Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that explores the big ideas and trends moving money across
Speaker 1: the region. I'm Katy Dmitrieva here in Hong Kong, and I'm.
Speaker 2: John Lee on assignment in Seoul, South Korea. Katya, the
Speaker 2: trade war is finally upon us.
Speaker 1: Yes, it feels like it's been a long time coming,
Speaker 1: but it has finally happened. It's kicked off. We're recording
Speaker 1: this on February fourth. We should know it for our
Speaker 1: dear listeners, because a lot could happen between now and
Speaker 1: when the episode airs. But as of right now, what
Speaker 1: we know is that Mexico and Canada, two of America's
Speaker 1: largest trading partners, have managed to escape tariffs, at least
Speaker 1: they're on hold for now. And as for China, well
Speaker 1: that's where the trade war is actually kicking off. The
Speaker 1: US has imposed ten percent tariffs on China across the board,
Speaker 1: and China has fought back.
Speaker 2: Everything's still in a flux at the moment, lots of uncertainties,
Speaker 2: but what we do know is that the world's two
Speaker 2: largest economies, in US and China, are in a trade war,
Speaker 2: and that has huge ramifications for the whole global trade.
Speaker 3: Yeah.
Speaker 1: Absolutely, and I can't think of a better time to
Speaker 1: have our guest here today to walk us through all
Speaker 1: this and definitely what it means for Asia as a whole.
Speaker 1: Joining us today is Helen Chow. She's the chief economist
Speaker 1: for Greater China Bank of America. Welcome to the show, Helen.
Speaker 4: Nice meeting you all.
Speaker 1: Helen. I wanted to start with the topic of the day.
Speaker 1: We're going to be talking a lot about China, but
Speaker 1: tariff specifically. So we know that the deadline passed, We've
Speaker 1: now got ten percent tariffs on Chinese goods. China's retaliated
Speaker 1: as well, So what's going to be the impact.
Speaker 4: Well, I would say, first of all, the start of
Speaker 4: this tariff imposition overnight was probably nothing too surprising. It
Speaker 4: was well telegraphed so that actually people were largely expecting it.
Speaker 4: So I would say also the second thing is that
Speaker 4: this is not the first time that China is seeing
Speaker 4: the the tariffs of being imposed on Chinese imports into
Speaker 4: the US, mainly because that if you look at what
Speaker 4: has been imposed back in twenty eighteen and then later
Speaker 4: in twenty nineteen, most of those tariffs actually remained in place.
Speaker 4: So in other words, we are seeing just on top
Speaker 4: of an existing set of on average about twenty percent
Speaker 4: of the tariffs on the Chinese products being imported into
Speaker 4: the US, we're seeing a blanket edition of about another
Speaker 4: ten percent on top of that. So this is actually
Speaker 4: what we see an escalation of what is already in place,
Speaker 4: rather than a completely introduction of something new. That said,
Speaker 4: I would say that still going to hurt the Chinese
Speaker 4: economy even with the expectation, even with the fact that
Speaker 4: this is not completely new, we are expecting the overall
Speaker 4: growth to be hurt, probably more visibly starting from a
Speaker 4: second quarter.
Speaker 1: How much do you think we are.
Speaker 4: Expecting that in sequential terms, potentially removing as much as
Speaker 4: more than two percent points Q and Q analyzed terms,
Speaker 4: so in year terms it's probably much less. So, you know,
Speaker 4: moving the GDP growth from five percent as of you know,
Speaker 4: last year or the last quarter five point four percent
Speaker 4: to maybe in first quarter now, I think the risks
Speaker 4: are increasingly higher that we're seeing the possible negative impact
Speaker 4: maybe in Q one already hurting the numbers, and we
Speaker 4: could see this number coming below five percent for the
Speaker 4: first quarter and for the second quarter, I think the
Speaker 4: risks are that we can see it going a little
Speaker 4: bit bigger over time. In Q three and Q four,
Speaker 4: I think it could probably look a bit better when
Speaker 4: Chinese exports find alternative routes to send the products, probably
Speaker 4: you know, without being counted as Chinese director exports to
Speaker 4: the US, or they can figure out some exemptions, and
Speaker 4: therefore I think the impact on growth might be a
Speaker 4: little bit less. And secondly, also because of the potential
Speaker 4: Chinese policy easing measures that they're going to introduce that
Speaker 4: is also going to help offset the headwinds coming from
Speaker 4: export side. So for those reasons, I think that Q
Speaker 4: three and the Q four will look better and the
Speaker 4: risks are still probably I was say, relatively balanced on
Speaker 4: either side around our GDP growth forecast this year at
Speaker 4: four point five percent.
Speaker 1: I want to let John ask another question. I know
Speaker 1: something you wanted to ask, but just given your answer
Speaker 1: just now, I wonder if you can just quantify for
Speaker 1: listeners how big of a deal this is. At the beginning,
Speaker 1: you know that it was ten percent tariffs, much lower
Speaker 1: than the sixty percent promise during the campaign trail, and
Speaker 1: China retaliated, but not to the degree that the US
Speaker 1: has imposed heariffs, So like, how do you quantify this?
Speaker 1: Maybe on a scale of like one to ten. How
Speaker 1: should we be thinking about this?
