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 ladies and gentlemen and welcome to our first ever live recording of the Under the Banyan Tree podcast where we put Asian markets and economics in context.
Speaker: My name is Fred Neumann, Chief Asia Economist at HSBC.
Speaker: And I'm Harold van der Linde, your other host.
Speaker: And I'm the Chief Equity Strategist for HSBC.
Speaker: Great to see so many this evening.
Speaker: We have three guests here that I would like to introduce to you.
Speaker: The first one is Jing Yu, who is our chief China economist at HMC Global Research.
Speaker: Michel Kwok next to me, who is the head of Asian real estate research.
Speaker: And we got Frank Lee, who is our head of technology research.
Speaker: And he's going to talk a bit about AI, artificial intelligence later on.
Speaker: And we want to jump right in.
Speaker: I think China is obviously the topic du jour.
Speaker: Jing, let's start with you.
Speaker: How bad are things really in mainland China?
Speaker: I open up the newspapers.
Speaker: I talk to clients in Europe and the U.S. They tell me it's really going the wrong way and really we should all flee from Chinese financial markets.
Speaker: How bad are things really if you look at the Chinese economy at the moment?
Speaker: I think the pessimism may not be quite justified because the hard data still show quite some bright spot.
Speaker: To start with, just look at the growth so far.
Speaker: Even if for the last two quarters, the sequential growth is zero, China can still deliver 4.3%.
Speaker: I think that growth rate, although based on quite disappointing 3.0 growth last year, is still higher than most of the countries around the world.
Speaker: And secondly, we see a very clear disconnect between, for example, the housing sector performance versus the service sectors in general.
Speaker: We have actually seen the data supporting
Speaker: the strong service sector performance, including the newly created statistics by the National Bureau of Statistics, which is showing the service retail sales more than 20% year-on-year growth for the first seven months.
Speaker: And if we go to all kinds of
Speaker: High frequency data, traffic jam, the box office revenue, et cetera.
Speaker: Those are all doing well.
Speaker: And let's speak the EV sector.
Speaker: We have seen the EV export basically more than double this year.
Speaker: So it's not that bad.
Speaker: Let's put it that way.
Speaker: Jing, you were also in China not too long ago.
Speaker: You told me that you tried to get into, what is it, some supermarket in Hangzhou.
Speaker: And how long did people line up?
Speaker: Yeah, this is the news circulated on the social media.
Speaker: Basically, Hangzhou opened a Costco.
Speaker: I'm not sure whether this is the first one, but people are willing to wait for two hours just to get into the supermarket and another five hours to check out.
Speaker: And then on the social media, they said it's a 300 yuan kind of experience, but still worth it.
Speaker: A lot more people.
Speaker: So there are things doing pretty okay, but the policy makers, at least the market, expect that policy makers are going to do something, right?
Speaker: And so far, the response has been rather underwhelming.
Speaker: Is that fair to say?
Speaker: What do you expect they're going to do?
Speaker: Yeah, exactly.
Speaker: So, so far we have seen lots of talks and incremental measures at best.
Speaker: And this is very different from the previous cycles where the Chinese government usually would rush in to either inject a large liquidity or launch the big infrastructure investment or lifting the housing restrictions one way or the other in order to boost a strong recovery.
Speaker: But this time around, they'd rather see
Speaker: and more organic consumption driven growth.
Speaker: But Jing, let me challenge you a little bit here.
Speaker: Even if Chinese policymakers wanted to do something, what can they really do?
Speaker: In the past, they built infrastructure to get the economy going again.
Speaker: They reflated the housing market.
Speaker: What is there really that they could conceivably do that would excite us about it?
Speaker: Aren't they constrained with too much debt?
Speaker: Aren't they constrained with demographics?
Speaker: Aren't they constrained with the property market that has gotten too big?
Speaker: What are you really hoping for that they could deliver that would, say, get people excited again about investing in China?
Speaker: That's right.
Speaker: You're exactly right about in the past we have built too many infrastructure projects, maybe too many homes as well.
Speaker: And actually the debt overhang also means a lot of resources, a lot of capital have been locked into those sectors.
Speaker: Now China is probably looking for a structural change where the future growth could be driven by
Speaker: first of private consumption and maybe manufacturing, operating and green transition.
Speaker: But at the same time, because the housing and infrastructure have represented such a big share in GEP, so they need a smooth transition towards the new growth engines.
Speaker: Now, we're talking about housing here.
