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Under the Banyan Tree - It began with a trip to the dentist
127 Plays1 month ago
An unexpected trip to a Shenzhen dentist leads to a wide-ranging chat about the Chinese economy, as Fred and Herald reunite in the Hong Kong studio. Disclaimer: https://www.research.hsbc.com/R/101/X6nBRpV. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:02
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.
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Speaker
Thanks for listening.
00:00:17
Speaker
And now onto today's show.
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Speaker
This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
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Speaker
However you're listening, analyst notifications, disclosures, and disclaimers must be viewed on the link attached to your media player.
Asian Markets and Dental Adventures
00:00:46
Speaker
Hello from Hong Kong, I'm Fred Newman.
00:00:48
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.
00:00:54
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.
00:01:02
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.
00:01:08
Speaker
Let's get the conversation started right here on the Banyan Tree.
00:01:24
Speaker
So Harold, here we are again.
00:01:25
Speaker
I'm waiting for you in the studio.
00:01:27
Speaker
You finally arrived late as always.
00:01:29
Speaker
Where were you?
00:01:30
Speaker
Well, I'd love to say I had a long lunch, but that wasn't really the case.
00:01:34
Speaker
My wife decided to go for a dental treatment in Shenzhen, just across the border with a friend.
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Speaker
A friend cancelled on the last moment.
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So she said, you've got to bring me there.
00:01:43
Speaker
So there we went this morning, actually this early afternoon.
00:01:47
Speaker
Off to Shenzhen with my new China travel card, straight through the immigration, very fast, to the dentist.
00:01:53
Speaker
Wait, wait.
00:01:54
Speaker
How long did it take you from downtown Hong Kong in the office?
00:01:58
Speaker
Because I saw you this morning.
00:01:59
Speaker
I was in the office, yeah.
00:02:00
Speaker
To the dentist across the border.
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Speaker
And the dentist is seven subway stops away from the border.
00:02:07
Speaker
It took me about maybe just less than an hour, but say...
00:02:10
Speaker
Let's say an hour.
00:02:12
Speaker
An hour, okay.
00:02:13
Speaker
And so what you said in the dentist's office, but why would you go for, why would you travel for an hour?
00:02:17
Speaker
We've great dentists here in Hong Kong.
00:02:19
Speaker
We've got fantastic dentists here in Hong Kong.
00:02:21
Speaker
However, my wife's friend said, if you go to mainland China, it's so much more affordable.
00:02:26
Speaker
So let's give it a shot.
00:02:27
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So she just wanted to figure it out.
00:02:30
Speaker
So there we went.
00:02:31
Speaker
Funny enough, she needed a crown.
00:02:32
Speaker
So she already went there, I think, 10 days ago.
00:02:35
Speaker
So she had an appointment, right?
00:02:36
Speaker
So...
00:02:37
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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.
00:02:43
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He did so, he says, no, all in good condition, but there's a small thing.
00:02:46
Speaker
Maybe we should repair that a little bit.
00:02:48
Speaker
Can I do that?
00:02:49
Speaker
You got 20 minutes?
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Speaker
So, yeah, that's fine.
00:02:51
Speaker
Fred can wait.
00:02:52
Speaker
So I did that.
00:02:53
Speaker
The cleaning is like... Wait, wait, wait.
00:02:54
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.
00:03:00
Speaker
Well, I had to wait for my wife anyway, so that's my excuse here, right?
00:03:03
Speaker
Okay.
00:03:03
Speaker
But...
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Speaker
Then the bill came and it's about 20% of what you would pay in Hong Kong.
00:03:10
Speaker
And it was good.
00:03:12
Speaker
I mean, the services were good.
00:03:14
Speaker
It was all fast and streamlined, very friendly.
00:03:17
Speaker
The equipment, fantastic.
00:03:19
Speaker
The guy came from Zuhai and studied in Beijing.
00:03:21
Speaker
So there is a broader point to this story.
Cross-Border Shopping and Economic Impact
00:03:24
Speaker
I was wondering where you go with this.
00:03:25
Speaker
So here is a real-life example of many Hong Kongers really going across the border to mainland China.
00:03:34
Speaker
It's really about an hour from here.
00:03:36
Speaker
You can take the subway.
