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Speaker 2: Joining us now on the program is Katia Dimitrieva, Bloomberg
Speaker 2: Asia Economics correspondent, to take a closer look at the
Speaker 2: PBOC briefing this morning. So I just ran through the
Speaker 2: cutting of interest rates, the freeing up of banks to
Speaker 2: loan more with the drop in the triple R. There
Speaker 2: also lowering the down payment on second homes. One of
Speaker 2: our correspondents is James Mager. I know him to be
Speaker 2: a pretty sober individual. Katya, he says, my hands were
Speaker 2: shaking as I sent the headlines out. What a bazooka
Speaker 2: from the Central Bank. I don't think I've ever seen
Speaker 2: such an announcement before in China. Katya Dmitrieva, do you agree?
Speaker 3: Well, it's not only a big announcement, it also came
Speaker 3: in about seven minutes, so you have one of the
Speaker 3: top officials in China sitting down with the media. He said,
Speaker 3: good morning, so good to see all of you. And then,
Speaker 3: you know, seven minutes straight of just announcements of various
Speaker 3: cuts to loan rates, to r rate that's how much
Speaker 3: banks need to hold in reserve, to mortgage rates.
Speaker 4: So there was.
Speaker 3: Quite a lot. The question though, and I appreciate the
Speaker 3: commentary on James, I know it was a definitely big
Speaker 3: announcement from what compared to what we've seen from China recently.
Speaker 3: The question is, you know how much it'll really impact
Speaker 3: an economy that is so deep in a hole right
Speaker 3: now in terms of consumer spending but also the effect
Speaker 3: of deflation. You know, if you were announcing these policies
Speaker 3: a year ago, a year and a half go, particularly
Speaker 3: the housing market component, this would be a very positive development.
Speaker 3: You know, you're seeing markets already reacting to the thoughts
Speaker 3: of you know, the interest rate moving down, yield to
Speaker 3: move down as well. So it would have been a
Speaker 3: very big kind of Bazooka style which is the term
Speaker 3: we use for this for China's fiscal stimulus at this
Speaker 3: size would have had a bigger impact if you had
Speaker 3: announced it a year, year and a half go now
Speaker 3: not so sure. Not sure essentially if this is enough.
Speaker 3: And we're already seeing some economists saying that.
Speaker 1: You know, it's very interesting. I was looking at the
Speaker 1: headlines one from the government that we will soon have
Speaker 1: a release of six new measures to support MNA, which
Speaker 1: I thought was very interesting, and that in my mind
Speaker 1: goes right to the overcapacity story. Now, I know that's
Speaker 1: a loaded term, so let's not use it. I'll put
Speaker 1: it aside. But in one industry, let's say, and as example,
Speaker 1: electric vehicles, where there's so much over capacity, is something
Speaker 1: like this design to begin to intentionally make the economy
Speaker 1: maybe a little bit more efficient, to shrink it just
Speaker 1: a bit. Now, that could have second and third order
Speaker 1: effects that might be unwelcomed.
Speaker 3: Yeah, it could make it more efficient, It could make
Speaker 3: m and A could make the markets just a bit
Speaker 3: more active. And this is something that the government has
Speaker 3: been messaging for over a year now. You know, alongside
Speaker 3: this view of high quality development, it's always oh, we
Speaker 3: also want to support the equity market. We want to
Speaker 3: support the markets. This could definitely do that. At the
Speaker 3: same time, it's tough when you have a government, especially
Speaker 3: this year, and at this point in the year, that's
Speaker 3: messaging a five percent or about five percent growth target,
Speaker 3: and you have companies and provinces and cities that are
Speaker 3: incentivized to reach that target. So M and A and
Speaker 3: purchasing other companies and perhaps growing their business that way,
Speaker 3: Maybe that's not necessarily the priority. The priority is trying
Speaker 3: to get to that five percent growth target by any
Speaker 3: means necessary, and we've seen that impact across the board.
Speaker 2: Some of this is targeted at companies and some is
Speaker 2: targeted at consumers. Obviously, the refinancing tool for listed companies
Speaker 2: and shareholders to buy back shares is something that's getting
Speaker 2: some commentary in our Top Live blog. I'm curious whether
Speaker 2: or not you think that this does actually move the
Speaker 2: needle for the average consumer.