Speaker: So, Michelle, that's a sector that you look at in detail.
Speaker: Can you give us a bit of a description of how bad is the picture?
Speaker: So certainly, Harold, it's a very difficult time for the market.
Speaker: We had hoped that a couple of years ago, as things continue to evolve, we should be clearer by now.
Speaker: But it so happened that we continue to be disappointed by the pace of deterioration of the market.
Speaker: It's fragile.
Speaker: You know, we have had to take our numbers down directionally to rethink about what that practical scenario would be in China.
Speaker: Let's take a step back and when we talk about the Chinese housing market,
Speaker: From your vantage point, has the psychology been broken?
Speaker: Because that seems to me very important here.
Speaker: We've had for decades rising prices in real estate.
Speaker: People wanted to get on the real estate ladder.
Speaker: Now we've seen a year and a half of probably sliding prices, not officially, but maybe unofficially.
Speaker: Do you think that the psychology has been broken, that it'd be very hard to convince people to buy apartments again?
Speaker: Or do you think really there's still a lot of pent-up demand that ultimately can be unleashed?
Speaker: It's actually very tough because home price expectation is something that we all look at.
Speaker: We buy when there is expectation that home price would continue to increase, but clearly that's not the case.
Speaker: But more importantly, I do think there are risk pants of demand.
Speaker: There are still households looking to purchase a home.
Speaker: because there's a need to.
Speaker: For instance, if you're a family, you need to send your kids to school, you need to be in a certain district, then you'll be quite picky in terms of the location.
Speaker: But clearly, in terms of thinking about what we should be expecting now versus a year or two years ago, the size of the pie has shrunk very meaningfully.
Speaker: So yes, there is demand, but as a willing home buyer, they will be a lot more picky in terms of what they get for pricing,
Speaker: and also the location of the home.
Speaker: Jing, to bring you back here, the Chinese property market is probably 20% of GDP, conservatively measured.
Speaker: That has huge implications.
Speaker: What do you think is then the underlying growth rate for China?
Speaker: Surely the 6% rates are over that we saw in the past.
Speaker: Can you give us a hint of where we are in the next few years in terms of what you think the potential of the economy is if property is kind of falling away as a growth driver?
Speaker: Right.
Speaker: So ironically, if actually now the expectation is housing prices may not go up, at least not so rapidly or even going down, certain people who haven't bought a home may feel less pressure because they don't have to save so much for the down payment.
Speaker: So that could to some extent help with the consumption.
Speaker: At the same time, we see a clear change of the mentality from the government.
Speaker: Maybe in the past they focused more on the hard infrastructure, but in the future they probably will spend more on soft infrastructure, such as granting the migrant workers access to the public health, public schools, etc.
Speaker: That can also support consumption.
Speaker: So I think private consumption is something
Speaker: to look forward to.
Speaker: On top of that, now it's still small, but probably, you know, starting with the EV sector and some other sectors belonging to this new economy can grow much bigger.
Speaker: So that would be the
Speaker: new driver as well.
Speaker: Last but not least, China is very ambitious on the green transition.
Speaker: I think the green transition actually cut into every single sector in the economy.
Speaker: So those are all quite promising in my view.
Speaker: So still promising growth potential in medium term, but maybe last question for you, Michelle, is we still need to get there.
Speaker: That is, next two, three, four months, we still have a lot of hurdles to pass.
Speaker: Do you get a sense that there's still a bit of pain to come when it comes to Chinese housing market?
Speaker: We have obviously big headlines that we grapple with in the last few weeks when it came to China.
Speaker: Markets are quite on edge a little bit.
Speaker: From your perspective, looking at housing names, developers, is there...
Speaker: A bit more pain to come?
Speaker: Certainly I do think more pain, but in terms of assessing the level of pain, I think it really depends on when we would see if there is one, a meaningful policy package.
Speaker: And I want to talk about meaningful policy package here.
Speaker: What I really mean is to give these developers the much needed liquidity support that they need so we can buy more time.
Speaker: Otherwise, I think more defaults will come.
Speaker: But at least on the bright side, we see that some of the leading developers, particularly the state-owned names, they are still growing.
Speaker: They are still performing quite well.
Speaker: Will that liquidity support come?
Speaker: I think on one thing, over the past several weeks maybe, we see the price controls have been relaxed.
Speaker: So we used to have both price ceiling, price floor, both binding in different cities, preventing the market to clear.
