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: And now onto today's show.
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, Head of Asian Equity Strategy here at HSBC.
Speaker: And I'm Fred Newman, Chief Asia Economist.
Speaker: A warm welcome from Hong Kong, Harold.
Speaker: What are we talking about today?
Speaker: Well, it's an interesting one, Fred.
Speaker: Trade tariffs on Chinese goods are a hot topic right now, particularly in Europe.
Speaker: But the Chinese export juggernaut keeps plowing on.
Speaker: Indeed, Chinese exports are soaring.
Speaker: We're going to try to square the circle on what's keeping the numbers so high, despite the levies and restrictions imposed by Western economies.
Speaker: We'll also take a look at what all this means for companies, supply chains, regional competition and much more.
Speaker: It's time for you to join us under the banyan tree.
Speaker: Let's start with some facts to put today's topic in context.
Speaker: The European Union has become the latest Western power to discuss tariffs on imports of Chinese electric vehicles.
Speaker: This could be as high as 38%.
Speaker: Keep in mind that the U.S. already has announced it would impose a 100% tariff on Chinese EV imports, not to mention other tariffs and levies on various products from metals to medical products.
Speaker: And yet Chinese exports are hovering near record highs, averaging around 300 billion U.S. dollars every single month.
Speaker: So Fred, it appears to me that in China we have an issue whereby a lot of companies are producing a lot of products, but overall demand is still a bit sluggish and therefore we see that these companies are starting to export their products.
Speaker: Export numbers are very strong in the last couple of months in China.
Speaker: But the world is now responding to this, right?
Speaker: Talks with tariffs and stuff.
Speaker: How do you look at this and how do you see this unfolding?
Speaker: Yeah, we've seen a number of economies already announce or threaten to announce tariffs on imports from China.
Speaker: Of course, the U.S. famously under President Donald Trump went first, got then extended a little bit under the Biden administration.
Speaker: But now you just have the European Union impose tariffs on the importation of some electric vehicles from China into the European Union.
Speaker: And that is, of course, a signal that more might come in Europe.
Speaker: or even in the United States, and of course with the presidential election in the U.S., one of the candidates in particular is proposing even more aggressive tariffs.
Speaker: In reality, though, all of that, as of today, doesn't really stop the Chinese juggernaut, the big export engine.
Speaker: China's exports are running at record highs, absolutely red-hot.
Speaker: On ships and containers, like...
Speaker: full to the brim?
Speaker: We don't even have enough containers.
Speaker: We can't recycle containers fast enough through China for all the goods that are coming out.
Speaker: We have port congestion in places like Singapore and Shanghai.
Speaker: We have, as I said, record volumes coming out in China.
Speaker: So if you put on some tariffs here and there,
Speaker: That's going to slow it down maybe, but I mean, it's going so strong, it's not going to put a hold to this trend, right?
Speaker: You would need much bigger restrictions, much more comprehensive restrictions to really stop that Chinese export engine.
Speaker: Now, but we are seeing some interesting trends, and one of them is that increasingly, though Chinese producers, for example, are putting final assembly into other economies, and they're applying the components to these factories because the final good is then shipped from, say, Vietnam or Mexico into the United States, and that, of course, doesn't incur as high a tariff.
Speaker: And so the supply chain diversification that we have seen with production coming out of China is a little bit related to this threat of tariffs.
Speaker: Yeah, but that doesn't solve the problem of the capacity in China, right?
Speaker: Because you have a factory somewhere in China.
Speaker: Okay, now it's going to be difficult to sell it into, let's say, Germany.
Speaker: So you're going to set up a factory in, say, Hungary.
Speaker: But, I mean, then you still have a lot of capacity around.
Speaker: You've got now two factories, right?
Speaker: And it doesn't help the employment situation in China necessarily.
Speaker: Indeed, it might make it worse.
Speaker: Yeah.
Speaker: It doesn't necessarily help, but it keeps the Chinese export engine alive.
Speaker: It's more that rather than export the final good, China is increasingly exporting components.
Speaker: And so, you know, there's still very strong employment in the export industry in mainland China.
Speaker: We've seen...
Speaker: fairly strong industrial production come through, investment in that sector as well.
Speaker: So it's one of the few bright spots in terms of employment.
Speaker: But you're right, overall there's, of course, even the Chinese producers are suffering from margin pressure.
Speaker: And so what do you see for listed companies, for example?
Speaker: There's margin pressure in, I mean, it's almost difficult to find industries where there's not margin pressure.
Speaker: There are industries, by the way.
Speaker: that are heavily consolidated and they do fine on food and beverage and these sort of things, but they are domestic oriented sectors.
Speaker: But in many other sectors go from construction equipment and sometimes parts of robotics, electric vehicles is a classic example.
