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Under the Banyan Tree - Are the US and China back from the brink?
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Fred Neumann and Herald van der Linde discuss the newly announced China-US trade agreement and what's next for the world's two largest economies.
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Transcript
Introduction to Podcast Series
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify. However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Introducing 'Under the Banyan Tree'
00:00:45
Speaker
Hello from HSBC Hong Kong, I'm Fred Newman, chief Asia economist. And I'm Harold Vernerlin, the head of Asian equity strategy. You're listening to Under the Banyard Tree, where we put Asian markets and economics in context.
China-US Trade Agreement Discussion
00:00:57
Speaker
So China and the US s have reached a trade agreement, for now at least. Today we're asking, does this signal an end up to the standoff between the world's two largest economies? And how far does the saga still have to go?
00:01:09
Speaker
Much to discuss, so let's begin from HSBC's global research you're listening to Under the Banyard Tree.
00:01:27
Speaker
Let's start with a quick recap of the US-China trade deal.
Pause on Tariffs and Decoupling
00:01:30
Speaker
Reciprocal tariffs have been paused for 90 days. The US is rolling back tariffs on Chinese goods to 30%, while China is cutting tariffs on US goods back to about, say, 10%.
00:01:42
Speaker
Both sides say they want to prevent decoupling, and discussions are set to continue, probably for the next few weeks at least. So Fred, watch your take on this. Well, look, this is very positive news. Markets are reacting positively and very few people had expected that so quickly after the escalation of tariffs, gonna see some sort of a rapprochement between the two sides and a big cut in tariffs. But here's why we need to keep things a little bit in perspective. The first thing to say is this reduction is really only for 90 days. and
00:02:15
Speaker
And we still need a more permanent agreement.
Limitations of the Trade Agreement
00:02:17
Speaker
Now, it seems likely, perhaps, that we get this. The language seems to be very constructive, right? sort the The language is very constructive, but it's not a permanent agreement, right? So that's one thing. The other thing is that that this is only about their so-called reciprocal tariffs. There's still a whole other bucket of tariffs, which are sectoral tariffs. So the Trump administration, for example, has said it would impose tariffs on auto imports, semiconductor imports, pharmaceutical imports. There already imposed tariffs on steel, for example. So there are certain categories where we might still see higher tariffs ah come through.
00:02:55
Speaker
And then, of course, um There is also this just this issue that China said we're going to get rid of non-tariff barriers, for example. But it's not really clear what that is. There's no real um kind of set of deliverables that came out of this. It's a broad kind of um intentions of of ah negotiating principles.
00:03:16
Speaker
But often in these negotiations, really, the devil is in the details.
Retailers' Adaptation Strategies
00:03:20
Speaker
And so you might see a bit of friction, prolonged negotiations come back. but
00:03:27
Speaker
be too negative here. yeah it and mood is good It's better than it was a week ago, right? We've taken a step back from a very, very um prohibitive level of of tariffs. And also buts what's good here is that it it kind of raises respect that maybe other economies, which still need to negotiate with the Trump administration, also therefore might have a path to maybe less punishing tariffs. terrorists um than we first thought. So ah the the hope might be here that pragmatism prevails, that there's more negotiation and ultimately ah countries will come to a sort of agreeable settlement with other governments. I think the timing here is a bit of importance as well because ah we know that a lot of companies find ways to deal with the terrorists for the moment. For example, some of the larger retailers, ah we spoke with Paras, our ah shipping expert,
00:04:17
Speaker
A lot of the retailers have actually taken, I wouldn't say delivery of the goods, but they brought in goods, but put them in bonded warehouses in the US, hoping for something like this to happen so that they actually could restock their their their stores very, very quickly.
00:04:32
Speaker
um So the disruption to the supply chains at the moment is not so big yet. But if this would have continued, then, of course, all sorts of yeah these warehouses would be full. So you can't do this. So that's interesting. Yeah, it means that maybe we had these tariffs for five weeks, four weeks, five weeks, six weeks, depending on which tariffs you look at. And and maybe, um you know, the the disruptions are manageable for the U.S. economy and for the world economy at large.
