Transcript
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Neumann, Chief Asia Economist at HSBC.
Speaker: And I'm Harold van der Linde, Head of Asian Equity Strategy.
Speaker: Well, we've been talking a lot lately about China's slowdown.
Speaker: But today we want to broaden out the conversation and ask what impact is it having on other Asian economies or even a wider world?
Speaker: It's a conversation that touches on everything from local equity markets to global goods prices, as well as trade, finance and investment trends.
Speaker: From HSBC Global Research, this is Under the Banyan Tree.
Speaker: A little background context before we begin.
Speaker: Analysts around the world have been cutting growth forecasts for mainland China recently.
Speaker: Here at HSBC we lowered our 2023 estimate to 4.9% year on year from 5.3% previously.
Speaker: We've also lowered our outlook for next year to 4.6% from 4.9%.
Speaker: We won't go into much detail on what caused the slowdown, we've discussed this on various episodes in recent months, but suffice here to say that the post-Covid rebound never really took hold in a way that many had expected.
Speaker: China's property sector is also in a bad way, and so far we've seen little in terms of policy stimulus from Beijing.
Speaker: Fred, is there anything a little bit more nuanced around the recent wave of downgrades?
Speaker: You're right.
Speaker: We've seen quite a few downgrades.
Speaker: And there's two elements to this.
Speaker: One is sort of the cyclical indicators were just weaker than expected.
Speaker: And, of course, everybody shaves the GDP forecast based on these high-frequency indicators like monthly export numbers, for example, which were disappointing.
Speaker: Retail sales, yeah.
Speaker: But there's another element to this, and that is that really analysts have started to reassess the structural outlook for the economy.
Speaker: So one is just a cyclical outlook, which is near term, depending on exports, say.
Speaker: And then there's a structural view on the economy for next few years, and that's come down as well.
Speaker: In fact,
Speaker: You know, we believe that really the structural growth rate has started to decline.
Speaker: We have sort of number four to four and a half percent in mind over time, which is not the end of the world, but certainly much lower than the six percent.
Speaker: That is not unusual for an economy where GDP per capita has risen rapidly over the last decade, right?
Speaker: As you get larger, it's more difficult to continue to grow.
Speaker: It is, yes.
Speaker: And the higher per capita income is, the harder it is to squeeze out further productivity gains.
Speaker: And so that naturally slows the economy.
Speaker: But there's also this stuff going on, like demographics and sort of shift away from housing investment.
Speaker: Debt issues.
Speaker: But then one of the implications then for you, Harold, is that if that's true, that the Chinese structural growth rate is lower,
Speaker: the outlook is lower for now, does that then imply that we need to think differently about equities in China?
Speaker: A little bit of a yes and a little bit of a no, to be extremely frank.
Speaker: The downgrades in the economic outlook make people worried about growth for companies.
Speaker: For obvious reasons, they are part of that economy.
Speaker: That is absolutely correct.
Speaker: However, I also think that very often the impact of GDP growth on earnings in China is overstated.
Speaker: If you do a bit of statistical analysis, you find that it's only about one-fifth of the earnings growth that can be explained.
Speaker: by economic growth.
Speaker: There's many other factors at play as well.
Speaker: Think about market share gains, think about pricing power, branding, therefore the ability to set margins.
Speaker: Think about tax implications, think about interest payments you need to make.
Speaker: There's many other things that are at play as well.
Speaker: We need to take that into consideration.
Speaker: And what we see is that they actually are relatively positive at the moment.
Speaker: So, yes, the GDP downgrades have come through.
Speaker: Now, if you look at earnings growth, for example, in China, about two or three months ago, consensus was looking for about 23%.
Speaker: At the moment, that is lower, but it's 19%.
Speaker: That's not that much lower.
Speaker: And what that suggests is that, yes, the earnings growth expectations and equities have also come off, but not as much as what we've seen on the economic front.
Speaker: That's because all the other factors are of importance.
Speaker: And it's very important for us to understand that market share gains and margin expansion.
Speaker: But having set the stage, I really would like to go a little bit deeper on what the impact is on the rest of the region.
Speaker: How do you think about that slowdown that we see in China?
Speaker: What are the channels and how that impacts the rest of the Asian region?
Speaker: Enormous implications.
Speaker: Keep in mind that in the 2000s, China contributed 10% to global growth.
Speaker: Then over the 2010s, it was about 35% of global growth was driven by China.
Speaker: And so now if China slows down, of course, that has enormous implications on global growth, including on Asia.
Speaker: And there are a number of channels we can think of, three channels in particular, through which a slowing Chinese economy impacts the rest of the region and the world at large.
Speaker: And one key one and very obvious one is of course import demand.
Speaker: And one sector that is very important for foreign or other economies is Chinese construction.
Speaker: That is a very high linkage to the rest of the world through commodity demand,
Speaker: elevators that you put in buildings, through construction machinery, etc.
Speaker: And that has the highest transmission, as we would call it, from Chinese growth to the rest of the world.
Speaker: And on average in Asia, about 0.7% of the average Asian economy is
Speaker: accounted for by Chinese construction.
