Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain non global business so you
Speaker 1: can invest better across the Pacific rim. I'm Tom Corbett
Speaker 1: in Hong Kong.
Speaker 2: And I'm John Lee. China's economy is sputtering. As COVID
Speaker 2: zero restrictions fell away. Global investors held their breath expecting
Speaker 2: a powerpacked economic rebound, but so far China's come back
Speaker 2: from COVID hasn't lived up to the hype.
Speaker 1: It's a different story in the US, where the economy
Speaker 1: shows surprising resilience, leaving the door open for higher rates,
Speaker 1: but that's not stopping investors from getting excited over the
Speaker 1: promise of productivity from artificial intelligence.
Speaker 2: What does this mean for the dollar, the women Bee
Speaker 2: and other Asian currencies and what risks lurk in South
Speaker 2: Korea's financial sector.
Speaker 1: Let's bring in Alvin Tan, head of Asia Currency Strategy
Speaker 1: with RB's Capital Markets.
Speaker 2: And Rina Quark Asia Financials credit analysts with Bloomberg Intelligence.
Speaker 1: Both join us from Singapore.
Speaker 2: Hi Alvin. In June, we had the Federal Reserve Chairman
Speaker 2: Jerome Powell state that the fight with inflation has a
Speaker 2: long way to go and indicated two more rate hikes.
Speaker 2: On the other hand, China just cut interest rates by
Speaker 2: ten basis points. How do these actions frame your currency view?
Speaker 3: Well, on the one hand, of course, that implies that
Speaker 3: the interest rate differential between China and the US is widening.
Speaker 3: Of course, that is a fundamental contributor to the women
Speaker 3: beatz continued appreciation. On the other hand, we also know
Speaker 3: I mean, of course it's lengthened, but we also know
Speaker 3: that that is approaching the end of its heightening cycle.
Speaker 3: But at this point, the interest rate differential widening between
Speaker 3: China and the US is still the primary factor, I think,
Speaker 3: driving dollacy and more higher.
Speaker 2: What's your view of the US dollar going forward versus
Speaker 2: the Asian currencies.
Speaker 3: Well, we do think that the US dollar is peaking
Speaker 3: on a cyclical basis, but this this is quite a
Speaker 3: drawn out process. I mean, we look at historically the
Speaker 3: peaks in the dollar tends to be drawn out for
Speaker 3: many months up sometimes even years in fact, and indeedtail
Speaker 3: euro dollar at ninety five cents last autumn probably marked
Speaker 3: the absolute peak the usl for this cycle. But of
Speaker 3: course the US dollar has not plunged from that, so
Speaker 3: again it is a peaking process. It's going to be
Speaker 3: a drawn out process, and we do think there's still
Speaker 3: room for the US dollar to gain some ground at
Speaker 3: least towards your end, particularly against the likes of the
Speaker 3: Japanese and also against you know, the Romain bit. But
Speaker 3: it is a peaking process, and we we do foresee
Speaker 3: that the US dollar will likely commence a more steady
Speaker 3: decline probably next year.
Speaker 1: Alvin as we speak, we are at the doorstep of
Speaker 1: the second half of twenty twenty three. Let's take a
Speaker 1: look forward if we can. Lots of factors influencing the market.
Speaker 1: We've got interest rates, we've got recession risk, We've got
Speaker 1: this productivity leap that's being promised by AI, or at
Speaker 1: least you know, that's the general sense. What are going
Speaker 1: to be the dominant themes, the prevailing narratives going into
Speaker 1: the second half of twenty twenty three For.
Speaker 3: Some of the Asian currencies, this AI narrative is quite important,
Speaker 3: particularly for the likes of the Korean one and to
Speaker 3: a less extent time onan dollar. In fact, we've already seen,
Speaker 3: for example, Samsung and the Chronics Heinex share prices at
Speaker 3: the highest level since spring of last year, and that
Speaker 3: has actually helped the Korean one diverge from the rooman
Speaker 3: Beza depreciation trend. Over the past two months or so,
Speaker 3: the Korean one has done relatively well actually quoted date,
Speaker 3: So I think this will be a contributor to some
Speaker 3: of the Asian currencies are performing within the Asian currency conflict.
Speaker 3: Now at the broader level, I think we're also begin
Speaker 3: to see that the exports slump in Asia is bottoming out.
