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Speaker 2: Joining us now in our studios in Hong Kong is
Speaker 2: David Chu, Bloomberg China economist. David We mentioned there that
Speaker 2: that cut in the mortgage reference rate, the five year
Speaker 2: loan prime rate of twenty five basis points, while being
Speaker 2: greater than expected, was met with kind of I don't
Speaker 2: know if it's a yawn or a little bit of
Speaker 2: disdain even in the market. Is that fair?
Speaker 3: Well?
Speaker 4: I have to say that it was not such a
Speaker 4: big surprise to the market because the PBOC has had
Speaker 4: it delivered to some of the indication via some media
Speaker 4: before the reduction in the five year LPR. But actually
Speaker 4: I have to say people didn't expect that it was
Speaker 4: cut so much, because we expected that it could be
Speaker 4: five or ten BIPs, but it turned out to be
Speaker 4: twenty five. Well, I have some reasons for the twenty
Speaker 4: five business point cut. Although the base the policy rate,
Speaker 4: which is the one year MLF rates was steady because
Speaker 4: in last year August, when the people cut the policy
Speaker 4: rate by fifteen bibs, the five year LPR remained steady.
Speaker 4: It didn't change, so that it allowed the five year
Speaker 4: LPR to have at least fifteen business points to cut
Speaker 4: in this year. So another reason, apparently the commercial banks
Speaker 4: had another ten bibs for the reduction, so that it's
Speaker 4: total to be twenty five. So one thing we are
Speaker 4: talking about, we are thinking is that whether this can stimulate,
Speaker 4: try or raise China's housing market. That is the key
Speaker 4: question because as we just decided that the five year
Speaker 4: LPR is the base or the benchmark for the mortgage rate.
Speaker 4: And apparently that it seems that the authorities are trying
Speaker 4: to help the housing market. But to be honest, we
Speaker 4: are not so optimistic on this because if you look
Speaker 4: at the housing market in China, it has been sleeping
Speaker 4: over the past two years, and the sentiment in the
Speaker 4: market is very weak, especially in the lower tier cities
Speaker 4: such as the Tier three and Tier four cities. So
Speaker 4: and also we see the oversupply in the housing market,
Speaker 4: so that putting all this together, we think, yes, it
Speaker 4: will help, but the help should be very limited.
Speaker 1: I'm wondering whether anyone is concerned about the pressure that
Speaker 1: this would put on banks. I mean, obviously when you
Speaker 1: lower interest rates, it puts a little bit of pressure
Speaker 1: on your margins. Is that a chief concern or will
Speaker 1: it be let's call it a sacrifice that has to
Speaker 1: be made as authorities try to rescue or unwine this
Speaker 1: property crisis.
Speaker 4: Well, I agree with you that that the banks are
Speaker 4: not so happy with this. Actually, in January I had
Speaker 4: a travel in Beijing and Shanghai and to see some
Speaker 4: bankers and they told me that they were worried about
Speaker 4: the narrowing of their interest to margin. But it seems that,
Speaker 4: as you said, that it is a more political decision
Speaker 4: to to to press the interest margin further because I
Speaker 4: think maybe, uh, the leaders think that the bankings actor
Speaker 4: should do something to help the economy as a whole.
Speaker 2: Yeah, it's about affordability, and even you know, pressure is
Speaker 2: building here in Hong Kong for the government to relax
Speaker 2: some of the restrictions on buying homes that we've seen
Speaker 2: for almost a decade now, and we're even seeing that
Speaker 2: pressure coming from pro China parties, and we're talking about
Speaker 2: things like the stamp duties, some of the friction that's
Speaker 2: in there, for instance, also the size of the down payment.
Speaker 2: In some cases you have put fifty percent down, then
Speaker 2: you have to pay a fifteen percent stamp duty, and
Speaker 2: it's on and on and on. Do you think that
Speaker 2: the time is ripe now for both Hong Kong and
Speaker 2: China to think about relaxing some of these restrictions.
Speaker 4: Actually, I think it's not about the timing, because for both,
Speaker 4: especially for mainland China, they have been cutting the down
Speaker 4: payment ratio and also the mortgage rates and also relaxed
Speaker 4: the Home Purchase.
Speaker 2: Act yourself, Is it working?
Speaker 4: Yeah, that is the question whether it works. But honestly,
Speaker 4: it hasn't worked so much in China.
Speaker 1: Do you think things are so desperate now that there's
Speaker 1: going to be a major initiative unveiled at the National
Speaker 1: People's Congress, which I guess is set for early March.
