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Under the Banyan Tree - The economists' guide to summer in Asia
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Fred Neumann is joined by fellow Asia economists Erin Xin, Aris Dacanay and Justin Feng for a look at the key economic and political events coming up in the region in the next few months. Disclaimer: https://www.research.hsbc.com/R/101/MNXDdMq
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
This podcast was recorded for publication on Thursday, the 17th of July by HSBC Global Investment Research. Analyst certifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Economic Events in Asia for July and August
00:00:45
Speaker
Hello from Hong Kong and welcome to Under the Banyan Tree. I'm your host Fred Newman, chief Asia economist here at HSBC. It's summertime in the northern hemisphere at least and a lot of our listeners will no doubt be tuning in on vacation. But Asian markets and economics won't be taking a break. We've got a full house of economists here to tell you what to keep an eye on for July and August. Aaron Shin, who looks at Greater China, Iris Dekene from ASEAN, and our Asia economist Justin Feng is here to talk about Japan.
00:01:15
Speaker
We're looking at everything from tariffs to comic book-inspired earthquake warnings and plenty in between. From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
00:01:33
Speaker
Welcome, Aaron, Justin, Iris to the Banyan Tree HQ here, our fantastic studios in Hong Kong. And we before taking a break for the summer, we really wanted to look at some of the key events that you guys are looking forward to when you sort of think about the economic and political landscape across the region, what kind of events that investors should be
China's Politburo Meeting and Economic Plans
00:01:55
Speaker
looking at. And Aaron, let me start with you because China obviously very, very dominant economy and we have a big meeting coming up, the Politburo meeting at the end of July. um
00:02:07
Speaker
Tell us a bit more about this. How important are Politburo meetings in general and why are investors really focused on this one at the end of July? Thank you, Fred. So that's a great question. Politburo's meet every month, which takes together the top leadership of China.
00:02:24
Speaker
ah The reason why we focus on July is because it's actually an economic focused one. There's a few economic ones throughout the year, but July is one of them. And that'll give us the kind of outlook on the policymaking and thinking for ah the second half of this year.
00:02:41
Speaker
The reason why this one is particularly important is because we're actually coming into the end of the 14th five-year plan, and then we'll also be getting the 15th five-year plan. So this is a forward-looking five-year policy setting for the next 2026 to 2030 time period.
00:03:00
Speaker
So that's interesting. so there are really two reasons why this Politburo meeting is important. The first one, as you say, it's really sort of the mid-year take on where the economy is. And actually the economy has not done too badly. We started out first quarter of this year 5.4%, second quarter maybe around we don't know yet.
00:03:20
Speaker
The target for this year is 5%. And usually what happens during this meeting is that they just policy for the second half of the year just to reach that target. Would that mean that maybe they hold back on stimulus and have to add more stimulus? What's your hunch in terms of what the message will be in terms of what they'll do for the second half of the year?
00:03:38
Speaker
We're thinking it's going to be steady as she goes because, as you say, things have been going pretty well. ah It's really about implementing what's already been announced and instead thinking more about the structural side, more longer-term thinking as we get into this planning for the coming five years. So no bazooka stimulus. So no bazooka stimulus. Investors have obviously been wanting this bazooka for quite some time. It's not coming and probably won't come at this meeting as well.
00:04:05
Speaker
um Now, in terms of the the five-year plan, that's very, very important. We only get this really every five years, of course, by definition. But this is where in China the broad structure is being laid for policy for the next few years.
00:04:17
Speaker
What are some of the highlights that you would expect to be emphasized? We hear a lot about consumption boosting. We hear a lot about new technology areas. um Is it going to be more of the same or is anything new really you expect to come forth?
00:04:33
Speaker
Yeah, so just to clarify, ah the next five-year plan probably won't be announced until we get to the fifth plan later this year, maybe October, November time.
00:04:45
Speaker
But in terms of the overall structure, i don't think that there's really going to be a big deviation from what we've seen in the past. A lot of emphasis on technology and innovation, supporting people's livelihoods, so also emphasis on things like consumption, expanding consumption,
00:05:02
Speaker
um Thinking about population demographics, but at the same time, also, you know, your ongoing focus on economic growth, ensuring security in various aspects like food security, energy security, things like that.