Speaker: There is a lot of pain.
Speaker: The good thing with that is that a year ago, I think we mentioned on this podcast once that there were
Speaker: At the top of my head, 70 producers who made something like 400 models of EVs, electric vehicles.
Speaker: I think there is already consolidation taking place in a lot of them.
Speaker: The worry I have a little bit, and this is maybe a micro view on these trends, is that a lot of these companies that still survive, let's take EVs again.
Speaker: They say our strategy is to go to Germany or to other places.
Speaker: That sounds like, okay, that might work.
Speaker: But then you think about how do they distribute the product?
Speaker: Have they thought about the tastes or the licensing issues or the safety issues in this country?
Speaker: After sales service, and if you buy a car from a Chinese company, it breaks down, can you get a component?
Speaker: So I think there are all kinds of other things that will make it quite difficult for these companies as well.
Speaker: A lot of things make it difficult, though we have to say that some of them are investing heavily in that strategy.
Speaker: Some of them will succeed.
Speaker: I was just in Milan, actually, on a work trip, and I had some time to walk around the famous cathedral in Milan, a beautiful night, evening, full of people, of course, tourists.
Speaker: But then right next to the cathedral in Milan, a wonderful big BYD showroom.
Speaker: So they're selling...
Speaker: BYDs in the heart of, you know, Milan.
Speaker: Yeah, and these are the leading producers of electric vehicles in China that even under current circumstances still make a small profit.
Speaker: So their profit margins are not negative.
Speaker: They are, I think for some of these leading companies, about 6% or so.
Speaker: It's not a lot.
Speaker: They will consolidate that market.
Speaker: But if you're number 25 or 38 producer in China, and you're not so big, then you have serious problems.
Speaker: And you need to really question what you're going to do.
Speaker: But there is a positive effect from this as well, right?
Speaker: For the Milanese, it's more choice at lower prices.
Speaker: It's fantastic for the world's consumers.
Speaker: If you're in the market, ladies and gentlemen, for an electric vehicle, your choices have just expanded and the prices have come down, of course.
Speaker: And this is a little bit the paradox here is that in many ways, cheap Chinese goods being exported is helping to bring down inflation, expanding choices for consumers.
Speaker: and is arguably not a bad thing.
Speaker: Of course, if you are an employer, if you have a job with an auto company in Europe, then of course you are on the other side.
Speaker: And this is what you trade off.
Speaker: This we see in parts of Asia already if we look at companies,
Speaker: Their margins are starting to come under pressure.
Speaker: I'm thinking about, for example, in Indonesia and ASEAN, because that's, if you think about, again, a car producer in China, you look around the world.
Speaker: The US is a difficult market to penetrate, Europe as well, but ASEAN is nearby, is sizable, quite open to receive your products as well.
Speaker: So you go there, and the problem is, of course, that the competition,
Speaker: is increasing in those markets.
Speaker: So the existing incumbent producers in markets such as Thailand, Malaysia, Indonesia, yeah, they see their margins coming down, exactly what you're saying here.
Speaker: And I think that's a very good point.
Speaker: And we should maybe take a quick break here.
Speaker: And when we come back, talk a little bit more about the regional impact of China's competitiveness and how that's really being reflected in regional stock markets, in regional economies as well.
Speaker: Sounds like a good plan.
Speaker: So welcome back.
Speaker: So we just talked about the enormous competitiveness of the Chinese exporters and despite the tariffs being imposed, that actually as of today, China is still taking market share from most other economies.
Speaker: And interestingly, Harold, actually if you look at export volumes from mainland China running a record highs, from the rest of the region, they're actually down slightly, suggesting that actually China is taking some market share.
Speaker: Now, if you think about Korea, for example, their semiconductor exports are doing well because China doesn't compete with that.
Speaker: Their auto exports are doing okay as well.
Speaker: But if you look at steel, chemicals, petrochemicals, general machinery, all of that is fairly weak because you have Chinese producers being quite competitive.
Speaker: And so the export surge that we see at the moment is to a large extent a Chinese export surge from the region.
Speaker: But I wanted to ask you, how much do equity investors follow that?
Speaker: How important is that, that margin squeeze that is coming from China's competitiveness for people who want to invest in Korea?
Speaker: I mean, as I mentioned, you see that margin squeeze taking place, but actually it's more complex.
Speaker: So let's take just a country, let's say in ASEAN in general, right?
Speaker: If you are a direct competitor with the Chinese producers that come in, like you're an EV producer or just a normal car producer in Indonesia, Thailand, Malaysia, Philippines, you have more competition.
Speaker: You need to deal with that, probably lower your prices.
Speaker: And that means more competition.
Speaker: Your margins come under pressure.
Speaker: On the other hand, if you're a car component producer, you've got two clients now that want to build a growth, right?