Speaker 3: It's again, it's hard to say. I mean, it is
Speaker 3: true that in China about ninety percent of people own
Speaker 3: their homes. That's a big difference from other countries. So
Speaker 3: if you cut the market rate on existing loans, then
Speaker 3: you free up quite a bit of capital. But the
Speaker 3: issue China is not necessarily that people lack money. I mean,
Speaker 3: there's almost a record in savings right now. It's more
Speaker 3: the ability or likelihood or interest in spending that money.
Speaker 3: It's not clear that these policies so far are going
Speaker 3: to make people feel more comfortable or stable about the market,
Speaker 3: especially when doesn't really do much for the labor market.
Speaker 3: I mean, that's been a key area of concern. You have,
Speaker 3: you fun employment that's the highest all year. You've got
Speaker 3: other indicators that are showing people are not getting raises,
Speaker 3: people are getting cuts to their pay, people are losing
Speaker 3: their jobs, even in the white collar space. None of
Speaker 3: this really addresses that.
Speaker 1: So, Kantia, if you're looking at the policy response today
Speaker 1: kind of from outside of China, would you be a
Speaker 1: little concerned that this is maybe going to add a
Speaker 1: little bit of well more leverage. And I think maybe
Speaker 1: if that is true, that there is going to be
Speaker 1: a little bit of concern about that fact.
Speaker 3: It's totally fair concerned to have in a country that's
Speaker 3: already has such a high debt, when you know, compared
Speaker 3: to other countries. I think it's not you know, China
Speaker 3: doesn't really have a choice right now. This is sort
Speaker 3: of a similar issue, and this is frankly why a
Speaker 3: lot of officials have been hesitant to unveil these kinds
Speaker 3: of moves up until now, up until sort of this
Speaker 3: pain point where more and more Wall Street economists are
Speaker 3: saying they're not going to reach five percent this year
Speaker 3: and also revising lower their estimates for future growth, so
Speaker 3: they kind of have no choice.
Speaker 2: Gatia, thanks so much for joining us. So we'll be
Speaker 2: watching the markets this morning and see how big the
Speaker 2: impact is. Katia Dimitriev, Bloomberg Asia Economics Correspondent Again, just
Speaker 2: very briefly, PBOC Governor Pangong Shong has announced these policies.
Speaker 2: The announcement to lower the banks reserve ratio requirement by
Speaker 2: fifty basis points, cutting the seven day reverse repo rate
Speaker 2: by twenty basis points, and cutting the outstanding mortgage rate.
Speaker 2: Ben emmon Cio and founder at fed Watch Advisors. Ben,
Speaker 2: thank you very much for coming on the show with us. Well,
Speaker 2: I suppose if you believe in mark to market, the
Speaker 2: FED would seem to have a lot of work to
Speaker 2: do here and the way Neil Kashkari outlined it, as
Speaker 2: you pointed out, the FED can cut one hundred and
Speaker 2: fifty basis points in fairly short order. Are you in
Speaker 2: that camp?
Speaker 4: Yes? I am Brian and great to be back on
Speaker 4: with you and dark though, first of all, it's not
Speaker 4: the eighth anniversary of Day Make Asia Radio, right, and
Speaker 4: we've been together on this show.
Speaker 2: We hit nine years exactly last week, and I remember
Speaker 2: you with us pretty much the.
Speaker 4: Whole run exactly exactly. Oh not ys tare Y. So
Speaker 4: but thank you very much to forget for having me back. Yes,
Speaker 4: I am in that camp, and you know, the way
Speaker 4: I come down to it is that I think that
Speaker 4: by the way Neil Cascari outlines is a bit wonkish,
Speaker 4: but the outlines are well, you got to really think
Speaker 4: in real terms, right, accounting for inflation, and that was
Speaker 4: I think the worry from war that came through on
Speaker 4: Friday was like he saw this infflication that was cooling
Speaker 4: off quicker. And where the fatales rate is currently even
Speaker 4: after that first cut, there's a there's a pretty big
Speaker 4: difference now in real terms, and they feel, and probably
Speaker 4: rightfully so, that that's real rate. The respective rate is
Speaker 4: still pressing a lot on the economy, even though we're
Speaker 4: seeing some subtraction coming through, right, you know, the last
Speaker 4: number of weeks, and there's a forward looking data and
Speaker 4: so I think they build us this building and think
Speaker 4: insurance against their own forecasters in they put the four
Speaker 4: point four percent on the poor rate out there because
Speaker 4: that's what they think that the rate will be. But
Speaker 4: yet they're willing to cut faster in order to not
Speaker 4: have that forecast material lines and they based upon that announceers.
