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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Daybreak,

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Speaker 1: aisha podcast. I'm Doug Prisner. You can join Brian Curtis

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Speaker 1: and myself for the stories, making news and moving markets

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Speaker 1: in the APAC region. You can subscribe to the show

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Speaker 1: anywhere you get your podcast and always on Bloomberg Radio,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App.

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Speaker 2: Joining us now in our studios in Hong Kong is

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Speaker 2: David Chu, Bloomberg China economist. David We mentioned there that

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Speaker 2: that cut in the mortgage reference rate, the five year

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Speaker 2: loan prime rate of twenty five basis points, while being

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Speaker 2: greater than expected, was met with kind of I don't

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Speaker 2: know if it's a yawn or a little bit of

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Speaker 2: disdain even in the market. Is that fair?

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Speaker 3: Well?

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Speaker 4: I have to say that it was not such a

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Speaker 4: big surprise to the market because the PBOC has had

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Speaker 4: it delivered to some of the indication via some media

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Speaker 4: before the reduction in the five year LPR. But actually

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Speaker 4: I have to say people didn't expect that it was

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Speaker 4: cut so much, because we expected that it could be

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Speaker 4: five or ten BIPs, but it turned out to be

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Speaker 4: twenty five. Well, I have some reasons for the twenty

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Speaker 4: five business point cut. Although the base the policy rate,

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Speaker 4: which is the one year MLF rates was steady because

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Speaker 4: in last year August, when the people cut the policy

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Speaker 4: rate by fifteen bibs, the five year LPR remained steady.

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Speaker 4: It didn't change, so that it allowed the five year

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Speaker 4: LPR to have at least fifteen business points to cut

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Speaker 4: in this year. So another reason, apparently the commercial banks

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Speaker 4: had another ten bibs for the reduction, so that it's

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Speaker 4: total to be twenty five. So one thing we are

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Speaker 4: talking about, we are thinking is that whether this can stimulate,

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Speaker 4: try or raise China's housing market. That is the key

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Speaker 4: question because as we just decided that the five year

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Speaker 4: LPR is the base or the benchmark for the mortgage rate.

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Speaker 4: And apparently that it seems that the authorities are trying

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Speaker 4: to help the housing market. But to be honest, we

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Speaker 4: are not so optimistic on this because if you look

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Speaker 4: at the housing market in China, it has been sleeping

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Speaker 4: over the past two years, and the sentiment in the

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Speaker 4: market is very weak, especially in the lower tier cities

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Speaker 4: such as the Tier three and Tier four cities. So

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Speaker 4: and also we see the oversupply in the housing market,

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Speaker 4: so that putting all this together, we think, yes, it

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Speaker 4: will help, but the help should be very limited.

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Speaker 1: I'm wondering whether anyone is concerned about the pressure that

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Speaker 1: this would put on banks. I mean, obviously when you

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Speaker 1: lower interest rates, it puts a little bit of pressure

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Speaker 1: on your margins. Is that a chief concern or will

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Speaker 1: it be let's call it a sacrifice that has to

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Speaker 1: be made as authorities try to rescue or unwine this

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Speaker 1: property crisis.

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Speaker 4: Well, I agree with you that that the banks are

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Speaker 4: not so happy with this. Actually, in January I had

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Speaker 4: a travel in Beijing and Shanghai and to see some

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Speaker 4: bankers and they told me that they were worried about

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Speaker 4: the narrowing of their interest to margin. But it seems that,

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Speaker 4: as you said, that it is a more political decision

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Speaker 4: to to to press the interest margin further because I

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Speaker 4: think maybe, uh, the leaders think that the bankings actor

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Speaker 4: should do something to help the economy as a whole.

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Speaker 2: Yeah, it's about affordability, and even you know, pressure is

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Speaker 2: building here in Hong Kong for the government to relax

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Speaker 2: some of the restrictions on buying homes that we've seen

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Speaker 2: for almost a decade now, and we're even seeing that

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Speaker 2: pressure coming from pro China parties, and we're talking about

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Speaker 2: things like the stamp duties, some of the friction that's

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Speaker 2: in there, for instance, also the size of the down payment.