Speaker 4: Well, great question. I do recall that many of our clients,
Speaker 4: many of our colleagues, have been asking about how about
Speaker 4: sixty percent up front? Right? That probably was seen as
Speaker 4: one of the you know, very likely but worse scenario
Speaker 4: compared to what we currently see. I would remind everyone
Speaker 4: that not only there was this potential scenario where there
Speaker 4: could be a sixty percent up front, there was also
Speaker 4: this mentioning during the campaign rally that President Trump back
Speaker 4: then also mentioned one hundred percent on Chinese products, And therefore,
Speaker 4: I would like to remind everyone then maybe compared to
Speaker 4: one hundred percent, ten percent is indeed a very small
Speaker 4: amount of teriff punishment. But the problem is two things.
Speaker 4: Number one is that the tariffs on Chinese products, probably one,
Speaker 4: compared to those on the Mexican and Canadian imports, tend
Speaker 4: to be more permanent, which means if they are introduced,
Speaker 4: they probably will not be taken away. In other words,
Speaker 4: you know, if you look at the Mexico and also
Speaker 4: the Canadian twenty five percent, it was set out to
Speaker 4: be higher. However, it was avoided basically a few hours
Speaker 4: before it is going into action, and even if that
Speaker 4: goes into action, it probably wouldn't stay very long, mainly
Speaker 4: also because of the fact that this would hurt the
Speaker 4: US economy and especially on the consumer side a bit
Speaker 4: more visibly. But for China, I think now that ten percent,
Speaker 4: you know, while it does not necessarily look like as
Speaker 4: bad as one hundred percent, I think it has the
Speaker 4: potential challenge that here it also implies that it is
Speaker 4: going to stay on top of those existing twenty and
Speaker 4: therefore will end up with thirty, so that is definitely
Speaker 4: more hurtful. And secondly, I would say beyond these headline numbers,
Speaker 4: I think we also need to see into the details.
Speaker 4: For example, you know, on China, what happens to the
Speaker 4: exemptions of the previous you know tariffs that a lot
Speaker 4: of the products, the producers of those products have been
Speaker 4: applying and actually got waived of those tariffs temporarily many
Speaker 4: of them were expiring and we probably are about to
Speaker 4: expire in twenty twenty five. So whether those exemptions can
Speaker 4: be granted were extended I think could also be something
Speaker 4: to explore, which we do not know at the answer
Speaker 4: to number three. I think also, you know, the role
Speaker 4: on the small package, especially the TERRAFF waiver policies in
Speaker 4: the past on those small packages I think now have
Speaker 4: been revoked. So does it mean that these you know,
Speaker 4: small packages would have a completely different way of reporting
Speaker 4: to the customs? Are they going to buy the ten
Speaker 4: percent or are they going by the ten percent plus?
Speaker 4: You know, some average consumer goods are subject to about
Speaker 4: four percent of terraffs, so is that going to be
Speaker 4: on average fourteen percent? We still do not know. There
Speaker 4: are too many things right now. As you said, many
Speaker 4: things are still developing, and you know, it's hard to
Speaker 4: tell how it would be exercise. But so far, I
Speaker 4: think we have already found that in almost every single
Speaker 4: dimension there are many things that.
Speaker 1: We do not know.
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Speaker 3: Chair Helen, you mentioned that the China's economy is likely
Speaker 3: to fall to some like four point five percent this
Speaker 3: year from five percent last year. How will these tariffs
Speaker 3: impact the different sectors which will be hurt the most well?
Speaker 4: When we are having this forecast on GP we do
Speaker 4: not specifically make by industry forecast or by sector, but
Speaker 4: we would imagine that this year the external sectors will
Speaker 4: probably be hurt more compared to the more domestic oriented
Speaker 4: ones because we are expecting such uncertainty around the tariffs,
Speaker 4: especially coming from the US, could potentially derail this external
Speaker 4: sector recovery that we saw from last year. A lot
Speaker 4: of those sectors in the in last year were actually
Speaker 4: I think benefiting from the fact that while domestic demand
Speaker 4: has been quite weak and the PPI has been staying
Speaker 4: in the deflationary territory and therefore their causes relatively low,
Speaker 4: what they have seen is rather robust demand coming from
Speaker 4: the US and elsewhere. I would say that for those
Speaker 4: that rely particularly on the US demand, I think the
Speaker 4: challenges that this year whether they would be able to
Speaker 4: go through twenty twenty five, especially against a very high
Speaker 4: base in twenty twenty four, when many of those US
Speaker 4: importers probably frontloaded there in their orders and try to
Speaker 4: take more inventory. At that point, they should have already
Speaker 4: thought about twenty twenty five when such peak demand goes over,
Speaker 4: and they probably need to prepare for some period of
Speaker 4: quietness or think about trade diversion. So that, I think
Speaker 4: is the most important thing that we are actually putting
Speaker 4: in our forecast without explicitly giving let's say a sector
Speaker 4: growth or production activity growth forecast. Second, I would also
Speaker 4: mention that while the external sectors, you know, for those
Speaker 4: that are actually more reliant on US demand seems to
Speaker 4: be more under pressure last year, China's export rebound was
Speaker 4: not completely based on just the US. If you look
Speaker 4: at what we have published, we actually were saying that
Speaker 4: last year a lot of the demand that came from
Speaker 4: the global South rather than global North. We basically put Japan, US, Europe,
Speaker 4: and also Australia and Canada together and look at China's
Speaker 4: exports and we found that for these destinations export growth
Speaker 4: have held up reasonably well, but they did not jump up.