Trade Policy and Financial Markets
00:04:57
Speaker
But there is an element here, I think, that um the entire episode has injected a lot of uncertainty into trade policy. And and and what what matters here for the business community, of course, is predictability, right? If you start to invest in a large factory, put a billion dollars down to expand your factories, and you don't know whether the rules of the game might shift very quickly,
00:05:21
Speaker
then you're more hesitant to to deploy the cash. That's right. But I think there's even something bigger going on because just before Liberation Day, U.S. bond yields, the 10-year benchmark, stood at 3.9%. That's what the U.S. s government was asked to pay.
00:05:37
Speaker
for ah issuing a loan for 10 years. Now it's 4.4%. percent So that's gone up a lot. That's quite a lot, actually. That is not all just inflation, my suspicion is this is exactly what you mentioned.
00:05:51
Speaker
There's a risk element now being attached to the whole decision-making process that that that is involved here. that That could be, right? So uncertainty in itself, um investors don't like uncertainty. And so they always demand a premium, if you will, for extending loans and be it loans to the U.S. government or or otherwise to companies.
00:06:11
Speaker
And so what you might see is higher ah risk premia in financial markets. And and you mentioned U.S. s Treasury market. and It might be for the trade reasons or other reasons that actually the market is demanding now for for time being at least a high risk premium.
00:06:26
Speaker
And that, of course, then impacts also even equities in Asia, right?
Roots of Trade Imbalances
00:06:30
Speaker
That's the U.S. risk premium going up. But why would that impact then how investors in Asia should think about it? Well, everything – to be honest, actually, everything in the world, every financial asset is priced off – that 10-year bond yield.
00:06:45
Speaker
That's the alternative that people look for. what can i i can I can put this 10-year into the government and then, hey, how does that work? And what is the alternative that I have and what additional risk do I take in to ah invest in equities or property or anything like that? So that's a negative. But I also think for Asia, in particular for China, there's a kind of an offsetting effect as well.
00:07:06
Speaker
I think that the tariffs, they get a lot of attention. If they would have combined the policies that they put in place, tariffs, ah with something like that. So on one day you say, we're going to impose these tariffs. And the second day say, we're going to make any company that invests in these particular technologies in the U.S. tax-free or we're going to give all kinds of grants or we set up a research institution, whatever you do.
00:07:28
Speaker
That could have been a very powerful combination. That hasn't happened. And China is increasingly taking yeah ah leadership or is very close to catching up with the US. I think economists would even argue that, yes, there is a trade imbalance between the US and China, no doubt about it. And it's probably not sustainable, at least politically not sustainable. But to fix that, it's not clear that tariffs are necessarily the best tool to do that because the source of the imbalance lies and in respective domestic economies. One consuming too much and the other one producing too Yeah, and and the consumption the U.S. s is is very high, and it's partly because the budget deficit is very high. And in China, it's too low. And so actually, the way to resolve this is not to use tariffs ultimately, but it is to fix the domestic imbalances in in both economies. of But that, of course, entails difficult political decisions. And so you then
00:08:20
Speaker
it's easier to revert back to terrorists um because it's it's easier to sell. But um look, maybe it's- Actually, just to hang, hook onto this very quickly. These imbalances need to over time yeah be rebalanced, but it hasn't hurt the US or China, right? I mean, China has seen reasonably good economic performance and the US s as well.
00:08:42
Speaker
It's done better than, say, Europe or Japan. So it's not that this is an immediate sort of stress, I would think. It's not an economic problem that you have this imbalance at the moment, but there's a political reality.
00:08:56
Speaker
Yeah, that's true. And so you can say imbalances have reached their political constraints before they're reaching their economic constraints. But that political reality is what it is. It is what it is. That's right. That's what you see that come in. That's right.
00:09:09
Speaker
But Harold, maybe this is a good good time to take a break.
