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Speaker 2: This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
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Speaker 3: And joining us now for some discussion is Rebecca Cheng Wilkins,
Speaker 3: Bloomberg's Asia Government and Politics correspondent. And one of the
Speaker 3: other numbers that I think, well, there's another number that
Speaker 3: sounds quite impressive, that China plans more than half a
Speaker 3: trillion dollars worth of special local government pawns. But the
Speaker 3: other one that I think investors might be a little
Speaker 3: bit disappointed in is the budget deficits set at three
Speaker 3: percent of GDP. I think some were expecting more. Your
Speaker 3: thoughts on the mix of numbers that.
Speaker 4: We got this morning, Yeah, let's talk about that. That
Speaker 4: deficit ratio three percent, I mean three percent is the
Speaker 4: sort of target that they've generally tried to stick to,
Speaker 4: but worth remembering, of course, we did have to raise
Speaker 4: that last year to three point eight percent.
Speaker 3: They can certainly exceeded and they don't really have to
Speaker 3: say anything, just do it.
Speaker 4: Yeah, absolutely, and it doesn't quite tell the full story.
Speaker 4: I think one of the big pieces of news coming
Speaker 4: so far is the unveiling of this one trillion un
Speaker 4: worth of Ultralong Special Central Government bonds. So it's a
Speaker 4: bit of a mouthful. It is the only the fourth
Speaker 4: time we've had these type of bond sales come in
Speaker 4: the last twenty six years or so. I mean, it's
Speaker 4: important because this is a is a potential source of
Speaker 4: funding for those infrastructure projects where it's just seen as
Speaker 4: a really key part of both funding for local government
Speaker 4: but also trying to get growth up and running again.
Speaker 2: So I'm going to spitball this because it looks as
Speaker 2: though about thirty percent of that one trillion in Ultralong
Speaker 2: Special Government bonds is going to be allocated for science
Speaker 2: and technology research and development.
Speaker 4: Yes true, And then that again interesting, right, we are
Speaker 4: seeing and center these other ambitions. If she didn't ping
Speaker 4: high end manufacturings focusing on strategic technologies, they shift to
Speaker 4: boost both domestic manufacturing and consumption as well. I mean,
Speaker 4: I think we'll expect to see more in that work report,
Speaker 4: but that emphasis again taking it back to these core
Speaker 4: aims that she didn't ping has laid out time and
Speaker 4: time again.
Speaker 3: And it seems like the target of five percent for
Speaker 3: GDP growth will be a little ambitious or aggressive in that,
Speaker 3: you know, the comps will be more difficult this year
Speaker 3: than last year. Do they believe then that what they've
Speaker 3: rolled out, and you know, far be it for you
Speaker 3: to answer what they believe, But it is the thinking
Speaker 3: then that the initiatives that they've announced here will enable
Speaker 3: them to bump growth up without doing anything extra special.
Speaker 4: Well, we'll have to wait to see a little bit
Speaker 4: more of those details of figure out precisely how it
Speaker 4: is we are going to get to that five percent target,
Speaker 4: but I think it's safe to say that if they
Speaker 4: want to get there, they are going to have to
Speaker 4: roll out some kind of stimulus more forcefully and more
Speaker 4: swiftly than we have seen in the past, because, of course,
Speaker 4: twenty twenty three was coming up from that very low
Speaker 4: base of the pandemic. Twenty twenty four target of five
Speaker 4: percent is much harder for them to reach. Is worth
Speaker 4: bearing a mind though, despite sort of the pessimism around
Speaker 4: how we get there, policymakers did appear quite confident, actually
Speaker 4: quite cool, calm and collected last year, think about Lee
Speaker 4: and so on. Speaking about how they got to five
Speaker 4: percent last year, they seemed pretty comfortable with the fact
Speaker 4: that they were able to get that without any kind
Speaker 4: of big stimulus. That's a disappointment for some investors, but
Speaker 4: does suggest the kind of element of confidence in Beijing.