Speaker 4: What has jumped up and overtaken their large share from
Speaker 4: the past was actually the global South. If we look
Speaker 4: at you know, Latin America, Africa, Asian countries thousand countries
Speaker 4: are becoming very important nowadays, as well as Russia, India
Speaker 4: and the Middle East countries as well as the Eastern
Speaker 4: European countries. We also saw a lot of the exports
Speaker 4: going there. I think that is partly related to the
Speaker 4: Chinese companies going overseas them so that I think could
Speaker 4: be more sustainable coming back. And you know, looking at
Speaker 4: the tariff impact, I would say that we probably cannot
Speaker 4: be just putting everything into one block and say that
Speaker 4: external sector is going to face a very tough time.
Speaker 4: I think depending on the destination market, if it is
Speaker 4: the US and primarily the US, I think that this
Speaker 4: is probably the time that we need to see some diversion.
Speaker 4: But otherwise I think that for the Global South, I
Speaker 4: think those exportsers are probably still going to do well. Meanwhile,
Speaker 4: if we look at the domestic economy, those that are
Speaker 4: you know, more reliant on the domestic demand. For example,
Speaker 4: you know a lot of people were saying that the
Speaker 4: consumer subsidies in China are finally coming and in the
Speaker 4: first three days of the Chinese New Year, we actually
Speaker 4: saw the data from t MAOL saying that they have
Speaker 4: seen these cell phone sales going through the roof growing
Speaker 4: by more than fifty percent, you know, year on year
Speaker 4: compared to the first or three days of the last
Speaker 4: Golden Week holidays around Lunar New Year in twenty twenty four.
Speaker 4: And this is probably because that there was this subsidy
Speaker 4: by as much as fifteen twenty percent from the local
Speaker 4: governments that if you buy a cell phone, then you
Speaker 4: can be subsidized, and that I think could probably be
Speaker 4: you know, some of the spotlight areas that we should
Speaker 4: be looking out for this year within Chinese economy to
Speaker 4: see that when policy comes out to help offset the
Speaker 4: pain from the tariffs impact, which sectors could potentially do better.
Speaker 1: Is there a limit to that though, like in terms
Speaker 1: of the stimulus that China can do, like what level
Speaker 1: of tariffs I guess or economic pain would kind of
Speaker 1: cross that threshold to where Chinese officials, you know, are
Speaker 1: kind of stuck. They can't necessarily give more of these
Speaker 1: incentives to consumers or change the mortgage rates or whatever
Speaker 1: other subsidies or stimulus they have.
Speaker 4: So Kadia compared to twenties eighteen twenty nineteen, China probably
Speaker 4: has less. I would a levers to pull given that,
Speaker 4: you know, the domesa demand is less robust, you know,
Speaker 4: and then the room for easing on both physical and
Speaker 4: monetary policy fronts seems to be more limited right now. However,
Speaker 4: I wouldn't necessarily say that we are going to run
Speaker 4: into a constraint in any time in the near future.
Speaker 4: For example, on the monetary side, we're expecting potential tripleard
Speaker 4: cuts as well as interest rate cuts. We're expecting as
Speaker 4: much as forty basic points of seven day reverse report
Speaker 4: rate cuts this year.
Speaker 1: And what is that, just for listeners who aren't familiar.
Speaker 4: That is the policy interest rate in China. It's comparable
Speaker 4: to the federal funds deposit rate. The federal fund rate
Speaker 4: cuts in the US would generally be seen to be
Speaker 4: conducive to more accommodative financial conditions, and so is the
Speaker 4: rate cut in China. Policy rate cut lowers the cost
Speaker 4: potentially for the borrowing in the interbank market, so that
Speaker 4: actually it could be seen as being helpful to ultimately
Speaker 4: reducing the borring cost for households as well as corporate
Speaker 4: And if they cut it by let's say twenty basis
Speaker 4: points each time, and we have probably at least twice
Speaker 4: as much of twice of such cuts. Going forward, I
Speaker 4: think we could potentially see a boost to boast the
Speaker 4: investment as well as a consumer demand at the same time.
Speaker 4: Physical deficit is another area where China can do more
Speaker 4: of well. You know, of course, not all the deficit
Speaker 4: will be put onto the consumer subsidies that we just
Speaker 4: mentioned on home appliances, cell phones, paths, or cars. I
Speaker 4: think that a lot of that has also been put
Speaker 4: into infrastructure investment, et cetera. So physical deficit that we're
Speaker 4: expecting this year to grow from three percent last year
Speaker 4: to three point five percent for economy that is growing
Speaker 4: with a sub substantially you know, at a level that
Speaker 4: is substantially lower than its long term potential. I would
Speaker 4: say that China has been perhaps almost too disciplined on
Speaker 4: the physical side, that they have not really borrowed as
Speaker 4: much as they could, and they have kept the central
Speaker 4: government's budget at a pretty conservative level with a deficit
Speaker 4: running at only about three percent. We definitely see the
Speaker 4: upset to it, and we think they can increase it
Speaker 4: to at least at three point five this year, if
Speaker 4: not higher. And could that be helpful well, depending on
Speaker 4: how they use it, And there are many other, you know,
Speaker 4: I would say potential policy tools that they can use
Speaker 4: beyond the monetary policy and those physical deficits that we
Speaker 4: just mentioned to relax the equidity conditions of the local
Speaker 4: governments and potentially allow them to pay back their debt
Speaker 4: to local companies as well as pay employees and the
Speaker 4: boost to reboot the local economy. So we think that
Speaker 4: there is quite a lot more that they can do.