00:05:19
Speaker
So, of of course, you know a lot of this is domestically driven. It's sort of ah retooling the domestic economy. But there's also – or maybe this is more important now at time when there are external challenges on China. And there are two other important events coming up this summer um in terms of the external side. what What are these stats investors should pencil into the diary?
US-China Treasury Meeting
00:05:38
Speaker
Yeah, so recently it's been announced that U.S. Treasury Secretary ah Scott Vincent will be planning to meet with his Chinese counterpart. So that would be the Vice Premier He Li Fong.
00:05:49
Speaker
And maybe they would be discussing things outside of just trade. So that would be important in terms of the dynamics for U.S.-China relations. Another key event will be the China-EU summit that's set to be held later this month in Beijing.
00:06:03
Speaker
Now, we have seen that tensions between China and the EU have picked up a little bit. It's reported that this summit has also been cut short a day. We're not exactly sure what we may get out of it, um given that there's been a little bit more heightened tensions. There have been some tariffs on EU brandy in retaliation for the tariffs on Chinese EVs and such and so forth.
00:06:24
Speaker
So plenty of news out of China, Politburo meeting, UChini summit, and of course also a meeting or a visit by Scott Besant to China. But there's another thing, of course, looming over the region. That's on August 1st, we might get finally those U.S. reciprocal terrorists kick in.
00:06:44
Speaker
ah There's still going to be a lot of negotiation over the second half of July. um But Justin, let me bring you in here.
Japan's Export Challenges and Tariffs
00:06:50
Speaker
ah Japan. Japan is facing very high tariffs, probably higher than people thought even a few months ago.
00:06:58
Speaker
And the negotiations have not been going as smoothly as I think many people had expected initially. um Where do we stand here and and what should we watch when it comes to these negotiations? Sure, Fred. Like you said, I think a few months ago, everybody thought that Japan would be at the front of the line ah when it came to reciprocal tariff negotiations.
00:07:18
Speaker
ah And when Trump really sent his tariff letter to Japan, i think it came as a surprise to many, right? So instead of getting a love letter, I think it came as more of a breakup letter for many Japanese officials. 25%, like you said, that's really quite high.
00:07:31
Speaker
And then on top of that, there are also the U.S. sectoral tariffs on products such as autos. And this is also a major drag on Japan's export sector. Because actually auto exports to the U.S. alone is equivalent to roughly 1.3% of Japan's entire GDP.
00:07:47
Speaker
ah So definitely not an insignificant portion of its economic engine. ah So these are certainly ah things to consider when we talk about Japan's trade sector. So August 1st, obviously very important for Japan. They need to get a trade deal with the U.S. But Japan is not the only one. ah Across ASEAN, I would imagine officials are really looking closely at the August 1st deadline, aren't they?
00:08:10
Speaker
Yes, indeed. And similar to Japan, another country in Southeast Asia got its heart a bit broken, um although nothing is final, and that's actually the Philippines. So we received the letter, and the Philippines basically get a higher tariff rate, a higher reciprocal tariff rate than what was originally announced from 17% to 20%. Now, we've got to have know to give this some context.
00:08:32
Speaker
A lot of officials in the Philippines were looking forward to the opportunity of having a lot of these supply chains relocating to the Philippines, mainly because it has a tariff advantage, a lower reciprocal tariff rate to everyone else.
00:08:45
Speaker
um But that doesn't seem to be the case now, or at least before the August 1 deadline with the 20% tariff rate, we are in line with Vietnam. who where a lot of supply chains relocated to during Trump 1.0.
00:08:58
Speaker
So it's a big shock to the Philippines. um We have yet to hear what officials will say. So a lot of uncertainty there. And I think, Aris, you make a good point. It's not just about the absolute tariffs that individual economies get. It's also the relative tariff that matters, of course.
00:09:12
Speaker
in terms of directing where future supply chains are going. um But i want to switch a little bit to politics. You have a bit of political developments in Thailand at the moment. What are you watching there? Might there be something happening over the summer?
