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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van Linde, Head of Asia Equity Strategy at HSBC Global Research.
Speaker: Today we'll be diving a little deeper into the Chinese stimulus measures.
Speaker: A lot of news has come out around that.
Speaker: Beijing has pledged trillions of renminbi to help the economy.
Speaker: But where is that money actually going?
Speaker: What is still to come?
Speaker: We'll also get into the role of local government financing vehicles in all this.
Speaker: They're a really big part of the story right now.
Speaker: My guests today are our economist Jing Liu, our credit specialist Helen Huang, and our property guru Michel Kwok.
Speaker: Let's get the conversation started right here under the banyan tree.
Speaker: So just to set the scene before we kick off, we've had a few announcements from Beijing since the stimulus package was unveiled in September.
Speaker: And the most recent one came on the 8th of November and is worth 12 trillion renminbi, that is 1.6 trillion with a T,
Speaker: US dollars.
Speaker: That's a lot of money.
Speaker: But that money is going in a very specific direction, easing government debt.
Speaker: Let's dig a little deeper into what that actually looks like and what we might see in terms of further stimulus going forward.
Speaker: Jing, let's start with the big picture.
Speaker: We know growth is slowing in China.
Speaker: How is Beijing planning to deal with this?
Speaker: So basically this year, since the second quarter, we start to observe that different kind of economic statistics suggest growth is slowing down.
Speaker: In particular, consumption is no longer as strong as past year.
Speaker: And then at the same time, we still see the pressure from the housing market correction.
Speaker: Local government also seem to face a lot of pressure.
Speaker: So this is at the moment where China...
Speaker: really needs to do something about its growth outlook in terms of stop this deflationary pressure that some people are also quite worried about and also guide the economy towards a more
Speaker: healthy transitional path.
Speaker: Because in the last decade or so, we've seen China invest a lot in, say, subways and all sorts of other infrastructure property.
Speaker: Now, that they want to move away from.
Speaker: There's new areas they want to invest in, like, for example, high-end tech.
Speaker: So isn't that just picking up the kind of the slag?
Speaker: Isn't that going to be the driver of the economy?
Speaker: I think going forward, we have seen basically the investment-driven kind of growth is reaching some limit.
Speaker: You know, there are only so many bridges you can build, and also the housing, arguably, in some cities, some areas, too much supply.
Speaker: So from that perspective, China is looking to transition into the so-called high-quality growth, meaning domestic consumption should account for a sizable share of the economy,
Speaker: as well as the innovation-driven growth, as well as green transition field growth.
Speaker: So that's the direction to go.
Speaker: But at the same time, we need to make sure some old engines, including the housing and traditional infrastructure, they should have a smooth transition as well.
Speaker: Because the problem is that property is a real big part of the economy.
Speaker: That's slowing.
Speaker: And all these new technologies and stuff that they're investing is a small part, so it can't take up the slack, right?
Speaker: But they could go for consumption at some point in time and grow that, right?
Speaker: They are already doing that.
Speaker: We start to see the central government directly supporting consumption, such as those durable goods trading as well as automobile trading programs.
Speaker: Now, there's a lot of talk about LGVs.
Speaker: Now, we've got Helen here as well to talk about this.
Speaker: What is an LGV and how many of them are there?
Speaker: What's the problem here?
Speaker: So basically, LGFV, the full name is Local Government Financing Vehicles.
Speaker: I think some 2,000 have issued bonds, so we have a better idea what they are, what they are doing.
Speaker: Helen will probably go into more details, but according to the bank regulator, there are much more than the bond issuing ones, probably in the magnitude of over 10,000.
Speaker: And how many, what amount of debt is outstanding there, Helen?
Speaker: You've looked at it and looked at all these individual 2,000 projects.
Speaker: How much of that is outstanding?
Speaker: So the outstanding interest-bearing debt of the LJVs is roughly 60 trillion RMB.
Speaker: So that's as of 2023.
Speaker: They are technically corporate.
Speaker: It's just the investment they made has a lot of social well-being implications.
Speaker: Give me an example of an LJV.
Speaker: For example, if local governments want to invest in, say, a subway, but they don't really have the budget to do it, they can ask the local government funding vehicles to invest in that subway.
Speaker: Obviously, when they charge citizens for the subway fee, it's going to be heavily subsidized by the government.
Speaker: But technically, these LGBTs are corporates.
Speaker: And in China's financial statistics, they are also counted as corporates.
Speaker: So there's a company that runs the subways, builds it, costs a lot of money, but the government says you can only charge maybe two RMB for a ticket.
Speaker: That doesn't make commercial sense.