Speaker 2: One of the other headlines that our team is moving
Speaker 2: in terms of this work report China vowing faster legislations
Speaker 2: on promoting private sector. I would imagine that that's a
Speaker 2: growth story, and this is going to come to the
Speaker 2: market in a way that's friendly. I would imagine because
Speaker 2: regulatory risk has been a big factory.
Speaker 4: See what exactly the details are on this and how
Speaker 4: much meat is put on the bone here. But this
Speaker 4: is going to be a big story for investors if
Speaker 4: we get some substantive details. I would place this alongside
Speaker 4: this target or this emphasis for a year long push
Speaker 4: for consumption to try and boost that, as well as
Speaker 4: this focus on creating over twelve million jobs in urban areas.
Speaker 4: All of these factors are combined because the private sector
Speaker 4: the biggest employers in cities. Now it's worth saying that
Speaker 4: to really support both the property market and the private
Speaker 4: sector in China, you have to get urbanization going up
Speaker 4: and running again. Typically about twenty two million people move
Speaker 4: from the countryside into city centers in China. Over the
Speaker 4: last couple of years, we've seen just ten million moving.
Speaker 4: There is a twelve million shortfall in the number of
Speaker 4: people going. And you need to get the private sector
Speaker 4: hiring up and running to boost consumption, but also to
Speaker 4: provide some of that funding to property companies too.
Speaker 3: So creating twelve million new urban jobs arged and then
Speaker 3: urban unemployment getting it to around five and a half percent.
Speaker 3: How does that compare with where we sit at the moment.
Speaker 4: Yes, I mean five point five percent. It's worth saying
Speaker 4: it's a little higher than we have now five percent,
Speaker 4: but it is actually in expectation. There is a question mark,
Speaker 4: I would say here there is some skepticism from some
Speaker 4: corners over whether this is a truly accurate picture. And
Speaker 4: we know, for example, in addition to just the figure
Speaker 4: of unemployment, there are these other issues. For example, wages,
Speaker 4: are we seeing wages actually growing stalling, falling, benefits being
Speaker 4: pulled back? We know there are reports for example even
Speaker 4: among local government officials. These are the foot soldiers expected
Speaker 4: to roll out the findings in this report that they
Speaker 4: have actually had to repay their bonuses back to the
Speaker 4: government in past years because finances are so strained. So
Speaker 4: unemployment itself as a headline figure doesn't really tell the
Speaker 4: full picture or the full challenges that China faces here.
Speaker 2: Yeah, I'm trying to understand as I'm listening to the
Speaker 2: youth unemployment story when I think the last print because
Speaker 2: of the revision, was something closer to fifteen percent, thirteen
Speaker 2: and a half to fifteen I can't remember exactly, but
Speaker 2: I'm wondering how that correlates with a plan to target
Speaker 2: kind of an urban unemployment rate of around five and
Speaker 2: a half percent. Is a lot of that going to be,
Speaker 2: you know, in support of helping the youth find work?
Speaker 4: To be frank, I don't think we know quite enough
Speaker 4: to make that comment. I think youth unemployment certainly is
Speaker 4: a big priority. One of the difficulties we have in
Speaker 4: understanding that figure is we cannot do a sort of
Speaker 4: apples apples comparison because they have fundamentally changed the way
Speaker 4: that they calculate that figure. So it has come up
Speaker 4: in the latest monthly revision. We can't really understand how
Speaker 4: that figure compares directly to the numbers that we've seen before,
Speaker 4: but anecdotally youth unemployment, it is still an issue, and
Speaker 4: of course is focused more on on urban centers.
Speaker 3: And they set the CPI growth target rate at around
Speaker 3: three percent. We're under that now. But I saw a
Speaker 3: report yesterday that farmers were going to cut pork production
Speaker 3: expecting pork prices to go up. So that's one thing
Speaker 3: that will help. Where is China in the fight against
Speaker 3: deflation and inflation?
Speaker 4: Yeah, I mean this is going to be a prevailing issue.
