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: Hello from Hong Kong, I'm Fred Newman.
Speaker: And I'm Harold van der Linde, and you're listening to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: On today's show, a late appearance by my co-host gives rise to an interesting conversation on the macro picture in mainland China and beyond.
Speaker: Indeed, it's amazing what a little trip to the dentist can do for podcast inspiration and, of course, for your teeth as well.
Speaker: Let's get the conversation started right here on the Banyan Tree.
Speaker: So Harold, here we are again.
Speaker: I'm waiting for you in the studio.
Speaker: You finally arrived late as always.
Speaker: Where were you?
Speaker: Well, I'd love to say I had a long lunch, but that wasn't really the case.
Speaker: My wife decided to go for a dental treatment in Shenzhen, just across the border with a friend.
Speaker: A friend cancelled on the last moment.
Speaker: So she said, you've got to bring me there.
Speaker: So there we went this morning, actually this early afternoon.
Speaker: Off to Shenzhen with my new China travel card, straight through the immigration, very fast, to the dentist.
Speaker: Wait, wait.
Speaker: How long did it take you from downtown Hong Kong in the office?
Speaker: Because I saw you this morning.
Speaker: I was in the office, yeah.
Speaker: To the dentist across the border.
Speaker: And the dentist is seven subway stops away from the border.
Speaker: It took me about maybe just less than an hour, but say...
Speaker: Let's say an hour.
Speaker: An hour, okay.
Speaker: And so what you said in the dentist's office, but why would you go for, why would you travel for an hour?
Speaker: We've great dentists here in Hong Kong.
Speaker: We've got fantastic dentists here in Hong Kong.
Speaker: However, my wife's friend said, if you go to mainland China, it's so much more affordable.
Speaker: So let's give it a shot.
Speaker: So she just wanted to figure it out.
Speaker: So there we went.
Speaker: Funny enough, she needed a crown.
Speaker: So she already went there, I think, 10 days ago.
Speaker: So she had an appointment, right?
Speaker: So...
Speaker: We go there, she goes for the crown, and the dentist comes over to me and says, listen, while you're waiting, I can clean your teeth.
Speaker: He did so, he says, no, all in good condition, but there's a small thing.
Speaker: Maybe we should repair that a little bit.
Speaker: Can I do that?
Speaker: You got 20 minutes?
Speaker: So, yeah, that's fine.
Speaker: Fred can wait.
Speaker: So I did that.
Speaker: The cleaning is like... Wait, wait, wait.
Speaker: The point of this whole story is that I was waiting here in the studio for an hour and a half because you could get your teeth cleaned.
Speaker: Well, I had to wait for my wife anyway, so that's my excuse here, right?
Speaker: Okay.
Speaker: But...
Speaker: Then the bill came and it's about 20% of what you would pay in Hong Kong.
Speaker: And it was good.
Speaker: I mean, the services were good.
Speaker: It was all fast and streamlined, very friendly.
Speaker: The equipment, fantastic.
Speaker: The guy came from Zuhai and studied in Beijing.
Speaker: So there is a broader point to this story.
Speaker: I was wondering where you go with this.
Speaker: So here is a real-life example of many Hong Kongers really going across the border to mainland China.
Speaker: It's really about an hour from here.
Speaker: You can take the subway.
Speaker: And they're going there because they're getting their headspace.
Speaker: They're getting a dental treatment.
Speaker: Foot massages, dinners, anything.
Speaker: They're getting tennis lessons.
Speaker: Yeah, seeing doctors.
Speaker: So there is actually, with the further integration of the greater Bay Area, there is now actually a lot of people who go really north and consume goods there.
Speaker: Yeah, I mean, the good news is that it's very easy to get across the border.
Speaker: But, I mean, hundreds of thousands of people must be crossing it every day.
Speaker: I mean, what I just saw is just thousands of people just walking their rights.
Speaker: So there's a lot going on on that front.
Speaker: Now, we should look at this a little bit from the economics perspective.
Speaker: So that means that for the price level in mainland China is much lower than it is in Hong Kong.
Speaker: That was always the case.
Speaker: But, of course, if you make it easier for people to go across the border with electronic kind of ID detections, we just walk through basically.
