Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the last week by our team of economists and strategists.
Speaker: Coming up today, we discuss the shifting growth drivers that will power China's economy in the years ahead.
Speaker: We find out why oil prices look set to stay high over the longer term and examine some surprising developments in bond market yield curves.
Speaker: This podcast is recorded on Thursday, the 11th of November 2021.
Speaker: Full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Chris Brown-Hulmes.
Speaker: We kick things off in Asia, where our economics team predicts that China's economy is set to undergo a significant transition.
Speaker: Let's get the details now from Xu Hongbin, our chief China economist.
Speaker: Hongbin, thanks for joining us today.
Speaker: Many thanks, Chris.
Speaker: Pleasure to be here.
Speaker: So Hongbin, the starting point for your piece is that the decades-long boom in real estate and infrastructure is coming to an end in China.
Speaker: Why do you feel that?
Speaker: Firstly, if you look at the home ownership,
Speaker: has already reached over 80% across all the cities in China, which is one of the highest in the world.
Speaker: Then more importantly, more than 40% of the household now owes more than two apartments.
Speaker: So the home ownership has really reached kind of limits.
Speaker: And secondly, if you look at basically the housing per capita, it has more than doubled over the last decade.
Speaker: Now in terms of the level, it's one of the highest
Speaker: among all the Asian countries.
Speaker: And also in terms of the demographics, the younger generation is shrinking.
Speaker: So I would suggest that this kind of double-digit growth in China's construction investment has already come to the end.
Speaker: And if that is the case, what is going to pick up the slack?
Speaker: There are three new growth drivers that are likely to help to pick up the slack.
Speaker: Firstly,
Speaker: is the capex in the manufacturing sector, particularly the medium to high kind of tech manufacturing.
Speaker: In fact, we already see kind of the credit growth for the manufacturing sector has been accelerating in the recent quarters.
Speaker: At the same time, we also see the scale for labor.
Speaker: The supply has been increased quite rapidly.
Speaker: And also we see Beijing now giving a big push in terms of technology development.
Speaker: So that all points to basically acceleration in the capex manufacturing sector.
Speaker: The second new growth driver is going to be green investment.
Speaker: There is some estimate that in the next 30 years, China needs to invest more than 200 trillion of RMBs
Speaker: into the new clean energy as well as other sectors in order to reach the climate goals in the near term.
Speaker: They need to basically increase the green investment as percentage GDP to over 5%.
Speaker: in the coming years.
Speaker: So that is also going to be a major boost to the investment demand in China.
Speaker: And the third thing that you highlight is the importance of consumption.
Speaker: Yes, there has been a lot of talks about the rebalancing away from investment towards consumption in China in the past, but so far consumption is still relatively steady.
Speaker: But going forward,
Speaker: One of the new forces which is going to push the consumption growth is the expansion of the middle classes.
Speaker: We already see that the scale for labor has been growing quite rapidly.
Speaker: And at the same time, structural reforms try to give the 300 million migrant workers equal opportunities that will also help to expand the middle classes.
Speaker: That, in my view, is going to give more support to the consumption going forward.
Speaker: And what then is this going to mean for overall Chinese growth and employment?
Speaker: In terms of GDP growth rate, of course, growth is going to slow a bit.
Speaker: But still, given all these three new growth drivers, we expect China's GDP growth rate is continuing to remain around 6% in the next three to five years.
Speaker: that, in my view, is going to give them needed kind of support for the kind of job growth in China as well.
Speaker: It all sounds fairly optimistic given the demographic challenges that you mentioned earlier that China is facing.
Speaker: What are the risks to the view?
Speaker: Yes, of course, you know, as you said, demographic, they're in a shrinking, you know, labor force is a new challenge.
Speaker: However, at the same time, we'll also see
Speaker: basically the quality of labor.
Speaker: In other words, the education has been improving.
Speaker: So that helps to offset some of those kind of headwinds.
Speaker: And also at the same time, China is also facing some kind of external challenges.