Speaker 4: And part of this does, of course touch back to
Speaker 4: some of the other things that we're talking about, this
Speaker 4: issue of consumption and confidence, this issue of whether or
Speaker 4: not we see the property market come back up, whether
Speaker 4: we see wages starting to rise again and people willing
Speaker 4: to go out and spend. Some of these factors, though,
Speaker 4: it's worth saying with deflation, are sort of cyclical. So
Speaker 4: for example, you'd talk about pork, that will help the number,
Speaker 4: but it is something that is a cyclical factor rather
Speaker 4: than perhaps being truly representative as shifting sentiment.
Speaker 3: Okay, Rebecca, out of time. Unfortunately, but thank you for
Speaker 3: coming into our studios Rebecca Chong Wilkins, Bloomberg Asia Government
Speaker 3: and Politics correspondent Robert Lee, who is Bloomberg Intelligence Senior Analyst,
Speaker 3: to take a closer look at AI and the tech
Speaker 3: aspect of the NPC meeting, because we no doubt got
Speaker 3: Robert quite a little bit from the NPC this morning,
Speaker 3: just talking generally about the type of special performance that
Speaker 3: they want in China going forward.
Speaker 1: Your thoughts, No, that's absolutely right, and I suppose it's
Speaker 1: still early days in this Sorry, we're into the first
Speaker 1: few hours the MPC session. So far they've sort of
Speaker 1: confirmed they're going to increase spending national level on science
Speaker 1: and technology research by around ten percent, which to think
Speaker 1: is sort of no great surprise to anyone and broadly
Speaker 1: in line. But the key priorities for the investment are
Speaker 1: going to remain semiconductors in AI, both for national reasons
Speaker 1: and also to try and put their stamp more globally
Speaker 1: that China is a you know, to reinforce the view
Speaker 1: that China is a major play on the global technology stage.
Speaker 1: So those areas will remain in focus. I think we'll
Speaker 1: probably hear some more details as the two day event unfolds.
Speaker 1: But China's greatest challenge going forward is clearly on the
Speaker 1: semiconductor side, given the US export restrictions and given the
Speaker 1: sort of embargos that the likes of ASML in Europe
Speaker 1: and the issue or the impact that that's happening on
Speaker 1: their domestics semiconductor business. So can no doubt talk.
Speaker 2: About yeah, clearly. I mean, the export controls are beginning
Speaker 2: to bite. I think they have been for a while,
Speaker 2: and that's certainly going to limit a lot of the
Speaker 2: advancement on the AI front. But is there a way
Speaker 2: for China to kind of home grow if you will,
Speaker 2: I mean a semiconductor industry that I think it's going
Speaker 2: to take years, But I mean, you know, we've talked,
Speaker 2: Brian just mentioned the AMD chip. I mean, if you
Speaker 2: speak to industry analysts looking at the time frame that
Speaker 2: it would take for China establish an industry that could
Speaker 2: rival what the West has, and I'm thinking of a
Speaker 2: company like in Video. I mean, this is years long process.
Speaker 2: This is not anything where you can just simply throw
Speaker 2: some money and flip a switch.
Speaker 1: No, that's absolutely right. And let's briefly look at a
Speaker 1: place like Taiwan. I'm not sure of the exact year,
Speaker 1: but I think at some point in the nineteen sixties,
Speaker 1: did you know Taiwan's number one export was sugarcane. So
Speaker 1: that country has evolved from agricultural based economy to the
Speaker 1: world's leading semiconductor region for semiconductors and not just mainstream
Speaker 1: semi conductors, advanced semiconductors. But that is a path through
Speaker 1: you know, national investment and you know prioritization on education
Speaker 1: and producing the high quality engineers. That's taken the best
Speaker 1: part of fifty sixty years to get there. Now I'm
Speaker 1: not saying it's going to take half a century for
Speaker 1: China to get there, but you know, it's an immense
Speaker 1: task that China faces. Having said that, another quick fact
Speaker 1: at you if you just pay with yeah, now right,
Speaker 1: if you go on to Google, you google how many
Speaker 1: engineers does China you know, come out of Chinese universities.