Speaker: It makes sense for the government to do so.
Speaker: Everybody happy, but these companies are losing money.
Speaker: Eventually, they run out of cash.
Speaker: They go to the local government.
Speaker: The government helps them.
Speaker: And now we see that the governments are running into debt.
Speaker: Is that right?
Speaker: Yes.
Speaker: So previously, the way to balance it is through land sales.
Speaker: Local governments, they sell massive amount of land every year, and they use the proceeds to subsidize these infrastructure projects.
Speaker: But land sales, obviously, in China is slowing down massively.
Speaker: So that creates a lot of problems.
Speaker: You have two choices.
Speaker: The first choice is to sell the asset, which is the underlying subway.
Speaker: But nobody wants to buy them because you have the money.
Speaker: In China's context, it's quite hard to do.
Speaker: The other way is to refinance it.
Speaker: You can either refinance it with a loan or a bond.
Speaker: So these are commercial or market-driven refinancing channels.
Speaker: But once that channel is shutting down, then you have to refinance it with, say, a municipal bond.
Speaker: And that's exactly what's going on.
Speaker: So first the company says, okay, we're going to issue some debt to keep running.
Speaker: Eventually they can't do that.
Speaker: They go to the local government.
Speaker: The local government says we sell some land.
Speaker: They can't do it.
Speaker: They borrow.
Speaker: They can't do that.
Speaker: And then what?
Speaker: They can refinance it with Unisable Fund.
Speaker: They say we repay it all.
Speaker: So what has been the announcement from last week then?
Speaker: What happened there?
Speaker: Because there was some talk about $10 trillion kind of refinancing.
Speaker: No, you just mentioned that the total amount is $60 trillion.
Speaker: Can you explain that to me?
Speaker: So this is part of the refinancing program.
Speaker: These are money that if you cannot refinance with municipal bonds, then you have to repay it with cash or refinance it with a bank loan.
Speaker: But you need to be able to find the banks to help you to refinance that loan.
Speaker: So essentially, these expanded swap programs help you to reduce the pressure to find such money in the markets.
Speaker: The government essentially help you to refinance it.
Speaker: So maybe, Jing, why aren't they just going to Beijing and ask Beijing and say, listen, we have a problem.
Speaker: Why don't you just give us some money?
Speaker: And the problem is done.
Speaker: Beijing tells them to go to the banks now.
Speaker: Well, yes and no, because basically for every government around the world, there's this fiscal discipline.
Speaker: The central government needs to make sure local governments don't build too many things which don't have actual use.
Speaker: And at the same time, they should provide enough support to the economy.
Speaker: And that cash comes actually from the banks at the moment.
Speaker: The banks will subscribe to these new bonds.
Speaker: Or whoever wants to.
Speaker: But it's not that the Beijing government is saying we paid, we subscribe to that.
Speaker: No, it's a capital market.
Speaker: You know, whoever wants to do most of that, I think.
Speaker: I think 80 or 90 percent of commercial banks.
Speaker: Yes, 80 percent of the municipal bonds are bought by Chinese commercial banks.
Speaker: And the point I want to make is that banks are willing to buy them.
Speaker: These are highly solid, solid after high quality assets.
Speaker: Because there's a lot of cash in the banks from the households who are not investing in property.
Speaker: They're not investing in the stock market.
Speaker: They put everything in the banks.
Speaker: The banks say, okay, we give it to the local governments.
Speaker: And that's good for them because that's a lower risk profile than actually financing that subway operator who's probably going to go out of business anyway, right?
Speaker: Exactly.
Speaker: So it's a big kind of reallocation of money from people's cash to the banks, to the local governments at the moment.
Speaker: Exactly.
Speaker: So that's our study as well, that banks' deposits have been growing really fast in recent years, and banks need assets, and local government bonds is one of the high-quality assets that they can buy.
Speaker: Okay.
Speaker: And this allows, for example, the local governments to also pay salaries again, because there was some talk that some of them couldn't even pay salaries anymore, right?
Speaker: So people get money again.
Speaker: So it allows the blood to flow, you could say, in the system.
Speaker: Yeah, that's fair to say.
Speaker: And in some cases, probably the local governments actually use the money to settle arrears.
Speaker: A lot of their contractors cannot get paid before.
Speaker: Yet now they get paid and the payment can actually go down the line.
Speaker: The contractor can pay their own suppliers, pay off the banks and so on and so forth.
Speaker: Good.
Speaker: Now,
Speaker: I want to take a break here.
Speaker: We understand the problem a little bit here.
Speaker: Also, I know, Jing, you got to run.
Speaker: So I want to continue the conversation after the break with Helen.