Speaker 1: My authorities wait for that moment in time to unveil
Speaker 1: something that's a little bit more sweeping in scope. I mean,
Speaker 1: clearly there is just declining center it not just as
Speaker 1: it relates to the property market, but the equity market
Speaker 1: as well.
Speaker 4: Yes, I think for both the housing sector or housing
Speaker 4: market and the equity market, people have the same concern.
Speaker 4: It is whether China is still still views the growth
Speaker 4: as the top priority. I think that would be a
Speaker 4: signal that we can see from the the People's Congress
Speaker 4: in the coming months. But to be honest, I don't
Speaker 4: think that even the government or the authorities release the
Speaker 4: signal that we still view it very important. I really
Speaker 4: doubt how much the market can buy it.
Speaker 2: I'm going to going to ask you a question. You're
Speaker 2: an economist, and you're going to say, oh boy, you know,
Speaker 2: that's kind of a political question. But it seems like
Speaker 2: what we have here is an issue that comes down
Speaker 2: to societal considerations versus economic considerations. We understand that a
Speaker 2: lot of what President Chijenping is trying to do is
Speaker 2: good for the common man, but that may not be
Speaker 2: in the shorter term, what's good for the economy. How
Speaker 2: do you decide?
Speaker 4: Yeah, that is a kind of it could be a
Speaker 4: trade off, because if you want to make the common prosperity,
Speaker 4: or in other words, you want to help the common people.
Speaker 2: You want to make property more affordable to the average person,
Speaker 2: but then it slows down the economy to the point
Speaker 2: where the average person may not even have a job.
Speaker 2: You know what makes more sense?
Speaker 4: That is the question, you know, because I think what
Speaker 4: caused the pain. It was the timing, because I think personally,
Speaker 4: I think it was a bit late for the government
Speaker 4: to do so. They should have done that ten years
Speaker 4: ago to do it. But if you leave the problem today,
Speaker 4: you must have some price for that, right.
Speaker 1: David, I'm wondering whether or not you could see a
Speaker 1: world where authorities, let's say at the Central Bank, began
Speaker 1: to adopt something that both Japan and the US have used,
Speaker 1: where the Central Bank has used its balance sheet through
Speaker 1: quantitative easing to address the problems that the China is
Speaker 1: facing with so much bad credit right now. Is that
Speaker 1: something that you think they might experiment with.
Speaker 4: Well, I have to say that I have been asked
Speaker 4: about this question at least a dozen of times over
Speaker 4: the past year. But I have to say that for China,
Speaker 4: the PBOC always have some quantitative tools. So when the
Speaker 4: PBOC is doing easing or tightening, it is doing so
Speaker 4: in both the price and the quantitative side. For example,
Speaker 4: the PBOC can raise or cut the triple R, which
Speaker 4: is definitely a quantitative tool. And also the PBOC can
Speaker 4: do something to inject the more money via the MLF
Speaker 4: or the PSL DOT two tools are also qutitative. So
Speaker 4: for the PBOC it is not a quite enough whether
Speaker 4: a quantitative eating or not. They always do that.
Speaker 2: Yeah, all right, David, thanks very much. I enjoyed this
Speaker 2: session quite a lot. David Chu, Bloomberg China economist. Joining
Speaker 2: us now is Shuly your En Bloomberg opinion columnists to
Speaker 2: take a look at market sentiment on Chinese and Japanese markets.
Speaker 2: She wrote a piece citing two articles from Barons and
Speaker 2: one of them talked about how Toyota Motor Company was
Speaker 2: looking like a growth stock, whereas in China it's a
Speaker 2: totally different story. Let's get to Shuley. Thanks very much,
Speaker 2: Shuley for joining us here on the program. Is that
Speaker 2: still the case even after the big run up in
Speaker 2: Japanese shares? And you know, how long can this continue?
Speaker 3: We don't know, but it does seem to be the case,
Speaker 3: especially early this year January and February. Like over the
Speaker 3: last decade, basically a lot of global investors have plowed
Speaker 3: their money into Chinese stocks, a lot of them trading
Speaker 3: in Hong Kong, right, and everyone knows that the China's
Speaker 3: economy has some structural issues that cannot be solved there
Speaker 3: within perhaps even a year or two, So that's why they're.
Speaker 5: Looking everywhere else.
Speaker 3: And India has become very expensive, So of course Japan
Speaker 3: is the other big liquid market that for investors can
Speaker 3: go to.
Speaker 5: That's why they're going.
Speaker 1: What I'm listening to comes to mind is the corporate
Speaker 1: reform that has taken place in Japan, which may be
Speaker 1: underpinning the rally that we have seen in Japanese equities.