Speaker: And the most market, particularly the expanding middle class, in my view, is some kind of things which can help China to cope with these new challenges.
Speaker: Hongbin, that's a very helpful summary indeed.
Speaker: Thank you very much for your time.
Speaker: My pleasure.
Speaker: Rising energy prices have been hitting the headlines in recent months.
Speaker: Brent crude oil prices traded in a range for most of the year, but then rose sharply in September.
Speaker: So how does this affect our thinking about the longer term outlook?
Speaker: Gordon Gray is our Global Head of Oil and Gas Equity Research.
Speaker: Gordon, welcome to the podcast.
Speaker: Thanks very much.
Speaker: So firstly, Gordon, bring us up to date in terms of the latest developments on the oil price.
Speaker: The oil price was in a fairly narrow range for much of the year until September, and then it spiked sharply upwards into the mid eighties.
Speaker: And a lot of that was to do with the pull up of commodities in general, particularly the spikes that we saw in, in natural gas and in coal as well.
Speaker: And in the backdrop to all of this is that the OPEC plus group has been increasing production steadily in recent months.
Speaker: There's been pressure on them to produce more and so far they've resisted it.
Speaker: So let's break it down.
Speaker: Firstly, what's happening on the demand side?
Speaker: What's the outlook for that?
Speaker: Well, demand at the moment is extremely strong.
Speaker: We've got a bit of a boost from fuel switching because the gas price in particular is so high.
Speaker: There's maybe a half a million barrels a day of extra demand from switching from gas to oil.
Speaker: But even beyond that, the underlying demand picture is really fairly strong.
Speaker: And we're now looking for demand probably next year to be all the way back to where it was in 2019.
Speaker: And that's still with a lot to come back on the jet fuel side.
Speaker: And then on the other side of the equation is supply, where from your report, it sounds like there are quite a lot of constraints.
Speaker: Well, I think one of the big questions with higher prices is what reacts to those higher prices.
Speaker: And outside of the OPEC group, the most reactive is US tight oil or shale.
Speaker: That's something like 12% of world production.
Speaker: It is starting to show some growth now.
Speaker: Activity in the States has come back with the higher oil price.
Speaker: But yes, it is being hampered to some degree by manpower and other constraints.
Speaker: Nevertheless, we see US growth of something like a million barrels per day next year.
Speaker: Beyond that, outside of OPEC, though, a little bit of a bounce next year, but the longer term picture for other non-OPEC supply we think is flat to down.
Speaker: And so if we put these two parts of the oil price equation together, what's your outlook in the next couple of years?
Speaker: If we look at the reasons oil prices have recovered, I would say, look, demand has recovered quite obviously.
Speaker: But the big factor has been that OPEC cuts nearly 10 million barrels per day off supply last year.
Speaker: Their attitude towards bringing those cuts, bringing that supply back online, being massively conservative ever since mid last year.
Speaker: And it stays conservative.
Speaker: Now, those cuts are unwinding.
Speaker: There will still be a little bit less than 4 million barrels a day of cuts by the end of this year.
Speaker: And there's room for some of that to be unwound next year.
Speaker: But because of that growth in US supply, we don't think all of it will be unwound.
Speaker: But I think there's a bigger issue than that.
Speaker: And that is, as those cuts are unwound, I think they become more and more visible.
Speaker: That spare capacity globally is becoming very limited.
Speaker: And certainly on our estimates, we think global spare capacity could be as low as 3 million barrels a day, maybe even less by the end of next year.
Speaker: Historically, that's a pretty low number and it's a pretty concentrated number within just a very, very few countries.
Speaker: So we think the outlook overall for the oil market is one of reasonable tightness in the medium term.
Speaker: And is that because of underinvestment by the industry?
Speaker: I think to a large degree it is.
Speaker: We're seeing even within the OPEC plus group, we have several countries like Nigeria, Angola, who can't produce at their allocations even after the cuts.
Speaker: And th is is because declines in capacity have hit them.
Speaker: But at the global level, yes, we saw something like a 45% drop off in upstream investment relative to the earlier past last decade.