Speaker 3: You can see that in the VAT Trade Satistics Advanced
Speaker 3: statistics our career. No doubt the trade is still negative
Speaker 3: on a year on your basis, exports growth in particular
Speaker 3: still negative in the year on your basis, But I
Speaker 3: think the bottoming process is happening, and so going forward,
Speaker 3: I think this AI and at the broader level, the
Speaker 3: gradual ending of the exports slump can support such an
Speaker 3: Asian currency is going forward. I think what's quite interesting
Speaker 3: also is that although of course China's growth rate growth
Speaker 3: momentum has disappointed as recently, I think though that as
Speaker 3: the disappointment piles up on China's part, the chances of
Speaker 3: more stimulus measures, particularly from the physical side, is actually growing.
Speaker 3: So this possibility of further stimulus are China, particularly from
Speaker 3: the physical side, is going to help end the room
Speaker 3: in based depreciation trend, particularly gainst the US dollar at
Speaker 3: some point in the second half of the year, But
Speaker 3: at this point not yet, because we're still seeing that
Speaker 3: the government and Bating appears reluctant to really roll out
Speaker 3: any decisive stimulus measures, particularly on the fiscal side.
Speaker 2: Alvin, what decisive measures does the China authorities need to
Speaker 2: implement to appease global investors? You know, recently we had
Speaker 2: a ten basis point count that obviously was enough. Can
Speaker 2: you just give us some more details.
Speaker 3: Yes, I think that the LaNese economy currently is suffering
Speaker 3: from lack of demand and factly lack of confidence on
Speaker 3: the out of households and to suspend and so, you know,
Speaker 3: making the price of credit cheaper, perhaps it only helps
Speaker 3: in the margin, is not going to solve the underlying
Speaker 3: lack of demand problem. I think that we definitely need
Speaker 3: more decisive fiscal measures. For example, one reason why households
Speaker 3: have been so cautious in China because China actually never
Speaker 3: had the physcal handouts that was very common and developed
Speaker 3: countries during the pandemic at all, So households are basically
Speaker 3: trying to repair balance sheets currently, and so they cautious
Speaker 3: in the spending, cautious in the borrowing as a result,
Speaker 3: of course, that is certing internal demandment in common. So
Speaker 3: I think you need fiscal measure just as what happened
Speaker 3: in many the countries during the pandemic itself, like.
Speaker 2: Cash handouts basically, right, Yeah, well.
Speaker 3: That is one extreme of it. Of course, perhaps more
Speaker 3: moderate DISCO policies would be the likes of more government
Speaker 3: spending basically on infrastructure, perhaps on more government projects.
Speaker 1: Yes, let's take a deeper dive into China. When China
Speaker 1: emerged from COVID zero, there was a lot of, for
Speaker 1: lack of a better word, fanfare optimism over its growth prospects.
Speaker 1: That light appears to have dimmed a bit. What do
Speaker 1: you see going forward? And has China's shall we say,
Speaker 1: stumble out of the gate surprised you?
Speaker 3: First of all, yes, certainly the growth momentum has pieced
Speaker 3: it out a lot faster than I thought it would.
Speaker 3: But on the other hand, I know because in fact,
Speaker 3: if you tried to remember back to be called back
Speaker 3: to what happened in March when the government set its
Speaker 3: growth target. They at least had the growth target that
Speaker 3: quote around five percent, so actually it was quite a
Speaker 3: modest growth target. And again, if you look at China's
Speaker 3: economic policies just before the pivot away from COVID, at
Speaker 3: the beginning of reopening, there were no particularly very large
Speaker 3: stimulus measures have been put in place. So I think
Speaker 3: that another one. We're expecting China to grow something like
Speaker 3: six seven percent. I think that was definitely this guidet
Speaker 3: in that sense.
Speaker 2: Yes, what do you think the authorities can do regarding
Speaker 2: China's beleagate property sector.
