but consumption is really important.
Speaker: So tell us, how is consumer spending faring?
Speaker: We just had the Chinese New Year holidays, and that's a period for the Chinese to go out and travel, see their loved ones, spend a bit of money on gifts, on entertainment, and maybe buy themselves something for the New Year.
Speaker: So the first data, what does it suggest how the Chinese actually spent over the last few weeks?
Speaker: Do we see signs of an acceleration in spending?
Speaker: Well, certain categories are actually on fire.
Speaker: You might have heard about this cartoon movie, Nezha.
Speaker: That one is close to 10 billion cells within China only.
Speaker: Remnant B, 10 billion Remnant B, which is one of the highest grossing openings ever in China, I believe, and close to worldwide.
Speaker: These are very big numbers.
Speaker: Yes, I haven't seen that.
Speaker: So I decided to watch it after it hit 10 billion.
Speaker: But that aside, in general, the total spending year on year, we have seen the growth, but not as a great hit as this movie per se.
Speaker: Overall, per capita spending is only slightly more than last year in a single digit.
Speaker: So you mentioned some sectors doing quite well, the movie business, of course, big blockbuster movie coming out.
Speaker: But other sectors, you said some sectors are on fire.
Speaker: What is sort of sputtering at the moment?
Speaker: Where do we not see a Chinese consumer step up as much as needed?
Speaker: So basically, if we look at the aggregate spending, the growth is faster than the per capita spending, which basically means for every single individual, when they come out to spend, there still seem to be some sort of hesitation one way or the other.
Speaker: And in particular, I think, you know, luxury spending and large item, large ticket spending, we still see some softness in that.
Speaker: So clearly, hesitation still among the consumer.
Speaker: And maybe last year, the Chinese economy could manage that because it had booming exports.
Speaker: But if exports now slow down, then we need the consumer really to step up.
Speaker: So maybe that's a great place to take a quick break.
Speaker: And when we come back, I want to ask you what the government can and or is likely to do to actually stoke consumer spending in China over the course of this year.
Speaker: Yeah, sure.
Speaker: So before the break, Jing, we discussed of how the terrorists in the United States put a drag on the economy.
Speaker: We need the Chinese consumer to step up to kind of offset that drag, if you will.
Speaker: But the question was, how do we do this?
Speaker: What can the government do to actually stimulate consumer spending going forward?
Speaker: And what do you have in mind here?
Speaker: What is the government actually doing to get households to spend again?
Speaker: Right.
Speaker: So if we look at the data, actually the consumer sentiment remains relatively low in historical standard.
Speaker: And also at the same time, we can see that a lot of hesitation to spend seem to come from the unclear outlook.
Speaker: Either they are facing slower growth in terms of the income or in some cases a labor market uncertainty.
Speaker: And some of them are worrying about in the future the income cannot grow as quickly.
Speaker: So for the government to convince the Chinese people to spend, I think it's very important to show them their income can grow steadily, the economy can grow steadily.
Speaker: And at the same time, the government is willing to give better social safety nets such that they can rest assured.
Speaker: When the rainy days come, they can rely on the government.
Speaker: So beefing up the social security system would be one way, encouraging Chinese to maybe save less, and the knowledge that they may be supported in case they fall on hard times.
Speaker: So that's been something that economists...
Speaker: have proposed for many, many years, and maybe this may come.
Speaker: Another program, maybe more short-term, I think you and your team have talked about quite a bit, is these trade-in programs.
Speaker: Explain to us, what is that, and how does it help consumer spending?
Speaker: Right.
Speaker: So the trading program is basically certain types of goods, such as home appliances and also now the tablets and cell phones.
Speaker: If a consumer plan to buy a new one and also trading the old one, then the government is going to subsidize up to 20 percent of the goods.
Speaker: new product price.
Speaker: So that's a way to get people maybe to change their microwave, change their cell phone quicker.
Speaker: And interesting fact is that we see those categories of goods which have received the subsidy actually see double-digit growth.
Speaker: And in the case of home appliances, those happen to be the items also China export quite a bit when the domestic consumption pick up
Speaker: That basically helped to mitigate the trading balance with other countries as well.
Speaker: And then presumably, and I think what you're referring to is what in the U.S. at some point was called cash for clunkers.
Speaker: That was this idea, I think was after the global financial crisis, that the government would give cash for people to essentially get rid of their old car and buy a new one to stimulate.
Speaker: Now, similar program happening in China, as you say, and that could be scaled up.
Speaker: But what's interesting is it seems to be targeting some of these industries that are actually directly exporting to the U.S. So is there a link here between, you know, if these factories can't sell them to the U.S. and actually the government is there saying, well, we're going to help drive domestic demand.
Speaker: Is that the connection?
Speaker: I think there is certainly a connection.
Speaker: I remember when I was in my primary school, there's always this saying about certain things originally produced to export, but now reoriented for domestic sales.
Speaker: So the same idea, if we're trying to address imbalance between production and consumption, the consumption could be external consumption, external demand, or domestic consumption.
Speaker: So by helping the Chinese consumers to
Speaker: buy those products, this actually means that less will be exported to other countries.
Speaker: So let's tie things together here.
Speaker: We talked about trade friction with the US.
Speaker: We talked about the fact that Chinese demand is still, the local demand is still relatively weak and the need for the government to
Speaker: support that.
Speaker: Now, in many ways, economists have argued for the Chinese government to do more for consumption spending already many, many years, and nothing has ever happened.
Speaker: So my question to you, are the tariffs that the US imposes on China kind of the catalyst for these domestic reforms to revive their domestic economy?
Speaker: Is that kind of the ultimate push to get China to do these longstanding reforms?
Speaker: I think, interestingly, this will work that way.
Speaker: As you wrote in your report, this might be a blessing in disguise.
Speaker: So the idea is that when the external uncertainty from U.S., from maybe Europe and other trading partners seem to be on the rise, one thing China can do to basically continue the resilient growth is to stimulate the domestic consumption.
Speaker: That way it can absorb the production production.
Speaker: Made in China production and also help the economy to get a firmer footing in terms of the future growth path.
Speaker: And China still has the capacity to do that.
Speaker: It could still have spending.
Speaker: It could still borrow money to spend.
Speaker: I think so.
Speaker: When we look at the debt to GDP, I think it's important to look at the structure.
Speaker: In particular, the central government, among all different central government, might be the one with the lowest leverage, one of the lowest leverage, if not the one.
Speaker: So there you have it, ladies and gentlemen.
Speaker: Interestingly, yes, US-China trade tensions, a bit of a headache for China in terms of export growth, but we might actually see a lot more domestic reform coming through as a result of these trade tensions that might ultimately put China on a more healthy, sustainable,
Speaker: trajectory.
Speaker: So maybe a kernel here of a silver lining with all these trade tensions.
Speaker: And that could mean that we see the needed changes in China.
Speaker: Thank you very much, Jing, for joining us.
Speaker: And we'll make sure we'll revisit this topic again with you in the coming months.
Speaker: Sure.
Speaker: Thank you, Fred.
Speaker: And that's a wrap for this week's episode.
Speaker: Thank you, dear listeners, as always, for joining us.
Speaker: We'll be back again at the same time next week, putting Asian markets and economics in context.
Speaker: Take care.
Speaker: Till then.
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