00:03:38
Speaker
And they're going there because they're getting their headspace.
00:03:40
Speaker
They're getting a dental treatment.
00:03:42
Speaker
Foot massages, dinners, anything.
00:03:43
Speaker
They're getting tennis lessons.
00:03:45
Speaker
Yeah, seeing doctors.
00:03:46
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.
00:03:59
Speaker
Yeah, I mean, the good news is that it's very easy to get across the border.
00:04:03
Speaker
But, I mean, hundreds of thousands of people must be crossing it every day.
00:04:06
Speaker
I mean, what I just saw is just thousands of people just walking their rights.
00:04:10
Speaker
So there's a lot going on on that front.
00:04:13
Speaker
Now, we should look at this a little bit from the economics perspective.
00:04:16
Speaker
So that means that for the price level in mainland China is much lower than it is in Hong Kong.
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Speaker
That was always the case.
00:04:25
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.
00:04:36
Speaker
Well, prices, not sure Chinese price will equalize to Hong Kong, but there's certainly a draw there.
00:04:43
Speaker
One of the questions is, why are prices so low in mainland China?
00:04:48
Speaker
Surely it has to do something with weak demand in China?
00:04:51
Speaker
So I think weak demand in mainland China is one issue.
00:04:55
Speaker
But of course, we have oversupply as well.
00:04:56
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.
00:05:04
Speaker
So I wouldn't be surprised.
00:05:05
Speaker
I mean, we know in a lot of industries there's oversupply, and that is deflationary.
00:05:09
Speaker
And, of course, some companies can export the products, but for dentists, that's not really the case, right?
00:05:15
Speaker
Well, they import, obviously, gullible patients from Hong Kong.
00:05:20
Speaker
But that's an interesting, then, sort of microcosm because you have, of course...
00:05:25
Speaker
and mainland economy being hugely competitive at the moment.
00:05:29
Speaker
Export prices in the last 24 months have fallen about 17%, which is a lot.
00:05:35
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.
Deflation and Trade Tensions
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And exporting deflation.
00:05:54
Speaker
exporting deflation, and of course that also then raises the risk of trade tensions, right?
00:06:00
Speaker
And we know about the trade tensions with the US, but there's also some trade tensions that could occur with other economies.
00:06:08
Speaker
Other economies, yeah.
00:06:09
Speaker
Korea, for example, just imposed tariffs on... There's a lot of dentists, you mean?
00:06:13
Speaker
No, Korea not on dentists, but on steel plates, actually.
00:06:16
Speaker
So Korea imports a lot of steel plates for shipbuilding,
00:06:21
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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.
00:06:28
Speaker
This is also interesting for Hong Kong, right?
00:06:31
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.
00:06:39
Speaker
And I wonder if the dynamics there are going to be very similar because
00:06:42
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.
00:06:50
Speaker
So retail, we know in Hong Kong, has struggled.
00:06:53
Speaker
But the funny thing is, at the very high end in Hong Kong, so high-end shopping malls, they're raising prices now.
00:06:59
Speaker
So clearly there's something else going on there that you can't get into.
00:07:03
Speaker
All the sourcing, of course, outside of Hong Kong, some of the consumption needs to happen here.
00:07:09
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.
00:07:19
Speaker
And that's, of course, reducing demand for dentists, for hairdressers in Hong Kong.
00:07:25
Speaker
And that's an economic headwind, even if the consumer themselves, of course, benefit through cheaper prices.
00:07:31
Speaker
Yeah.
00:07:32
Speaker
So what we now need to see, we said, well, the prices should equalize.
00:07:36
Speaker
And you're right, that won't happen.
00:07:38
Speaker
Maybe over the very long run, it will happen, right?
00:07:39
Speaker
But I mean, we're talking 20 years or so.
00:07:42
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.
00:07:49
Speaker
That...
00:07:50
Speaker
They're losing money by doing it.
00:07:52
Speaker
And therefore, we need to see industry consolidation.
00:07:55
Speaker
So we have way too many solar panel makers, way too many electric vehicle cars, and maybe way too many dentists.
00:08:00
Speaker
And maybe you can export them, actually.
00:08:02
Speaker
I don't know.
00:08:02
Speaker
Pentists could find a job somewhere else.
00:08:04
Speaker
I don't know how that works.