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Speaker 2: In some cases you have put fifty percent down, then

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Speaker 2: you have to pay a fifteen percent stamp duty, and

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Speaker 2: it's on and on and on. Do you think that

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Speaker 2: the time is ripe now for both Hong Kong and

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Speaker 2: China to think about relaxing some of these restrictions.

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Speaker 4: Actually, I think it's not about the timing, because for both,

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Speaker 4: especially for mainland China, they have been cutting the down

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Speaker 4: payment ratio and also the mortgage rates and also relaxed

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Speaker 4: the Home Purchase.

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Speaker 2: Act yourself, Is it working?

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Speaker 4: Yeah, that is the question whether it works. But honestly,

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Speaker 4: it hasn't worked so much in China.

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Speaker 1: Do you think things are so desperate now that there's

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Speaker 1: going to be a major initiative unveiled at the National

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Speaker 1: People's Congress, which I guess is set for early March.

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Speaker 1: My authorities wait for that moment in time to unveil

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Speaker 1: something that's a little bit more sweeping in scope. I mean,

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Speaker 1: clearly there is just declining center it not just as

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Speaker 1: it relates to the property market, but the equity market

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Speaker 1: as well.

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Speaker 4: Yes, I think for both the housing sector or housing

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Speaker 4: market and the equity market, people have the same concern.

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Speaker 4: It is whether China is still still views the growth

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Speaker 4: as the top priority. I think that would be a

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Speaker 4: signal that we can see from the the People's Congress

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Speaker 4: in the coming months. But to be honest, I don't

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Speaker 4: think that even the government or the authorities release the

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Speaker 4: signal that we still view it very important. I really

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Speaker 4: doubt how much the market can buy it.

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Speaker 2: I'm going to going to ask you a question. You're

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Speaker 2: an economist, and you're going to say, oh boy, you know,

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Speaker 2: that's kind of a political question. But it seems like

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Speaker 2: what we have here is an issue that comes down

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Speaker 2: to societal considerations versus economic considerations. We understand that a

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Speaker 2: lot of what President Chijenping is trying to do is

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Speaker 2: good for the common man, but that may not be

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Speaker 2: in the shorter term, what's good for the economy. How

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Speaker 2: do you decide?

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Speaker 4: Yeah, that is a kind of it could be a

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Speaker 4: trade off, because if you want to make the common prosperity,

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Speaker 4: or in other words, you want to help the common people.

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Speaker 2: You want to make property more affordable to the average person,

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Speaker 2: but then it slows down the economy to the point

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Speaker 2: where the average person may not even have a job.

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Speaker 2: You know what makes more sense?

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Speaker 4: That is the question, you know, because I think what

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Speaker 4: caused the pain. It was the timing, because I think personally,

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Speaker 4: I think it was a bit late for the government

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Speaker 4: to do so. They should have done that ten years

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Speaker 4: ago to do it. But if you leave the problem today,

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Speaker 4: you must have some price for that, right.

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Speaker 1: David, I'm wondering whether or not you could see a

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Speaker 1: world where authorities, let's say at the Central Bank, began

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Speaker 1: to adopt something that both Japan and the US have used,

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Speaker 1: where the Central Bank has used its balance sheet through

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Speaker 1: quantitative easing to address the problems that the China is

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Speaker 1: facing with so much bad credit right now. Is that

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Speaker 1: something that you think they might experiment with.

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Speaker 4: Well, I have to say that I have been asked

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Speaker 4: about this question at least a dozen of times over

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Speaker 4: the past year. But I have to say that for China,

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Speaker 4: the PBOC always have some quantitative tools. So when the

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Speaker 4: PBOC is doing easing or tightening, it is doing so

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Speaker 4: in both the price and the quantitative side. For example,

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Speaker 4: the PBOC can raise or cut the triple R, which

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Speaker 4: is definitely a quantitative tool. And also the PBOC can

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Speaker 4: do something to inject the more money via the MLF

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Speaker 4: or the PSL DOT two tools are also qutitative. So

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Speaker 4: for the PBOC it is not a quite enough whether

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Speaker 4: a quantitative eating or not. They always do that.

