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 der Linde, head of Asia Equity Strategy at HSBC, and I'm joined today by our chief China economist, Qing Liu.
Speaker: After a pretty brutal 2022, China's economy is on the up again.
Speaker: So much so that we're now raising our GDP forecast for this year and beyond.
Speaker: The worst of COVID seems to be behind us and various macro stars are aligning, all pointing to a strong rebound.
Speaker: So stand by for all the facts, figures and analysis right here on the Debenium Trail.
Speaker: Jing, welcome to the podcast.
Speaker: Thanks for having me, Harold.
Speaker: So last time we spoke was before Chinese New Year.
Speaker: I know that your team have gone back to China.
Speaker: Before we're going to talk about your GDP forecast and the changes that you're making and the confidence that you seem to have, tell me a little bit what's going on on the ground in China.
Speaker: Things are buzzing again.
Speaker: For example, the restaurants have long queue again.
Speaker: People are going back to the cinema.
Speaker: Even the traffic congestion index is now above the pre-pandemic level.
Speaker: Are people wearing masks?
Speaker: Is that still mandatory in China or is that also gone?
Speaker: It's not mandatory.
Speaker: So we see some people voluntarily still wear masks, but most people don't care that much anymore.
Speaker: Okay.
Speaker: Yeah, it's like already move on.
Speaker: Yes.
Speaker: So consumption must be growing.
Speaker: People are spending their money.
Speaker: As you say, they're stuck in traffic jams again.
Speaker: The one sector that everybody is looking for, if that will recover, is property.
Speaker: Do you see signs that people are out buying property again?
Speaker: I think this one seems to be progressing a little bit slower in a sense that in selective cities, such as some tier two cities, Chengdu, Nanjing, Wuhan, you know, where the local governments actually relax certain restrictions, we see the property market heating up.
Speaker: However, you know, broadly speaking, we still see over all the sales, et cetera, kind of disappoint on the downside.
Speaker: It will take time.
Speaker: It will take time.
Speaker: I guess also it takes time for people to make that decision and then feel confident to buy.
Speaker: So it might take a few months before we actually get numbers whereby we can see what they are really doing.
Speaker: Right.
Speaker: And I know that our property equity analyst, Michelle Kwok and her team, they believe it will take until May before they can see sales data.
Speaker: Because, yeah, we know that in January, February, around Chinese New Year,
Speaker: It's not typically the time for people to buy property.
Speaker: So it would be March maybe or April when that's going to happen.
Speaker: And those numbers will only be disclosed in May.
Speaker: So it will probably take a bit of time for us to assess what really goes on in that particular part of the economy.
Speaker: I also believe there's a big policy meeting coming up.
Speaker: Is that right, Jing?
Speaker: That's right.
Speaker: That's once in a year National People's Congress.
Speaker: It's going to be held on the first week of March.
Speaker: So we're going to hear, you know, this year's GDP target as well as a slew of policy intention.
Speaker: Is there anything in particular that you expect will come out of that?
Speaker: We actually expect stronger policy support for this year.
Speaker: Actually, we already see this lockstep policy stimulus.
Speaker: Basically, if you look at monetary, fiscal, and even regulatory side, all the policies are focusing on growth, stimulating growth, stabilizing growth.
Speaker: So this year will be a year where policymakers will refocus on getting the growth back on track.
Speaker: Now, it seems that they're trying to do so.
Speaker: You feel more confident about your own forecast as well.
Speaker: Now, you set the forecast for HEBC with regards to what the growth path of this economy is.
Speaker: I understand you've changed your numbers recently.
Speaker: Can you run us through that?
Speaker: What kind of growth do you expect now?
Speaker: What did you see previously?
Speaker: What has changed your mind?
Speaker: Right.
Speaker: So actually, we revised up our forecast for this year from 5.0% to 5.6%.
Speaker: And next year, we will have 5.5%.
Speaker: So this is actually a profile of faster recovery.
Speaker: Previously, we believe after China emerges from the pandemic, it will actually...
Speaker: regain the speed in growth.
Speaker: However, we thought the first quarter could be a more challenging one.
Speaker: As a matter of fact, the worst COVID wave, which actually spread out the whole nation, probably is behind us.
Speaker: And things are getting back on track, as we just mentioned.
Speaker: So, you know, this takes us to a faster recovery path.
Speaker: And if I would dig down into your numbers, I presume therefore it's consumption that is driving your GDP numbers higher?
Speaker: What is happening with investments?
Speaker: Is that correct?
Speaker: And what is happening on the export side?
Speaker: Exactly.
Speaker: So actually we see domestic consumption as a big driver for growth this year.
Speaker: The consumption recovery actually is a very familiar story as all other economists have experienced this during the reopening.
Speaker: I think something probably a little bit unique for China is that on top of the service consumption recovery, we also expect the goods consumption to pick up.
Speaker: This is because during the pandemic, most of the stimulus ended up supporting the enterprises rather than direct subsidies to the households.
Speaker: So for mid to low income households, they probably have cut a lot of their discretionary consumption, as we can see from the numbers.
Speaker: Now with a job coming back, with the economy outlook, much better.
Speaker: So they are now catching up with their key purchases.
Speaker: And then I presume that gives maybe confidence as well to corporates to invest a little bit again?