Speaker: Now that maybe some of the price cuts in certain cities can attract more buyers and to that extent already naturally more funding available.
Speaker: Maybe less profit, but at least the market is moving.
Speaker: On top of that, we also see more talks about the three arrows, they call it, different channels of raising funds.
Speaker: That is coming as well.
Speaker: Fred, so this has implications for you as well in terms of how this impacts the rest of the region, right?
Speaker: So we see weaker growth in China coming through that will be impacting the rest of the region.
Speaker: Where are the areas where maybe that are less sensitive or more sensitive to weaker growth in China?
Speaker: Well, I think what we just heard, the challenges near term in China, even if we say medium term, there's stabilization coming through, is essentially that we're seeing disinflationary pressures, deflationary pressures coming out of China.
Speaker: One statistic, to share statistics here, China's housing construction sector uses one quarter of global steel demand.
Speaker: in three years, it loses enough cement to turn the entire Great Britain into a car park.
Speaker: That just gives you a sense of the size of the construction sector.
Speaker: And so if that declines, then that puts downward pressure on commodities, less steel consumption, and that means
Speaker: disinflation for the rest of the world.
Speaker: We now have, for example, reports of Chinese steel producers putting steel on the global market, undercutting the prices of others.
Speaker: And that spreads pain around the region.
Speaker: Yeah, that's pain if you sell cement, of course, but it's good if you're buying cement and if you're importing commodities, right?
Speaker: And I'm, for example, thinking about India.
Speaker: They could benefit from this.
Speaker: Is that correct?
Speaker: That's right.
Speaker: So we have economies that compete directly with China, like Korea, like Vietnam, for example, like Japan, ultimately are undercut in global export markets because they compete directly with China, and that's disinflationary.
Speaker: But India has the opposite issue because India imports a lot of commodities, and so weaker commodity prices are actually good for India, and hence we see the Indian economy actually doing quite well at the moment.
Speaker: But let's bring Southeast Asia in because, of course, Southeast Asia needs China as a big export market.
Speaker: Very important.
Speaker: But they also compete with China.
Speaker: So it's kind of more, you know, not clear where Southeast Asia falls in terms of the growth prospects.
Speaker: How do you think about the equity markets in Southeast Asia?
Speaker: Yeah, so there's a couple of things going on in the Southeast Asian equity markets.
Speaker: First of all, we see some of these markets widening up.
Speaker: All sorts of new companies are coming to these markets, so that's good.
Speaker: We see this in Vietnam, we see this in Indonesia, for example, as well.
Speaker: Secondly, there are, similar to India, certain growth drivers.
Speaker: So next week I'm going to be in Java.
Speaker: As you know, I'm doing a bit of temple hunting and stuff like that.
Speaker: So I need to travel through Java.
Speaker: And certain places that would take five or six hours to get to only five years ago, there's now a highway.
Speaker: Access there has significantly improved.
Speaker: And that means that factories can go there.
Speaker: That means employment opportunities go up.
Speaker: And that creates a new consumer market there.
Speaker: So there are kind of these long-term drivers over there as well.
Speaker: But of course, there are also buyers of commodities, right?
Speaker: Harold, you lost me there a little bit.
Speaker: You just said you're temple hunting in Indonesia.
Speaker: Can you explain that, please?
Speaker: So I'm writing a book about the 14th century Java, a very interesting period, the rise of China, Kublai Khan, and how Indonesia responded to that.
Speaker: And in order to understand what happened, you have to go to the temples, because on the temples, there's the stories have been carved into stone.
Speaker: So I'm visiting about 50 temples and trying to figure out what actually happened in those places.
Speaker: So we all had a nice summer holiday, but Harold spent it in Tamil Nadu and in Indonesia going to temples in 40 degree heat.
Speaker: Everybody has their own job.
Speaker: My wife joins me and thinks this is actually fun.
Speaker: So imagine that.
Speaker: So that's what I'm going to do over the next three weeks.
Speaker: But just to put that aside, the old temples and the access that is improving there, you of course have also that there is demand for commodities there.
Speaker: Indonesia is a large producer of nickel and the Chinese is
Speaker: They're making electric vehicles.
Speaker: You need big batteries for it.
Speaker: And of course, that means that they are investing there.
Speaker: And that should have all sorts of macro benefits for Indonesia as well, Fred.
Speaker: It does.
Speaker: We talked about weaker commodity prices a little bit because China's economy is not doing too well.