Speaker 1: And on the other hand, the situation in China where
Speaker 1: the regulatory regime is so mercurial and shifting, such a
Speaker 1: lack of clarity on what policy is going to be
Speaker 1: for the foreseeable future. Does that come into play in
Speaker 1: any way? Do you think that dichotomy?
Speaker 5: Yes?
Speaker 3: Absolutely, I mean, like in China, like I think investors
Speaker 3: at this point, they're not even looking for stimulus, They're
Speaker 3: just looking for some predicted predictability and the stability. I
Speaker 3: mean with Japan, the corporate reform story is actually quite old.
Speaker 3: It started with has basically a decade ago. And I
Speaker 3: do want to say that the Japan you know that
Speaker 3: the investment narratives that we are seeing Japan, these are
Speaker 3: not news stories.
Speaker 5: They have been around for a decade.
Speaker 3: It's just that the investors being burned by China in
Speaker 3: such a dramatic fashion that they're willing to give Japan
Speaker 3: a second look. And it's not clear to me that
Speaker 3: Japan can finally come out of this deflationary environment.
Speaker 2: I remember you from your days at Barons. It was
Speaker 2: more than a decade ago. And yeah, so this piece
Speaker 2: about about you know, Japan looking like the growth story
Speaker 2: in China looking like a value play. You say that
Speaker 2: it's value trapped, not a value play, particularly I suppose
Speaker 2: because of policy and is it likely to change sometime soon?
Speaker 2: I mean you are starting to see almost daily developments
Speaker 2: with the policy makers in China. Now do they realize it?
Speaker 3: I think there is some good trend. For instance, the
Speaker 3: new security is watchedot he sounds a little bit more humble.
Speaker 3: He's willing to hear opinions from market participants, and that
Speaker 3: could be a good trend. Butruct structurally, China's property sector
Speaker 3: used to account for twenty five percent of the GDP,
Speaker 3: and structurally, this property sector has not found its bottom.
Speaker 3: I mean, let's just compare the home prices right from
Speaker 3: peak to trial to now. Basically, home prices have come
Speaker 3: downly about twenty percent. During the US subprime crisis in
Speaker 3: twenty two thousand and eight, the price came down by
Speaker 3: forty percent.
Speaker 5: So we just feel that there is no bottom yet.
Speaker 3: So regardless of how the Chinese government changes, it's tom
Speaker 3: economy is economy, right, it's the fundamentals.
Speaker 6: Yeah.
Speaker 1: The other thing that's interesting is to after thirty years,
Speaker 1: we're getting an indication that Japan is leaving a deflationary trap,
Speaker 1: and it seems like Chinese is now firmly you know,
Speaker 1: under one or one is firmly underway in China right now.
Speaker 3: Yes, but I do want to say that it looks
Speaker 3: like Japan is coming out of the deflationary trap, but
Speaker 3: not quite right, Like if this inflation is ongoing globally,
Speaker 3: I mean Japan's it's unclear how much inflation Japan can have.
Speaker 3: And also global investors are not expecting Japan to Japan's
Speaker 3: economy to grow slowly but not so fast that the
Speaker 3: Bank of Japan changes is quantity easy, and that is
Speaker 3: a very blue sky scenario.
Speaker 2: The policy makers in China are hinting that deflation is
Speaker 2: just about run its course. Do you believe them?
Speaker 5: No?
Speaker 3: I mean at this point, like China has a statistics
Speaker 3: is all very opaque, right, Like we don't know what's
Speaker 3: in the like a CPI basket, but just from anecdotal experiences,
Speaker 3: everything is kind of un sale in China, Like if
Speaker 3: you go to restaurants, there are always discount steals, you know,
Speaker 3: home prices, secondary home sales that there are always you know,
Speaker 3: some kind of under the table coupunsen et cetera.
Speaker 5: So we don't believe that. No Chinese believes that.
Speaker 1: So before you were barons, you were here in the
Speaker 1: US working for a major investment bank whose name I
Speaker 1: will not mention. So you have some familiarity with the
Speaker 1: banking industry overall. And I'm wondering, is there a way
Speaker 1: to compare and contrast what is likely to happen for
Speaker 1: Japanese banks versus Chinese banks, given the situation that you've
Speaker 1: been kind of laying out for US.
Speaker 3: I think with Japanese banks there their biggest obstacle is
Speaker 3: uh uh. I mean there has been no interest rate
Speaker 3: margin for Japanese banks because it's zero percent for the
Speaker 3: longest time, right, So, so their their problem is that
Speaker 3: some of them have gone overseas, like you know, more
Speaker 3: brokerages as well, no moral et cetera, and then they
Speaker 3: could have exposure to to the weakening global commercial real estate.