Speaker 4: But because carried us comparing the funds rate to the
Speaker 4: expected inflation and trying adjust according to and on that basis, yes,
Speaker 4: you could cut a little faster. It maybe means that
Speaker 4: that is a nure and fifty base points in court
Speaker 4: Coate short order.
Speaker 1: We had a number of FED speakers today, including Austin Goulsby,
Speaker 1: and he was saying that current policy rate and FED
Speaker 1: funds is hundreds of basis points above neutral. Brian and
Speaker 1: I were talking yesterday with a guest, I mean, I
Speaker 1: know the neutral rate is largely theoretical. It can't be measured,
Speaker 1: it's only estimated. We get that. Does it benefit the
Speaker 1: conversation around monetary policy to talk about a neutral rate
Speaker 1: and do you have a sense of where that may be?
Speaker 4: Yeah, it does benefit up because you know, ultimately the
Speaker 4: neutral rate is really were the Fed points to get
Speaker 4: at where you know they essentially have achieved the mandate completely,
Speaker 4: meaning Maggie, we have a soft lending now to get
Speaker 4: to that man. But ultimately it's about price stability and
Speaker 4: maximum employment. Right, So it may be at three three
Speaker 4: and a half percent. I think the pandemic and the
Speaker 4: rate is shock played out and all the stimulus and
Speaker 4: then subsequent investment is taking place in near the stage,
Speaker 4: you know, with the productivity that has come along with
Speaker 4: that that I think the economy is at a higher
Speaker 4: trend growth currently than it was pre pandemic, and that
Speaker 4: is the reflection of the cowed neutral rate. So the
Speaker 4: FAEDA spencials then close to three percent, the market is
Speaker 4: pricing something like three in the quarter three and a
Speaker 4: half percent. We'll probably get some sort of facility in there.
Speaker 4: If the fat cust rates further from here, as in
Speaker 4: we're trying to get to some sort of neutral rate,
Speaker 4: then we have to assess it that is truly neutral, right,
Speaker 4: But that's what the market things currently and the Fed's
Speaker 4: are too far away. Yeah, probably a good guide boasts
Speaker 4: full for overheading with multi policy in the near two.
Speaker 2: So there's the economy and what it's doing, and then
Speaker 2: there's the market. We've got the S and P five hundred,
Speaker 2: up just under twenty percent year to date. It gained
Speaker 2: more than twenty percent last year, so two twenty percent years.
Speaker 2: It's not unheard of, but it would naturally make some
Speaker 2: people nervous, unless, of course, you consider that the year
Speaker 2: before that, twenty twenty two, we were down more than
Speaker 2: twenty five percent. So if you put these three years together,
Speaker 2: you're up about eighteen percent over three years, and that's
Speaker 2: below the average return on the S and P. So
Speaker 2: I'm confused. Are we fully valued here or is there
Speaker 2: more room to run?
Speaker 4: Yeah, and it's amazing. It's a pretty complicated question because Brian,
Speaker 4: because you know, on one hand, you can basis upon
Speaker 4: the interest rate forecast, right, if we're going to go
Speaker 4: low with interest rates, the mechanics are that, you know,
Speaker 4: stock prices are going to go higher, right most most
Speaker 4: of the time, you know, especially if you're in an
Speaker 4: environment where the economy is actually doing fairly okay, and
Speaker 4: all that lower interestrates do is just giving the economy
Speaker 4: more of a push, right, So that should be reflected
Speaker 4: into the mark it and that's sort of what happening.
Speaker 4: On that basis we're not fully valued. We could actually
Speaker 4: expand in the multiple by just simply higher price stock prices.
Speaker 4: But if you think of like if we're still an
Speaker 4: economy where there's risk of inflation, or risk of ejudging
Speaker 4: the sharks, or risk of what we saw this summer,
Speaker 4: right of a sudden unmind of leverage in the system.
Speaker 4: You know, you are at a loftier level, so to speak,
Speaker 4: and so it is vulnerable to the subsequent volatility that
Speaker 4: could emerge, whether as will be the election. Not so sure.
