Transcript
Speaker: Hello and welcome to Under the Menia Tree. I'm Harold van der Linde, Head of Asian Equity Strategy back in Hong Kong, little an hour ago. It's Wednesday evening when we record this and many of us have spent the last two days in Shenzhen at the 2026 HSBC China Conference.
Speaker: We had panels, we had meetings and of course a lot of client conversations at the Global Investment Research Analyst Cafe. Fred actually isn't able to join me today. He's actually still there in Shenzhen, but I'm happy to welcome Asia Managing Editor Jake Lee to the podcast. Jake has also spent the last couple of days in Shenzhen and has helped me put a note together on our key takeaways from the conference.
Speaker: That's what today's podcast is all about. So let's get to it. From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
Speaker: Jake, welcome to the podcast. Thanks for having me, Harold. Long-time listener, first-time caller. Yeah, that's right. This is your inaugural session at the at under the Banyan Tree. um Jake and I actually travel together on our way back, just got back here into ah into Hong Kong. And actually, it's quite nice. I mean, you have a China travel card as well, right? I mean, it could not be easier with these snazzy China travel cards. It's such an improvement from, you know... It's basically going like you go into the subway. So you cross the border so so quickly. I believe it all works on on the Chinese side on face recognition as well. So if you even if you forget your passport and your travel card, you can still get in and out because it will recognize you.
Speaker: That's right. And then on the Hong Kong side, as we just witnessed, you don't even have to get out the car. They do it all. yeah And then, which is also maybe interesting before we talk about the conference, you go over a bridge because we went through Shenzhen Bay. There's, of course, different areas where you can get into Hong Kong. And that's not far away where the Lodermatropolis is being erected. And we actually saw some building projects here and there in in the distance, right? we so We saw a lot of building. yeah It's coming up fast. There's already...
Speaker: Yeah, there was a whole building that looked like some university research unit or something like that. Yeah. yeah ah Parking lots I saw were being constructed. So, yeah, so that's happening as well because we spoke about this under the banyan tree not long ago last week, if I'm not mistaken.
Speaker: So just maybe let me cast a little bit of a picture for for the listener at at a conference here. It's basically in a hotel and they have a large ballroom. And in the ballroom, there are big presentations where there's hundreds of people sit And normally big issues are being discussed. The central bank is there or maybe some minister or some academics talking about what's the direction of China what they're going to do with interest rate policies, and these sort of things. And then next to it, there are is a smaller cafe, as I mentioned earlier on, where there's tables with all the analysts there. And we have conversations with clients who just want to talk about, say, Asian equities or India, China, or whatever they are interested in. And that's where I spent most of my time ah because I had a whole bunch of meetings in the Amnesty Cafe. I didn't join the panels in the ballroom. But you were there, right? Yeah, you actually had to go and do some work. I had the easier job of actually sitting in on the panels. And they were, as always, fascinating. But, I mean, the tone started off right from the very beginning with this idea that deflation is still hovering over China. But the good news and the first speaker and many others said, look, China's starting to come out of deflation. ok And that's important yeah because if you come out of deflation, then you get consumption starting to go up. And you've written lots about this, Harold. Absolutely. And I think you can imagine why this would take place. Because if I think that a TV is cheaper next week, one I'm going to not buy now because I want to buy it next week. And next week, I think it's going to be cheaper next month. So I'm going to wait and usually delay consumption.
Speaker: But if you think the prices go up, it's the reverse, of course. You say, let's buy now. Otherwise, next month it will be more expensive. So this can have a real big impact. And I think we need some more policy stimulus to get that done probably. That's what the economists got excited about. What they heard was, look, if we're coming out of deflation, that means probably more supportive policies. We're already supportive, but...
Speaker: The signal seems to be there might be more down the road. Yeah, I think the market is still saying, well, let's wait and see first because, to be honest, the consumer stocks are not rallying in China. There's not a lot of interest in that particular sector because, yeah, growth is still very, very weak. You can imagine if you're a consumer company but your prices come down and people don't want to buy it, then your sales are not really good. so Yeah, so the profit growth in that particular sector still remains a problem. There are some interesting companies that can benefit from, this is an interesting story actually I heard from the the consumer analyst. In the past it was all about the people said, well, we can buy stuff in the stores, but I want to buy it online now. and So online was was winning over offline, but now in snacks, it's the other way around. People want to go to funky stores that look odd and have different snacks and they want to go and pick them themselves. so
Speaker: There's this trend, so there are these companies who do okay in consumer, but yeah, that's a sort of a specialized story, right? Some colleagues even took me to a lovely local Szechuan restaurant. ah Lovely food. The restaurant was empty.
Speaker: Now, I thought that was a big red flag, but what they said was, actually, that just means everybody's ordering the food to take it away. So so the restaurant has got a good business in the sense, but as long as it's online. Yeah. Yeah, good food. Actually, I unfortunately was not able to join that particular. it was a lunch, right? It was a lunch in Sichuan and it was spicy. yeah So I just had sandwiches, so not so exciting actually.
