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.
Speaker: This HSBC Global Research Podcast was recorded for publication on the 16th of February, 2023.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Hello and welcome everybody to this week's Macro Viewpoint, our window on the top research from the team here at HSBC Global Research.
Speaker: I'm Piers Butler in London.
Speaker: And I'm Aline van Dyn in New York.
Speaker: Coming up this week, Jing Liu, our chief economist for Greater China, tells us what's behind faster than expected growth after the lifting of COVID restrictions just over a month ago.
Speaker: European Union policymakers are training their regulatory powers on EV batteries.
Speaker: A new directive is taking aim at the main minerals in them.
Speaker: We'll be exploring the winners and losers in the supply chain.
Speaker: And amid worsening energy shortages that are weighing on economic growth in South Africa, a preview of action next week by the South African government to fund a solution to the crisis.
Speaker: Thanks for joining us.
Speaker: We turn to China First and our producer in Hong Kong, Graham Mackay.
Speaker: Graham has been speaking with Jing Liu about her report this week on the Chinese economy and why things are looking up for growth in GDP.
Speaker: Jing, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So new China GDP numbers, mainland China that is, can you give them to us?
Speaker: Yes, we now see China to grow by 5.6% this year and 5.5% next year.
Speaker: That is a faster reopening process and faster recovery.
Speaker: And what's fueling that recovery?
Speaker: Actually, we see consumption to be the driver for growth this year.
Speaker: Everyone is familiar with the service consumption recovery during the reopening process, but we also see the goods consumption to pick up, especially on the category of discretionary consumption.
Speaker: Now, that's somewhat of a unique position that China's economy is in, isn't it, if you compare it to other economies and how they have progressed, let's say, post-COVID?
Speaker: Indeed, we have seen most economies rotate from goods to service consumption.
Speaker: But in China, keep in mind that the government stimulated the economy during the pandemic, many to support the enterprises.
Speaker: So as a result, quite some lower income household, they may not have stable income to draw on or not even a big investment.
Speaker: saving to draw on, so they cut back their discretionary consumption quite a bit.
Speaker: That's why we see it to pick up rapidly this year as well.
Speaker: Now one thing that we were talking about a lot at the time when we expected an eventual uptick in the mainland Chinese economy was of course the property sector.
Speaker: How's that doing?
Speaker: Perhaps a little cooler than we'd initially anticipated?
Speaker: Indeed, I think based on the Lunar New Year sales data and, you know, several weeks after that, we still haven't seen the substantial pickup nationwide yet.
Speaker: There are some early signs in selective cities, especially some tier two cities where there are certain level of relaxation on, you know, price controls or
Speaker: purchase restriction, as well as lowering of the mortgage rate.
Speaker: So this could actually become more meaningful going forward.
Speaker: Now, obviously, policy is something that we can't ignore.
Speaker: We've got a big policy meeting coming up on the horizon.
Speaker: Remind us what it is and what we're expecting to see from it.
Speaker: Right.
Speaker: That is once in a year National People's Congress, where we will hear the premier announce the target of China and also the policy mix, the policy focus of the year.
Speaker: We expect China to focus on growth.
Speaker: and getting the economy back on track.
Speaker: So in regard of that, we expect the fiscal policy to take the lead.
Speaker: And actually now we see the fiscal deficit likely to be around 3.2 percent and also a higher local government special bonds, likely around four trillion.
Speaker: than last year.
Speaker: So these are examples of expansionary policies a government could still implement in order to stabilize the economy.
Speaker: What about monetary policy?
Speaker: What's the PBOC going to be up to in the coming months and quarters?
Speaker: Right.
Speaker: PBOC will continue its prudential monetary policy with an easing bias, we believe, and it will do so mainly through the quantitative tools such as RRR card and likely more structural monetary tools in order to inject the liquidity.
Speaker: So that's basically in line with the pro-growth mindset we talked about just now.
Speaker: Very good.
Speaker: And let's just round it off with a picture of what life in mainland China is like at the moment.
Speaker: For anybody listening internationally, they've no doubt been seeing pictures of masks and hazmat suits for the last few years.
Speaker: But it's really no longer like that on the ground, is it?
Speaker: Yeah, we actually seen in quite some cities, at least half of the people no longer choose to wear masks.
Speaker: And there's no mandatory mask requirement either.
Speaker: International travel and also domestic travel have been pretty much normalizing in a sense that no quarantine, no PCR tests are required.
Speaker: So I would say this is a year of normalization and also economy getting back on track.
Speaker: Very good.
Speaker: Just before you go, Jing, a little plug from all of us here in the multimedia department at Global Research.
Speaker: If you do want to know more about China's reopening and our new economic forecast, do give a listen to our other podcast, Under the Banyan Tree, recorded here in Hong Kong with Jing and Harold van der Linde.