00:08:06
Speaker
You got my point.
00:08:07
Speaker
You need consolidation in the industry where you have fewer supplies.
00:08:10
Speaker
And we see this.
00:08:10
Speaker
Yeah.
00:08:11
Speaker
In what industries have you seen that consolidation?
00:08:14
Speaker
So because – let me back this up.
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Speaker
We're saying weak demand at the moment in mainland China is actually leading to excess capacity.
00:08:23
Speaker
Now, resolving that would require increasing demand –
00:08:27
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.
00:08:40
Speaker
But in which sectors do you already see the second happen, that consolidation of capacity?
00:08:45
Speaker
So there's two things now happening.
00:08:47
Speaker
First of all, we see consolidation.
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Speaker
I'll give you a few examples.
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Speaker
Electric vehicles, solar panels.
00:08:53
Speaker
We see it even in consumer goods.
00:08:55
Speaker
We see it in property, right?
00:08:56
Speaker
I mean, a lot of property developers have gone.
00:09:00
Speaker
We see it in... Have we seen it in cars yet?
00:09:03
Speaker
Because there's a lot of fantastic electric vehicle makers, but we have, what, 60, 70?
00:09:08
Speaker
60, 70, but in 2019...
00:09:13
Speaker
The top 10 had something like 15% market share, 20% market share.
00:09:18
Speaker
Now the top five have got like 70% or maybe even 80% market share.
00:09:22
Speaker
So they're still around, these other small ones, but their market share is declining.
00:09:25
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.
00:09:32
Speaker
They've probably gone to the local governments and said, can you help us out?
00:09:35
Speaker
Because otherwise I have to put 10,000 people on the street.
00:09:37
Speaker
And local government itself has got problems, right?
00:09:39
Speaker
So they've said, sorry, in the past, they helped you out.
00:09:43
Speaker
But now, not anymore.
00:09:44
Speaker
So these companies are still there in the statistics, but they're not doing anything.
00:09:48
Speaker
And this is the second consequence.
00:09:50
Speaker
They're not investing.
00:09:52
Speaker
And if you're not investing and you're a company that just about can break even, you're actually accumulating cash.
00:09:59
Speaker
because there's no investment cash flow anymore.
00:10:01
Speaker
So what do you do?
00:10:02
Speaker
You pay it back.
00:10:03
Speaker
So they're buying back their own shares because they're not investing, because they're not that profitable.
00:10:08
Speaker
No, that's right.
00:10:08
Speaker
And so they don't see a reason to expand capacity.
00:10:10
Speaker
So they're holding back investment and buying back the shares from investors.
00:10:14
Speaker
Yeah, or they pay dividends for shareholders.
00:10:17
Speaker
That's, in effect, the same.
00:10:18
Speaker
Now, one more thing from an economic perspective.
00:10:21
Speaker
This is probably then what needs to happen.
00:10:23
Speaker
It's the beginning, if you will, of a consolidation
Industry Consolidation in China
00:10:26
Speaker
wave.
00:10:26
Speaker
It could obviously run for quite a long time.
00:10:29
Speaker
Yeah.
00:10:29
Speaker
To reestablish profitability.
00:10:33
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.
00:10:44
Speaker
It might be lower growth than before, but at least it's more sustainable growth.
00:10:48
Speaker
Yeah, and more sustainable profitability.
00:10:50
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.
00:10:59
Speaker
That's exactly what's happening now.
00:11:01
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.
00:11:09
Speaker
But yeah, this is exactly happening.
00:11:10
Speaker
But these things go over two, three, four, five-year times, depending on the industry.
00:11:14
Speaker
Certain industries consolidate very fast, other ones much longer.
00:11:18
Speaker
The crucial point is we start to see that happen.
00:11:21
Speaker
Yeah.
00:11:21
Speaker
And I think the green shoots of industrial restructuring consolidation happening.
00:11:26
Speaker
Exactly.
00:11:27
Speaker
Yes.
00:11:27
Speaker
And that could well mean that profitability in China over the course of the next two, three, four years.
00:11:33
Speaker
And I know that's a very long time around.
00:11:35
Speaker
could actually improve.
00:11:36
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.
00:11:44
Speaker
And that means that the valuations you attach to a stock market could higher as well, if this really materializes.