Speaker: Yeah, that's right.
Speaker: I think, you know, basically consumption pickup, business sentiment also increases and everything seem to go on a virtual cycle.
Speaker: And then the export side, because the rest of the world is slowing to a certain extent, maybe not as fast as what we thought a couple of months ago.
Speaker: But what is happening in the Chinese export sector?
Speaker: So we have seen in the last quarter of 2022, exports slow down quite a bit.
Speaker: And we expect that to be the case this year as well, especially because a trade recession globally isn't totally behind us.
Speaker: So given that, we don't expect net export to be the key driver.
Speaker: Consumption will be a key driver.
Speaker: And also on the investment, we actually...
Speaker: have quite a confidence that manufacturing investment will hold up quite decently.
Speaker: I think, you know, again, here there's a little bit pent up story as some of the corporates have delayed their big projects last year due to the COVID and related uncertainties.
Speaker: And this year they could start to invest again.
Speaker: And we also see there's interest from foreign investors probably expand their operation in China.
Speaker: You know, together with a continuous policy support, we actually think the manufacturing investment could grow the fastest among three different type of fixed asset investment.
Speaker: Well, this is all fascinating stuff, Jing.
Speaker: We're going to take a very quick break here on the podcast.
Speaker: And after we come back, we're going to turn the tables and you're going to ask me a couple of questions.
Speaker: Look forward to that.
Speaker: So Harold, we talked about the economy is picking up.
Speaker: So what do you see on the corporate earnings side?
Speaker: Do you expect growth this year?
Speaker: Yeah, we see a recovery in growth in Chinese earnings.
Speaker: Same story as what you have with the GDP.
Speaker: It's led by consumer sectors in China.
Speaker: The recovery is quite substantial.
Speaker: I mean, last year earnings were pretty much non-existent.
Speaker: What is important is that we see that consensus is upgrading this forecast as well.
Speaker: We haven't seen this for three years.
Speaker: But Chinese earnings are continuously being upgraded.
Speaker: So the outlook for earnings growth in Chinese equities is pretty good at the moment.
Speaker: So we have noticed that the inflows to Chinese equities have picked up.
Speaker: Do you expect that trend to continue?
Speaker: Yeah, I expect that trend to continue.
Speaker: What we've seen since October last year is a very significant pickup inflows into Chinese equities, predominantly actually into the Hong Kong market.
Speaker: A lot of funds, Asian-based funds, now seem to be at least neutralish in their position.
Speaker: the global funds are still significantly underweight.
Speaker: So I think we're going to see continuous inflows into China as we get further confirmation that the recovery that you spoke about is actually materializing, but that from the regional funds, the magnitude of inflows was slow.
Speaker: They've already bought a lot.
Speaker: But it's the global funds where we need to see the inflows going to come from.
Speaker: And those are funds that don't have to invest in China or Asia, but can opt to do so.
Speaker: So, yeah, there will be inflows, maybe not as strong as what we've seen in the past.
Speaker: And it's really driven by global assets allocators, I believe.
Speaker: I see.
Speaker: So as we know, international investors can choose to invest in A shares or H shares.
Speaker: What's your expectation for flows into those two markets?
Speaker: Yeah, so you're right.
Speaker: International investors have the option to choose mainland Chinese companies that are listed in Hong Kong.
Speaker: We call those the H shares or those that are listed in either Shanghai and Shenzhen.
Speaker: And we call those the A share market.
Speaker: The composition of these two markets is very different.
Speaker: The larger internet names are listed in Hong Kong, but for example, not in Shanghai.
Speaker: In Shanghai, we have mostly insurance companies and banks and consumer companies and those sort of more traditional names.
Speaker: What we've seen over the last couple of months is that most international investors have gone to Hong Kong.
Speaker: That market has outperformed.
Speaker: It's done much better than the Asia market.
Speaker: But more recently, we've seen significant flows from Hong Kong into the Asia market in Shenzhen and Shanghai through the Stock Connect program.
Speaker: Those flows are really significant.
Speaker: Now, what we also know is that a lot of funds are already neutralists.
Speaker: It's the global funds that are going to come in.
Speaker: What we actually see now is that there is a large flow from Hong Kong going into Shanghai.
Speaker: What we call northbound flows have been very, very strong over the last couple of months.
Speaker: That might well continue in the next couple of months.
Speaker: So basically the picture that emerges here is that China's economy is recovering.
Speaker: We're seeing a growing confidence that is leading to more consumption and investment that is being then also translated in stronger earnings growth for the companies that are listed in either Shanghai or in Hong Kong.
Speaker: So it's a positive story that is unfolding in China.
Speaker: Jing, very quickly, can you remind me what your GDP forecasts are for this year and next year in China?
Speaker: 5.6% this year and 5.5% next year.
Speaker: Excellent.
Speaker: Well, great for having you on the podcast this week, Jing.
Speaker: Nice chatting with you.
Speaker: Thanks.
Speaker: And with that, we come to the end of another episode of Under the Banyan Tree.
Speaker: Thanks as always for joining us.
Speaker: And if you haven't already, be sure to listen also to other global research podcasts such as the Macro Viewpoint and the ESG Brief wherever you're listening to us right now.
Speaker: We'll be back again next week.
Speaker: Take care till then.
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