Speaker 3: With Chinese banks, their problem is that their interest rate
Speaker 3: margins have are also compressing because the Chinese government wants
Speaker 3: the banks to give our loans very cheaply. But you
Speaker 3: know that that really contracts the Chinese banks profit margins
Speaker 3: and that that could hurt their capitalization ratios as well.
Speaker 2: So if we look at China and try to figure
Speaker 2: out a way of getting out of this, you think
Speaker 2: that deflation is still pretty well entrenched and that households
Speaker 2: are you know, they're saving, they're not spending. Is there
Speaker 2: a way to transfer some of that wealth to households
Speaker 2: so that they can feel more comfortable? You know, we
Speaker 2: often think of tax cuts, that's not often considered in China.
Speaker 2: What about some other measures that would you know, move
Speaker 2: capital into the household sector.
Speaker 3: I think at this point it's the sentiments, and I'm
Speaker 3: not sure about this because China has no opinion polls.
Speaker 3: But I have a feeling that the households are just
Speaker 3: doing this revenge non consumption because they were burned quite
Speaker 3: badly during the three years of COVID lockdowns, right and lot.
Speaker 3: Like just anecdotally, some people that I know who have
Speaker 3: no financial issues, they're still not willing to spend. They
Speaker 3: just think, why am I contributing to the economy, Like
Speaker 3: the government can can take care of everything. Like it's
Speaker 3: almost kind of a revenge what the lockdowns. So if
Speaker 3: that is indeed the case, I mean, like we have
Speaker 3: to talk about psychology.
Speaker 5: Oh yeah, great, measures.
Speaker 1: Absolutely, that's a fascinating point. Surely, thank you.
Speaker 2: One of our big stories in the past twenty four
Speaker 2: hours capital One Financial agreeing to buy Discover in a
Speaker 2: thirty five billion dollar all stock deal. The deal would
Speaker 2: create the largest US credit card company by loan volume.
Speaker 2: But there is a catch and joining us now is
Speaker 2: Adam Hag, Bloomberg Finance editor, to discuss more on this story.
Speaker 2: I find this a fascinating story because it goes to
Speaker 2: a lot of things business model. It could help capital
Speaker 2: One compete with amex here and lower its cost by
Speaker 2: not having a process through MasterCard. And Visa, extra competition
Speaker 2: for MasterCard and Visa. You just go on and on.
Speaker 2: Of course, there's the ANI trust concerns as well. Maybe
Speaker 2: we can deal with that first. Is this the type
Speaker 2: of story, Adam, that you think ultimately gets blocked by
Speaker 2: a Biden administration, this sort of anti mega merger. Yeah.
Speaker 7: Well, the thing to watch, of course is the timing
Speaker 7: of when any block would would take place. Obviously we're
Speaker 7: in an election year in the US, and there's a
Speaker 7: lot of political capital now going to go into scrutinizing
Speaker 7: this deal. And we've seen already Senator Elizabeth Warren of
Speaker 7: course come out quite quickly and make some quite clear
Speaker 7: comments on Twitter to raise the argument about how this
Speaker 7: not only threatens financial stability and reduces competition, she said,
Speaker 7: but raises costs for Americans. Is a is a typical
Speaker 7: kind of language that you would expect to get this
Speaker 7: into the political discourse to try and examine some of
Speaker 7: the issues that we have. So the next few months
Speaker 7: will be will be crucial. But the timing whether this
Speaker 7: ends up getting postponed and is a post election decision
Speaker 7: or not, I think is crucial. There's obviously so many
Speaker 7: hurdles still to get through, so this could still drag
Speaker 7: on for quite some time.
Speaker 1: I think the strategy is also interesting. If you're Capital One.
Speaker 1: Up until this point, you've been catering to a lot
Speaker 1: of some subprime borrowers. This is an opportunity because Discover
Speaker 1: is traditionally kind of gone after those of kind of
Speaker 1: a higher credit quality. But one of the things that
Speaker 1: I think is equally as interesting here is that Discover
Speaker 1: has kind of put itself in a very weak situation.
Speaker 1: I mean, I think the stock has been decimated over
Speaker 1: a period of time. There were a lot of concerns
Speaker 1: here about management, and I'm wondering whether or not Capital
Speaker 1: one is basically capitalizing on another company's weakness.
Speaker 6: Well that could that could be a lot of truth
Speaker 6: in that, and you see that often with with M
Speaker 6: and A transactions, where you know the company being acquired
Speaker 6: has been through quite some turmoil.