Speaker: And we're bringing in Michel, our property expert, to see what the implications are for the overall economy.
Speaker: But we're also deeper into what this means, for example, for the buyers of property in China.
Speaker: So here we are with Helen, who's a credit specialist, so she looks at bond market in China and Michelle just came in because we also want to talk about what the implications are for the property market in China.
Speaker: But first of all, we saw this announcement.
Speaker: It seems the market was a bit kind of disappointed with it.
Speaker: The market was down on the day after.
Speaker: So the expectations were that maybe a little bit more was going to be announced, I guess.
Speaker: So let's talk a bit about capital market performance, Harold.
Speaker: Clearly, stocks have actually reset the valuation ahead of the meeting, whereby there is a lot of expectation in terms of what sort of policies could come out, in terms of what they can do to resolve the debt issues.
Speaker: Yeah, they rallied a lot, right, these stocks.
Speaker: That's right.
Speaker: I think China is the best performing major stock market in Asia this year.
Speaker: It's up 25, 30 percent almost.
Speaker: Exactly.
Speaker: But there is also the real estate component and there is also the consumption component.
Speaker: So if you were to be greedy, give me everything in one go.
Speaker: You know, a policy that could resolve the debt issue, a policy that could resolve the property crisis that we're currently in, hopefully getting better fairly soon, and then more policies to stimulate consumption in general in China.
Speaker: So what I think is that share prices actually build up to a level whereby people have actually been expecting a lot.
Speaker: And so the way we would think about it is that the government has actually been quite smart in how they have been managing the market's expectation.
Speaker: So we have some magic number out for resolving the local government debt issue.
Speaker: But at the same time, they have also explicitly cited the need to resolve the real estate issue and that more should be coming in due course.
Speaker: Yeah, it seems it's much more better coordinated than what we've seen, say, last year or the year prior to that.
Speaker: But also my impression is that I have the impression they want to maybe keep that powder a little bit dry as well because there's a lot of changes in the world.
Speaker: We have a new administration coming in in the U.S. who's got some very strong views on tariffs being imposed.
Speaker: So they want to probably see what's really happening on that front and from there on maybe increase.
Speaker: That's right, Harold.
Speaker: And then the other point I want to make is that, say, on real estate, right, what is the need to announce much more at this juncture?
Speaker: We have already announced a lot of real estate-specific policies.
Speaker: And this is a time when we have started to see, at the moment still, sustained recovery in
Speaker: I would say transaction volume in the primary and the secondary market in China.
Speaker: So what that means is that they can actually afford to take a short break before they reconsider putting more.
Speaker: Yeah, it's not that things are falling apart as we speak.
Speaker: So things are actually going quite well in China.
Speaker: Maru is their perspective at the moment.
Speaker: But when I say well, right, I know everyone is going to… It comes from a very low base.
Speaker: Yeah, yeah.
Speaker: And also the fact that well means there is transaction.
Speaker: It doesn't mean that prices have already stabilized.
Speaker: I just want to throw in that point to clarify.
Speaker: Yeah, yeah, yeah.
Speaker: No, no, I think that's clear.
Speaker: Before we go further, maybe quickly, Helen.
Speaker: So they've put the stimulus.
Speaker: People get their salaries paid again.
Speaker: Some of the contractors get their money.
Speaker: So money is flowing again.
Speaker: That's good for growth.
Speaker: But a lot of bonds will come to the market.
Speaker: What do you think is going to happen with interest rates in China?
Speaker: Because that maybe also impacts what these households are going to do, right?
Speaker: So we are not too concerned about the bond supply by local governments.
Speaker: The historic lesson on this is that when there is more bond supply, normally interest rates will drop.
Speaker: Because interest rates is mainly driven by government policy.
Speaker: So you're thinking that interest rates effectively in China will come down?
Speaker: So if I'm, for example, a household now and I would buy a bond from a local government, feel safe, how much do I get every year?
Speaker: 2% to 3%.
Speaker: That's not a lot, right?
Speaker: It's not a lot.
Speaker: And what is the inflation?
Speaker: Well, there's no inflation in China, but 2% to 3% doesn't sound like a lot.
Speaker: Because if I think about, if I buy a stock in the equity market, a bank, which is a state-owned bank, similar sort of risk, the dividend they pay is sometimes 7% to 8%, sometimes even higher.
Speaker: Right.
Speaker: Exactly.
Speaker: So what we have observed in the past six years is massive inflow into fixed income to buy bonds.
Speaker: So bonds, right, yeah.
Speaker: Because they are supposed to be safer.
Speaker: But at the same time, if you look at yield as of this moment, it's already significantly below many other asset class.