Speaker 3: Well, that's the other part where in recent weeks, I
Speaker 3: would say there's been quite a bit of disappointment because
Speaker 3: there's a lot of news out and boom Will did
Speaker 3: the reporting about China was on the verge between the
Speaker 3: State Council the cabinets, on the verge of announcing various
Speaker 3: measures to support the property markets, of just reducing mortgage requirements,
Speaker 3: reducing limits and second home ownership. But so far it's
Speaker 3: means weeks now, we haven't gotten any details of any
Speaker 3: such policies that in particular, the State Council meeting just
Speaker 3: over two weeks ago, you know, he was expected that
Speaker 3: something with a murder of their meeting, but instead we
Speaker 3: just got more promises that more stimulus measures to particularly
Speaker 3: incite where the demand was forthcoming. So so far even
Speaker 3: now we haven't heard anything. And Premier lead he mentioned
Speaker 3: again that China was on course to meet five percent
Speaker 3: growth title, which is absolutely true, but that was because
Speaker 3: of base effects. The government appears to be continuing with
Speaker 3: a raatively modest growth pilate and their actions speak louder
Speaker 3: basically than there are words promising for the stimulus. I
Speaker 3: think that the market senses that there is a bit
Speaker 3: of foot dragging here in terms of rolling out more
Speaker 3: decisive stimulus measures, in turn the economy around.
Speaker 2: So for China's currency, the CNY or the CNH, are
Speaker 2: you a bull or bear?
Speaker 3: I would say from here, I'm largely positive on the CNY,
Speaker 3: but that's like, let's say, taking an eight and twenty
Speaker 3: four month deal. I think that in the near term, definitely,
Speaker 3: the depreciation trend is a clear one and it makes
Speaker 3: sense in fact, if you think about it, the CNY
Speaker 3: has retained much of its gains from mid twenty twenty,
Speaker 3: from the bottom of the pandemic turbulence that we saw
Speaker 3: it market. If you look at, for example, CNY against
Speaker 3: the Japanese end, it is much much higher, or even
Speaker 3: CNY against Korean war. This is no close neighbors. So
Speaker 3: there is a good argument that the trade weighted CNY
Speaker 3: can continue to move lower simply because the Chinese economy
Speaker 3: is definitely underperforming and a weaker currency is again another
Speaker 3: form of monetary easing. However, long of the term, I
Speaker 3: am a bit more bullish on the CNY because number one,
Speaker 3: China has a persistent current account surface. It's account surface
Speaker 3: currently is still not two percent of GDP, so that's
Speaker 3: a fundamental support for the currency in the longer term sets.
Speaker 3: And secondly, I think that with the depreciation that we've
Speaker 3: seen over the past year or so, I think it's
Speaker 3: hard to argue that the remin bee is expensive. Now
Speaker 3: I think what one could say that is falling into
Speaker 3: relatively cheap levels. So this is what makes me a
Speaker 3: bit more boollish over the medium belong term prospects. But
Speaker 3: certainly in the near term, the depreciation pressures are art clear, Alvin.
Speaker 1: Right now global investors are tiptoeing or treading cautiously around China.
Speaker 1: There are many reasons for that, what's it going to
Speaker 1: take for China to attract the attention and generate that
Speaker 1: global investor interest. Again, is it going to be infrastructure spending,
Speaker 1: Is it going to be support for the property market
Speaker 1: or is this something that we're not considering.
Speaker 3: I think certainly more the size of managers that support
Speaker 3: the economic particularly on the property sector, is going to
Speaker 3: be a part of it. And so to turn that around,
Speaker 3: essentially we need to see a lessening of the pressures
Speaker 3: on the property sector, on the property developers. In fact,
Speaker 3: part of it comes from government used to restrict credit
Speaker 3: provision to highly interested developers. So I think we definitely
Speaker 3: need some easing on those policies. And also beyond that,
Speaker 3: I think part of the reason why foreign investors have
Speaker 3: become a wary of China lately is, of course, you know,
Speaker 3: that stems from the regulatory crack now that of course
Speaker 3: started with ants one in two years ago, and you
Speaker 3: know engulf the education and the tutory sectors for example.
Speaker 3: So I think a clearer regulatory regime, a more transparent
Speaker 3: policy making regime in terms of how the government intends
Speaker 3: to deal particular sectors of the economy, and that it
Speaker 3: tends to ease this regular crack. Now, I think that's
Speaker 3: they will be important for foreign investors.
Speaker 2: Alvin, you're sitting in Singapore and I noticed that you
Speaker 2: haven't mentioned anything about Southeast Asian currencies. What's your view there.
Speaker 3: I've been quite positive on the Indonesian rupia, and I
Speaker 3: continue to be positive on the Indonesian mupia. And one
Speaker 3: reason is that, but partly it is a carry trait.