Speaker: Well, prices, not sure Chinese price will equalize to Hong Kong, but there's certainly a draw there.
Speaker: One of the questions is, why are prices so low in mainland China?
Speaker: Surely it has to do something with weak demand in China?
Speaker: So I think weak demand in mainland China is one issue.
Speaker: But of course, we have oversupply as well.
Speaker: Now, I do not know the number of dentists, but given the amount of time that he spent with me, it seems like he was happy to have business.
Speaker: So I wouldn't be surprised.
Speaker: I mean, we know in a lot of industries there's oversupply, and that is deflationary.
Speaker: And, of course, some companies can export the products, but for dentists, that's not really the case, right?
Speaker: Well, they import, obviously, gullible patients from Hong Kong.
Speaker: But that's an interesting, then, sort of microcosm because you have, of course...
Speaker: and mainland economy being hugely competitive at the moment.
Speaker: Export prices in the last 24 months have fallen about 17%, which is a lot.
Speaker: Because in many industries, maybe not necessarily dentists or just dentists, but certainly steel, cement, glass, solar panels, there's so much capacity and weak demand at the moment that these companies are exporting goods very cheaply to the rest of the world.
Speaker: And exporting deflation.
Speaker: exporting deflation, and of course that also then raises the risk of trade tensions, right?
Speaker: And we know about the trade tensions with the US, but there's also some trade tensions that could occur with other economies.
Speaker: Other economies, yeah.
Speaker: Korea, for example, just imposed tariffs on... There's a lot of dentists, you mean?
Speaker: No, Korea not on dentists, but on steel plates, actually.
Speaker: So Korea imports a lot of steel plates for shipbuilding,
Speaker: for example, and now they impose tariffs on that because they're saying, look, you know, it's just we can't compete with that.
Speaker: This is also interesting for Hong Kong, right?
Speaker: And I think maybe also for Singapore, for example, because Singapore has got a Malaysian satellite city just across the border that opening up as well.
Speaker: And I wonder if the dynamics there are going to be very similar because
Speaker: It's, of course, not good if you are a dental hygienist, in our example, here in Hong Kong, because some of their business goes to mainland China.
Speaker: So retail, we know in Hong Kong, has struggled.
Speaker: But the funny thing is, at the very high end in Hong Kong, so high-end shopping malls, they're raising prices now.
Speaker: So clearly there's something else going on there that you can't get into.
Speaker: All the sourcing, of course, outside of Hong Kong, some of the consumption needs to happen here.
Speaker: But I think there is clear evidence that for Hong Kong's retail sales, consumer spending, more and more is done, more and more consumers spend in mainland China.
Speaker: And that's, of course, reducing demand for dentists, for hairdressers in Hong Kong.
Speaker: And that's an economic headwind, even if the consumer themselves, of course, benefit through cheaper prices.
Speaker: Yeah.
Speaker: So what we now need to see, we said, well, the prices should equalize.
Speaker: And you're right, that won't happen.
Speaker: Maybe over the very long run, it will happen, right?
Speaker: But I mean, we're talking 20 years or so.
Speaker: What we do need to see in mainland China, though, is because these companies are exporting this product at cost or maybe below cost.
Speaker: That...
Speaker: They're losing money by doing it.
Speaker: And therefore, we need to see industry consolidation.
Speaker: So we have way too many solar panel makers, way too many electric vehicle cars, and maybe way too many dentists.
Speaker: And maybe you can export them, actually.
Speaker: I don't know.
Speaker: Pentists could find a job somewhere else.
Speaker: I don't know how that works.
Speaker: You got my point.
Speaker: You need consolidation in the industry where you have fewer supplies.
Speaker: And we see this.
Speaker: Yeah.
Speaker: In what industries have you seen that consolidation?
Speaker: So because – let me back this up.
Speaker: We're saying weak demand at the moment in mainland China is actually leading to excess capacity.
Speaker: Now, resolving that would require increasing demand –
Speaker: which they're trying to do, but also reducing some of the supply, which would mean consolidation with industries, removing some of the old factories that are producing, but really probably not profitable.
Speaker: But in which sectors do you already see the second happen, that consolidation of capacity?
Speaker: So there's two things now happening.
