Transcript
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Speaker: Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van Linde, HSBC's Asian Equity Strategist.
Speaker: China's most important policy meeting of the year, the National People's Congress, is underway and the economic target for this year has been set.
Speaker: What does this tell us about the outlook for the world's second largest economy?
Speaker: And what does some of the jargon really mean?
Speaker: That's what we're going to discuss with Jing Liu, our Chief China Economist.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: So here are the headline numbers.
Speaker: China set an economic growth target of around 5% for 2024, very much in line with expectations.
Speaker: The fiscal deficit, we're going to talk a bit about that more later, that's been set at 3%.
Speaker: And there's a lot of bonds that are being issued, a trillion RMB for the central government and nearly 4 trillion for local governments.
Speaker: We'll talk about this in a second as well.
Speaker: But the one who's going to enlighten on all of this is Jing Liu, our chief China economist.
Speaker: Jing, thanks for joining us.
Speaker: This must be a very busy time for you.
Speaker: Indeed.
Speaker: Thank you, Harold, for having me here.
Speaker: So growth, economic growth, they said it's going to be around 5%.
Speaker: That doesn't seem like a huge surprise.
Speaker: China's been hovering around this number actually for quite some time.
Speaker: Is this a bit of a damn squid or is there more to it?
Speaker: Well, on the surface, the around 5% growth target is exactly the same as last year.
Speaker: But you got to remember there's something called basic fact in a sense that last year, China grew by 5.2%.
Speaker: And in year of 2022,
Speaker: it grew by 3%.
Speaker: So in that sense, growing another about 5% in addition to last year's 5.2% would be a lot harder than last year to deliver 5%.
Speaker: That's the base effect, right?
Speaker: You grow 5% and then on top of it, you grow 5%.
Speaker: On that again, it's a bigger number by then.
Speaker: So let's take a step back.
Speaker: And can you remind me what sort of state the Chinese economy is in?
Speaker: Well, China is still in the stage of normalizing from the pandemic scar in the sense that we see, for example, the Chinese New Year spending, the total spending has surpassed the 2019 level.
Speaker: However, per capita spending is still 10%, you know, less than the 2019 level.
Speaker: On top of that, export probably...
Speaker: We don't expect a very exciting number, mostly influenced by the global trade.
Speaker: And, you know, above all, the most headwinds come from the housing market correction.
Speaker: Yeah.
Speaker: So clearly there's quite a few challenges out there.
Speaker: Housing market, exports, demand is recovering, but slowly so.
Speaker: Does this put pressure on the leaders, the policymakers to unleash some more stimulus?
Speaker: Indeed, we actually have seen the policymakers becoming more proactive this year.
Speaker: For example, in the first two months, we already see the central bank surprise the market twice by delivering the monetary easing.
Speaker: So the first one was to lower the requirement for reserve by 50 basis points.
Speaker: So the banks have to keep money reserves at the central bank.
Speaker: They said, well, you can keep a little bit less and therefore that money becomes available for lending, right?
Speaker: Exactly.
Speaker: More liquidity injection.
Speaker: Actually, one trillion RMB liquidity will be released.
Speaker: And other than that, we also see the reduction of the so-called low prime rate on the five-year end.
Speaker: That is the benchmark rate for lending, for example, for mortgage and also corporate loans.
Speaker: So when you lower that, that can also stimulate the demand.
Speaker: Yeah, because it's cheaper to borrow money and purchase a house or build a factory and these sort of things.
Speaker: Good.
Speaker: So that's going on at the moment, right?
Speaker: But there's been talk about this transformation of the growth model.
Speaker: And China had this first 10 years in this millennium of export growth and then that investment growth.
Speaker: What is that new growth model?
Speaker: So the new growth model is called high quality, which by itself sounds very vague.
Speaker: What it means is it's not a pure pursuit of a high speed growth.
Speaker: You remember China used to grow by double digit number and then 8%, etc.
Speaker: So now they emphasize on the growth should be driven by things such as manufacturing, modernization, green transition, and also to expand the domestic consumption.
Speaker: So how are they going to do that?
Speaker: Expand domestic consumption or move into these high-tech sort of industries?
Speaker: So I think in terms of the domestic consumption, that really hinges on the share of middle-income group.