Speaker 3: I think we're seeing that volatility in actually EM bonds
Speaker 3: and EM currencies have fallen quite significantly the course of
Speaker 3: this year, So I think Indonesia is attractive from that
Speaker 3: point of view. I think that definitely botes well for
Speaker 3: Indonesia's growth and economic prospects. And the other one is
Speaker 3: I do think that the Singapore dollar, for example, has
Speaker 3: actually done quite well over the past two years or so,
Speaker 3: and that's because the Monetary authors Yere of Singapore has
Speaker 3: PYTHON policies quite significantly over the course of the past
Speaker 3: two years. Now that, of course, MAS has already stopped.
Speaker 3: I think it's definitely paused. Its tightening cycle is over. However,
Speaker 3: the appreciation settings on the Singapore dollar that were put
Speaker 3: in place during the course that pythoning remains in place.
Speaker 3: And so the Singapore dollar I think can continue to
Speaker 3: do well with those appreciation settings in place, driving it
Speaker 3: forward modestly, but nonetheless I think that will help with
Speaker 3: whole its gains of the past two years well.
Speaker 1: Alvin. Commercial real estate, especially the office segment, is a
Speaker 1: big player in developed economies, especially in Asia. Right now,
Speaker 1: there are some headwinds. Developers are finding it difficult to refinance,
Speaker 1: of course, due to the higher interest rates. We've got
Speaker 1: high vacancy rates. You're seeing it here in Hong Kong
Speaker 1: people working from home. Can you assess how big a
Speaker 1: risk is at stake here with commercial real estate and
Speaker 1: how does Asia's situation compare to the rest of the world.
Speaker 3: I think when you talk about this, it's important to
Speaker 3: differentiate between the various countries. Certainly in the commercial census
Speaker 3: of Hong Kong and Singapore, it is an issue that
Speaker 3: loans law. But in cases such as Indonesia to less extent,
Speaker 3: but still Malaysia or even India for that massive, I
Speaker 3: don't think it's particularly law problem on the macro level,
Speaker 3: at least for the economy, and I think the solid
Speaker 3: these Asian banks are actually quite relatively well capitalized in
Speaker 3: that sense, and which should help them whether these problems
Speaker 3: are in my view, but certainly in the more urban,
Speaker 3: commercial oriented centers of On Kong in particular and also Singapore,
Speaker 3: it is likely to be a big question mark going forward.
Speaker 2: I think it's a good time to bring in Rena
Speaker 2: into this discussion. Earlier this year we seem to be
Speaker 2: on the precipice of a global banking crisis. We had
Speaker 2: US regional banks fail, especially SVP. We also, you know,
Speaker 2: across the pond, we had credits with fail in Europe.
Speaker 2: Are you surprised at how well Asian banks have weathered
Speaker 2: the storm? Rena?
Speaker 4: Thanks for having me, John, Still, how we actually looked
Speaker 4: at why Asian banks seem to be better placed but
Speaker 4: not insulated from the global banking crisis that we have
Speaker 4: seen in March. Now, a couple of credit strengths that
Speaker 4: we see for the Asian banks. The first thing is
Speaker 4: most of the major Asian banks they have big capital
Speaker 4: cushions that allows them to actually what we call the
Speaker 4: credit losses potential credit losses in them books. Now. The
Speaker 4: second thing is that healthy liquidity. Most of the major
Speaker 4: banks liquidity profiles are likely to remain healthy this year,
Speaker 4: despite the elevated funding cause, and it seems unlikely to
Speaker 4: see the similar kind of deposit flight that we've seen
Speaker 4: in SVB as we see that for Asian banks. Now,
Speaker 4: the third thing is that as we look for most
Speaker 4: of the major Asian banks, they actually show up preemptive
Speaker 4: provisions since the pandemic to cushion their books. So that
Speaker 4: helps to actually cushion potential looms pages. Should you know
Speaker 4: Microhaatemin's person.
Speaker 1: Rina Quad, you've written quite a bit about Korean banks
Speaker 1: from your perch there in Singapore. When you stand out
Speaker 1: and you gaze across Asia, does Korea stand out in
Speaker 1: terms of risk to its financial center for better or
Speaker 1: for worse?
