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 and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC in Hong Kong.
Speaker: And I'm Harold Wendelinde, Head of Asian Equity Strategy.
Speaker: It's mostly about mainland China on today's show.
Speaker: We'll bring you up to date on the macro picture as the post-COVID recovery kicks up a notch or two.
Speaker: We'll also be asking why equity markets haven't been performing so well despite some encouraging economic data.
Speaker: Much to discuss and not a whole lot of time, so let's get going right here under the banyan tree.
Speaker: So last week was Chinese golden week.
Speaker: Lots of people traveling out there.
Speaker: I've seen some of the stats, 247 million people were traveling in China last week.
Speaker: Spending was 19% up from last year.
Speaker: Jewelry, clothing, cosmetic spending is up 58% over last year.
Speaker: So that's been really strong.
Speaker: Clearly there seemed to be a little bit of rebound, but if I look at the markets,
Speaker: The Hang Seng market is only up a few percent since the beginning of this year.
Speaker: So we're trying to unpack this a little bit.
Speaker: Fred, what is going on with consumption in China?
Speaker: So the golden week is always an important measure of where the Chinese economy is going.
Speaker: Of course, the headline numbers this year look quite strong.
Speaker: You have seen a rebound in consumer spending.
Speaker: You mentioned some of these numbers.
Speaker: But there are also sort of few question marks that are creeping in here.
Speaker: And I think investors are grappling with that.
Speaker: One is that, yes, spending is up a lot from last year when we had the lockdowns.
Speaker: But if you look at per capita spending, that is the spending per person, that looks a bit weaker actually and still slightly below where we were in 2019.
Speaker: And that suggests that the average person has maybe held back a little bit, particularly the mass consumption part.
Speaker: We see that hesitation come in.
Speaker: So that's one big issue.
Speaker: The second big issue is of course that most of this is domestic spending.
Speaker: We've seen not yet this big surge in outbound travel for example because we don't have the airline capacity.
Speaker: So it's mostly domestically driven spending.
Speaker: And the third element here is of course that yes mass consumption may not have quite revived as much but we see at the higher end clearly a lot of spending come through.
Speaker: So the luxury item is doing quite well.
Speaker: But it's a mass market that's not really firing up as much as one would hope.
Speaker: So that was what happened last week.
Speaker: What is going on in the broader economy?
Speaker: And what is the outlook for the Chinese economy in the rest of the year?
Speaker: So here, numbers have been actually quite strong as well.
Speaker: So one would expect over 6% GDP growth, for example, for this year.
Speaker: That's a pretty robust number.
Speaker: And that's not just a consumption story.
Speaker: We've also seen a big acceleration in infrastructure spending, for example, in housing construction.
Speaker: So all of that points to stronger growth.
Speaker: But the question's still over the durability of that rebound, because if you look at the construction sector, for example,
Speaker: We've seen a lot of credit growth in the first quarter.
Speaker: That's likely to cool.
Speaker: There might be less credit available for local infrastructure projects.
Speaker: When it comes to housing part, actually developers have completed existing projects or in the process of completing existing projects, but they're not adding new projects on it.
Speaker: So once the pipeline of new projects sort of starts to thin, then the question is, where does a construction activity come afterwards?
Speaker: And all of that suggests that, yes, relatively strong start, but we probably still need that policy support going to second half of the year because the economy isn't fully yet at a sustainable speed.
Speaker: We're still trying to ramp things up in China.
Speaker: So encouraging numbers overall, headline consumption, broader GDP growth.
Speaker: But starting with consumption, what do you hear from companies?
Speaker: How do investors think about the consumer spending story in China?
Speaker: Well, what we hear from companies is very much in line with what you just mentioned.
Speaker: So we hear that from certain companies that actually business is strong.
Speaker: Luxury companies have come out and said, listen, things are really going very well for us.
Speaker: But we also see in certain particular goods categories, so think about footwear, for example, things are really moving ahead as well.
Speaker: In other industries, it's a completely different story.
Speaker: So think, for example, about the auto industry.
Speaker: Consumption is up, people would be buying more cars.