Speaker 1: You get a lot of different stats, you know, so
Speaker 1: it's quite hard to pin down exact number. But just
Speaker 1: looking at a South China Morning Post article from the
Speaker 1: last year, in terms of PhD so doctorates students trying
Speaker 1: to produce seventy seven thousand PhD students or graduating with
Speaker 1: PhDs and doctorates. That's the projection for twenty twenty five
Speaker 1: versus forty thousand in the US. So my point I'm
Speaker 1: trying to make here is, I mean, like everything related
Speaker 1: to China, there's a huge domestic population and there's a
Speaker 1: bit of a number game, numbers game at the end
Speaker 1: of the day. So whilst it's very difficult to put
Speaker 1: a finite timeline on how quickly they may narrate a gap,
Speaker 1: they are their domestic universities are producing a lot of
Speaker 1: engineers and I think, I mean, that's the only option
Speaker 1: to throw money at the problem and throw bodies at
Speaker 1: the problem, and I think in time they will.
Speaker 2: Narrate a gap.
Speaker 1: The question is is that going to be a two
Speaker 1: or three year process, is it five year? Is it
Speaker 1: going to be in multi decades? It's very very difficult
Speaker 1: to answer.
Speaker 3: One thing we have to remember, though, is that for
Speaker 3: a lot of Chinese tech companies, the market is China
Speaker 3: and they don't have US competitors there for the most part. Now,
Speaker 3: you know, it depends on whether you're talking smartphones or
Speaker 3: whether you're talking about Internet services and such. But for instance,
Speaker 3: on the E commerce front, there's there's not US. There's
Speaker 3: not big US competition for JD dot Com and Ali
Speaker 3: Baba and such. So, you know, as we look now
Speaker 3: at this environment, because investors listening to the program, they
Speaker 3: want to they want to find some successes. I mean,
Speaker 3: where are there some areas here that investors can mine
Speaker 3: for our performance by Chinese companies.
Speaker 1: Okay, again, you know there are obviously huge technical barriers
Speaker 1: to entry on the semiconductor side. You know, you're working
Speaker 1: at the cutting edge of physics, you know, building the
Speaker 1: devices at the atomic scale. That's an incredibly, incredibly different, sorry,
Speaker 1: difficult problem to overcome, whereas the barriers on the software
Speaker 1: side and much lower. At the end of the day,
Speaker 1: quite simply, you need a desktop, a high powered desktop,
Speaker 1: and the right skill set to do it. So I
Speaker 1: think it's far easier for China to develop its domestic
Speaker 1: software business and internet business. I think that's the direction
Speaker 1: of travel and the most easy route that China can
Speaker 1: drive new global leaders on that front.
Speaker 3: I can see people sharpening their pencils now looking for
Speaker 3: the best software companies to get their hands on. Robert,
Speaker 3: Thank you, Robert Lee, Bloomberg Intelligence Senior Analyst.
Speaker 2: Let's get to our guest. Ron Temple joins us. He
Speaker 2: is chief market strategist at Lazard Asset Management on theline
Speaker 2: from Hong Kong. Ron, thanks for being with us. We're
Speaker 2: talking a lot about what we're getting out of the
Speaker 2: NPC here. Let's begin with a five percent growth target.
Speaker 2: It's not really five percent, it's at around five percent,
Speaker 2: so there's some plus and minus there just but generally speaking,
Speaker 2: what's your takeaway?
Speaker 5: Yeah, I might take away from the first read and
Speaker 5: watching the speech this morning is really that this is
Speaker 5: there's no surprise, let's put it simply, and probably no
Speaker 5: surprise is not good enough. If we look at the targets,
Speaker 5: they are generally the same as last year. You know,
Speaker 5: there's some minor cement differences. For example, this year the
Speaker 5: target is over twelve million new urban jobs. Last year
Speaker 5: it was about twelve million, so again minor differences there.
Speaker 5: But when it really comes to getting the Chinese economy
Speaker 5: moving again, there's there's nothing in this NPC announcement that
Speaker 5: seems like it'll be terribly effective in that regard. And
Speaker 5: I would say the biggest issue facing China really still
Speaker 5: is the real estate industry and housing issues and I
Speaker 5: don't see anything here that's going to materially move the needle.