Speaker 4: But this is not all all for the sake of
Speaker 4: offsetting the impact from the tariffs. I think that Chinese
Speaker 4: domesad economy is in a state that requires and the
Speaker 4: warrants more policy eating, so that they definitely should do more.
Speaker 3: Helen. It feels like we've been talking about this issue
Speaker 3: for a number of years now a week domestic economy
Speaker 3: in China. Now, a lot of global investors have been
Speaker 3: anticipating like almost like a big bang in terms of stimulus. Now,
Speaker 3: all these stimulus measures that you just mentioned, do you
Speaker 3: think there'll be enough to appease or satisfying.
Speaker 4: Investors, Well, it's a jo I think that's a little
Speaker 4: bit hard to guess. How much is the institutional investors
Speaker 4: expecting and you know by when the market will be
Speaker 4: saying Oh, that's good enough. Clearly that China is not
Speaker 4: delivering something like a Basuoka package that many probably have
Speaker 4: been hoping for. For example, many were in the past
Speaker 4: probably two years, have been hoping for China to deliver something,
Speaker 4: you know, along the lines of giving helicopter dropping ash
Speaker 4: to everyone, so that you know, like what the US
Speaker 4: did to the American household, writing the blank checks, so
Speaker 4: that you can actually get an immediate boost to consumer
Speaker 4: demand right away. That I think has pretty much been
Speaker 4: seen as being very unlikely by now. But you can
Speaker 4: see that there are alternative measures that have been adopted
Speaker 4: that are actually designed to do something similar. For example,
Speaker 4: the subsidy program, right the consumer product trade in So
Speaker 4: this treateding program started last year and then it covers
Speaker 4: from cars to home appliance and also now to technology products.
Speaker 1: Pretty successful, right.
Speaker 4: I think so. Even some of your colleagues over here
Speaker 4: told me that she bought quite a lot using the
Speaker 4: subsidies because she was getting married, so I trust her.
Speaker 4: I wasn't able to use it, but I have heard
Speaker 4: a lot of people saying that that has been pretty
Speaker 4: effective because they probably were still hesitating in terms of
Speaker 4: if they should buy a new one or they stay
Speaker 4: put with the existing gear. But then this really gives
Speaker 4: them the push to say that okay, let me frontload
Speaker 4: the person decision and let me get it done. So
Speaker 4: I think that those turn out to be pretty effective,
Speaker 4: and according to the Ministry of Commerce, it has really
Speaker 4: boosted retail sales quite substantially, especially in the second half
Speaker 4: of last year. But I would say would that be enough.
Speaker 4: Probably not, especially not only from a market perspective to
Speaker 4: make all the investors happy, which tend to be more transient.
Speaker 4: I think it's more important to see if we are
Speaker 4: seeing all these boosts to the economy to ultimately deliver
Speaker 4: the productivity growth that we were looking for, the technology
Speaker 4: progress that we were hoping to see, so that ultimately
Speaker 4: we can see more sustainable growth down the road. That's
Speaker 4: actually where we mentioned that we need to see probably
Speaker 4: more than just a consumer subsidy program, more than the
Speaker 4: physical deficit expansion, and not just the interest rate and
Speaker 4: trip our cuts. Beyond that, we need to see that
Speaker 4: actually if there could be some measures being taken to
Speaker 4: promote the positive incentives in our view, in the system
Speaker 4: so as to allow people to work towards their individual
Speaker 4: goals more efficiently. When we mentioned that, I think a
Speaker 4: lot of people were saying, what kind of positive incentives
Speaker 4: are you talking about? Well, what we mean is it's
Speaker 4: not just about these headline you know, physical and monetary
Speaker 4: policy measures, but instead we hope to see that for
Speaker 4: governmental officials, for SOE managers, as well as private individuals,
Speaker 4: business owners and households. We hope to see more upside
Speaker 4: so that they could potentially work harder and more willingly
Speaker 4: take risks, and therefore we could see a stronger economy
Speaker 4: when the investment demand comes back. That I think is
Speaker 4: probably more crucial then let's say a fifty basic points
Speaker 4: of a physical deficiting expansion.
Speaker 1: What do you think is about this time around between
Speaker 1: monetary policy? Like, I know you had mentioned the potential
Speaker 1: for more essentially interest rate cuts in the years ahead,
Speaker 1: the sort of counterbalance as impact of tariffs, But doesn't
Speaker 1: that risk the currency? Like, how do you think the
Speaker 1: government is thinking about that balance? Well?
