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Under the Banyan Tree – Tariffs, AI and China’s fragile rally
570 Plays1 day ago
Fred and Herald are back in the studio and ready to catch up on what's shaping Asian markets and economics right now.
Disclaimer: https://www.research.hsbc.com/R/101/SFrjHVv
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Transcript
Introduction to HSBC Global Viewpoint Series
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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
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
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This podcast was recorded for publication on the 28th of August by HSBC Global Investment Research. Analyst certifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Key Discussion Points: Tariffs, Chinese Equity, and AI
00:00:44
Speaker
Hello from HSBC Hong Kong and welcome to Under the Banyan Tree with me, Fred Newman, chief Asia economist. And me, Harold van der Linde, head of Asian equity strategy. It's been a while since we've been both in the studio and we've got a lot to catch up on.
00:00:57
Speaker
We're going to start with a recap of the tariff situation and what it means for Asian economies, plus a closer look at what's been driving the Chinese equity rally. We're also going to zoom in on the AI supercycle. How much of a market story is it right now?
00:01:10
Speaker
And could we see faster AI adoption in all areas of life in China than in the US? Plenty to discuss, so let's get to it. From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
Tariffs Impact on Asian Exports
00:01:33
Speaker
Fred, um now we're back in the room. It's good to have you here because, you know, I'm a little bit confused on the tariff front. There's so much going on. Where are we now? what's what What's going on and on the tariff side? You're not the only one who's confused. There has been so much going on in recent weeks, right? The summer months were filled with headlines and negotiations and deals and so forth. So where do we stand? Well, most countries in the world have been given a certain tariff level.
00:02:02
Speaker
um Only six economies actually have a deal, quote unquote, with the United States. We're talking about 200 deals at some point in time. Yeah, but as of today, there's only six, quote unquote, deals. And even those, we only have the text of actually two of them.
00:02:17
Speaker
ah so A lot of them would be Asian countries, right? I think Indonesia's got a deal. Indonesia has, Vietnam has, Korea has, Japan has. I thought Switzerland maybe there was something there. Switzerland has no deal. Switzerland was told a very high tariff rate. That's right. The other two are really just UK and Europe. Yeah, of course. So it's six in total. And that means that ah really most other economies were just told tariffs. And that, of course, means, yes, we have these tariffs, very high tariffs, in fact, ah not far off of where we were on April 2nd, if you remember Liberation Day. So the terrorists were not too far from that. Yeah, the exception of say China, because that went up and then went down again.
00:02:56
Speaker
So the terrorists have now been in place for, what is it? It was April, it's it's now late summer, August. um So quite a few months in there. The data should start to respond to this now. The exports should start to respond.
00:03:10
Speaker
Initially you had some front-loading, I think, but What do we see in numbers? Data comes out always with a bit of a lag. But um you know if you take a snapshot of data today globally, actually global economy isn't doing too badly. Manufacturing is kind of hanging in there.
00:03:27
Speaker
Trade still the latest numbers out of many Asian economies and exports pretty robust through July. and so does that mean that actually tariffs don't do anything to trade? that's a bit too early to conclude that because there's probably still a lot of front loading that has occurred up until the very last minute until these tariffs were imposed. Yeah.
00:03:49
Speaker
And so that would mean that the evidence of the impact of these tariffs really will come through only next few months. And so we would expect a slowdown in trade, particularly Asian exports to the U.S., to filter through. And that, of course, matters then for economic growth I mean, just as an anecdotal sort of story to
Impact of Tariffs on Furniture Business
00:04:10
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back that up. I have a friend of mine who's in the furniture business. so he designs in Hong Kong, makes it in China, sells it into Canada and the US.
00:04:18
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And he told me that his business has been as good as it's ever been because his customers as as basically purchased as much as they could in order to get all that already into the US and and Canada.
00:04:30
Speaker
But he says second half, there is simply no waters for him. They've stocked up. So I guess, I mean, that's an individual case, but that's a little bit illustrating. But furniture is a great example because um there wasn't the expectation that there would be big tariffs on furniture, but suddenly – The Trump administration announced tariffs on lumber in the summer and by extension of also furniture. And suddenly furniture makers are like scrambling because they then realize they have to beat that tariff line. And there's still about as a time of recording now, probably 45 days, 50 days or so until ah these tariffs start to kick in. This is currently under investigation. so
00:05:12
Speaker
you're probably going to see even through August, maybe September, still strong shipments. But then at some point we'll hit that cliff.