Speaker: um So the deflation is a key story. Let's see how that's going to develop into next year. What other stories came out of out of it? Well, I don't think you can talk about China without talking about trade. It's in the headlines all the time. um But one of the big messages I thought was move beyond the headlines and actually China is staying nimble. It's navigating the tariffs and There's different measures of this, but they're saying trade to the US is actually holding up okay. It's down, but it's not as bad as you think it is. And look, we've got to talk about Europe. China is really exporting quite a lot there. And that's quite an interesting development. now um So at the conference, they had the latest sort of car. One of my colleagues ah took that. And it's literally a sort of SUV. But if you get in, one of the configurations is that the front two chairs can actually flip. So it's a sort of a kind of a living room. So with the four of you can talk and you can eat or you can do whatever you want to do. um And yeah, that car then drives itself around. So my colleague was completely blown away with it. I actually sent a video to my dad and said, this you can get in China for 40,000 euros. And he was like, hands up, like, okay, I'd love to sign up for that. And is, of course, why they're so successful. Because of the intense competition that we had in China, these companies had to be super client-focused and competitive and therefore also doing so well in export markets. Absolutely, being sold domestically but exported. yeah But we also heard not just hard goods but services as well doing doing quite well overseas for China. So really racking up some some good numbers, even as growth, what we heard, was quite muted still at home overall. Yeah, so overall growth domestically, that's the consumption story you spoke about, is still muted, but the export numbers are good services as well. But to be honest, actually, Europe is also a big service exporter into into China, selling all sorts of particular specialized services and these sort of things. So it's it's not that Europe is losing out here. It's just a very complex sort of balance of trades picture that emerges here. um There was also some talk about debt, right?
Speaker: There was some talk about debt. And here, one speaker in particular emphasized how, look, US has got a lot of debt, but so has China. But the slightly worrying sign for China is how fast it's rising. It's rising... um Faster than in the US? Faster than the US and faster than most other or a lot of other markets. And that's something we need to keep a close eye on because it limits the room for any extra fiscal spending. And that can really lead to problems down the road. Yeah. And they pointed also to say, well, where's all this money going? And they said, look, it's going in investment, but it really needs to go in proper productive investment. And we need to see more of that in China.
Speaker: um Jake, let's take a quick break here. And then I'd like to come back and talk about AI, because that was a big topic on the conference. And the question is, of course, is that the big productive investment?
Speaker: Well, Jake, if we talk about China and Shenzhen and ah investments, we have to talk about AI. And actually, one I think one of the particularly interesting features at the conference were that there were startup companies, so companies that are not really looking to raise money on the stock market yet. They're just growing with all sorts of AI ideas. So people could visit these sort of new emerging companies on the conference as well. Really, really, really interesting. But did you pick up anything about, must have been talking plenary room about AI as well? Well, firstly, no China conference is possible today without dancing robots. And we had that, and that's all powered by AI. But more seriously, that's what economists describe as the K-shaped economy. can you explain that? Yeah, sure. So if you think of the K, and it's got an arrow going up and a sort of yeah arrow going down going down, the thing going up, that's AI. And for China, that's going gangbusters. It's having a great time during this Absolutely. If I look at just the earnings growth in China from companies, overall earnings growth is about, to say, 12, 13 percent or so. But AI hardware, that's 90, 90 percent. But it's just a small portion of the overall market. So that's the the K going up.
Speaker: And people seem very positive that this story is going to continue. yeah it's It's chips, it's other bits of hardware, it's services around that. It's adoption as well, the adoption of these models by companies and implementation. That's right. And on a serious point about robots, it's probably humanoid robots around the corner as well. China's leading leading the world in all that. yeah So people were excited about that. And they felt that it sort of compensates for the down-shaped arrow of of the cave, which is the consumption. that's the consumption story we just spoke about, right? Yeah. No, that's right. But all this must have been something you were talking about in your meetings, Harold. Yeah, in all the meetings we had, this came up.
Speaker: And very often more in a regional sort of context. But the the tone of the investors is slightly, it's changed a bit. From the AI is the best thing ever since sliced bread, and you have to be in Korea, that was the first story of the first half of year. What we've seen in July is that the Korean market came off quite a lot. um About, say, 40% at one particular point in time.
Speaker: And now the question is, Is this really a good story? So people are reassessing this. And is there too much capacity being built? And this is not just in the US. Globally, we're building about a trillion dollars in in data centers. But also, are we not making too many chips in in Asia?
Speaker: The short answer is probably not yet, but this could become an issue, but maybe not until early 2028, late 2027. But you see that people are thinking a bit about that. um And that also impacts flows in the market. What we've seen is that in July, as i said, the Korean market has come down. Money's been taken out. It actually went back into the U.S. partially.
Speaker: But also we've seen a rotation whereby people said, let's go into maybe other markets, not just everything in in Korea. There's a growing interest in Japan. We talked a lot about Japan, but also China, actually. So money is coming back into China. And then then the question is, where do you want to be? And this is a case-shaped sort of story for us in equities as well. So NIA is a great story, but it's a lot more than that. it's ah' Yeah, exactly. It's easy to make it a real good story, but hey, are we going to make money out of it? Are we not investing too much? Who is going to make that money? And will that then be paid out in difference to me as a shareholder? And those are some of the questions that people try to ask in in Asian equities, global equities, and in China equities, of course, as well.
Speaker: Well, Jake, thanks a lot for joining us. And that's a wrap up on the 2026 China Conference, as well as this particular episode of Under the Banyan Tree. Thanks for listening. And do listen, like and subscribe. You know the drill by now. Under the Banyan Tree is an HSBC Global Investment Research Production. And our producer sitting here in the room, very quiet, is Graham Mackay.
Speaker: From all of us in Hong Kong, take care. Till next week.