Speaker: Yeah.
Speaker: It doesn't mean that borrowing costs will go up a lot, especially for the short term, because those are mainly impacted by policy rates.
Speaker: It's mainly on the long end, longer dated.
Speaker: Longer dated, so if you have a mortgage or something like that, right?
Speaker: Something really long-data.
Speaker: So you're saying interest rates are coming off, have already come off, and people are looking for other investments to make.
Speaker: Now, of course, I look at the equity markets.
Speaker: They can put money in that one, and we've seen that a little bit maybe.
Speaker: And that explains maybe why property is doing a little bit better, Michelle.
Speaker: Is that right?
Speaker: Yeah.
Speaker: So exactly, Harold.
Speaker: So what exactly is happening in the property world is that there's been a lot of price corrections, price cuts.
Speaker: And so when home price become more affordable, home buyers that have been waiting on the sidelines are now more comfortable.
Speaker: in reconsidering and probably speeding up their investment decision and home purchase decision, I would say.
Speaker: Normally people then go for the best locations, the best deals in town and the biggest cities.
Speaker: Is that correct?
Speaker: Yeah, always about location.
Speaker: But I think everyone has become a lot more selective and more sensitive to what they're willing to pay.
Speaker: Okay, so is it fair for me then to say that growth in China is slowing, investments is a bit of a problem.
Speaker: They try to grow there, but that's not really enough.
Speaker: So in the long run, they need to look at consumption.
Speaker: But the more immediate problem they have is that local governments have built these subways that Helen just mentioned.
Speaker: that are just not economically viable.
Speaker: They're great for the city, not economically viable.
Speaker: And what they've done now is to say, listen, we'll make sure that local governments can get money from the banks in order to pay this for about 10 trillion.
Speaker: So that's one sixth of the overall problem.
Speaker: The other five, six, we'll deal with that at some later stage.
Speaker: It seems that that means that people get paid, contractors get paid, salaries are being paid.
Speaker: People go back to the property market for all the reasons you just mentioned.
Speaker: So that seems to be enough for the moment.
Speaker: I would just say that Harold, it means a lot for the government to be taking a big step.
Speaker: I would say a big step because this is a proper implementation.
Speaker: There is this number out there so people can kind of track progress.
Speaker: From say an investor's perspective or a household perspective, we are now much less fearful of the next big blow up.
Speaker: And so I think from that perspective, right, risk is controlled and there is a few good factor in terms of stimulating not just investment in real estate,
Speaker: but just overall investment, things that would help the market feel good and be willing to deploy money, say in the capital market, bond market, or the physical asset.
Speaker: Yeah, it brings a bit of confidence back and it takes, as we in technical terms call the downside risk, right?
Speaker: If you make an investment, it can go very well, it can go really bad, but the chances that it goes really bad were big, say six to eight months ago.
Speaker: Or you would even argue the last three, four years was quite... The last three, four years.
Speaker: Yeah, you could buy a property from somebody who would go bankrupt and you lost all your money.
Speaker: But the chances of that is gone and therefore confidence very slowly comes back.
Speaker: That's right.
Speaker: And, you know, as a final point, I also want to throw in, all of a sudden you could also have a dynamics in the real estate market where there could be rotation from the secondary market to the primary market when price is correct enough.
Speaker: Yeah.
Speaker: And it makes sense for them to do this slowly and stepwise instead of one really big bazooka because, as we mentioned, there's a lot of changes in the world and they might want to see first how these changes are going to impact them, right, before they're going to make further steps.
Speaker: While continuing to reiterate that more will come if it's not enough.
Speaker: Yeah, exactly.
Speaker: So they tell us that we will do more if we so need to provide that confidence.
Speaker: Now,
Speaker: That makes it really clear there's a lot of technicalities going on with LGFVs and bond yields and maturation and restructuring and these sort of things.
Speaker: But I think there was a real clear kind of overview of what's really happening in China and also what we can expect from China over the course of the next months and maybe 2025.
Speaker: Thanks a lot for coming in and talking to us and clear that up.
Speaker: Thank you, Harold.
Speaker: Thank you, Harold.
Speaker: Well, I'm sure we could be talking about Chinese stimulus for a longer time, but unfortunately, we're out of time.
Speaker: Many thanks to my three guests today.
Speaker: And a big thank you, as always, to our listeners for joining us.
Speaker: Before you go, we just wanted to remind clients of HBC that voting in the Extel Asia 2025 survey is now open.
Speaker: Please do keep us in mind when casting your votes.
Speaker: And on that note, we're going to wrap up the show.
Speaker: See you next week on The Banyan Tree.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