Speaker: The problem is that in the auto industry, there's a price war going on, particularly in the electric vehicles.
Speaker: So from an investor point of view, yes, demand might be good, but there are other issues at play that dilute that particular recovery story to a certain extent.
Speaker: And that's one of the reasons I think why the Chinese equity market has not performed as well as one would expect in this regard.
Speaker: There is a couple of other reasons related to that as well.
Speaker: I think the appetite for in particular US investors to buy into China is structurally adjusting to a lower level.
Speaker: Now, that is being compensated by maybe other industries, other regions.
Speaker: Think about the Gulf, for example, that is coming in, but it might not compensate for that.
Speaker: So all these things are at play that impact the equity market as well.
Speaker: But as a follow-up, how important is the foreign equity investor for China?
Speaker: Because it's a large domestic market, lots of retail money.
Speaker: If domestic consumers feel more confident, doesn't that drive the market itself?
Speaker: Or are foreign investors still so important that that actually matters?
Speaker: Well, two things on this.
Speaker: First of all, what you've just mentioned is that consumption is rebounding, but there doesn't seem to be the confidence that's spent as much as what they did in 2019, in particular in the mass consumption category, right?
Speaker: Now, those are the real investors in Chinese equities.
Speaker: And just to take a step back, when we talk about China, we have the mainland Chinese stock markets, predominantly Shanghai, and we have the market, for example, here in Hong Kong.
Speaker: The nature of investors is different.
Speaker: For the Hong Kong market, it's much more dominated by global flows.
Speaker: Mainland China, Shanghai is mostly driven by domestic and mostly driven by retail investors.
Speaker: So those are the people that haven't really gone out to spend as much.
Speaker: So that might explain that to a certain extent.
Speaker: Time for a quick break.
Speaker: We'll be back in a moment discussing implications for the region.
Speaker: But before that, we want to tell you about HSBC's 10th annual China Conference, which has taken place in Shenzhen on the 17th and 18th of May.
Speaker: That's right.
Speaker: This is our flagship China event providing unparalleled access to investors, companies, and of course, expert analysis from HSBC Global Research.
Speaker: The two of us will be taking to the stage alongside colleagues from our economics equities, fixed income and FX teams to discuss the latest trends across China.
Speaker: It's also part of our commitment to helping clients access the Chinese market and assist those in China seeking to expand overseas.
Speaker: This is the first time the conference is being held in person since 2019.
Speaker: If you're a global research client, you can register online at research.hsbc.com or reach out to your HSBC representative for more details.
Speaker: We'll see you there.
Speaker: Harold, before the break, you mentioned that really global investors are looking at perhaps other opportunities as well.
Speaker: China is an important economic engine, but for various reasons, they're looking for other exposure as well.
Speaker: What are you seeing in terms of flows across the region?
Speaker: What other markets are attractive given that, yes, China's economy is rebounding, but the market is lagging?
Speaker: Have other markets benefited perhaps in terms of receiving more foreign investment of late?
Speaker: Yeah, so there's a couple of interesting things going on.
Speaker: Just quickly to hook back to what we spoke about, the Chinese consumption story.
Speaker: Foreign investors are buying, you can buy domestic companies in China, but you can also buy the luxury companies, which are predominantly listed in Europe.
Speaker: So you see that the appetite there is actually fairly strong.
Speaker: But what we see across the region is a shift.
Speaker: In the beginning of the year and late last year, the flows were really going toward mainland China in order to benefit from...
Speaker: People hoping for a stronger recovery.
Speaker: We've just spoken about that.
Speaker: The recovery is not as strong as expected as other issues at play.
Speaker: Then the money started to move to Taiwan and Korea, the export markets, because it turned out that the world wasn't as bad as a place as we all thought it to be, say, six, nine months ago.
Speaker: And those are the exporting companies that really benefit from that.
Speaker: But that is now shifting as well.
Speaker: We're seeing increased worries about are we going to have weak economic conditions in late this year or maybe next year?
Speaker: Should we go into other markets?
Speaker: And we see money moving back towards, in particular, India at the moment, a large domestic economy that still considers, is still be doing pretty good.