Speaker 4: I do think that the government is probably trying to
Speaker 4: stabilize the exchange rate as much as possible. I think
Speaker 4: there are easy options at this point. Right if China
Speaker 4: has seen this tariff increase, it could potentially relax the
Speaker 4: controls on effects and let the women be depreciate. But
Speaker 4: so far we do not necessarily see a lot of
Speaker 4: this being used as a weaponry basically by the PBOC
Speaker 4: to offset the pain from the tariffs. I think this
Speaker 4: is probably due to the going concerns. Number one, the
Speaker 4: effects of depreciation is probably easy to implement. However, you
Speaker 4: know that probably raised a question to your other trading
Speaker 4: partners that what are you trying to do here?
Speaker 1: Right?
Speaker 4: You know, nobody wants to see a bigger side neighbor
Speaker 4: type of situation with a competitive exchangeerate depreciations. And at
Speaker 4: the same time, I would say that the depreciation may
Speaker 4: not necessarily send the right signal to people holding the
Speaker 4: one assets or REMAMBI assets on shore were offshore, because
Speaker 4: nobody wants to hold on to a currency that is depreciating.
Speaker 1: Uh.
Speaker 4: And it seemed to be continue to be this depreciating
Speaker 4: over time, and therefore it may trigger more capital outflows
Speaker 4: uh And therefore you know, kind of increasing the pressure
Speaker 4: on the effects. So I don't necessarily think that the
Speaker 4: exchange rate approach, well, let's say depreciation would be an
Speaker 4: easy and efficient approach to really address the domestic issues
Speaker 4: over here, and that is why in our view that
Speaker 4: the Chinese government probably so far has been refraining using
Speaker 4: that as the most important tool to address the growth
Speaker 4: concerns well going forward, Whether they would continue to hold
Speaker 4: on to the current level in USDC and white terms,
Speaker 4: we're not so sure because that also depends on what
Speaker 4: the dollar does.
Speaker 3: Right.
Speaker 4: If the dollar actually substantially appreciates against other currencies, I think,
Speaker 4: you know, then if the PBOC looks at the c
Speaker 4: FATS and they consider the nominal effective exchange rate, they
Speaker 4: might need to do something different. But at the moment,
Speaker 4: if we're seeing a relatively stable dollar index, I think
Speaker 4: that we could potentially see the central bank probably being
Speaker 4: willing to hold on to a relatively stable exchange rate
Speaker 4: level and at the same time probably use more a
Speaker 4: combination of quannotative as well as price based approach domestically
Speaker 4: to boost the growth. Many people are saying, oh, you know,
Speaker 4: would they be able to do so? Because there is
Speaker 4: this famous impossible trinity theory that if you would like
Speaker 4: to control your exchange rate, then you probably need a
Speaker 4: capital control to help you, you know, at the time
Speaker 4: when you want to have your monetary policy independence. But
Speaker 4: at this point I think that the PBOC is probably
Speaker 4: trying to strike a balance between those two while maintaining
Speaker 4: the domestic monetary policy at a level to address the
Speaker 4: domestic growth support issues.
Speaker 1: John had mentioned consumer spending. How you know, we just
Speaker 1: talked a lot about levers that could be pulled and
Speaker 1: things that have worked in the past. I wanted to
Speaker 1: ask you about the property sector, and I wonder to
Speaker 1: what extent tariffs or this trade war that is escalating
Speaker 1: now delays the process of the property market coming back
Speaker 1: to life in China.
Speaker 4: Indirectly, not directly. I would say that if the overall
Speaker 4: aggregate demand is still going to be seeing this hit
Speaker 4: from the tariffs without being you know, fully addressed by
Speaker 4: domestic policy easing or further easing, then yes, household income
Speaker 4: growth is unlikely to recover anytime soon, and therefore people's
Speaker 4: expectations for housing sectors to recover would also be postponed.
Speaker 4: So under the big if that China does not fully
Speaker 4: address this demand problems at home, then we could potentially
Speaker 4: see the delay in the property sector recovery. But I
Speaker 4: don't necessarily think that it's necessarily the case. If China
Speaker 4: would be able to intensify policy easing in time. You know,
Speaker 4: we could see quite some stabilization in the near term,
Speaker 4: especially if let's say this Terff shock turns out to
Speaker 4: be short lived and you know, the impacts them to
Speaker 4: be relatively limited, then we probably could see that it
Speaker 4: was China's stimulus. Then there could be more a faster turnaround,
Speaker 4: let's say in the property sector. We think that that
Speaker 4: could probably take place in the second half of this year,
Speaker 4: if let's say we do not see much further Terraff
Speaker 4: shock from what we have seen so far in the
Speaker 4: very near future. But I think on that different economists
Speaker 4: may have different views to someeople may think that they
Speaker 4: have to wait until twenty twenty six.
Speaker 3: Well, well, Katia earlier mentioned that Beijing has been relatively
Speaker 3: restrained in retaliating against the US in terms of tariffs.
Speaker 3: They've imposed some tariffs limited in amount. But if things
Speaker 3: do get worse in US relations, what levers does China
Speaker 3: have retaliating.
