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Under the Banyan Tree – US, China and more chocolate cake?
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As Presidents Trump and Xi prepare to meet face-to-face in Beijing, Fred and Herald ask Chief China Economist Jing Liu what she'll be looking out for during the summit.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/RqbqnFp
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Transcript
Normalization of US-China Trade
00:00:00
Speaker
There's a lot of room for both sides to normalize the trade. China can buy more soybeans or maybe Boeing airplanes. And from the China perspective, now some of the U.S. tariffs have been removed. Probably direct export to the U.S. can increase.
00:00:26
Speaker
Hello from Hong Kong and welcome to Under the Banyan Tree. I'm Fred Newman, chief Asia economist here at HSBC. And I'm Harold van Linde, head of Asia Equity Strategy. This is the podcast where we put Asian markets and economics in context. And on this week's show, it's the world's top two economies in the limelight.
00:00:44
Speaker
That's right. Presidents Trump and Xi, the leaders of the US and China, are meeting in Beijing. And what could that meeting hold and what can it tell us about the relationship between the two largest economies on the planet?
Significance of US-China Summit
00:00:55
Speaker
We're going to bring in Chief China Economist Ching Liu to help answer those questions in a moment. From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
00:01:14
Speaker
Well, for full disclosure, we're recording this a few days before a major summit between the US and China, between Donald Trump and Xi Jinping. Fred, you as an economist, how how do you look at these sort of big events? Because they're important, but...
00:01:30
Speaker
Again, it's there's not always a lot of news coming out of it either.
Cooling Tensions and Tariff Reductions
00:01:34
Speaker
summits themselves often don't bring a breakthrough in agreements, for example, but they do signify something about the broader relationship. And I think if you take a step back here, you know When Donald Trump got elected, there was an expectation of heightened tensions between you know China and the United States. um But what transpired over the past year actually that the relationship after a few bumps initially actually started to kind of steady out quite a bit. And we saw actually tensions cool bit. And so this summit now is kind of – needs to be seen in that context. you have two leaders who probably are striving towards a fairly – cordial meeting, maybe build some sort of rapport. yeah
00:02:18
Speaker
So that that suggests actually that some of the policy risks around US-China relations have
Impact on Geopolitical Risk and Investments
00:02:25
Speaker
disappeared. For example, a year ago, we talked about, oh, tariffs could go up to 150%, right? Remember famously in April last year, tariffs shot up. But today, actually, we'll look at, you know, yes, there are tariffs that the US imposes on imports from China, but they're not extraordinarily high. China can kind of live with them. That that risk has has receded a little bit. You had other tensions. you know The US famously are around fentanyl, for example, is one of the reasons why they impose tariffs. That has also quietened it down. There's been some cooperation behind the scenes. And so i think broadly, this summit really signifies a stabilization in that relationship. But
00:03:03
Speaker
That's how economist looks at it. But it would be interesting to hear from you because in some ways that also means that the geopolitical risk that you attach to Chinese assets will have gone down. So the way we talk call this is saying that the geopolitical risk premium has declined because the relationship is more stable.
Regular Meetings and Continuous Dialogue
00:03:21
Speaker
Do you see as a result foreign investors being more likely to wade back into the Chinese market because things have stabilized? Well, in the past, we've seen these sort of things. When there was talk about the summit, I'm talking about the last 10 years or so, right? There was talk about summit, or there would be a conversation between the two. Normally, they say in the next three or four months, we will have a conversation, and the market would be respond to that. So, yes, there is a geopolitical risk that comes down. And I i agree with you. Not always are there sort of and announcements coming out of this that change the path of companies that invest or these sort of things. But...
00:03:57
Speaker
We know now that there is communication and it's not just on the presidential level, but also they come with lots of delegates, right? It's on a ministerial level and the trade representatives will talk with each other and maybe also military personnel, they will have a meeting around this sort of summit. So there is more coordination and therefore these risks can go down. That's right. And also I think sometimes it's helpful to know what is being discussed even if there isn't a specific agreement that comes out. But what are they focusing on, right? And here we can already know what has been discussed in the run-up to the summit. We're likely some discussions around tariffs. Some discussions around maybe purchases by China of certain U.S. goods. Think about soybean and these sort of things. But also the availability of rare earths for
Summit Topics: Tariffs, Trade, and Investments
00:04:51
Speaker
the Americans. So that's a point. Some visibility in that. Visibility in that. That's very important. I think rules and regulations come in there. We've seen the last few months a bit more... You know, regulations around supply chain investments, access to buying certain semiconductors. There was a of noise there. That could be a topic.
00:05:10
Speaker
um Investment. but There's always been this recurring theme that China might – increase investment in the United States, or at least the U.S. would like to see that. hasn't really happened yet, but that could be a theme. So so we know we know broadly the areas that that are likely to be discussed, and we might not have a concrete agreement, but certainly something that investors
Investment Discussions and Tension Management
00:05:32
Speaker
will latch on to. Yeah, and what I would suggest is actually that we're getting in Jing, our colleague, in order to talk us actually through these points. Great idea. Let's bring in Jing Liu, our chief China economist.
00:05:51
Speaker
Jing, welcome to the podcast. Yeah, welcome, Jing. Thank you. Now, we have a ah major event coming up. Donald Trump, Xi Jinping are going to meet. What is the single most important thing that you will be looking out for?