00:09:25
Speaker
So indeed, the Prime Minister, Peitong Shinawatra, is currently under investigation for a conversation she had with the father of the Cambodian Prime Minister. um So she's under investigation for an ethical breach.
00:09:39
Speaker
If she is found guilty, she will need to step down as Prime Minister, and that would risk delaying the 2026 fiscal budget and will add another headwind to Thailand's growth story come 2026 on top of the very high reciprocal tariff rates imposed on the region.
00:09:55
Speaker
Another thing that needs to be monitored is how the negotiation gets played out. So with the political uncertainty, people are questioning whether Thailand will have a coherent negotiating response to the U.S. when it comes to reciprocal tariffs.
00:10:10
Speaker
So certainly a lot to watch there in Thailand, and we'll see whether the current government survives in its current form. That's really at stake here.
Japan's Elections and Rice Inflation
00:10:18
Speaker
and And Justin, um Japan also, we have elections coming up.
00:10:22
Speaker
What are they and and how important are they? Yes, ah big upper house elections on July 20th, just around the corner. ah Now, what's very interesting with this upper house election is that Japan in the post-war period has generally been dominated by the Liberal Democratic Party or the LDP.
00:10:38
Speaker
ah To use a basketball analogy, they're essentially the Chicago Bulls in the 1990s. They almost always win. ah But right now, they're facing ah some very challenging electoral circumstances. Japan has very high rice inflation at the moment. It's about doubled the price that it was around this time last year, and voters are very dissatisfied about this.
00:10:58
Speaker
And as we know in Asia, rice is a very important staple product. It has toppled governments in the past, so ah this is certainly a big challenge for the LDP. ah Now, both the LDP and the opposition parties have ah introduced some policy proposals to mitigate the impact of rice inflation.
00:11:15
Speaker
ah For example, they have offered cash handouts, They have proposed ah certain consumption tax cuts to offer relief to households. um But as you know, rice inflation can be very sticky. So it does not seem that there's going to be significant relief for households anytime soon.
00:11:29
Speaker
And this can certainly ah carry important policy implications for both Japan's monetary policy as well as its trade negotiations with the U.S. because obviously it's going to be very hard for them to have substantial negotiations before the election on July twentieth So that will also add more pressure on Japan's trade negotiations. So plenty to watch for in Japan, in Thailand, in China, and across the region. I think one thing that really strikes me talking to all of you is how global and local developments are often intertwined. um That you have essentially to trade tensions with the US putting pressure on domestic ah reforms. And so that that really means that everything is is is connected in many ways. but
00:12:11
Speaker
um It is, of course, summer, and you know it's also time to head off and do something fun. um Aris, when you look at Southeast Asia, what are sort of some of the things to look forward to across that region?
00:12:25
Speaker
So during the summer, there's not much events because it's pretty humid, it's pretty hot. So people just hang out so in the beaches. The beaches are very beautiful. You don't need an event to go through these to go to the very beautiful beaches, particularly in the Philippines and Thailand.
00:12:39
Speaker
But at the end of summer, or at least the start of the next season, and we have the Singapore F1 race. Oh, the f night race. Yes, of course. Which is a rich still is one of the hottest races in on the circuit, even though it's at night. Yes, absolutely.
00:12:54
Speaker
And another thing right after that is the Blackpink tour. So just to note, um amongst the four members of Blackpink, one is Southeast Asia, one is Thai, Lisa Manoman. So she has a large Southeast Asian following.
00:13:06
Speaker
Wait, wait, Aris, I got to stop you. I'm of ah of an older generation. You just have to explain what Blackpink is. So Blackpink is a K-pop band, a Korean pop band that is widely successful. Yes. So they are so huge, so international that they are going to Indonesia, they are going to the Philippines, Singapore, and Thailand.
00:13:26
Speaker
And they have at least two days of concerts in the biggest arenas in these countries. So we do estimate that if it is at full capacity, growth or at least the revenues alone would lead to 0.02% GDP.
00:13:40
Speaker
Now, no that sounds like a bit small, but we have to consider the fact that a lot of people fly in to see these concerts. Again, Blackpink is very international. See what happened through to Singapore with Taylor Swift.