Speaker 4: Well, at the moment, we think that the measures that
Speaker 4: we have seen, the reactions have been more measured compared
Speaker 4: to even the twenty eighteen time. I think at that
Speaker 4: time we have seen probably especially rhetorically more aggressive kind
Speaker 4: of exchange of tariff increased spreads, et cetera that this
Speaker 4: time we have seen less of. But in the report
Speaker 4: that we publish on potential retaliations China could have if
Speaker 4: let's say the US imposes are ten percent, twenty up
Speaker 4: to sixty or even one hundred percent tariffs, we think
Speaker 4: that there are potentially other means that China could could use.
Speaker 4: One is the tariff's re act. Have seen a little
Speaker 4: bit of you know today, which is China is imposing
Speaker 4: tariffs on the imports from the US, including on energy products,
Speaker 4: So that I think could probably be one area where
Speaker 4: we can see that China can turn up the dial
Speaker 4: a little bit, which is if you're seeing the you know,
Speaker 4: what US is importing in China is about three times
Speaker 4: as much as what China is importing from the US.
Speaker 4: And therefore, by definition, you know, even if that China
Speaker 4: is imposing the same amount of terraffs on the US imports,
Speaker 4: you wouldn't necessarily hurt the US exports that buy as
Speaker 4: much simply because China is not buying as much. Right second,
Speaker 4: we can also see the export sanctions, for example on
Speaker 4: rare earth and other important industrial or special purpose used materials.
Speaker 4: And then number three, we could also see let's say,
Speaker 4: certain measures being taken on US businesses operating in China.
Speaker 4: So I think that at this point we can probably
Speaker 4: still safely that there is more US business interests in
Speaker 4: China operating than Chinese businesses operating in the US. So
Speaker 4: that could be one area that China could be looking at,
Speaker 4: But obviously they need to be very careful because that
Speaker 4: also could send a message to others, you know, are
Speaker 4: you actually hurting you foreign businesses in China? If that
Speaker 4: is the case, then would businesses from Europe or Latin
Speaker 4: America from Japan feelm still secure?
Speaker 1: Right?
Speaker 4: So those are the measures that we think could potentially
Speaker 4: be wielded, but we don't necessarily think that there is
Speaker 4: a lot of freedom for China to use it very freely, though,
Speaker 4: mainly because that more aggressive use of those measures could
Speaker 4: potentially challenge you know, the let's say, the recovery that
Speaker 4: China was hoping to see. And beyond that, we can
Speaker 4: see other measures such as exchange rey depreciation as well
Speaker 4: as threatening to sell US treaty bonds. But I think
Speaker 4: those measures are probably seen to be more aggressive, and
Speaker 4: therefore China would way more carefully when it comes down
Speaker 4: to using such options.
Speaker 1: How long have you been covering China for now? Can
Speaker 1: I say, what decorade? Two decades?
Speaker 4: Yes?
Speaker 1: Wow?
Speaker 4: Since two o five?
Speaker 1: So you started when you were twelve? Yeah, exactly, started
Speaker 1: at a very young age. So, Helen, you've been covering
Speaker 1: China for about two decades. I wanted to ask you
Speaker 1: this to get your thoughts because we were just talking
Speaker 1: about the reaction that China's had And if you're looking
Speaker 1: at this reaction or this retaliation compared to previous years,
Speaker 1: what message do you think it sends? You know, we
Speaker 1: just spoke about how it's a bit more of a
Speaker 1: moderate response maybe, But how would you if you were
Speaker 1: looking at the kind of opening gambit or opening moves
Speaker 1: of these two nations, how would you kind of define
Speaker 1: it or look at it?
Speaker 4: Well, Kadia, I will say that, you know, just at
Speaker 4: the face value, the Chinese retaliation so far probably is
Speaker 4: not at a very high level as we you know agreed. However,
Speaker 4: we're not so sure if they are going to stay
Speaker 4: over here right going forward. Neither do we know that
Speaker 4: if the tariffs on Chinese products are going to be
Speaker 4: added just by ten percent or you know, let's say
Speaker 4: a month later be increased by another twenty right. So,
Speaker 4: I think with those uncertainties in mind, we can see, however,
Speaker 4: that there is still some healthy conversations between the two sides,
Speaker 4: especially at a very high level, which I think could
Speaker 4: probably be read as the telltale sign that there could
Speaker 4: be more negotiations and things are not in the words
Speaker 4: shape compared to, for example, twenty twenty. At that point,
Speaker 4: I think there was a lot of you know, ultimatum
Speaker 4: threatening and a lot of bad will basically in that
Speaker 4: relationship of the two most important economic powers in the world.
Speaker 4: But right now we can see that the negotiations are
Speaker 4: probably happening behind the scene. Then maybe we're not being
Speaker 4: allowed to view what exactly happened so far. I think
Speaker 4: that right now there are some interesting evidence that there
Speaker 4: is still some conversation and things are probably going to
Speaker 4: be held at a reasonably rational level. For example, I
Speaker 4: think if we're looking at what has been addressed to
Speaker 4: TikTok right so far, I think that has been seen
Speaker 4: as a commercial decision and both sides has exercised a restraint.