Speaker 3: Is it more time that is need did here ron
Speaker 3: as opposed to a large stimulus package or do you
Speaker 3: think investors are right in expecting and hoping for more?
Speaker 5: Yeah, I think you've just put your finger on the
Speaker 5: really big issue on the housing market. I think this
Speaker 5: is going to take two to three years to basically
Speaker 5: find a new equilibrium on housing. And just keep in
Speaker 5: mind this all really started three and a half years
Speaker 5: ago when the Chinese government announced the three Red Lines policy,
Speaker 5: where it basically said if you're a property or a
Speaker 5: real estate developer and you exceeded certain key metrics in
Speaker 5: regards to leverage, that your ability to access additional credit
Speaker 5: was significantly curtailed. So they effectively shut off additional credit
Speaker 5: for highly levered developers, and then you started having a
Speaker 5: series of rolling defaults from the developers. And the problem
Speaker 5: with that is as developers defaulted, consumers lost confidence that
Speaker 5: they should be buying apartments from these people because if
Speaker 5: you buy the apartment, it might not be delivered. If
Speaker 5: you fast forward to today, out of the top one
Speaker 5: hundred real estate developers in China, over eighty five percent
Speaker 5: of the private developers are in default, and over thirteen
Speaker 5: percent of the state owned developers are in default. And
Speaker 5: so effectively, you've had a sharp decline in new housing sales.
Speaker 5: You have a sharp decline of new housing starts. It's
Speaker 5: going to take time for the supplies that we're started
Speaker 5: over the last two to three years to work their
Speaker 5: way through the system and to find some kind of
Speaker 5: new equilibrium on demand and supply in this market. And
Speaker 5: I do worry, by the way that the longer this persists,
Speaker 5: the more damaging it is to consumer confidence and optimism
Speaker 5: and willingness to take risk in China.
Speaker 2: And do you have a sense as to what might
Speaker 2: might the government do to help this situation to turn
Speaker 2: it in any way? I mean, it seems like more
Speaker 2: stimulus is required, but given the GDP to debt story
Speaker 2: in China, that doesn't seem to be forthcoming.
Speaker 5: Yeah, I mean, I actually give some credit to the
Speaker 5: Chinese government. I think what they've recognized is, don't you
Speaker 5: do not solve the debt problem with a lot more debt,
Speaker 5: And so they've been quite disciplined in trying to de
Speaker 5: lever the property segment and actually right size it. I
Speaker 5: do think when you look at the other stimulus measures
Speaker 5: you just mentioned, the Ultralong bond, the local government special bonds,
Speaker 5: those are largely unchanged amounts from last year, especially as
Speaker 5: it relates to local government bonds. But I do think
Speaker 5: when you go through the dozens of stimulus measures announced
Speaker 5: in the last six to nine months, including in most
Speaker 5: recent weeks, the twenty five basis point reduction and the
Speaker 5: prime loan rate for the five year LPR, those will
Speaker 5: all cumulatively add to economic momentum in my view and
Speaker 5: other parts of the economy. So importantly, that five year
Speaker 5: LPR is the benchmark for mortgage rates, and so by
Speaker 5: lowering that rate twenty five basis points, for example, it
Speaker 5: reduces payments on existing mortgages, which should lead the consumers
Speaker 5: having extra disposable income that of their mortgage payments, and
Speaker 5: they should be able to spend morning on more money
Speaker 5: on things other than real estate. So I think you
Speaker 5: put all these together, the government is announcing kind of
Speaker 5: a drip feed of stimulus measures. Do you think over
Speaker 5: the next six to twelve months that will start to
Speaker 5: perk up growth?
Speaker 3: Yeah, well, we need a story. I think we don't
Speaker 3: really have a story for China. We've got a story
Speaker 3: in Japan, We've got a story in India, and the
Speaker 3: AI story in the US. Let's talk a little bit
Speaker 3: about the US. The equity market has been grinding higher.