00:13:53
Speaker
Blackpink is also a big deal. So we expect a lot of people's tourism in the Southeast Asian regions to increase. You have a lot of hotel income, I mean, transport income, um flight income.
00:14:05
Speaker
So, you know, exciting times. ah so So the concert tourism is heating up in Asia. And Justin, Japan on the agenda for travel, it still one of the top travel destinations in Asia, maybe not because of the music, but because of the food and the culture. And is is there going to be a peak tourism season this summer in Japan?
00:14:24
Speaker
ah Well, tourism inflows have definitely hit a record high this year, Fed. But actually, here in Hong Kong, ah there has been some skepticism about traveling to Japan this summer, particularly in the month of July. There is a bit of an urban legend about an earthquake that could happen.
00:14:39
Speaker
um But I think, you know, hopefully, fingers crossed, nothing happens in July. And I think once that passes, I think we're going to see a lot more colleagues from the research. Justin, I got i gotta to stop you there. What do you mean urban legend about an earthquake happening? Is this the official forecast by the Japanese government that there will be an earthquake? No, no, this is ah this is not government proof. This is also not an HSBC forecast, by the way. um But ah no, this actually comes from a manga.
00:15:08
Speaker
Although I have to admit, I am personally not very familiar with this. Well, Aaron, maybe do you want to weigh in here as a manga expert? What's going on here? So there's been this manga artist, which is a comic ah style in Japan, and basically she wrote a book many years ago that made a number of predictions. A number of these predictions came out to be true, including the tsunami that occurred in 2011 in Japan.
00:15:34
Speaker
um So one of the predictions was that in July 2025, there would be a pretty big earthquake in Japan, and that actually led to a number of ah Flights being kind of curtailed here in Hong Kong because demand slowed.
00:15:47
Speaker
um But once we kind of get past this, maybe we'll see more of a pickup, more Hong Kongers going to Japan again. That is interesting. So we actually do see a bit of an impact from this comic book author, that prediction. actually impacting tourism demand into Japan for July, which I guess might be a good period to go to Japan, barring there an earthquake happening, because it means the flights are less crowded
Beijing's Introduction of Driverless Cars
00:16:12
Speaker
then.
00:16:12
Speaker
um But Aaron, before we went on air, we just discussed something cool you did in Beijing recently. yeah what What was it you did in Beijing? So in Beijing, we tried the driverless cars, so the robo-taxis, where you don't have a driver.
00:16:28
Speaker
It basically works like Uber. You call it, you have an app, you download the app, and then you call it to where you are, you put in a placement of where you want to be dropped off,
00:16:38
Speaker
The car comes up, it honks, no one's driving, and you get There's nobody in that car. Yeah, and it seems a little bit scary at first, but to my surprise, I felt that it was actually pretty safe, maybe even a little bit more secure, at least this one day drive It doesn't drive as fast as a normal driver would, or slowly? Yeah, yeah. I would say even more smoothly, right? So the acceleration, it just felt like it was it was a smooth ride. and can take it anywhere in Beijing you like? No. So it is kind of restricted to kind of the outer parts, but they are in the wild. So so I think you can try that next time you're in Beijing.
00:17:17
Speaker
And do the cars look different? Do they have like a steering wheel and somebody could sit there and drive the car if they wanted to? Or is is it completely designed differently from from a regular car?
00:17:27
Speaker
they They put a box over the steering wheel. So it's no one sitting in the front seat. there Where there is a steering wheel, there's a big box over it. So you as a passenger cannot access it.
00:17:41
Speaker
But other than that, looks like a normal car. Well, so we got between Blackpink then and driverless cars. and There's a lot going on this summer in Asia, apart from the politics, apart from the economics.
00:17:54
Speaker
Thank you guys for joining us here in the studio, and I wish you a restful and happy summer. Thank you. Thanks, Fred. Thank you. Thank you. And thank you to all our listeners for joining us wherever you may be. Under the Banyan Tree will be back again next week, so do be sure to join us. The Macrobrief, our sister podcast from London, is also available to stream or download wherever you get your podcasts.
00:18:15
Speaker
That's a wrap from all of us here in Hong Kong. Talk to you next week.
00:18:49
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.