Market Reactions in China and Hong Kong
00:05:21
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So how do you then deal with that? Because you feel that these numbers are going to weaken at some point in time. That's the cliff.
00:05:28
Speaker
But you don't see that in the economic data yet. So i actually think – things are still looking good and if you're just looking at data. Harold, that's why economics is more art than science, right? Because you kind of don't see it in the data, but you know there is going to be an impact. So you have to factor that into some anticipated forecast. and And I think most economists would expect a slowdown into the fourth quarter and in the first half next year.
00:05:51
Speaker
Even if the tariffs had no impact, there's still going to be a slowdown because of the inventory dynamics. People have stocked up on on certain items. Now they have to get rid of it. So even then, there's going to be some impact. But we know from economic theory but also from economic history that tariffs do impact trade volumes. So would be very surprising if – at these this magnitude, there would be no impact. Now, one thing that um distorts that picture of an impending slowdown, Harold, is that equities in markets yeah stock markets are shrugging up. Now, you'd always tell me that economics doesn't matter for equity investors because they're so foreign to la la land that they kind of don't look at the facts on the ground. or why are Why are Chinese and Hong Kong stocks up so much if you have all this impending ah drag on growth coming through?
00:06:44
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Well, what I always say is that the stock market is not the economy. So it's important to listen to economists like you. Okay, can we just put that straight into that? I know that will make your day.
00:06:54
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But we can't just assume that what you guys say will be reflected in the stock market because stock markets are just not a reflection of the overall economy. This is a little bit the case in Asia now, I would say in particular in China, because China has been spearheading this sort of rallying in equities.
00:07:10
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And why is that the case?
Chinese Household Behavior and Market Dynamics
00:07:13
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It's because I think, and this is a new dynamic, Chinese households over the last three, four years have not done anything with their money. If the stock market is down, the property market is down, and you think you're losing your job, what do you do?
00:07:24
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You put money in the bank. And you had deflation, or you have deflation still in China. That means a dollar now will be – you can even buy more stuff with that tomorrow because prices will be lower tomorrow.
00:07:38
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So what do you do? You actually don't consume. You – and you cash up. That's exactly what Chinese households have done. Can I stop you on that? So you're arguing that essentially there's a lot of liquidity in China. Chinese households have a lot of money in the bank and now – With the interest rates declining, um they're looking at equities because their dividend yield is pretty high and you may as well buy some equities. so um In other economies in the past, I'm not thinking about Japan for example. Japan went through a long period of deflation, high savings.
00:08:10
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Did we also see people put money into the stock market in Japan? Would the Japanese do the same thing that you expect the Chinese now to do? No, well, in the early 90s, a little bit, because there was a feeling that the deflation would be sort of temporary maybe, but its no at some point time, they didn't.
00:08:27
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so So what makes the Chinese then different? I think, and this is important because they now have this, well, if you come back from holiday, you have this strange new word, anti-involution, this supply-side reform.
00:08:38
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I think that is important because if you feel that the deflation now is a temporary phenomenon, that inflation comes back, That impacts your consumer behavior and there's maybe a little bit more confidence now that things are starting to improve, that some of that confidence comes back.
00:08:55
Speaker
But it is incredibly fragile. If you get a situation whereby they feel that the economy is not improving, that property prices are not moving higher or that the stock market falls again for whatever reason it may be, you can dent that confidence and then you get people hoarding cash again. and You could get a situation, i think that's happened in Japan, whereby it's very difficult to convince people to actually do something with them. So it's a conclusion then that persistent deflation or disinflation yeah is ultimately not good for equities. Absolutely. But that the hope of this changing can give temporary equity rallies. So the key question then is economic at the end of the day because your rally can only be sustained if yeah we get out of deflation. Is that is that right? No, that that's absolutely right, yeah.
00:09:41
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And if in six months' time we find out that the economy is not doing well and confidence is dented again, then people hold up and to convince them then to come back is an even bigger hurdle. So it's very important that this anti-influential supply side sort of reforms, that that actually works to a certain extent.