Speaker 4: It doesn't seem to be that the market supported by
Speaker 4: the election. More again, something about unexpected coming through the
Speaker 4: data or others sign judging the sharks, or about what
Speaker 4: may take note that we do have some disruptions going
Speaker 4: on in the supply chain. Again, you know, that may
Speaker 4: be something that Marcus is paying attention to as one
Speaker 4: one factor. So I think to somewhere up with the
Speaker 4: market may look overvalued, but there's more room in the price,
Speaker 4: especially if you think about interests, you know, declining in
Speaker 4: the future.
Speaker 1: You know, our colleagues has spoke with the noted strategist
Speaker 1: ed Yardenny earlier in the day. Maybe you had a
Speaker 1: chance to see this on the Bloomberg terminal, and he
Speaker 1: said that the basically, the decision that we had last
Speaker 1: week to go fifty basis points has lifted the odds
Speaker 1: of an outright melt up inequities, and he likened it
Speaker 1: to what we saw on the dot com bubble. I
Speaker 1: mean that that sounds a little concerning to me. Is
Speaker 1: does he have a point?
Speaker 4: Yeah, he does, because the melt up obviously is the issue, right,
Speaker 4: is that that's the sort of getting really a sprint
Speaker 4: to the finish here. That we've been on a pretty
Speaker 4: good run here for the last couple of years and
Speaker 4: a lot of charts out that the bullmarkt young and
Speaker 4: it could have a lot more to go. But what
Speaker 4: he's talking about is more like you get to sprint
Speaker 4: at the end. And look, let's face it, we do
Speaker 4: have an AI boom, so to speak, and there's a
Speaker 4: lot of data out on it at much to spend
Speaker 4: on it and maybe now being invested again. But there's
Speaker 4: some form of fraud there that we can't deny that
Speaker 4: and so that's where we have to work. That's what
Speaker 4: Jors talking about. Did you get amount of ben the
Speaker 4: frost of the AI, you know, spending may may be ons.
Speaker 2: He also warned that central bankers should be careful here
Speaker 2: with aggressive rate GUIDs because he thought inflation could resurface,
Speaker 2: and he highlighted that both candidates and the presidential election
Speaker 2: are proposing policies that could trigger inflation. So an interesting
Speaker 2: look there from Ed Yardnny and an interesting look from
Speaker 2: Ben Emmons joining us from FED Watch Advisories.
Speaker 5: Bloomberg Opinion Informed Perspectives, an expert data driven commentary on breaking.
Speaker 1: News time for Bloomberg Opinion. And we are joined now
Speaker 1: by opinion columnist Minchin Pei, who is writing about China's
Speaker 1: economic recovery. He's saying the game isn't over for China,
Speaker 1: but it's garbage time. Mention joins us from southern California.
Speaker 1: Always a pleasure and the timing is absolutely perfect. As
Speaker 1: we speak here, minshe in PBOC Governor Penggonsen as a
Speaker 1: conducting a news conference with two other officials, and they
Speaker 1: are outlining what is clearly just a massive program from
Speaker 1: the Central Bank to stimulate the Chinese economy. I want
Speaker 1: you to weigh in, what do you feel about this?
Speaker 6: Well, certainly they try to end the so called garbage time.
Speaker 6: The sentiments in China are really bad. I'm no economist,
Speaker 6: but based on what I have read, the real problem
Speaker 6: for China is not monetary policy, is actually low demand,
Speaker 6: consumer demand in particular. So this policy lower interest rate
Speaker 6: and doing other things probably is good, but not going
Speaker 6: to make a big difference. That is not a bazunka.
Speaker 6: One of your colleagues said it was a bazuka. I
Speaker 6: think that's a pistol rather than in the bluka. Because
Speaker 6: China right now is in a liquidity trap.
Speaker 4: The money there's.
Speaker 6: Just massive build above debt, so the money you pump
Speaker 6: into the system is just used to pay off debt
Speaker 6: rather than to buy stuff.
Speaker 4: Or do stuff.