Speaker: In all other countries, the bigger the share of the middle class, the larger the consumption will be as a share of the GDP.
Speaker: So China is pursuing the campaign to reduce inequality.
Speaker: Mm-hmm.
Speaker: China is a saving sort of country, right?
Speaker: People save and invest, that's used to invest.
Speaker: It's not really consumption.
Speaker: Saving rates are really high, consumption rates are really low.
Speaker: So that's an opportunity for them to grow over the course of the next couple of years.
Speaker: Right.
Speaker: So the way they do it is basically to beef up the social benefit such that people will know they can rely on the government for the rainy days.
Speaker: Yeah.
Speaker: So that's pensions, but there's also health care and these sort of things.
Speaker: The government needs to invest in that.
Speaker: So this brings us to the topic of the fiscal deficit.
Speaker: What is this fiscal deficit and why is that important?
Speaker: Right.
Speaker: So basically, the government would have the revenue from different things like tax and fees, collection, and also have expenditure that is to spend on social benefit, infrastructure and all different kind of things.
Speaker: So the difference between the revenue and expenditure is called the fiscal deficit.
Speaker: And naturally, you would imagine if the government is willing to take a higher deficit, that means there's more government spending.
Speaker: Usually government does that during the recession.
Speaker: Yeah, recessions in order to soften the blow, if you want to put it like that.
Speaker: Exactly.
Speaker: Technically, they call it counter-cyclical sort of stimulus.
Speaker: Okay.
Speaker: So the government is trying to spend more in order to reach these growth targets.
Speaker: Now, there's also been talk about special ultra-long-term treasury bonds to try to hit that particular target.
Speaker: Well, what is that?
Speaker: What makes them special?
Speaker: Why are they so ultra-long dated?
Speaker: I think the terminology sometimes make your head spin.
Speaker: Yeah, yeah, yeah.
Speaker: Nobody's in Chinese even.
Speaker: So here we actually have two types of treasury bonds.
Speaker: One is called regular treasury bond.
Speaker: The other is special.
Speaker: The special one is special because it's not counted towards the government deficit.
Speaker: Yeah.
Speaker: So it's a bit of an accounting issue.
Speaker: They don't count it in certain numbers.
Speaker: That's basically what makes it special.
Speaker: What about the ultra long term?
Speaker: What does that mean?
Speaker: So basically in China, what we see the most common kind of treasury tenor would be, you know, on the long end would be 10 years and some 30 years as well.
Speaker: But ultra long here, I think the government is thinking about 50 years.
Speaker: It's not uncommon, right?
Speaker: There are other countries that borrow for 50 years.
Speaker: I think there's even so few that they've looked at 100-year bonds and these sort of things.
Speaker: But what do they get out of issuing these sort of bonds that are so ultra long dated?
Speaker: Yeah.
Speaker: So in China, there are actually quite some infrastructure projects or strategically important investments which take a much longer term than, let's say, two years, five years, or even 10 years.
Speaker: In that sense, it makes sense for the government to have a longer time horizon.
Speaker: And by issuing such kind of bond, it can support those kind of projects.
Speaker: And also, the government only need to repay those bonds after the projects start to make money, maybe.
Speaker: Exactly, yeah.
Speaker: They don't have to think about repaying it for the next, say, maybe 50 years or so, right?
Speaker: So that's another headache that you're going to move into the future.
Speaker: Now, these bonds are also separated into central and local government categories.
Speaker: Why is that?
Speaker: So basically, central government treasury bond will be used for nationally relevant projects, while the local ones usually are used for the regional development, including the social benefit as well as some local infrastructure.
Speaker: So just to make it kind of an example here, you got spending on defense.
Speaker: That's a national thing, right?
Speaker: The local government wouldn't do that.
Speaker: But when you get spending on schools and hospitals, that's something that a local government needs to do, right?
Speaker: And they therefore have now a bit of room to do so in the coming months.
Speaker: That's a perfect example.
Speaker: Good.
Speaker: So just your thoughts on how achievable are these targets now?
Speaker: So now we understand that they got 5% growth.
Speaker: They've done already something on the monetary side.
Speaker: They're lower of interest rates and these reserve requirements we spoke about.
Speaker: There's a bit more room for spending there.