Speaker: First of all, we see consolidation.
Speaker: I'll give you a few examples.
Speaker: Electric vehicles, solar panels.
Speaker: We see it even in consumer goods.
Speaker: We see it in property, right?
Speaker: I mean, a lot of property developers have gone.
Speaker: We see it in... Have we seen it in cars yet?
Speaker: Because there's a lot of fantastic electric vehicle makers, but we have, what, 60, 70?
Speaker: 60, 70, but in 2019...
Speaker: The top 10 had something like 15% market share, 20% market share.
Speaker: Now the top five have got like 70% or maybe even 80% market share.
Speaker: So they're still around, these other small ones, but their market share is declining.
Speaker: Well, I think statistically they're around because these companies, they're losing money on every car they sell, so they can't go on.
Speaker: They've probably gone to the local governments and said, can you help us out?
Speaker: Because otherwise I have to put 10,000 people on the street.
Speaker: And local government itself has got problems, right?
Speaker: So they've said, sorry, in the past, they helped you out.
Speaker: But now, not anymore.
Speaker: So these companies are still there in the statistics, but they're not doing anything.
Speaker: And this is the second consequence.
Speaker: They're not investing.
Speaker: And if you're not investing and you're a company that just about can break even, you're actually accumulating cash.
Speaker: because there's no investment cash flow anymore.
Speaker: So what do you do?
Speaker: You pay it back.
Speaker: So they're buying back their own shares because they're not investing, because they're not that profitable.
Speaker: No, that's right.
Speaker: And so they don't see a reason to expand capacity.
Speaker: So they're holding back investment and buying back the shares from investors.
Speaker: Yeah, or they pay dividends for shareholders.
Speaker: That's, in effect, the same.
Speaker: Now, one more thing from an economic perspective.
Speaker: This is probably then what needs to happen.
Speaker: It's the beginning, if you will, of a consolidation wave.
Speaker: It could obviously run for quite a long time.
Speaker: Yeah.
Speaker: To reestablish profitability.
Speaker: And that's needed then to essentially to normalize investment, normalize return on capital, and bring China back on the path of sort of sustained growth.
Speaker: It might be lower growth than before, but at least it's more sustainable growth.
Speaker: Yeah, and more sustainable profitability.
Speaker: Technically, the way we think in equities is that if the profit you make is less than it costs to get the money to invest, then it doesn't make sense to make any investments.
Speaker: That's exactly what's happening now.
Speaker: So what you do, you don't invest, you get consolidation, your profitability goes up, and eventually then it starts to make sense to invest again because you have a profitable business.
Speaker: But yeah, this is exactly happening.
Speaker: But these things go over two, three, four, five-year times, depending on the industry.
Speaker: Certain industries consolidate very fast, other ones much longer.
Speaker: The crucial point is we start to see that happen.
Speaker: Yeah.
Speaker: And I think the green shoots of industrial restructuring consolidation happening.
Speaker: Exactly.
Speaker: Yes.
Speaker: And that could well mean that profitability in China over the course of the next two, three, four years.
Speaker: And I know that's a very long time around.
Speaker: could actually improve.
Speaker: It's not something that I'm working on as an assumption, but there are early kind of shoots to say, hey, maybe profitability in China is going to improve.
Speaker: And that means that the valuations you attach to a stock market could higher as well, if this really materializes.
Speaker: So something that we have to keep a very close eye on.
Speaker: But it might also mean that ultimately then the price of dental treatment in Shenzhen will climb as well and it might not necessarily be… I'm going to put all crowns in.
Speaker: You do it quickly.
Speaker: Just take all the teeth out, get new ones in and you're done for the rest of your life.
Speaker: And at a very low price.
Speaker: I want to ask you though, looking at you, would you also consider going to the hairdresser in Shenzhen?
Speaker: Well, you know, Fred, I don't know if you've seen my hairdo, but there's very little to dress over there.
Speaker: So that probably I won't do.
Speaker: Foot massages I might take.
Speaker: But one other interesting thing, by the way, that happens, if profitability improves, that comes against the background of slowing economic growth, because that is what you continue to see, right?
Speaker: So you might have a strange situation in China in the next couple of years whereby...