Speaker 2: Yeah, for people who haven't read the piece, I can
Speaker 2: just summarize it quickly in saying that the collapse of
Speaker 2: the real estate sector has really been a big part
Speaker 2: of this problem for the average person in China. It's
Speaker 2: shrunk their wealth considerably and it's hurt their consumption. But
Speaker 2: what's interesting is you say that the malaise goes a
Speaker 2: lot deeper and has political roots to it, that they
Speaker 2: just don't have as much confidence now in President Shijen
Speaker 2: Ping as they did maybe when we saw other ructions,
Speaker 2: like in the late nineties, because at that time they
Speaker 2: had a lot of confidence in the then premier at
Speaker 2: Jerome g tell us a little bit more about these
Speaker 2: political issues.
Speaker 4: That you see.
Speaker 6: Oh yes, I think there are really two issues for
Speaker 6: the average people. They think they've given the government enough
Speaker 6: time to show that it has a better game plan.
Speaker 6: They have not seen one because the economy is just
Speaker 6: stuck in neutral for now for the better part of
Speaker 6: eighteen months. So that is.
Speaker 4: So the government.
Speaker 6: Actually has to do something that changes the perception and sentiments.
Speaker 6: The other is that they doubt whether sheating pain will
Speaker 6: change costs. He might do some technical adjustment, but there
Speaker 6: is no end in sight of the end of his tenure.
Speaker 6: He effectively has made himself a lifetime ruler. So people say, well,
Speaker 6: in the past, at least a leader will be there
Speaker 6: for ten years and then we have a chance for
Speaker 6: real change. But no such possibility exists at a moment.
Speaker 1: So there's no way for the party to put pressure
Speaker 1: on him to change course.
Speaker 6: Here, no way, no way, Because now China essentially has
Speaker 6: centralized personalized leadership at the top. Most of the top
Speaker 6: people are chooging things friends or allies, So how are
Speaker 6: they going to put pressure on that patriot?
Speaker 2: You know, it's interesting though with people in China, I think,
Speaker 2: like Americans, they tend to be opportunistic and confident about
Speaker 2: the future, and they put a lot of faith in
Speaker 2: education and Chinese culture, and that's something that sort of
Speaker 2: supersedes to a certain degree political leadership in China. Is
Speaker 2: there a way that you can see kind of an
Speaker 2: organic reflowering of optimism and if so, what might lead
Speaker 2: to that?
Speaker 6: I think it would take a while, because China is
Speaker 6: now caught in this cycle, the their cycle, the lealistic cycle.
Speaker 6: Probably five six years from now, we don't know how
Speaker 6: long it will take, but I think if the economy
Speaker 6: recovers on its own organically, then the sentiments will change.
Speaker 6: The other is that, as I said, the government really
Speaker 6: needs to a lot, But the problem is that the
Speaker 6: government does not have a lot of dry powder that
Speaker 6: can be used.
Speaker 1: So if you had to speculate a little bit on
Speaker 1: what the reaction of the population in China might be,
Speaker 1: if we have considerably more weakness, no recovery in the
Speaker 1: property market, persistent deflation in the economy, and just overall
Speaker 1: weak sentiment, I mean, isn't that a way for the
Speaker 1: government to begin to kind of maybe second guess itself
Speaker 1: and change course, or do you think they would be
Speaker 1: unmoved The leadership would be unmoved under those circumstances.
Speaker 6: I think the leadership will have to react if, for example,
Speaker 6: we're have much higher levels of unemployment right now, the
Speaker 6: latest number on use unemployment is about nineteen percent. That
Speaker 6: is very high. And if because low consumer sentiment can
Speaker 6: create a self in reinforcing feedback loop, less income, more insecurity,
Speaker 6: less spending, so the economy will simply get worse and worse.
Speaker 6: So I think if the government does not do anything,
Speaker 6: this is what we can predict, we can count on happening.
Speaker 6: I think a critical thing is what happens on November sixth,
Speaker 6: of six years, the US election, because the government is
Speaker 6: saving what little fiscal power that it has in the
Speaker 6: case Trump gets re elected and flaps huge terrors on China,
Speaker 6: and then China will use its fiscal resources to stimulate
Speaker 6: the economy.
Speaker 2: For that, the.
Speaker 6: Government wants to just wait. They don't have much longer
Speaker 6: to wit. So I guess we can see some action
Speaker 6: at the end of the year.
Speaker 1: Well, we had some action today and we can talk
Speaker 1: more about that momentarily. Mentioned it's always a pleasure Mention
Speaker 1: pay Bloomberg opinion columnists joining us here on Daybreak as.
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