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Speaker 2: Yeah, all right, David, thanks very much. I enjoyed this

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Speaker 2: session quite a lot. David Chu, Bloomberg China economist. Joining

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Speaker 2: us now is Shuly your En Bloomberg opinion columnists to

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Speaker 2: take a look at market sentiment on Chinese and Japanese markets.

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Speaker 2: She wrote a piece citing two articles from Barons and

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Speaker 2: one of them talked about how Toyota Motor Company was

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Speaker 2: looking like a growth stock, whereas in China it's a

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Speaker 2: totally different story. Let's get to Shuley. Thanks very much,

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Speaker 2: Shuley for joining us here on the program. Is that

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Speaker 2: still the case even after the big run up in

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Speaker 2: Japanese shares? And you know, how long can this continue?

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Speaker 3: We don't know, but it does seem to be the case,

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Speaker 3: especially early this year January and February. Like over the

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Speaker 3: last decade, basically a lot of global investors have plowed

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Speaker 3: their money into Chinese stocks, a lot of them trading

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Speaker 3: in Hong Kong, right, and everyone knows that the China's

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Speaker 3: economy has some structural issues that cannot be solved there

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Speaker 3: within perhaps even a year or two, So that's why they're.

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Speaker 5: Looking everywhere else.

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Speaker 3: And India has become very expensive, So of course Japan

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Speaker 3: is the other big liquid market that for investors can

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Speaker 3: go to.

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Speaker 5: That's why they're going.

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Speaker 1: What I'm listening to comes to mind is the corporate

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Speaker 1: reform that has taken place in Japan, which may be

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Speaker 1: underpinning the rally that we have seen in Japanese equities.

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Speaker 1: And on the other hand, the situation in China where

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Speaker 1: the regulatory regime is so mercurial and shifting, such a

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Speaker 1: lack of clarity on what policy is going to be

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Speaker 1: for the foreseeable future. Does that come into play in

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Speaker 1: any way? Do you think that dichotomy?

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Speaker 5: Yes?

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Speaker 3: Absolutely, I mean, like in China, like I think investors

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Speaker 3: at this point, they're not even looking for stimulus, They're

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Speaker 3: just looking for some predicted predictability and the stability. I

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Speaker 3: mean with Japan, the corporate reform story is actually quite old.

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Speaker 3: It started with has basically a decade ago. And I

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Speaker 3: do want to say that the Japan you know that

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Speaker 3: the investment narratives that we are seeing Japan, these are

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Speaker 3: not news stories.

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Speaker 5: They have been around for a decade.

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Speaker 3: It's just that the investors being burned by China in

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Speaker 3: such a dramatic fashion that they're willing to give Japan

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Speaker 3: a second look. And it's not clear to me that

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Speaker 3: Japan can finally come out of this deflationary environment.

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Speaker 2: I remember you from your days at Barons. It was

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Speaker 2: more than a decade ago. And yeah, so this piece

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Speaker 2: about about you know, Japan looking like the growth story

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Speaker 2: in China looking like a value play. You say that

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Speaker 2: it's value trapped, not a value play, particularly I suppose

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Speaker 2: because of policy and is it likely to change sometime soon?

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Speaker 2: I mean you are starting to see almost daily developments

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Speaker 2: with the policy makers in China. Now do they realize it?

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Speaker 3: I think there is some good trend. For instance, the

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Speaker 3: new security is watchedot he sounds a little bit more humble.

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Speaker 3: He's willing to hear opinions from market participants, and that

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Speaker 3: could be a good trend. Butruct structurally, China's property sector

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Speaker 3: used to account for twenty five percent of the GDP,

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Speaker 3: and structurally, this property sector has not found its bottom.

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Speaker 3: I mean, let's just compare the home prices right from

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Speaker 3: peak to trial to now. Basically, home prices have come

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Speaker 3: downly about twenty percent. During the US subprime crisis in

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Speaker 3: twenty two thousand and eight, the price came down by

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Speaker 3: forty percent.