Speaker: As we went into 2020, we've seen a little bit of a pickup now, but investment is still lagging.
Speaker: And I think that investment is affecting not just OPEC members, non-OPEC members as well.
Speaker: And so that's, I think, is driving what will be something of a scarcity of capacity, which will emerge next year, potentially.
Speaker: Gordon, thank you very much.
Speaker: Thank you.
Speaker: We finish this week with a look at the bond markets, where recent central bank actions have had an unusual effect on yield curves.
Speaker: Steve Major, Global Head of Fixed Income Research, joins us now to explain.
Speaker: So, Steve, there's been a lot of activity from central banks recently.
Speaker: Are there any common strands to their thinking?
Speaker: Well, I think most of it is consistent with the idea that if and when rates go up, they don't go up very much.
Speaker: And that's speaking to the lower for longer theme.
Speaker: I mean, central banks haven't been saying that exactly, but it's their actions as much as their words that matter here.
Speaker: And we're talking about what's happened in Australia, the UK, Eurozone and US, all within a few weeks of each other.
Speaker: One of the things we've seen in the bond market this year is a flattening of the yield curve.
Speaker: But the unusual thing is that the short end has risen while the long end has come down.
Speaker: What do you think's behind that?
Speaker: Yeah, the flattening has been a general trend now through most of the year.
Speaker: But what's happened in the last few weeks is very unusual.
Speaker: It's a hard form decoupling whereby yields in the short end, say, for example, the two year have gone up and yields on the 30 year have gone down.
Speaker: whilst in the middle they've moved very little.
Speaker: That's a see-sawing effect.
Speaker: And I think it comes from some de-anchoring going on in places like Australia with the failure to defend the yield curve target.
Speaker: And then the hawkish rhetoric that you've seen in places like the UK that subsequently wasn't followed through on.
Speaker: And other regular speeches from the ECB and the Fed.
Speaker: And you're expecting this trend to reverse.
Speaker: Well, I think it sets up an opportunity and it could be something that starts to work soon or it could take a while.
Speaker: But we're not worried about being too early, better too early than too late on this.
Speaker: The curve is significantly flat.
Speaker: So I'm talking about the historical data here and it's shown by the forwards.
Speaker: So I'm talking about the 10 to the 30 year curve measured in forward terms.
Speaker: So that's something that investors will be noticing.
Speaker: The other thing is the drivers of the curve are going to be what's happening with short rates, which are linked to inflation expectations.
Speaker: If we're right and inflation expectations are peaking, then we'll see some easing pressure at the front end.
Speaker: And that will feed through into a generally steeper curve.
Speaker: So it's a big theme going into next year.
Speaker: Is this just relevant for the US curve or is it broader than that?
Speaker: No, I think it applies everywhere.
Speaker: The US is the biggest and most liquid market.
Speaker: So that's the one we're looking at.
Speaker: We've seen clear evidence of read-across from one to another.
Speaker: There have been days when Australia has been driving global fixed income and even the UK quite recently when it's surprised by not hiking rates, or it surprised many people at least.
Speaker: So it's a global read-across, but the US is the biggest and most liquid fixed income government market.
Speaker: Finally, Steve, where could you be wrong?
Speaker: Well, yes.
Speaker: So if we just go back to the big theme of whether the curve is going to steepen or not, I've already mentioned the timing is one that we could be too early by months on this.
Speaker: But then again, I think the forwards are quite a strong indication.
Speaker: The main risk is that the central banks, like, for example, the Fed especially, are
Speaker: abandon their flexible average inflation targeting, which I think is very unlikely, and it's not our call.
Speaker: But if they did, then they would validate the hawkishness that's been appearing at the front end of the curve, and even more.
Speaker: And the curve would flatten even more than it has done already in a way that would be counter to our view.
Speaker: Steve, thanks very much for explaining that to us.
Speaker: Thank you, Chris.
Speaker: So that's all from us today.
Speaker: Thank you to Chu Hongbin, Gordon Gray and Steve Major for joining us.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