00:06:03
Speaker
Well, I think the first thing I will look out for is ah whether there's any indication for future meetings. As a matter of fact, in January, U.S. ambassador to China, Mr. David Perdue, actually said in a Bloomberg interview that President Trump has invited President Xi to visit the U.S. in late August or early September. And also, President If everything goes well, there are two more opportunities. Both presidents can meet. One is the November AIPAC, happened to be in Shenzhen, China.
00:06:40
Speaker
And then there's another opportunity in December. ah The G20 meeting will be in Miami. So, you know, that's a last opportunity. It looks like we're going to have a series of meetings between the two, actually, or at least let's talk about that.
00:06:54
Speaker
Yes, that's more significant one other than one standalone meeting, which means a lot of topics can be discussed between two presidents. just listening to that, four meetings, Sarah, we're very stabilizing influence, right? That means you have regular contact between the leaders, and that means officials will have to prepare the meetings and constant meetings. And also issues you can't agree upon in one meeting, you can push that to the second and the third. So it gives you time to find… I'm actually, you know on ah on a on a side note, I'm particularly hopeful about the G20 meeting in December in Florida, you said, because I remember… The first time President Xi was meeting Mr. Trump in the US, Mr. Trump served a delicious chocolate cake famously and that apparently was received very well by
Potential Trade Deals and Economic Benefits
00:07:45
Speaker
a Chinese leader. Everyone loves chocolate cake. Everybody loves chocolate cake. So the first thing is the confirmation that there will be sort of more meetings taking place. But what else are you looking for in these ah in these meetings? Something on trade perhaps? Yes, indeed, because we see that U.S.-China bilateral trade actually last year seems to be at a a low level. So there's a lot of room for both sides to normalize the trade. For example, they can sign some trade deals, um like China can buy more soybeans or maybe Boeing airplanes and many other stuff from the U.S. Chipsets, yeah.
00:08:22
Speaker
chips, yeah, if there's some breakthrough on that. um And from the ah China perspective, now some of the US tariffs have been removed. Probably the direct export to the US can increase. see Jing, this is just remarkable. See how far we've come in 12 months. Because it was April 1st, famously when the US imposed very high tariffs, not just on mean and China, but because of on many other countries.
00:08:50
Speaker
um At some point, they went above 150%. Yeah, digit. And now suddenly they have dropped. and And you're now saying there's actually prospect potentially for bilateral trade to pick up again after having dropped precipitously. And and that's – to me, Harold, that just signifies how far we've come 12 months on that. And notably, um in the recent round of Paris negotiations, both U.S. and China decided to set up a regular mechanism, board of trade um and also board of investment to discuss. um The idea being instead of wait until escalation and then negotiate to de-escalate, set up a regular dialogue a mechanism such that they can manage the tension from the initial
Challenges in Chinese Investment to the US
00:09:39
Speaker
point. So preempt some of the tension. But you mentioned – mean that's on trade. But you mentioned also border investment. That is something new. Talk a bit more about that. Why do we need a border of investment between mainland China and the United States? Yes, I think um in that announcement, the border of investment also referred to um how the bilateral investment can be improved in the future. We know there's a lot of ah ah foreign direct investment from U.S. to China.
00:10:11
Speaker
But on the opposite direction, probably not enough outbound direct investment from China to the U.S. I think it's probably the most challenging part because we see U.S. has a CFS and you know kind of assessment. This a committee that screens inward investment into the United States. To see
Job Creation and Economic Boost from Chinese Investments
00:10:31
Speaker
what they would like it. So the bureaucratic hurdles are saying to to this investment by yeah mainland Chinese companies into the United States. But it would create jobs, right? It would create yeah investment jobs. And and trump has been President Trump has been very vocal, I think, bringing more investment into the United united States. So you see some path there on this potential. think possibility because we see ah all the deals U.S. negotiated with other economists include this element of investment. And also when we see manufacturing moving to ah you know one location to the other, normally happens with a supply chain. um Like a one manufacturer can bring its suppliers. But its suppliers will come along or want to be close to it so they follow. So big investments can be amplified by many other smaller companies joining as well. Yes.
00:11:22
Speaker
So actually, Jing, you make me feel a little bit better and I'm going to sleep a little bit better as well, Fred, here, because... we As we know, Harold has no trouble sleeping. He's naturally a positive person. Sleep like a baby. But yeah, we see um a continuous dialogue between China and the U.S. s in a constructive way on different fronts, trade investments. So hopefully this is what we're going to get out of this, that this is the first of many more
Positive Impact of Continuous Dialogue
00:11:47
Speaker
meetings. and And that just means that, yeah, they have difference of of opinion on certain things, but at least there's a dialogue and they're talking about this. More interaction, always positive. And I do think particularly between two such large, important economies for the for the world economy.
00:12:05
Speaker
We had periods where there was lack of communication, and I think that you know wasn't wasn't very helpful. And so this is certainly
Podcast Conclusion and Future Episodes
00:12:12
Speaker
an encouraging step. So we'll be watching, Jing, the summits. we'll We'll have you back here on the podcast and not only just checking in on what they're discussing, but also the menu items that they'll have during those summits. So thank you. Thank you thanks for going, Jing. Thank you for having me.
00:12:32
Speaker
And on that note, it's goodbye and thanks for listening. Under the Banyan Tree is an HSBC global investment research podcast. Listen, like and subscribe if you haven't already. We're on Apple, Spotify, YouTube or wherever you get new podcasts.
00:12:45
Speaker
Also be sure to check out our sister podcast, The Macro Brief, for a look at the key topics shaping global financial markets. From all of us here in Hong Kong, take care till the next one. We'll be back again next week.