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Speaker 5: So we just feel that there is no bottom yet.

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Speaker 3: So regardless of how the Chinese government changes, it's tom

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Speaker 3: economy is economy, right, it's the fundamentals.

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Speaker 6: Yeah.

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Speaker 1: The other thing that's interesting is to after thirty years,

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Speaker 1: we're getting an indication that Japan is leaving a deflationary trap,

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Speaker 1: and it seems like Chinese is now firmly you know,

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Speaker 1: under one or one is firmly underway in China right now.

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Speaker 3: Yes, but I do want to say that it looks

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Speaker 3: like Japan is coming out of the deflationary trap, but

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Speaker 3: not quite right, Like if this inflation is ongoing globally,

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Speaker 3: I mean Japan's it's unclear how much inflation Japan can have.

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Speaker 3: And also global investors are not expecting Japan to Japan's

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Speaker 3: economy to grow slowly but not so fast that the

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Speaker 3: Bank of Japan changes is quantity easy, and that is

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Speaker 3: a very blue sky scenario.

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Speaker 2: The policy makers in China are hinting that deflation is

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Speaker 2: just about run its course. Do you believe them?

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Speaker 5: No?

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Speaker 3: I mean at this point, like China has a statistics

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Speaker 3: is all very opaque, right, Like we don't know what's

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Speaker 3: in the like a CPI basket, but just from anecdotal experiences,

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Speaker 3: everything is kind of un sale in China, Like if

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Speaker 3: you go to restaurants, there are always discount steals, you know,

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Speaker 3: home prices, secondary home sales that there are always you know,

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Speaker 3: some kind of under the table coupunsen et cetera.

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Speaker 5: So we don't believe that. No Chinese believes that.

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Speaker 1: So before you were barons, you were here in the

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Speaker 1: US working for a major investment bank whose name I

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Speaker 1: will not mention. So you have some familiarity with the

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Speaker 1: banking industry overall. And I'm wondering, is there a way

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Speaker 1: to compare and contrast what is likely to happen for

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Speaker 1: Japanese banks versus Chinese banks, given the situation that you've

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Speaker 1: been kind of laying out for US.

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Speaker 3: I think with Japanese banks there their biggest obstacle is

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Speaker 3: uh uh. I mean there has been no interest rate

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Speaker 3: margin for Japanese banks because it's zero percent for the

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Speaker 3: longest time, right, So, so their their problem is that

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Speaker 3: some of them have gone overseas, like you know, more

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Speaker 3: brokerages as well, no moral et cetera, and then they

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Speaker 3: could have exposure to to the weakening global commercial real estate.

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Speaker 3: With Chinese banks, their problem is that their interest rate

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Speaker 3: margins have are also compressing because the Chinese government wants

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Speaker 3: the banks to give our loans very cheaply. But you

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Speaker 3: know that that really contracts the Chinese banks profit margins

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Speaker 3: and that that could hurt their capitalization ratios as well.

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Speaker 2: So if we look at China and try to figure

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Speaker 2: out a way of getting out of this, you think

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Speaker 2: that deflation is still pretty well entrenched and that households

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Speaker 2: are you know, they're saving, they're not spending. Is there

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Speaker 2: a way to transfer some of that wealth to households

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Speaker 2: so that they can feel more comfortable? You know, we

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Speaker 2: often think of tax cuts, that's not often considered in China.

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Speaker 2: What about some other measures that would you know, move

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Speaker 2: capital into the household sector.

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Speaker 3: I think at this point it's the sentiments, and I'm

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Speaker 3: not sure about this because China has no opinion polls.

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Speaker 3: But I have a feeling that the households are just

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Speaker 3: doing this revenge non consumption because they were burned quite

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Speaker 3: badly during the three years of COVID lockdowns, right and lot.

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Speaker 3: Like just anecdotally, some people that I know who have

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Speaker 3: no financial issues, they're still not willing to spend. They

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Speaker 3: just think, why am I contributing to the economy, Like

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Speaker 3: the government can can take care of everything. Like it's

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Speaker 3: almost kind of a revenge what the lockdowns. So if

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Speaker 3: that is indeed the case, I mean, like we have

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Speaker 3: to talk about psychology.