Speaker 7: And so the advertised kind of premium on this deal is,
Speaker 7: you know, about thirty percent of that closing price on
Speaker 7: February sixteen, But of course you look at what's been
Speaker 7: happening to that stock and it's it's pretty clear the
Speaker 7: position that they are in. So so yes, I think
Speaker 7: there's a large degree of truth in that analysis that
Speaker 7: they are. You know, Capter one is coming in at
Speaker 7: at a time of real weakness for the company that
Speaker 7: they're buying. But of course there may still be you know,
Speaker 7: a number of synergies, a number of kind of things
Speaker 7: that they can do to to for a long term
Speaker 7: shareholder for that still to be very very rewarding.
Speaker 2: Discoverer has struggled in trying to compete with Visa, mag
Speaker 2: to card Let alone someone like American Express. So this
Speaker 2: would seem to be you know, almost stroke of genius
Speaker 2: in the sense that the two together could be a
Speaker 2: formidable competitor to the other two. And I wonder whether
Speaker 2: that runs a little counter to the kind of knee
Speaker 2: jerk reaction that we saw from Shert Brown and Elizabeth Warren.
Speaker 2: They couldn't possibly have had time to analyze, you know,
Speaker 2: the impact on the marketplace. You have a duopoly, a
Speaker 2: virtual duopoly now with Master Garden Visa on the processing
Speaker 2: it even Capital One has to run its processing through them,
Speaker 2: Like you said, maybe some time, maybe some cooler heads.
Speaker 7: Well indeed, and I think there that goes to the
Speaker 7: heart of this. There's a lot of nuance in the
Speaker 7: analysis of the competition here. So there's a number of
Speaker 7: different things at play, and of course the distribution element
Speaker 7: for discovery is key. But how this addresses or changes
Speaker 7: the competitive landscape in the different sectors of the economy
Speaker 7: in which these companies operate, I think is key. It's
Speaker 7: a it's not kind of a one size fits all
Speaker 7: competition argument. There's lots of nuance and there's lots of
Speaker 7: kind of detail in there. And indeed, the quick response
Speaker 7: that we saw from some of these politicians speaks to
Speaker 7: that idea that you raise that perhaps maybe we haven't
Speaker 7: gone through the detail. Let's just take a step back,
Speaker 7: let's analyze really what this could do to the competitive
Speaker 7: landscape before reaching a conclusion whether this is anti competitive
Speaker 7: or not.
Speaker 1: I think that's very interesting also because Dick Durbin, i think,
Speaker 1: is trying to move forward the legislation on the Senate
Speaker 1: side to foster competition among credit card networks. To Bryan's point,
Speaker 1: right now, right that is pretty much controlled by Visa
Speaker 1: and MasterCard.
Speaker 2: Yeah, it's a very good point.
Speaker 7: Yeah, absolutely, Yeah, And you know, there there's a long
Speaker 7: term these are things that will have long term impact
Speaker 7: on this sector. So we shouldn't jump too quick conclusions.
Speaker 7: We should really look at the detail and examine just
Speaker 7: how this will impact the sector and how this will
Speaker 7: play out, because ultimately, consumers need to feel that they
Speaker 7: would benefit from this long term, that that they need,
Speaker 7: they need that kind of sense of comfort for this
Speaker 7: deal to get done.
Speaker 2: I guess the response in the marketplace, and you know,
Speaker 2: you have investors really running through the numbers, and it does.
Speaker 2: It does inform a little master guard down three and
Speaker 2: a half percent, Visa down as well, Discover up. So obviously,
Speaker 2: you know, it looks like it's almost like a Knight
Speaker 2: in shining armor coming to the rescue. A Discover gained
Speaker 2: twelve point six percent and for Capital one, well little changed.
Speaker 2: So what do you read into some of these stock
Speaker 2: price movements, Adam Well, I.
Speaker 7: Think some of those moves are bigger than others. Right,
Speaker 7: So the Discovery twelve thirteen percent or so moves is
Speaker 7: pretty clear. We probably don't need to say that much
Speaker 7: about that. But the you know, some of the Visa
Speaker 7: one you mentioned that there's small moves really that they're
Speaker 7: not they're not. They don't appear to me to suggest
Speaker 7: that this is an investor base that has decided that
Speaker 7: this is definitely a net negative for MasterCard in any
Speaker 7: meaningful way. So I think you should just pause for
Speaker 7: thoughts slightly and just understand what these stocks do over
Speaker 7: the coming days earning it's all been decided in the
Speaker 7: most recent trait.
Speaker 2: Hi, Adam, thanks so much. Adam, Hey, Bloomberg Finance.
Speaker 3: Editor with US Live.
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