00:09:58
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and And just to add at a point, it's interesting that the the equity market rally started a little bit September last year, then fizzled out and now got a second yes win. And ah just to link that to the household deposits in China,
00:10:13
Speaker
Generally speaking, in in China, you put ah money on fixed term deposits for about three years on average. And a lot of
Equity Market Rallies in China: AI and Liquidity
00:10:22
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people started to take out fixed term deposits in 2022 2023. And these are now rolling and these are now rolling off yeah And now, as and particularly this summer it started, this wave of people getting their money back from the term deposits. Then they have to make a decision.
00:10:39
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And then they make decision. Do I do a lower interest rate and do it again for three years or do I go in stock market? And that's, I think, where some of that initial catalyst came from. But as you say, um if in six months from now we still look at deflation, no increase in profits, that will unwind very quickly. Yeah, this is the risk and this is what Japan had. You might then get stuck whereby it is very difficult to convince consumers or households to change their behavior.
00:11:05
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So I think there's a window of opportunity that China still has. And because the numbers are so big, it means it can lift the overall market irrespective of what the global investor do, because we're talking so, the numbers are so big in China that we don't need foreign investors. They haven't really come into very high numbers into the Chinese stock market yet.
00:11:22
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But there is a second thing here and there is another whole narrative that's also adding a bit more a shine to the equity market rally. And I think this is a great time to take a quick break. And when we come back, we're going to talk about the AI super cycle that's ah driving markets and excitement, not just in Asia, but around
AI's Influence on Global Stock Markets
00:11:41
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the world. world Absolutely. Absolutely.
00:11:52
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So, Harold, before the break, we discussed the equity market rally in Hong Kong, mainland China, and very exciting for an equity strategist, of course. um And do you and explained ah quite nicely that a lot of it has to do with liquidity preferences and how households are shifting money from bank deposits.
00:12:11
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Now, but there is there is every stock market rally requires also a narrative. around it. um You know, that that's how lasting stock market booms are generated. It's not just about liquidity.
00:12:22
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um And a narrative this time around must be AI and how transformative that is. So we know about the Magnificent Seven in the US and a lot of this is AI driven and that that hype around it.
00:12:34
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How much does the AI story really fuel the current boom in Chinese equities? Is that also an AI element in that narrative? In China, equities are arguably limited because there are Chinese stocks that rally on AI. There are hardware makers that make stuff for the AI sort of food chain. You need servers. There are even companies that make refrigerators to cool these sort of servers.
00:13:00
Speaker
There are companies that make chips that the that they use. And then they are companies that actually develop the AI. So, yes. But... If you look at where the Chinese households have put their money, it's banks, because you get a good yield, a different yield, and they put it into the internet names more for consumption and these sort of things. So it's mixed. But if you look at the rest of the region, Japan, Korea in particular, it's really the AI stocks that have rallied.
00:13:24
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Now, when you say AI stocks, it's the hardware. This is hardware. these are the men These are the companies that make the equipment that you need in order to make the chips that Nvidia has.
00:13:36
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And the the companies that make the service on which all the data is being stored and these sort of things, yes. Now, let let me ask you something about this because I think the AI boom that we've seen globally that is clearly evident the US but also is catching up – catching ah wind and in Asia as well.
00:13:54
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a lot of this is often centered around hardware chips and so forth and maybe in the US some software makers. But um to what extent is there evidence that the application of AI might ultimately raise productivity for the broader corporate sector and be good for earnings? Has that come through yet? Because it seems to me as an economist, ultimately, AI will only start to lift prosperity and improve our lives if it's broadly applied, not by just building the data centers. Yeah.
00:14:26
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So I think that we don't have that in the numbers yet, simply. But my suspicion is that in particular in mainland China, the adoption of AI could be much faster than other parts of the world for the very simple reason that they have.
00:14:42
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standardized data sets, standardized languages, um faster interaction of data between different agencies. um So I think in China, the adoption of it could be much faster than elsewhere in the world.
00:14:57
Speaker
ah You see that to a certain extent already, actually, funny enough. I took a robo-taxi last week in Shenzhen. And robo-taxis are a nice example. It needs to communicate to it with the traffic lights and all the traffic around it. And eventually we'll communicate with other cars as well.
00:15:12
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um And and ah yank can then you can lay over AI to that to manage your whole city. What is the best way to to move traffic around? and These sort of things. But but but to be fair, US has that as well, right? US has that as well. In San Francisco, LA, for example, we do have global taxes as well.