Speaker: Jing, thank you very much indeed.
Speaker: Thank you.
Speaker: And as Graham mentioned there, Under the Banyan Tree can be found on Apple and Spotify on the HSBC Global Viewpoint channel.
Speaker: We turn now to Europe, an analysis by our environmental, social and governance team of the action by the European Union to tighten its rules on batteries.
Speaker: Existing rules, in the main, focus on end-of-life battery recycling.
Speaker: But the new EU Batteries Directive will take into account the full life cycle, and notably this brings into focus the supply chain for EV batteries.
Speaker: To discuss the new policies, Dubai-based ESG analyst Lynette Cotterell joins us.
Speaker: Lynette, welcome.
Speaker: Thanks, Eileen.
Speaker: So why is the EU now turning its attention to EV batteries?
Speaker: Well, in large part because there's a lot more of them being used in the EU and also the EU regulation that all new cars will have to be emissions-free by 2030.
Speaker: 35 means that even more of them are going to be used in the EU in the not too distant future.
Speaker: So they need to make sure that the batteries that are coming in are as sustainable as possible.
Speaker: Because at the moment, all EV batteries that are incorporated into EVs sold in the EU are supplied by third parties, mostly from Asia.
Speaker: And so what is it in these batteries that is so concerning?
Speaker: Some of the key ingredients of an EV battery are minerals such as cobalt, lithium, nickel, natural graphite.
Speaker: And most of these have quite significant issues, certainly in their extraction.
Speaker: So whether it's environmental issues such as a huge drawdown on the water reserves in the area in which they're mined, for example, in Chile,
Speaker: Or for cobalt, more social issues, there's a lot of artisanal mining that goes on of cobalt in the Congo, for example.
Speaker: And in the artisanal mining, it's mom and pop operations, essentially.
Speaker: But there's a lot of child labor involved.
Speaker: And clearly, you know, there's no environmental protections or regulations or standards around that sort of mining situation.
Speaker: So there's pretty significant ESG issues around the supply of these very critical minerals that go into these batteries.
Speaker: As you noted in your report, this directive builds on previous rules that really focused on recycling aspects of batteries and the carbon footprint.
Speaker: Tell us about that.
Speaker: Correct.
Speaker: And the battery regulations in the EU, they're not actually specific to EV.
Speaker: They apply to all batteries, but they have been getting tighter.
Speaker: So in the previous iteration of the EU battery rules, there was no mention of the supply chain.
Speaker: They focused very much on the carbon footprint of the battery.
Speaker: and the end of life, you know, the recycling of it, etc, etc.
Speaker: So what's really new is this focus on the mineral supply chain.
Speaker: And they've named four minerals, which is cobalt, nickel, lithium and natural graphite.
Speaker: that companies are going to have to do due diligence on the supply chain all the way back to the extraction.
Speaker: So all the way from digging it out of the ground, through the refining, through the processing, into the battery and delivery to the EV car manufacturer.
Speaker: So effectively, the EU is requiring battery makers to adhere to an entire set of standards.
Speaker: Correct.
Speaker: They will have to put in place due diligence policies.
Speaker: And a lot of that is around traceability.
Speaker: So, you know, making sure that they know absolutely where this mineral was dug out of the ground, where it was refined, where it was processed, every step of the way from it being dug out of the ground to arriving in the battery in their vehicle.
Speaker: So it's really going to be shining a very bright spotlight on the supply chain of these minerals.
Speaker: So what's the impact of these changes?
Speaker: It's going to put in place a pretty high entry barrier for battery manufacturers serving the EU market.
Speaker: So it will favour those companies who've already put in place responsible sourcing policies, largely because they've known this type of regulation, you know, it's been coming down the pipe.
Speaker: It will also favour EV manufacturers who have started to take more control of their battery supply chain.
Speaker: So whether that's through building their own battery factories or putting in place partnerships and agreements around mineral supply.
Speaker: On the recycling side, 80% of battery recycling capacity globally currently sits in China.
Speaker: Probably the regulation will encourage some of that recycling capacity to shift from China to the EU itself.
Speaker: And Lynette, how soon will this begin to take effect?
Speaker: The due diligence requirements...
Speaker: will kick in two years after entry into force of the regulation.
Speaker: So we're looking at some time in 2025.
Speaker: And for those companies that have already moved in anticipation of this regulation, they're probably going to be in reasonable shape.
Speaker: Those who haven't even started, they will really need to start motoring to get everything in place within the two-year timeframe.
Speaker: Lynette, thank you for joining us.
Speaker: Thank you.
Speaker: From batteries we turn to brownouts and worsening energy shortages in South Africa.
Speaker: More may become known next week when the South African government unveils its 2023 budget.