Speaker: But Indonesia is an exception because it is producing commodities that are feeding into the energy transition.
Speaker: And Jing, you mentioned China doubled its EV car prices.
Speaker: exports this year, actually becoming the number one exporter of vehicles potentially this year.
Speaker: And a lot of these minerals needed to be sourced from Indonesia.
Speaker: So that's a permanent boost to the Indonesian economy, even if China is slowing down.
Speaker: Yeah, that's right.
Speaker: And then there is a third driver.
Speaker: So you've got domestic growth, right?
Speaker: Investments, you have demand for commodities.
Speaker: And then you have supply chains moving from China into ASEAN.
Speaker: Is that correct?
Speaker: And I think Frank here can maybe give us a couple of examples of what is happening.
Speaker: I think we should bring in Frank on this because before you and I keep taking this conversation over, Frank, before we start talking about AI, what are you seeing on tech supply chains moving to Southeast Asia?
Speaker: Yeah, that's a great question, Fred.
Speaker: I think if you think about the overall supply chain relocation, it's been ongoing for quite some time.
Speaker: And I think the initial phase is really about the cost structure of mainland China has been going up.
Speaker: They raised their labor costs quite aggressively over a 20-year period, where it became kind of uneconomical for certain industries to stay there.
Speaker: And it happened first with a lot of textile.
Speaker: But it was more difficult to move the tech supply chain because there's a cluster effect.
Speaker: But that clearly has started, this unwinding has started to happen.
Speaker: So I think there's a concept that people talk about as China plus one.
Speaker: Basically, you have a supply chain in China, mainly in China, you'll be servicing the domestic market, but you're going to replicate that supply chain outside.
Speaker: And I think you are seeing that trend ongoing, and it's going to be a sustainable trend for the next couple of years.
Speaker: And you see, if you look at by country, Vietnam is probably the most attractive choice for a lot of the assembly.
Speaker: But if you go into semiconductor testing and assembly, it's Malaysia.
Speaker: Penang has been, it's quite interesting because Penang is a place that was 30 years ago a big focus for semiconductor investments.
Speaker: A lot of multinationals have invested in Penang.
Speaker: They have the resources and then 20 years ago basically people moved to China, mainly China.
Speaker: You can't escape the vortex of China, right?
Speaker: But now it's reversing again and you see people coming back.
Speaker: So that's interesting.
Speaker: It's reversing, but it's, of course, there's another big, big trend in the tech world, and that is artificial intelligence.
Speaker: Now, before we talk with some of the specific implications laid out for us, how many of these chips do you actually need?
Speaker: How expensive is this stuff?
Speaker: Give us a sense of what it takes in terms of the
Speaker: the computing power that sits behind AI.
Speaker: We're all amazed by what AI can do, but what is it in terms of the tech hardware that sits behind us?
Speaker: Give us a sense of how big the scale is.
Speaker: Yeah, that's a good question, Fred.
Speaker: The answer is I don't really know how much computational power needs.
Speaker: Nobody knows yet.
Speaker: I think if you think about, you know, this year is all about AI.
Speaker: The rage is all about AI.
Speaker: But nine months ago, 10 months ago, no one really noticed this.
Speaker: So basically, I think what you saw was ChatGPT was this lightning in a bottle that basically got people excited about it.
Speaker: But what has proven to be the case is that real investment is going on now in AI.
Speaker: And we're really seeing the infrastructure being built right now.
Speaker: I think initially when the AI craze took off, there were a lot of people that were skeptical.
Speaker: They were saying, is this just like metaverse?
Speaker: A couple of years ago, everybody kept talking about metaverse.
Speaker: But then we have seen that no one really talks about metaverse now.
Speaker: But AI, I think, is a different story because there's a lot of applications that are still yet to be realized.
Speaker: So, Frank, Nvidia chips, how much do they cost now these days?
Speaker: And some of these servers, can you give a price tag to that as well?
Speaker: Sure.
Speaker: So if you think about the amazing price power that NVIDIA has managed to generate this year, they used to make graphic cards for high-end gaming.
Speaker: And the average selling price for a graphic card was $2,000, which was very expensive for the average user.
Speaker: But now that they're going into AI, they're making $25,000 for a graphic card.
Speaker: That's a 10x increase.
Speaker: But if you add to the fact that they're actually not only selling cards anymore, they're actually selling the entire system, then the price point of a system could be over $200,000.