Speaker: That is, if you take the average Asian economy, 0.7% of that economy is dependent on Chinese construction.
Speaker: Now, that slows down.
Speaker: That clearly has a major impact on growth.
Speaker: So there's a growth impact because of slowing Chinese import demand.
Speaker: And that's a considerable effect and probably knock off about a quarter percentage point off of GDP growth in other Asian economies.
Speaker: That's quite considerable.
Speaker: But then for you, Riemann, on the equity side, do you see equity markets in the rest of the region trading really in response to Chinese news?
Speaker: Is the Chinese growth cycle important if you think about Indian equities or Korean equities, or does it depend on the economy?
Speaker: It's slightly different than it was a couple of years ago.
Speaker: A couple of years ago, you would say, yes, China slows, import demand is weaker.
Speaker: That is really bad for the countries that export a lot of that.
Speaker: So some of the, for example, Indonesia is a major exporter of all sorts of basic materials and commodities to China.
Speaker: Of course, the Australians are well.
Speaker: But then, of course, there are new stories emerging as well.
Speaker: Indonesia is maybe a nice example here because they sell nickel and the battery companies need that.
Speaker: So there's now a new import sort of channel being established there that offsets the weakness there.
Speaker: So the numbers that you just mentioned are very often in a kind of everything else equal status, right?
Speaker: If nothing else changes and we only change this, this is how this economy change.
Speaker: But we see that you see a shift in these equity markets in terms of how they benefit people.
Speaker: from this.
Speaker: That is not just Indonesia.
Speaker: Think about, for example, Korea as well.
Speaker: They get import, it's actually really tourists that travel there.
Speaker: So that has been disappointing.
Speaker: But on the other hand, they have AI and other themes that offset that to a large extent, and they export that then to China.
Speaker: Now, import demand is one of these channels.
Speaker: There must be other channels as well.
Speaker: One of them would be maybe a financial channel, right?
Speaker: Financial channel is one, but really the second big channel we tend to think about when we rank these channels in importance as well is actually the export channel.
Speaker: So China exporting to China, exporting the rest of the world.
Speaker: And it's a bit counterintuitive.
Speaker: But think of it this way, because China's economy is slowing, there's a lot of excess capacity in China.
Speaker: The currency is weakened, and that makes many Chinese exporters more price competitive.
Speaker: That's good for consumers globally because they can buy goods more cheaply.
Speaker: But of course, if you compete with China, then you have to match their price competitiveness.
Speaker: And that could squeeze the margin of exporters elsewhere in Asia, say Vietnam or Korea, for example, that compete directly on certain categories with Chinese exporters.
Speaker: And so
Speaker: There is a disinflationary impulse from weaker Chinese demand through the export channel as well.
Speaker: And there is sort of a sense that we might be looking at global goods price disinflation coming through.
Speaker: Anyways, because after the pandemic, people buying fewer goods.
Speaker: But on top of this, weaker Chinese demand and more Chinese exports are actually amplifying this disinflation in goods prices.
Speaker: Now, if you think about the implications potentially for equity markets, do you see evidence of companies suffering margin squeeze ex-exported?
Speaker: Would you say, well, a Korean exporter might be facing that pressure?
Speaker: Or is that really just too broad a statement if you look at these equity markets?
Speaker: I think that's a very broad statement indeed.
Speaker: A lot of companies are specialized in certain areas, so they are not necessarily impacted directly.
Speaker: But we do see, for example, in many industries from shipbuilding, the car industry, Chinese exports of electric vehicles, a nice example, where the Chinese are really emerging.
Speaker: And we haven't seen a good response always from either Western or Asian producers of similar goods.
Speaker: What we also see, for example, in China internet is that some of the Chinese internet giants are really going into Southeast Asia and trying to build up businesses there because these are large countries, large economies that would really make a difference to their overall profitability as well.
Speaker: But they struggle sometimes.
Speaker: Sometimes they do very well and sometimes they struggle.
Speaker: So again, you come into the idiosyncrasies of how these business models work and what the access of these companies is.
Speaker: Some of these companies are now being banned from having exposure in, for example, Southeast Asia.
Speaker: Indonesia, for example, has banned some of the Chinese and American social media companies to give maybe to a certain extent an advantage to local ground players.
Speaker: So there's many other factors that play a role in this story as well.
Speaker: The third channel, Fred, is the financial channel, right?
Speaker: Yeah, we talked about the import channel, China demanding fewer goods.
Speaker: We talked about the export channel, China becoming more competitive in this cost space.
Speaker: And the third channel is the financial channel.
Speaker: And this is not often well understood because generally we think of...
Speaker: the mainland Chinese financial system is being very much closed off from the rest of the world, not as integrated with the rest of the world.
Speaker: And so then analysts attempted to say there is fewer financial spillovers to the rest of the world.
Speaker: But because China is so large, one third of global GDP growth being driven by China, if that slows down, then it has implications for global financial markets in terms of risk appetite.
Speaker: And so the Federal Reserve has done a very, very in-depth study on this, for example, looking at really how China's changes in Chinese GDP growth impact risk appetite in the global financial system, in equity markets and bank lending in terms of how currencies move.