Speaker 4: Another thing is that on the the most important TV
Speaker 4: show in China, which is on the lunar New Year
Speaker 4: Eve that is watched by more than five hundred million
Speaker 4: Chinese and my family watched as well. And there was
Speaker 4: an interesting episode where an American you know, was invited
Speaker 4: to be the host temporarily to introduce some some program,
Speaker 4: some performances, and and this American was actually seen as
Speaker 4: the you know, the person who brought back not only
Speaker 4: brought back to China and donated a very important album
Speaker 4: from the Second World War, but also that he is
Speaker 4: seen as the symbol of a friendship. This is a
Speaker 4: very important gesture. It does not happen very often, you know.
Speaker 4: To be honest, I do not recall any other time
Speaker 4: in the recent past that an American would be so
Speaker 4: high profilingly like introduced at this show. So I think
Speaker 4: that this is probably suggesting that the current bilateral relationship
Speaker 4: is not as bad as some may have been postulating
Speaker 4: and thinking that it has to be a sixty percent
Speaker 4: up front tariff, you know, to to to hurt China,
Speaker 4: to put China to the corner and start a war.
Speaker 4: I don't think that it looks that bad. There probably
Speaker 4: is some kind of conversation behind the scene, and we
Speaker 4: still believe that rational thinking is over over time, it's
Speaker 4: still going to trimuth.
Speaker 1: So if rational thinking will prevail, what could a potential
Speaker 1: deal look like between the US and China? I mean,
Speaker 1: where where does the relationship go from here?
Speaker 4: Well, I think it's very likely to be an exchange
Speaker 4: of interest. And as we have actually put down in
Speaker 4: our reports, you know, repeatedly previously, we are expecting, for example,
Speaker 4: that China could promise something that the US is very
Speaker 4: much hoping to see, especially President Trump is willing to see.
Speaker 4: I think that increasing such tariffs and pushing up CPI
Speaker 4: inflation in the US could be probably not necessarily a
Speaker 4: welcoming sign or a welcoming headline anywhere. However, if let's
Speaker 4: say China can promise to buy more oil and gas
Speaker 4: from the US and deliver maybe more of it's a
Speaker 4: phase one deal, I think that could potentially be something
Speaker 4: that the US would be interested in. At the same time,
Speaker 4: I think there could be also many other areas where
Speaker 4: China can offer to work together with the US, as
Speaker 4: President Trump recently were suggesting, you know, on many issues together,
Speaker 4: you know, geo, political wise, environment wise, etc. So I
Speaker 4: think that at this point we could see that, you know,
Speaker 4: if China could add actually proposed to probably purchase more
Speaker 4: from the US and probably on the US treasuries, maybe
Speaker 4: suggest that that they would keep the market relative stable
Speaker 4: by not dumping into the market. That would be helpful.
Speaker 4: Promising that you know, riman be to the dollar would
Speaker 4: remain relatively stable. That would be another very welcoming gesture.
Speaker 4: So I think it's probably going to be a combination
Speaker 4: of those measures that would probably help repair the relationship.
Speaker 4: In the meantime, the US could probably come more towards China,
Speaker 4: not only to remove those tariffs, but also possibly you know,
Speaker 4: make adjustment on the technology, sunctions or other type of
Speaker 4: issues that are you know, at the moment hurting were
Speaker 4: becoming the roadblocks of the economic relationship of the two countries.
Speaker 1: So you were talking about the how they're kind of
Speaker 1: where the relationship could go from here and how the
Speaker 1: US and China could coordinate. Is that your base case though,
Speaker 1: like this scenario you're just laid out. Do you think
Speaker 1: that's going to happen?
Speaker 4: Well, I think that's the bookcase scenario for a basic
Speaker 4: case scenario. I think the two sides are going to negotiate,
Speaker 4: but we're not placing hope on the potential reduction of
Speaker 4: teriffs on the Chinese products going into the US. So, yes,
Speaker 4: that has been the hopeful scenario that the two sides
Speaker 4: could negotiate with each other, hopefully starting soon. But I
Speaker 4: would say that it's interesting to see that at this point,
Speaker 4: let's say, starting from November last year, and you know,
Speaker 4: increasingly now we're seeing, for example, the market is probably
Speaker 4: having their views going up and down with the headline news.
Speaker 4: And also we're seeing that my competitors are sales side
Speaker 4: has been also going up and down with the tariff assumptions.
Speaker 4: So at this point it is hard to tell what
Speaker 4: turns out. Let's say only ten percent, you know, and
Speaker 4: the staying here for another six months, would that necessarily
Speaker 4: be a positive surprise for the market. If you look
Speaker 4: at the H share today, the equity market, and also
Speaker 4: the fxys, I think it seems to be suggesting, yeah,
Speaker 4: it is better than investors we're thinking. But how much
Speaker 4: longer are we going to see this? You know, market
Speaker 4: sentiment staying at this level, could it be affected by
Speaker 4: further news and especially potentially bad news on the tariff front.
Speaker 1: We do not know.
Speaker 4: So I'm afraid that at this point we can only
Speaker 4: see that, you know, the we are hoping, keeping our
Speaker 4: fingers crossed and hoping that the two sides could come
Speaker 4: to a resolution sometime soon. But I would say that
Speaker 4: judged by the experience we had from twenty eighteen twenty nineteen,
Speaker 4: I wouldn't hold my breath for it a.