Speaker: Also a bit of accounting going on in terms of the sort of bonds that they issue.
Speaker: So you feel now more confident that they're really going to get there?
Speaker: I think actually last year when people talk about China, they usually look at, I would call it triple headwinds.
Speaker: We have the technical headwind, such as from the property market.
Speaker: Well, you can argue that's also part of the structural headwinds because China is looking to switch into a high quality growth model.
Speaker: And there's also this headwind in the sense that we do see the government policy coordination last year at least was not ideal at all.
Speaker: And oftentimes people... You know, oftentimes people were quite disappointed that the government might say something, promise something, but the delivery wasn't as much as they promised.
Speaker: So this year, I think a major change is government coordination process.
Speaker: probably will be much better than last year.
Speaker: And also they have this new framework for assessing different kind of policies, including non-economic policies, and want to make sure the restrictive type of policies will be minimized if possible.
Speaker: So that is one upside, I guess.
Speaker: Another thing is, I think, how are they going to take care of the housing market correction?
Speaker: That is still what we get the most from the investor, the question.
Speaker: And I think, you know, for the housing market, actually the new dual track model is promising, which basically means for the private housing market, the government will let go the restrictions on prices, on quantities, one way or the other.
Speaker: Maybe we'll see continued price correction, but at least transaction volume can pick up.
Speaker: On the other hand, we also have this social housing.
Speaker: And here the catch is not just about supplying more affordable housing.
Speaker: That is important too, you know, that could give people more spending power.
Speaker: But government might also use this as an anchor, such as absorbing some of the oversupply private housing and convert that into social housing.
Speaker: So if this model is applied and implemented,
Speaker: In a much bigger scale, I think it will be very meaningful in stabilizing the housing market.
Speaker: Okay, Harold, you asked me so many questions.
Speaker: Now it's my turn.
Speaker: What does all this mean for equity market?
Speaker: Yeah.
Speaker: Now, the Chinese equity markets has not performed very well, right?
Speaker: I mean, down last year.
Speaker: Fair enough.
Speaker: Oh, yeah, yeah.
Speaker: It's probably an even understatement.
Speaker: In the last couple of weeks we've actually seen it starting to perform a bit, right?
Speaker: Given that we have so many issues at the same time going on.
Speaker: We have the housing market, monetary stimulus, fiscal spending, a transition in the growth model that they have.
Speaker: That creates simply a lot of uncertainty.
Speaker: And given the kind of difficult policy messages that we got last year, the sentiment has been very poor.
Speaker: In addition to that, we've also had US pension funds publicly stating we want to reduce our exposure to China.
Speaker: Now that has happened last year.
Speaker: They sold down.
Speaker: That is, of course, not good for the market.
Speaker: But also all the other issues has created kind of bad sentiment.
Speaker: People just don't know what the direction is here.
Speaker: So we need to turn that sentiment around.
Speaker: And there's a couple of ways that this can happen.
Speaker: One is we need to get clearer policies and we need to see that they work.
Speaker: Now we have an idea what they do.
Speaker: So we need to see now evidence that this is working out.
Speaker: So we need to see better numbers coming through.
Speaker: The second thing is that the stock market in the end is not an economy.
Speaker: The stock market is a bunch of companies.
Speaker: And we need to see that the profits of those companies, because that's eventually what a shareholder gets, that the profit of these companies also benefit from this.
Speaker: Because it's nice if the economy is doing well, but if you put regulations in place that the profits are not, you can't make profits or it's more difficult to make profits, then that's not good for share prices.
Speaker: But if the economy recovers and we see that the profits recover as well, now that would be really good for the stock market.
Speaker: So we need to see that.
Speaker: Now we're actually in reporting season.
Speaker: That's for last year's earnings this month.
Speaker: So we're going to get a bit of a better idea of where we stand in that regard.
Speaker: So the equity market is in kind of a wait and see mode.
Speaker: But let's hope it's a little bit better than 2023.
Speaker: Indeed.
Speaker: And on that note, Jing, thanks very much for joining me here on the podcast.
Speaker: Always a pleasure.
Speaker: Thank you, Harold.
Speaker: Well, we're just about out of time, but a couple of quick announcements before we go.
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Speaker: That's a wrap for today.
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