Speaker: And there is an impact, which is understandable, because if you have the Chinese economy slowing down, well then, for example, growth elsewhere in the world slows down and makes banks perhaps somewhat more cautious in lending money, there's less liquidity.
Speaker: And that impact is not negligible, but, and this is where the Federal Reserve paper is quite interesting, it suggested that impact on the financial channel takes about 16 to 18 months to really show up.
Speaker: And so it might be that going into next year, we see the full impact of that financial channel really developed, where you might see higher risk premium inequities, for example.
Speaker: You might see higher bond spreads.
Speaker: You might see some impact on global financial markets.
Speaker: Now, of course, this is all else equal.
Speaker: In reality, of course, markets trade differently.
Speaker: But that's just interesting to go through that thought exercise that that channel is there.
Speaker: That is interesting because you're right, we've seen shifts in risk appetites, in particular by foreign investors, but in the context of all things not being equal.
Speaker: We've also seen new flows emerge in Asia, so the retail investors become much more important and their risk appetite, in particular to their own stock markets and the mid and small caps in those markets tend to be very different.
Speaker: They're much more willing to go there.
Speaker: In addition to that as well, that a lot of the listed financial companies, at least in India and Indonesia, for example, their balance sheets are really strong.
Speaker: So they can deal with any negative consequences that come from a slowdown of Chinese growth quite well.
Speaker: Asia is well weathered in that regard, I would say.
Speaker: So all of this means we can't just shrug off weaker Chinese growth.
Speaker: It's not, of course, the end of the world.
Speaker: Around 4% GDP growth plus is still respectable for a second largest economy in the world.
Speaker: But it does mean there's an adjustment process underway, not just for mainland China, but really for the rest of the region and the world.
Speaker: And it's sort of at least worth thinking through the channels.
Speaker: It's not just imports that matter, it's the exports that matter, and it's, of course, the financial channel as well.
Speaker: How it reshapes the regions.
Speaker: I'm sure we'll be going back to this particular topic of how China influences, impacts the world economy many, many more times.
Speaker: So Harold, the talk of the week really at Global Research HSBC in Hong Kong is that we moved office and specifically we moved towards a new office configuration where we have hot desks now.
Speaker: We've no longer singly assigned desks, but we actually have a rotating system where people can choose their desk when they come in in the morning.
Speaker: How has the experience been for you?
Speaker: Well, it's been quite an interesting experience, actually.
Speaker: First of all, on the day that we moved, on the Monday where everybody was out-disking, it looked like everybody was in the office just to make sure that they could participate in the game somehow.
Speaker: But then by day two, by the way, we suddenly had 11 desks that were empty.
Speaker: So it was really just the first 24 hours.
Speaker: And I made initially in the first week a concerted effort to really go and sit every day on a different spot on the floor.
Speaker: It has an advantage that you actually meet different people that you don't always talk too often with.
Speaker: So I actually really enjoy that.
Speaker: It also has a disadvantage because somebody felt on day two that I had taken his seat.
Speaker: I think different people have to go through a different kind of realization process of who can sit where.
Speaker: And there seems to be sort of unwritten rules as well whereby people say, well, you know, we can't sit there because that's for the senior people or stuff like that.
Speaker: These rules are never written.
Speaker: They've never been expressed.
Speaker: There seems to be all kinds of rules that come out of this hot-desking experience that we need to learn with.
Speaker: What's your experience been so far?
Speaker: Well, it's actually been relatively smooth.
Speaker: And yes, there's always an adjustment.
Speaker: But for me, the biggest adjustment was somewhat unexpected because we moved to a new floor.
Speaker: And beneath our new floor, there is a lounge.
Speaker: And at 4.30 p.m., they turn up the music.
Speaker: And so I find myself...
Speaker: about from 4.30 p.m.
Speaker: onwards, you know, sitting in a Buddha bar type of setting, which is quite entertaining, but also it's not necessarily always conducive to live calls with clients because they might wonder where you're actually sitting.
Speaker: Yeah, exactly.
Speaker: And you have to almost feel like you have to explain it to them that you're not actually sitting in a bar, but actually standing in the office.
Speaker: But also it's sometimes, you know, getting out of your comfort zone with these things, you know, reshuffling things.
Speaker: also helps.
Speaker: I realized that perhaps the documents I kept hidden in my locker for 15 years aren't quite up to date yet since it was a travel much more lightly nowadays.
Speaker: Yeah, that's right.
Speaker: So China might be slowing.
Speaker: There are tremendous changes taking place across the Asian region, but really the difficulty that we grappled with was where can we sit and work on a particular day with hot desking.
Speaker: And I say I really enjoy the new experience so far.
Speaker: It comes down to the small things, Harold.
Speaker: It's all about that.
Speaker: That's right.
Speaker: Well, everybody, we may no longer know where we're sitting day to day in the office.
Speaker: But what we do know is the two of us will be sitting right here next week, bringing you another edition of Under the Banyan Tree.
Speaker: Thank you very much for joining us as always.
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Speaker: We'll be back next week putting Asian markets and economics in context right here on the Banyan Tree.
Speaker: Talk to you then.
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Speaker: We hope you enjoyed the discussion.
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