Market Reactions and Investor Optimism
00:09:10
Speaker
And when we come back, I want to ask you about the market reaction, and particularly here in Hong Kong, which I find actually striking to what has been very positive news. Maybe the market reaction wasn't all sort of hurrah around Asia as one would have thought.
00:09:34
Speaker
So Harold, before the break, we talked about big picture, about this phenomenal trade deal, and that obviously is a positive element, certainly compared to a few weeks ago. We've really seen, at least for 90 days, a lot of reprieve. Now, many equity markets around the world have taken this initially very well, but the enthusiasm kind of faded very quickly, at least at the time of recording.
00:09:58
Speaker
ah We saw, for example, the Hong Kong market, which is a proxy for China, actually being bit down on the day after the announcement. um Shouldn't investors have been more excited about such a view? Why so is this skepticism suddenly coming back in?
00:10:16
Speaker
So I think there's a couple of reasons for that. First of all, um the market responded very rapidly when the news broke. It was actually in the afternoon here in Hong Kong. And I remember literally seeing it on the screens and watching my Bloomberg screen and the share prices started to to rally within seconds thereafter. Bang, it went up very quickly. So some of it was already priced in. So the day after, yeah, the new reality sets in. Secondly,
00:10:41
Speaker
What we've seen over the last months is that money has left the U.S. and That's that um kind of risk premium that you spoke about. It has left the U.S. and went into other parts of the world, Europe and the emerging markets. But as we now normalize a bit, that that returns. So the dollar has strengthened a bit.
00:10:57
Speaker
That's normally not so good for Asia. So that's that's another effect that is that is in place here. so Those two probably helped out. And we still have 30% tariffs on Chinese products. it's I mean, that's still quite sizable. If we would have and announced was this on Liberation Day, people would have said, well, that's very, very high.
00:11:13
Speaker
It's just that we come from a much higher level now. So these issues probably play a role. Also, global investors are still very underweight.
Impact of Domestic Economy on Chinese Equities
00:11:22
Speaker
But the regional investors, which have really been active in the last couple of weeks, they were already overweight on China. So it's not that they are buying that much more. So that's probably...
00:11:31
Speaker
a third reason that I would throw in there as well. so So actually, so the market reaction has been very quickly kind of faded yeah for for these various reasons you mentioned. um but But as an economist, we are looking more at fundamentals, is that also indicative of the fact that we've maybe made too much of the tariffs, that actually there are all these other underlying factors that matter quite a bit and they haven't been resolved? So yes, it's better, have slightly better news on tariffs, but really the big one for Chinese equities is what happens in a domestic economy. And so that's just, you know, kind of stuff on the side, the terrors. Exactly. And I think we get sometimes too much caught up in the news flow.
00:12:12
Speaker
But... It's the seen and the unseen. it's it It's a quote from a book I've seen once. We look at what we see in front of us, but we also have to look at the stuff that you can't see. So what I mentioned, for example, the absence of a policy in the U.S. to slow down China and these technologies means China can go ahead. But that's not something that's being discussed.
00:12:31
Speaker
And on the margin, I think that's positive for ah for for China. But that that's not something that's being discussed because there's there's no news flow on on this topic. So too much attention probably has gone to to terrorists. But I have the perfect solution here. If the news flow, if people just want a news flow, too much attention to the here and now, they should be listening to the Under the Banyan Tree podcast because there we put Asian markets and economies in context and we really provide the underlying picture, tune out the noise and subscribe to this podcast. Well, that's a wonderful way to finish it off, Fred.
00:13:05
Speaker
Thank you very much for those very wise words. and I hope people would listen to us ah next week again.
Closing and Promotions
00:13:12
Speaker
Well, we're going to have to wrap it up here, folks. Great to have you with us on The Banyan Tree, as always.
00:13:18
Speaker
Yeah, and with those very wise words of you, Fred, you can follow us and get more on this global terrorist story by listening, liking, and subscribing to The Macro Brief, our sister podcast from London.
00:13:29
Speaker
From all of us here in Hong Kong, take care, stay well, and we'll see you again next week.
00:13:58
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.