00:15:28
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Why would China be different than in the application of AI, say, compared to the US? I think one, they've clearly stated that they want a fast adoption.
00:15:39
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Two, they have an open sort of ah network whereby kind of the the mechanics of it is available to all sorts of companies and then build their own business on it. Well, I think in the US it's more closed.
00:15:51
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ah Certain companies control that. And thirdly, the interaction of privacy data and these sort of things is different in the US than it would be in China as well. So I don't know, but given if you put it all together, I suspect they're going to adopt it very quickly. But not yet evidence that it has raised broader earnings, No, no no with the exception, of course, of the companies that make the chips like here you're talking about. Isn't that, Harold, the challenge here for AI? ah
AI's Broader Economic Impact
00:16:19
Speaker
We all all enjoy using it. It's for free in many cases. um
00:16:23
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But what is the transformative potential here? Aren't we not building things a little bit on on extrapolation and dreams? Where's the hard answer? Yeah, i I forgot there was an economist who once said the internet has arrived and I can see it everywhere, but not in the economic data. The productivity data didn't move up. I forgot who want I think was Don Bush who said it, but doesn't matter.
00:16:44
Speaker
My suspicion is that with AI, it could be different. That actually shows up in economic and ah corporate profits data at some point in time. But... I question that to certain extent as well. so so So then just just in conclusion, you have essentially an equity market rally built around the narrative and hope of AI and you have the liquidity tailwind.
00:17:05
Speaker
But Harold, i I suspect you're going to say, tell me that ultimately the inflation is dead and AI will be great as an equity strategist. And me as an economist probably will say the opposite then.
00:17:18
Speaker
yeah So we're going to disagree, which is great because that can keep this podcast alive. But also so my worry is a little bit that I'm not the only one who says, hey, AI maybe could be something interesting and new because like you mentioned, you have the Magnificent Seven in the US.
00:17:35
Speaker
Everybody in Asia has moved into these AI stocks. So in some of of the Taiwanese chip makers, The average portfolio manager has got 10% of his portfolio in one single stock there.
00:17:49
Speaker
That's a lot. They can't buy more, so they try to buy now stocks that correlate with it, somehow moving in similar fashion. They've gone to Korea where they've loaded up as well. So my worry is a little bit that this is now very well played out in the market. Everybody's positioned for it.
00:18:06
Speaker
And if we then find that there is some sort of disappointment, then everybody rushes for the exit. Well, Harold, you're a young fellow. A young man, of course, yes. So in the late you will have been probably too young to remember. But are there parallels here to the internet bubble that developed in the think the internet bubble could be very interesting because of two reasons.
00:18:28
Speaker
So the e-commerce became – so buying something on a website became a thing in – what was it? 1998 or 1999 or something like that. The stock market rallied on that for a couple of years. So lesson one, this can go on for some time.
00:18:41
Speaker
And it then petered out, I think it was March 2001, if not mistaken, and went down. And I once did a study out, why did it peter out in March 2001? Nothing happened, it's just that the market rolled over, there was no event.
00:18:55
Speaker
So that's and lesson two. Sometimes these rallies can go on for a long time, but they can reverse, and that doesn't have to be based on a catalyst or an event. The third lesson that we've learned out of it is that the companies that dominate e-commerce now,
00:19:11
Speaker
Think about Facebook, think about ah Amazon and these sort of things. Some of them even emerged afterwards or were still small in the early days.
00:19:22
Speaker
Facebook, for example, is very big now, but you had something else. I forgot even the name. And the search engine, everybody uses Google, but yet, um what was it? ah American Online at some point in time. so It might well be that the companies that are going to drive AI in the future are actually very small companies now, are very difficult to identify.
00:19:41
Speaker
So there's still a lot going on. ah See, that's why we have you here, Held. We hope that in the coming months you will and and identify these companies for us. Absolutely. That's the nice thing. If you're into equities, it's not just about economics, but you have all these different companies doing all these different things. So it's an incredibly sort of complex universe that we
Conclusion and Subscription Reminder
00:20:00
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look at.
00:20:00
Speaker
And that's why, ladies and gentlemen, you should listen to The Banyan Tree, Under The Banyan Tree. Under The Banyan Tree. Asian Markets and Economics in Context. Yes. And we'll be back in your inbox next week.
00:20:38
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.