Speaker: The expected bailout of the state-run energy company ESCOM may have huge implications on growth in South Africa and government finances.
Speaker: For more, David Faulkner joins us from South Africa.
Speaker: David, welcome.
Speaker: Thanks, Piers.
Speaker: David, in terms of this 2023 budget, it's fair to say that the budget shortfall has shown some improvement of late, but the macro and fiscal pressures have hardened in recent months.
Speaker: And that's giving for a more challenging outlook.
Speaker: Can you set the scene for us?
Speaker: Well, we'd certainly seen some improvement in fiscal dynamics.
Speaker: You'd had the deficit come down from almost 10% of GDP at the height of the COVID pandemic, down below 5%, we think, for the current fiscal year.
Speaker: But as we go forward, we see a number of challenges coming to the fore.
Speaker: The principal one really is the worsening that we've seen in terms of load shedding, which is what South Africa uses to term power cuts.
Speaker: They are extremely severe and they've become much more persistent.
Speaker: So Escom, which is a state-owned energy company, it's a monopoly in terms of energy provision in the country.
Speaker: It's introduced a range of rolling blackouts over recent years that have got a lot worse.
Speaker: At the moment, we're seeing repeated stage six load shedding.
Speaker: This is when Escom take 6,000 megawatts of demand off the grid.
Speaker: That's the equivalent
Speaker: of 20% of demand, and it leads to power cuts that range from six to 10 hours a day.
Speaker: And this is having a debilitating impact on the economy and the outlook for growth as both households and businesses face the shortages.
Speaker: That growth headwind is certainly then filtering into a weaker outlook for government revenues.
Speaker: And it's also being exacerbated in an environment where
Speaker: commodity prices have come down and we think the windfall from higher commodity prices, stronger terms of trade for fiscal revenues that supported that improvement in the budget deficit in recent years is now turning and raising some question marks about the outlook for the fiscal metrics.
Speaker: So if we can drill down on ESCOM, it's not a new issue.
Speaker: This is a result of several years of underinvestment.
Speaker: So we've been experiencing periodic power cuts really since 2007, but they've got a lot worse.
Speaker: in the past two or three years.
Speaker: It is the function of a range of issues, principally the fact that ESCOM has an aging fleet of power stations, most of which were built in the 1960s and 70s, that have been very poorly maintained
Speaker: over a long time horizon and therefore are breaking down repeatedly.
Speaker: So at the moment we face around about a third of the fleet of power stations being off for unplanned reasons, equipment failure, breakdowns and not being able to supply a secure energy supply to the country.
Speaker: And that chronic lack of investment has meant that this situation has just got progressively worse, weighing heavily on the economic outlook.
Speaker: And so if the government provides more funding to ESCOM, that has a knock-on effect on everything else and ultimately worsens the outlook for the budget deficit?
Speaker: So we now see the government putting an additional 20 billion rands into ESCOM.
Speaker: At the moment, they've already committed to putting just over 20 billion rands into ESCOM as well.
Speaker: So that's a total of 40 billion rands.
Speaker: A big chunk of this will be to...
Speaker: for diesel use to alleviate the worst of the load shedding.
Speaker: But that's around about 0.6% of GDP.
Speaker: And it will place an upward pressure on the size of the fiscal shortfall.
Speaker: So you've updated your forecast for budget deficits.
Speaker: Can you just tell us what they are now?
Speaker: So we now see the budget shortfall at 5.4% of GDP in 2023-24, and we see it widening to 5.8% of GDP a year later.
Speaker: Now, that contrasts with the government's current projections that sees a consolidation in the fiscal shortfall, that sees that shortfall coming down to 4% and below as a share of GDP.
Speaker: And part of that is the more money going into ESCOM, part of it's a greater amount of cash going into public sector wages.
Speaker: And then the other part is the fact that we think revenue will underperform the government's current estimates by around about 0.6 percent of GDP.
Speaker: So if the global economy does recover, that's clearly going to alleviate some of these pressures.
Speaker: But surely South Africa needs to implement structural reforms as well?
Speaker: Certainly.
Speaker: On the energy side, what is important, and the government is taking steps in this direction, is to crowd in significant new private sector investment in renewable energy in the country.
Speaker: There have been significant commitments, significant ambitions, but that will take time to come to fruition.
Speaker: Over a longer time horizon, though,
Speaker: that greater private sector competition and investment in energy generation should start to alleviate this energy constraint and provide the basis for a stronger, longer term growth outlook.
Speaker: David, I hope you managed to keep the lights on, but thank you for joining us today.
Speaker: Thanks very much, Piers.
Speaker: So that's all the time we have for this week.
Speaker: Special thanks to our guests, Jing Liu, Lynette Cottrell and David Faulkner.
Speaker: Thanks for joining us.
Speaker: We'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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