Speaker 3: Realist, Helen, We've been talking a lot about tariffs, but
Speaker 3: I wanted to discuss sanctions. And the reason why I'm
Speaker 3: asking is that last week there was major news China's
Speaker 3: Deepsek launched an AI model that pretty much rivaled usps
Speaker 3: but at a fraction of the cost. Now, this is
Speaker 3: raising some questions that perhaps US sanctions on China tech
Speaker 3: is not working.
Speaker 4: What do you say to that, Well, I think at
Speaker 4: this moment it's probably too early to say that that
Speaker 4: the US sanctions on Chinese technology companies are not working yet. However,
Speaker 4: I would say that it is important to see that
Speaker 4: such technology breakthroughs probably still suggests that there are interesting,
Speaker 4: you know, uncertainties still in the environment where you know,
Speaker 4: I think that people largely form the consensus view that
Speaker 4: China would not necessarily be able to develop as much
Speaker 4: of a technology when they are being put under such sanctions.
Speaker 4: So I think that at this point the necessity really
Speaker 4: drove the much of the innovation and therefore I think
Speaker 4: contributed to the technology progress, and that I think could
Speaker 4: be used not only by Chinese companies but also by
Speaker 4: globally by any companies right since it is open source.
Speaker 4: So I think that at this point, from a macro perspective,
Speaker 4: I'm not so sure about the corporate level, But if
Speaker 4: we speak from the thirty feet birth eye view, I
Speaker 4: think this is basically saying that, you know, there are
Speaker 4: indeed things that US and China could do together to
Speaker 4: push the technology frontier to a higher level instead of
Speaker 4: trying to contain each other. And could we actually see that,
Speaker 4: you know, being the best example, that we could do
Speaker 4: something together and achieve something greater. I certainly hope so.
Speaker 4: But at this point, I think there is still a
Speaker 4: lack of institutions maybe between the two countries, and probably
Speaker 4: potentially some willingness as well to achieve that. But I
Speaker 4: think that, you know, at this point, it's interesting to
Speaker 4: see that the technology driver of growth, which economists like
Speaker 4: Solo probably saw as the most important driver rather than investment,
Speaker 4: is still having a chance to come back to China
Speaker 4: and contributed to its growth recovery, and that very encouraging and.
Speaker 1: From a macro level, if you're looking at this company
Speaker 1: and the reaction globally to what it does and what
Speaker 1: it can do from a macro view, from a thirty
Speaker 1: thousand for view, you know, as you're modeling economic growth
Speaker 1: or looking at forecasts, like did it influence at all
Speaker 1: how you think about China in the next couple of years,
Speaker 1: and you know, things from GDP to productivity to technology development.
Speaker 4: Good question if we look at the growth purely from
Speaker 4: the perspective on the supply side, and people think of, okay,
Speaker 4: how much investment you are going to put in more
Speaker 4: capital or how much more labor growth are we going
Speaker 4: to see, you know, not much because of aging or
Speaker 4: at the same time human capital. How much more cramming,
Speaker 4: you know, exams and training can you put into one's heads.
Speaker 4: I think that we all see constraints. So the only
Speaker 4: hope that we're placing in is on TFP total factor productivity.
Speaker 4: This is saying that beyond those factory inputs we just mentioned,
Speaker 4: there is still this possibility that we can achieve higher
Speaker 4: productivity through technology progress, through better allocation of resources through
Speaker 4: achieving better scale of the economy, and I think that
Speaker 4: China is probably not necessarily going to look that bad
Speaker 4: if we look back in five years time on what
Speaker 4: we're seeing now, I think, interestingly, in contrast to the
Speaker 4: very verish consensus on the Chinese economy, by then we
Speaker 4: probably could say that China is, you know, at this
Speaker 4: point in twenty twenty five, still preparing to get to
Speaker 4: the next level of technology, of economy, of scale through
Speaker 4: going overseas, for example, and that I think could probably
Speaker 4: be quite interesting, given that right now the consensus is
Speaker 4: too one way and pretty much saying that, you know,
Speaker 4: nothing could work out of the current Chinese economic development. However,
Speaker 4: I think that we have seen more and more evidence
Speaker 4: that as capital stock in China goes up, as human
Speaker 4: capital stock has been showing also like to be accumulating
Speaker 4: very quickly, we would probably see not immediately one after
Speaker 4: the other, but occasionally, you know, every few months, some
Speaker 4: surprising project like deep seek in different areas that China
Speaker 4: could potentially push the technology frontier forward, and hopefully that
Speaker 4: could happen in the global context where we could see
Speaker 4: more cooperation rather than trade wars.
Speaker 1: Well, it's been an interesting discussion, lots more to unpack
Speaker 1: in the days to come, I'm sure. Helen, thank you
Speaker 1: so much for joining us today.
Speaker 4: Thank you for having me.
Speaker 1: You've been listening to Asia Centric from Bloomberg Intelligence. You
Speaker 1: can find more episodes on Apple Podcasts, Spotify, or wherever
Speaker 1: you get your podcasts. I'm Katy Dimitrieva again, and you
Speaker 1: can find me on LinkedIn or on the Bloomberg terminal.
Speaker 2: And I'm John Lee.
Speaker 3: You can also find me on LinkedIn. And this podcast
Speaker 3: was produced and edited by Clara Chen And thanks for listening.