Speaker 3: Some would say that it's likely to continue in this
Speaker 3: direction until we see either economic data signal a slowdown,
Speaker 3: or maybe if inflation looks so sticky that the FED
Speaker 3: has to change course. What do you views on whether
Speaker 3: or not to stay the course inequities in the US.
Speaker 5: I think the story of the US equity market is
Speaker 5: a very different one. We've obviously had a narrowly led
Speaker 5: market rally. We've all talked about the Magnificence seven, the
Speaker 5: Fab five, all the different kind of names we've given
Speaker 5: these stocks. But the reality is, if you look back,
Speaker 5: say from January of twenty twenty two, from the prior
Speaker 5: market peak to where we are today, the bulk of
Speaker 5: the earnings growth and the price action has really been
Speaker 5: in a narrow group of tech stocks and maybe GOLP
Speaker 5: one inhibitors around the healthcare space. But you know, when
Speaker 5: I look at the market going forward, to me, the
Speaker 5: only way that AI tech juggernaut can be sustained is
Speaker 5: if the companies buying those goods and services from the
Speaker 5: tech providers get a return on investment. And I think
Speaker 5: where you're going to see that return on investment is
Speaker 5: a broadening out of productivity and earnings growth in the
Speaker 5: other parts of the market where people successfully deploy these tools.
Speaker 5: And so I think you're going to see a a
Speaker 5: broadening of earnings growth. But b let's just keep in
Speaker 5: mind that the geography of the earnings within the us
Speaker 5: P five hundred has been really dispersed. Over the last
Speaker 5: two years. You've seen major declines and energy earnings in
Speaker 5: the most recent year, declines in healthcare earnings, big increases
Speaker 5: in tech earnings. I think over twenty twenty four and
Speaker 5: twenty twenty five, you're going to see some real moving
Speaker 5: parts around. For up, perhaps the financial sector see lower earnings,
Speaker 5: whereas you might see higher earnings and energy. So to me,
Speaker 5: this is going to be more of a stock picker's market,
Speaker 5: less of a beta trade. And very importantly, by the way,
Speaker 5: I think the discount rate trade meaning buying equities writ
Speaker 5: large because ten year yields are going to go down.
Speaker 5: I think that trade's largely over. It's really all about
Speaker 5: earnings growth from here, not PE expansion, not lower discount rates. Ron.
Speaker 2: I think that's an important point to get back to
Speaker 2: the AI productivity story. Yes, we have a CAPEC spending up,
Speaker 2: a lot of companies investing in AI, but it's to
Speaker 2: be seen whether or not they really benefit that in
Speaker 2: the way in which kind of the spending would justify, right,
Speaker 2: I mean we've yet to really see that play out.
Speaker 5: Yeah, And I do think, you know, there's no question
Speaker 5: in my mind that AI is going to be revolutionary
Speaker 5: for the economy. I mean, when I think about the
Speaker 5: two biggest changes in the global economy in our lifetimes,
Speaker 5: it's likely to be the energy transition. In the question
Speaker 5: is the timing right? And if you're thinking about it,
Speaker 5: if you're in the C suite of a major corporation
Speaker 5: and you've invested X million dollars or even billions in
Speaker 5: some cases into AI technology, if you don't see rewards
Speaker 5: or fruits from those investments, what you tend to do
Speaker 5: is ring that spinning back in and say, let's figure
Speaker 5: out how to make sure we're getting a return on this,
Speaker 5: and then maybe you resume the spending later when you
Speaker 5: figure out how to build it into business flows. So
Speaker 5: I think it's all about timing here. The market's been
Speaker 5: quite enthusiastic that it's going to be a hockey stick
Speaker 5: on the upside. I'm a little more cautious on that front,
Speaker 5: but I do think it will ultimately translate to better
Speaker 5: earnings and productivity for a broad swath of the market.
Speaker 2: We'll leave it there on that cautious note, Ron Temple,
Speaker 2: thank you so much. Ron as chief investment strategist at
Speaker 2: Lazard Asset Management, joining from Hong Kong. This has been
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