Speaker: You have your existing producer and you have a new producer that's want to set up a business maybe in, let's say, ASEAN, right?
Speaker: So you could benefit from that in volumes.
Speaker: In another angle, it might create employment.
Speaker: It might lower prices, but it could mean that people have more money to spend on other products.
Speaker: And there are certain areas where, as a foreigner, you can come in, but domestic brands or domestic distribution is so important that you can't compete.
Speaker: So think about, for example...
Speaker: Local medicine.
Speaker: Every country in Asia has its own sort of medicine.
Speaker: The Koreans have ginsang, Chinese medicine, the Indians have the Ayurvedic sort of stuff, the Indonesians have that as well.
Speaker: They call it jamu.
Speaker: So you can come up with that particular product, but there's an existing product that is really entrenched for centuries already.
Speaker: It's a very local product with a local brand.
Speaker: So if you have that, you can deal with these new players.
Speaker: And yeah, there are other industries where people really benefit.
Speaker: So healthcare products, for example, that are exported out of China into Indonesia, they're doing really well because Indonesians, they think, hey, this works out very well for us.
Speaker: We can buy that more.
Speaker: So different industries respond to this all very differently.
Speaker: There's very nuances.
Speaker: It's like there's one macroeconomic picture, of course, individual companies, sectors reacting.
Speaker: Think about banks, for example.
Speaker: For local banks, if the Chinese producer goes, for example, to Indonesia, he will need to do business with a local bank to pay, for example, the salaries.
Speaker: They don't have a bank account with a Chinese bank.
Speaker: So that's good for that bank.
Speaker: And for international banks, it probably means they have more trade financing to do.
Speaker: So again, they could benefit from these things.
Speaker: And I think I hear in that because that is usually what happens with these economic shocks.
Speaker: It's mostly about redistribution rather than overall negative impact.
Speaker: Exactly.
Speaker: But it is, I think, one of the concerns here are that when people look at the Chinese economy, it's hard to see how the competitive pressure might end because maybe the region could take that for 18 months because Chinese growth is weak.
Speaker: But if we have multi-year long, really, very competitive Chinese exports coming through, and despite the tariffs that might come through, that's not really stopping the Chinese export engine, then, of course, it becomes harder and harder for others.
Speaker: The economy is completely different.
Speaker: I mean, you could argue, and this is actually more of a question to you than a statement, that were that to be the case, that means more employment and therefore people get better salaries in China and demand in China will pick up and they would want to buy these products.
Speaker: So maybe then supply goes back into China, right?
Speaker: And that's exactly what's needed because what we often define now as, and it's popularly termed as excess capacity, which is the idea that China is producing more than it consumes and that excess production is being exported and is bringing down global prices.
Speaker: Part of that is cyclical excess capacity, meaning it is really the excess capacity is there,
Speaker: because demand is very weak in China at the moment.
Speaker: So we could foresee in one, two years when the real estate market stabilizes, when we see consumption confidence come back, that actually a lot of that demand is reabsorbed within the country.
Speaker: That's, I think, sort of the bullish case, if you will, that this is more a temporary situation.
Speaker: decline in export prices rather than something more permanent.
Speaker: Others might of course argue, no, no, this might be something more structural, it's part of the feature of the Chinese economy.
Speaker: I think the truth is somewhere in between.
Speaker: Yeah, yeah, because you could argue that there are some features of the economy that are really
Speaker: focused on supply issues, right?
Speaker: And especially some higher tech industries, and that's new, right?
Speaker: So China is starting to compete against Germany, against Korea, against Japan, against the U.S. in certain categories, and that's new competition.
Speaker: But I looked, for example, recently at household deposits in China, and they are record, record high.
Speaker: It's really high.
Speaker: And I can see Chinese are putting money aside for an uncertain time.
Speaker: But if that calms down, yeah, maybe they take some of the money out.
Speaker: They could invest that.
Speaker: They can also consume that.
Speaker: So then demand might recover.
Speaker: And all these things start to balance out a little bit, as you described, right?
Speaker: And the idea is that then they buy not just Chinese EVs, but anything from French champagne to... And Chinese equities.
Speaker: And Chinese equities, of course.
Speaker: But I meant more foreign goods.
Speaker: Yeah, yeah.
Speaker: You're a one-track-minded person.
Speaker: You always go back to equities, don't you?
Speaker: Most exciting asset class on the planet.
Speaker: And that's about all we've got time for today, ladies and gentlemen.
Speaker: Thanks as ever for joining us under the banyan tree.
Speaker: It's been a great discussion and we'll be back with another one next week.
Speaker: Till then, do have a listen to our sister podcast, The Macro Brief.
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Speaker: From all of us here in Hong Kong, take care till next week.
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