Speaker: So imagine how much the multiple expansion is.
Speaker: So it's going from $200,000 to $200,000.
Speaker: You also talk about different stages of AI, I think three stages if I'm not mistaken.
Speaker: Can you just briefly tell me what that is?
Speaker: Yeah, sure.
Speaker: So I think probably the easiest, probably a more simplistic way of thinking about AI that we're looking at is that we think there's multiple stages of investment.
Speaker: Stage one is, I think, really right now about
Speaker: feeding the large language models, about training them right now.
Speaker: And this is where, you know, NVIDIA has a huge dominance.
Speaker: No one really competes against them in this space.
Speaker: So during this early phase, they're probably capturing 80% of the entire value.
Speaker: And then this is being driven by all these hyperscalers that are continuing to invest.
Speaker: Stage two is really when you move from training to what they call inference, where you start deducting with AI.
Speaker: This is an interesting opportunity because there could be more players.
Speaker: Specifically, people are talking about using these application-specific ICs.
Speaker: So these are chips that are customized.
Speaker: So you see cloud companies want to design their own chip, right?
Speaker: And then the third stage of AI is what I like to think is the blue sky scenario.
Speaker: And this is basically when you think about AI going away from the cloud, but toward your device.
Speaker: So basically you could have AI functionality directly on your phone.
Speaker: smartphone on your PCs.
Speaker: Now this is a blue sky scenario is because that could drive a big replacement in smartphones and PCs again, which we all know has been challenging.
Speaker: So that's really, I think, the ultimate positive scenario.
Speaker: You talked about NVIDIA, which is a U.S. space company.
Speaker: How many...
Speaker: companies in Asia are now able right now to really capitalize on it.
Speaker: You said NVIDIA is capturing 80% of that incremental dollars going into AI.
Speaker: Are there Korean companies, Taiwanese companies that are cashing in as well, or is it too early to tell?
Speaker: This is, I think, in the stage one, this is really one winner right now that dominates.
Speaker: So just to look as an example, we all know about TSMC is the manufacturer for all of NVIDIA's chips.
Speaker: So you would think they would benefit.
Speaker: But if you think about the value of how much TSMC makes per chip, they make about $500 to $600 per chip.
Speaker: NVIDIA makes $25,000, right?
Speaker: So there's a huge imbalance in terms of the power position.
Speaker: So I think this is the struggle is that one company is currently in stage one dominating so much.
Speaker: The beneficiaries for companies in the hardware supply chain are there, but they're not getting the same benefit as much as one company is.
Speaker: What we very often see is that a new concept arises, a new technology arises.
Speaker: There's initially exponential growth.
Speaker: A few companies benefit from that.
Speaker: We're there at the moment with these chip makers.
Speaker: But then all sorts of bottlenecks and challenges emerge that are not always easily identifiable in early stages.
Speaker: But if you look at that, where do you think some of the risks lies or some of the challenges lie for AI?
Speaker: The big question that I think hasn't really been asked is really, how do you monetize?
Speaker: How do you make money on AI?
Speaker: This hasn't really been a question that's been addressed.
Speaker: So I think once you get out of this investment stage, there will be questions that people are going to start looking at.
Speaker: And I think this is where, is it going to be the cloud providers that can make money?
Speaker: Is it going to be Microsoft who can charge people
Speaker: subscription fee for using AI in things like Microsoft Office.
Speaker: So I think those are going to be the challenges that come later.
Speaker: But for now, I think it's just the hardware makers are enjoying the early benefits, which is really just about building the infrastructure.
Speaker: It reminds me a bit how you really made money during the gold rush by buying companies that produce shovels and picks rather than actually the gold miners, because it's very uncertain at this point.
Speaker: Yes.
Speaker: And with that, ladies and gentlemen, it's been an excellent discussion.
Speaker: I want to thank you all for coming and everybody for listening around the world to the podcast, for joining us here literally under the Banyan tree.
Speaker: And I suspect, Fred, that this won't be the last time that we're going to do such a live event.
Speaker: Absolutely.
Speaker: Big thanks to our guests Jing Liu, Michel Kwok and Frank Lee.
Speaker: Thanks for joining us today.
Speaker: And if you're not already subscribed to Under the Bany Entry, you can find us on Apple Podcasts, Spotify, or wherever you get your podcasts.
Speaker: That's absolutely right.
Speaker: With that, we thank you all.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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