Speaker: But that's just the equity flows.
Speaker: What's going on from your perspective, Fred, in particular, US dollar movements across the region?
Speaker: Well, we've seen, I think, generally kind of still risk aversion a little bit in markets.
Speaker: So we had a lot going on globally in terms of banking sector issues in some economies.
Speaker: We've seen a still uncertainty around where the Federal Reserve will take interest rates.
Speaker: And I think that broadly has still kind of meant that cross-border capital flows have actually been lower so far, to see it broadly speaking.
Speaker: But if you look at broadly Asia, actually the fundamentals are still very, very resilient.
Speaker: And we still see that gradual economic shift in terms of momentum moving to Southeast Asia and South Asia in particular.
Speaker: Now, if you look at Korea, Taiwan, Japan, and even China, maybe the headwinds are stiffening over the summer months.
Speaker: But clearly Southeast Asia, South Asia, there's still a lot of domestic demand momentum coming through.
Speaker: They're gaining global export market share.
Speaker: And so you can almost see going through the second half of the year, these economies will remain resilient.
Speaker: And I think once you see global investor appetite kind of steady a little bit out with a bit more visibility on the Federal Reserve, for example, these markets are actually in relatively good shape and should come through all this turmoil in quite a bit of, you know,
Speaker: resilient and in fairly decent shape.
Speaker: No, I completely agree with that, Fred, because if I look deeper into 2023, assuming that the Fed is not going to continue to raise interest rates deep into this year, right, the global macro is going to be supportive to Asian equities.
Speaker: Presumably, the Chinese recovery will have a little bit more visibility on that.
Speaker: But
Speaker: Yeah, we shouldn't count out India, Indonesia and some of the other markets where actually momentum is pretty good as well.
Speaker: So we're in the beginning of a fairly unique year whereby growth is good in Asia on different fronts and the global macro might be helping us as well.
Speaker: Yeah, that's a very good note to end on.
Speaker: You know, the golden week has just ended in China.
Speaker: And despite all the headlines, we actually still remain somewhat constructive on China and broadly Asia.
Speaker: Yeah, well, next week we have a conference in China.
Speaker: And interesting data points will come out of that as well.
Speaker: So let's see what we hear there and if that confirms our views.
Speaker: So Harold, this is the first podcast for us after a month on the road.
Speaker: Travel is seemingly back.
Speaker: We had Golden Week in China, of course, that's also Travel Week.
Speaker: What's on your mind these days?
Speaker: Well, travel is definitely on my mind, Fred.
Speaker: I'll be back to Indonesia to see family.
Speaker: I've been in Australia marketing.
Speaker: Actually, after this podcast, I'm going to Korea to see clients there.
Speaker: I'll be in Europe in a month's time and I need to visit India as well.
Speaker: So, yes, I've been traveling a lot and it allows me to read up a little bit on the plane.
Speaker: I'm looking at 13th and 14th century Java at the moment.
Speaker: But you've been traveling a lot as well, Fred, right?
Speaker: Likewise.
Speaker: Travel is back.
Speaker: But with all that time spent on flights, I actually discovered this very nicely made documentary on an author that I've mentioned, I think, before, Robert Caro, who's written a biography of
Speaker: uh lbj linden johnson um and a couple of other books and he's just a wonderful writer and this documentary turn every page is actually about him and his relationship with his editor bob gottlieb and uh you have these two elderly gentlemen discussing their joy for words and language and uh
Speaker: You know, that's one of these rare documentaries where you walk away with this inspiration and you almost want to ride yourself.
Speaker: And I guess you're doing that with riding on the 13th century Java.
Speaker: That's indeed correct, yes.
Speaker: But maybe I should watch that documentary on the flight to Seoul later this afternoon.
Speaker: Absolutely.
Speaker: Anybody can catch that documentary on a flight or otherwise, I think it becomes highly recommended.
Speaker: And on that note, thank you for joining us.
Speaker: We'll be back next week with another episode of Under the Banyan Tree.
Speaker: We'll see you there, Fred.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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