00:11:50
Speaker
So something that we have to keep a very close eye on.
00:11:53
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.
00:12:02
Speaker
You do it quickly.
00:12:03
Speaker
Just take all the teeth out, get new ones in and you're done for the rest of your life.
00:12:08
Speaker
And at a very low price.
00:12:09
Speaker
I want to ask you though, looking at you, would you also consider going to the hairdresser in Shenzhen?
00:12:14
Speaker
Well, you know, Fred, I don't know if you've seen my hairdo, but there's very little to dress over there.
00:12:20
Speaker
So that probably I won't do.
00:12:22
Speaker
Foot massages I might take.
00:12:23
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?
00:12:34
Speaker
So you might have a strange situation in China in the next couple of years whereby...
00:12:38
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.
00:12:43
Speaker
In a couple of years, you're talking about four maybe.
00:12:45
Speaker
And that's the natural progression as economies grow.
00:12:48
Speaker
Well, we will be talking a very completely different story.
00:12:51
Speaker
That would be quite interesting to see how that's going to play out.
00:12:54
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.
00:13:03
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...
00:13:15
Speaker
reducing excess capacity.
00:13:18
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.
00:13:34
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.
00:13:43
Speaker
Absolutely, and I think the policy makers are clearly willing to let this happen.
00:13:48
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.
00:13:56
Speaker
They allow steel companies that are state-owned enterprises to consolidate.
00:14:00
Speaker
So clearly there's a much more willingness
00:14:02
Speaker
for them to continue with this process.
00:14:06
Speaker
Well, I think this is a great time to take a quick break.
00:14:08
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.
00:14:26
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.
00:14:39
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?
00:14:47
Speaker
And we know about the trade tension between mainland China and the U.S., but
00:14:52
Speaker
There's also some other trading partners of mainland China suffering through import competition.
00:14:58
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.
00:15:10
Speaker
But if we're actually seeing industry consolidation, which means it should raise the price level ultimately,
00:15:17
Speaker
That could also, from China's perspective, ease some of the potential trade tensions with its trading partners.
00:15:24
Speaker
Maybe not with the United States necessarily, but with others.
00:15:27
Speaker
And so there is also a global implication here, which I think is important for China.
00:15:32
Speaker
Yeah, that's a very good point.
00:15:34
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?
00:15:44
Speaker
In India, there's a great reluctance to do so.
00:15:47
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.
00:15:54
Speaker
They need three cars in a large family.
00:15:57
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.
00:16:05
Speaker
Yeah, so what happens in Maine and China has global implications, right?
00:16:08
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.
00:16:16
Speaker
And it's probably going down rather than up with what we told me today.
00:16:20
Speaker
Yes, but you will probably still go to your Hong Kong dentist and I will hop more over the border.
00:16:25
Speaker
I'm very loyal to my Hong Kong dentist, but if I look at you, I see slight... You smile.
00:16:30
Speaker
Yeah, I'm blinded by this smile.
00:16:33
Speaker
Yes, absolutely.
00:16:35
Speaker
So it might be a good idea for you to go there as well.
00:16:37
Speaker
Maybe I should head across the border as well.
00:16:39
Speaker
And do a haircut as well.
00:16:41
Speaker
I could do a haircut.
00:16:42
Speaker
I probably should.
00:16:45
Speaker
And that's all we've got time for on this episode of Under the Banyan Tree.
00:16:48
Speaker
A pleasure as always having you with us.
00:16:50
Speaker
A reminder, our other HSBC research podcast, The Macrobrief, is out every Friday.
00:16:55
Speaker
Do give it a listen.
00:16:56
Speaker
And we're less than two weeks away from the HSBC Global Investment Summit, GIS, here in
Closing Remarks and Promotions
00:17:02
Speaker
Hong Kong.
00:17:02
Speaker
The two of us will be taking part in panels and meeting clients and one-on-ones at the Global Research Analyst Cafe.
00:17:09
Speaker
For those of you joining, we look very much forward to seeing you there.
00:17:13
Speaker
We'll be back with another episode next week.
00:17:15
Speaker
All the best till then.
00:17:37
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:17:41
Speaker
We hope you enjoyed the discussion.
00:17:43
Speaker
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