Speaker: You guys as economists still talk about, well, you know, GDP is going to go from five and maybe go to four and a half.
Speaker: In a couple of years, you're talking about four maybe.
Speaker: And that's the natural progression as economies grow.
Speaker: Well, we will be talking a very completely different story.
Speaker: That would be quite interesting to see how that's going to play out.
Speaker: Yeah, I think that's a reminder that if you say the profit cycle and the economic cycle are not necessarily always perfectly aligned.
Speaker: And we've seen, taking a step back, there was already, I think for several years now, pressure to accelerate what the Chinese call supply-side reform, which is really...
Speaker: reducing excess capacity.
Speaker: But of course, as the economy slows, there was a sort of a reluctance to press ahead with this because it does mean potentially more unemployment, factory closures, particularly in areas particularly hard hit from the property market adjustment.
Speaker: So maybe the supply side adjustment has been proceeding more slowly than one would have liked, but I think it's now we're seeing the first signs of this starting to happen.
Speaker: Absolutely, and I think the policy makers are clearly willing to let this happen.
Speaker: In property, we've clearly seen that they've allowed companies to close down, but also in the end have said, okay, we put a stop to this.
Speaker: They allow steel companies that are state-owned enterprises to consolidate.
Speaker: So clearly there's a much more willingness
Speaker: for them to continue with this process.
Speaker: Well, I think this is a great time to take a quick break.
Speaker: And when we come back, I just want to branch out to the more global trade realm because there are implications for global trade as well with what we discussed.
Speaker: Well, we talked about this idea of excess capacity in China, which is gradually being addressed through supply-side reform, that is factory closures, consolidation, and you mentioned this is already happening.
Speaker: I think there is a global implication here as well, because the key theme in the global economy right now is trade tensions, of course, right?
Speaker: And we know about the trade tension between mainland China and the U.S., but
Speaker: There's also some other trading partners of mainland China suffering through import competition.
Speaker: And so if we kind of see access capacity expand in China, then there would be a protectionist response potentially by these other trading partners.
Speaker: But if we're actually seeing industry consolidation, which means it should raise the price level ultimately,
Speaker: That could also, from China's perspective, ease some of the potential trade tensions with its trading partners.
Speaker: Maybe not with the United States necessarily, but with others.
Speaker: And so there is also a global implication here, which I think is important for China.
Speaker: Yeah, that's a very good point.
Speaker: And you see, of course, for example, in Asia, that response to taking in Chinese capacity, buying Chinese products, you could say, in other countries is very different, right?
Speaker: In India, there's a great reluctance to do so.
Speaker: But in Indonesia, I was there a couple of weeks ago, my brother-in-law sold his cars and bought two Geely and one BUID car.
Speaker: They need three cars in a large family.
Speaker: And it was all subsidized by the local government and effectively by these producers because they sold it in Indonesia at very low prices.
Speaker: Yeah, so what happens in Maine and China has global implications, right?
Speaker: It's just such a large economy that it affects prices everywhere, including the price of dental treatment in Hong Kong, as we just found out.
Speaker: And it's probably going down rather than up with what we told me today.
Speaker: Yes, but you will probably still go to your Hong Kong dentist and I will hop more over the border.
Speaker: I'm very loyal to my Hong Kong dentist, but if I look at you, I see slight... You smile.
Speaker: Yeah, I'm blinded by this smile.
Speaker: Yes, absolutely.
Speaker: So it might be a good idea for you to go there as well.
Speaker: Maybe I should head across the border as well.
Speaker: And do a haircut as well.
Speaker: I could do a haircut.
Speaker: I probably should.
Speaker: And that's all we've got time for on this episode of Under the Banyan Tree.
Speaker: A pleasure as always having you with us.
Speaker: A reminder, our other HSBC research podcast, The Macrobrief, is out every Friday.
Speaker: Do give it a listen.
Speaker: And we're less than two weeks away from the HSBC Global Investment Summit, GIS, here in Hong Kong.
Speaker: The two of us will be taking part in panels and meeting clients and one-on-ones at the Global Research Analyst Cafe.
Speaker: For those of you joining, we look very much forward to seeing you there.
Speaker: We'll be back with another episode next week.
Speaker: All the best till then.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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