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Speaker 5: Oh yeah, great, measures.

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Speaker 1: Absolutely, that's a fascinating point. Surely, thank you.

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Speaker 2: One of our big stories in the past twenty four

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Speaker 2: hours capital One Financial agreeing to buy Discover in a

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Speaker 2: thirty five billion dollar all stock deal. The deal would

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Speaker 2: create the largest US credit card company by loan volume.

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Speaker 2: But there is a catch and joining us now is

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Speaker 2: Adam Hag, Bloomberg Finance editor, to discuss more on this story.

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Speaker 2: I find this a fascinating story because it goes to

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Speaker 2: a lot of things business model. It could help capital

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Speaker 2: One compete with amex here and lower its cost by

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Speaker 2: not having a process through MasterCard. And Visa, extra competition

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Speaker 2: for MasterCard and Visa. You just go on and on.

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Speaker 2: Of course, there's the ANI trust concerns as well. Maybe

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Speaker 2: we can deal with that first. Is this the type

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Speaker 2: of story, Adam, that you think ultimately gets blocked by

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Speaker 2: a Biden administration, this sort of anti mega merger. Yeah.

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Speaker 7: Well, the thing to watch, of course is the timing

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Speaker 7: of when any block would would take place. Obviously we're

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Speaker 7: in an election year in the US, and there's a

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Speaker 7: lot of political capital now going to go into scrutinizing

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Speaker 7: this deal. And we've seen already Senator Elizabeth Warren of

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Speaker 7: course come out quite quickly and make some quite clear

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Speaker 7: comments on Twitter to raise the argument about how this

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Speaker 7: not only threatens financial stability and reduces competition, she said,

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Speaker 7: but raises costs for Americans. Is a is a typical

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Speaker 7: kind of language that you would expect to get this

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Speaker 7: into the political discourse to try and examine some of

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Speaker 7: the issues that we have. So the next few months

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Speaker 7: will be will be crucial. But the timing whether this

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Speaker 7: ends up getting postponed and is a post election decision

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Speaker 7: or not, I think is crucial. There's obviously so many

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Speaker 7: hurdles still to get through, so this could still drag

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Speaker 7: on for quite some time.

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Speaker 1: I think the strategy is also interesting. If you're Capital One.

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Speaker 1: Up until this point, you've been catering to a lot

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Speaker 1: of some subprime borrowers. This is an opportunity because Discover

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Speaker 1: is traditionally kind of gone after those of kind of

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Speaker 1: a higher credit quality. But one of the things that

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Speaker 1: I think is equally as interesting here is that Discover

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Speaker 1: has kind of put itself in a very weak situation.

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Speaker 1: I mean, I think the stock has been decimated over

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Speaker 1: a period of time. There were a lot of concerns

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Speaker 1: here about management, and I'm wondering whether or not Capital

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Speaker 1: one is basically capitalizing on another company's weakness.

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Speaker 6: Well that could that could be a lot of truth

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Speaker 6: in that, and you see that often with with M

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Speaker 6: and A transactions, where you know the company being acquired

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Speaker 6: has been through quite some turmoil.

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Speaker 7: And so the advertised kind of premium on this deal is,

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Speaker 7: you know, about thirty percent of that closing price on

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Speaker 7: February sixteen, But of course you look at what's been

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Speaker 7: happening to that stock and it's it's pretty clear the

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Speaker 7: position that they are in. So so yes, I think

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Speaker 7: there's a large degree of truth in that analysis that

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Speaker 7: they are. You know, Capter one is coming in at

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Speaker 7: at a time of real weakness for the company that

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Speaker 7: they're buying. But of course there may still be you know,

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Speaker 7: a number of synergies, a number of kind of things

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Speaker 7: that they can do to to for a long term

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Speaker 7: shareholder for that still to be very very rewarding.

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Speaker 2: Discoverer has struggled in trying to compete with Visa, mag

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Speaker 2: to card Let alone someone like American Express. So this

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Speaker 2: would seem to be you know, almost stroke of genius

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Speaker 2: in the sense that the two together could be a

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Speaker 2: formidable competitor to the other two. And I wonder whether

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Speaker 2: that runs a little counter to the kind of knee

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Speaker 2: jerk reaction that we saw from Shert Brown and Elizabeth Warren.

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Speaker 2: They couldn't possibly have had time to analyze, you know,

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Speaker 2: the impact on the marketplace. You have a duopoly, a

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Speaker 2: virtual duopoly now with Master Garden Visa on the processing

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Speaker 2: it even Capital One has to run its processing through them,

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Speaker 2: Like you said, maybe some time, maybe some cooler heads.

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Speaker 7: Well indeed, and I think there that goes to the

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Speaker 7: heart of this. There's a lot of nuance in the

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Speaker 7: analysis of the competition here. So there's a number of

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Speaker 7: different things at play, and of course the distribution element

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Speaker 7: for discovery is key. But how this addresses or changes

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Speaker 7: the competitive landscape in the different sectors of the economy

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Speaker 7: in which these companies operate, I think is key. It's

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Speaker 7: a it's not kind of a one size fits all

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Speaker 7: competition argument. There's lots of nuance and there's lots of

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Speaker 7: kind of detail in there. And indeed, the quick response

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Speaker 7: that we saw from some of these politicians speaks to

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Speaker 7: that idea that you raise that perhaps maybe we haven't

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Speaker 7: gone through the detail. Let's just take a step back,

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Speaker 7: let's analyze really what this could do to the competitive

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Speaker 7: landscape before reaching a conclusion whether this is anti competitive

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Speaker 7: or not.

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Speaker 1: I think that's very interesting also because Dick Durbin, i think,

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Speaker 1: is trying to move forward the legislation on the Senate

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Speaker 1: side to foster competition among credit card networks. To Bryan's point,

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Speaker 1: right now, right that is pretty much controlled by Visa

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Speaker 1: and MasterCard.

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Speaker 2: Yeah, it's a very good point.

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Speaker 7: Yeah, absolutely, Yeah, And you know, there there's a long

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Speaker 7: term these are things that will have long term impact

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Speaker 7: on this sector. So we shouldn't jump too quick conclusions.

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Speaker 7: We should really look at the detail and examine just

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Speaker 7: how this will impact the sector and how this will

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Speaker 7: play out, because ultimately, consumers need to feel that they

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Speaker 7: would benefit from this long term, that that they need,

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Speaker 7: they need that kind of sense of comfort for this

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Speaker 7: deal to get done.

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Speaker 2: I guess the response in the marketplace, and you know,

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Speaker 2: you have investors really running through the numbers, and it does.

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Speaker 2: It does inform a little master guard down three and

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Speaker 2: a half percent, Visa down as well, Discover up. So obviously,

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Speaker 2: you know, it looks like it's almost like a Knight

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Speaker 2: in shining armor coming to the rescue. A Discover gained

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Speaker 2: twelve point six percent and for Capital one, well little changed.

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Speaker 2: So what do you read into some of these stock

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Speaker 2: price movements, Adam Well, I.

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Speaker 7: Think some of those moves are bigger than others. Right,

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Speaker 7: So the Discovery twelve thirteen percent or so moves is

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Speaker 7: pretty clear. We probably don't need to say that much

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Speaker 7: about that. But the you know, some of the Visa

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Speaker 7: one you mentioned that there's small moves really that they're

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Speaker 7: not they're not. They don't appear to me to suggest

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Speaker 7: that this is an investor base that has decided that

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Speaker 7: this is definitely a net negative for MasterCard in any

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Speaker 7: meaningful way. So I think you should just pause for

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Speaker 7: thoughts slightly and just understand what these stocks do over

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Speaker 7: the coming days earning it's all been decided in the

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Speaker 7: most recent trait.

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Speaker 2: Hi, Adam, thanks so much. Adam, Hey, Bloomberg Finance.

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Speaker 3: Editor with US Live.

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