Speaker 4: As we turn our focus through the South Korean financial sector,
Speaker 4: a couple of risks to watch. You know, the whole
Speaker 4: economy has elevated household that and of course we are
Speaker 4: facing enterrising interest rate. So in terms of mortgage defrauds
Speaker 4: and credit card defaults, we believe they could be manageable
Speaker 4: for the financial sector and stuff career this year, just
Speaker 4: because the income and the employment conditions continue to be
Speaker 4: resilient despite the microhat wents that we see in self Korea.
Speaker 4: But what is more important is really the non bank
Speaker 4: financial institutions what we call the mbfies increasing liquidity risks
Speaker 4: amid the elevated interest rate as well as their riskier
Speaker 4: project financing exposures seems to be a bigger risk to
Speaker 4: watch this.
Speaker 2: Year, and where the Korean households are also amongst the
Speaker 2: most indebted in the world.
Speaker 4: Right, yes, so if I may just put in note,
Speaker 4: how do we think about the mortgages defraud and self career?
Speaker 4: Given that we have really elevated levels of household that
Speaker 4: and self career, we believe that the mortgages deferred amid
Speaker 4: the rising interest rate could be manageable as the most
Speaker 4: outstay one of the crucial factors, such as employment continues
Speaker 4: to be resiliant. The unemployment rate and STEFF career may
Speaker 4: was about two point seven percent. Now risks are also
Speaker 4: offset by the microprudential measures we have in place in
Speaker 4: self career to actually avoid a herd lending of the
Speaker 4: property market. And most of the major of Korean banks
Speaker 4: they've Empire provisions.
Speaker 2: So really can I draw analogies? It sounds like the
Speaker 2: big Korean banks are okay, but the and similar to
Speaker 2: the US banks, the big ones are okay, but the
Speaker 2: smaller ones in the US it's regional banks and create
Speaker 2: sounds like it's the MBFIS, they're the ones at risk.
Speaker 4: Yes, couple of items to watch for the mbf FI.
Speaker 4: Firstly as the liquidity risk, you know, especially the security companies,
Speaker 4: the credit specialized financial companies as well as the mutual
Speaker 4: saving banks as we enter into elevate third interestry, market
Speaker 4: volatility and a struggling property sector. Now, as of top
Speaker 4: quarter last year, what we call the regulatory liquidity courage
Speaker 4: ratio were well above their regulatory requirements. For the MBFIS,
Speaker 4: their ratios have actually fallen sharply versus the twenty ninety levels.
Speaker 4: And particularly if we look into the securities companies as
Speaker 4: well as the credit specialized financial companies that are actually
Speaker 4: very vulnerable to market jetas just because they's a huge
Speaker 4: reliance on short term hostale funding and rina quad.
Speaker 1: What about Korean banks credit default swaps? What are they
Speaker 1: doing now? What's your outlook?
Speaker 4: So if we take a look at the what we
Speaker 4: call the CDs performance of the big four STUF current
Speaker 4: banks for their five year dollars senior CDs, we believe
Speaker 4: they could actually remain modestly higher than the twenty twenty
Speaker 4: one level this year. And this is because you know,
Speaker 4: the economy and stock careers facing rising hugments. Right, the
Speaker 4: soft care economy could be hurt by the exports amid
Speaker 4: the slow in global growth, the accumulated transmission effects of
Speaker 4: the tightening by the Central bank last year, as well
Speaker 4: as the elevated household that as the growing fears of
Speaker 4: the financial institution's project financing exposures. Now, if we look
Speaker 4: closely into the major stuft current banks whoming banks five
Speaker 4: years seen as CDs might remain tight again its peers
Speaker 4: just due to a stronger capital position as the bigger
Speaker 4: system important.
Speaker 2: Alvan, I'd love to bring you back on what could
Speaker 2: go wrong with your faces? Is there any black swan
Speaker 2: events that you're looking out for.
Speaker 3: Well, I suppose the geopolitical as fact is one black
Speaker 3: swan that people are worried about. And beyond this as
Speaker 3: reala mentioned the financial sector is a concern in the
Speaker 3: case of Korea, as we've seen of course in the
Speaker 3: United States, when you have rising interest rates, you're rising
Speaker 3: from near zero levels, bad things can happen, Things can
Speaker 3: break in the economy. So that's something definitely watch about,
Speaker 3: and particularly when you have a situation where China is
Speaker 3: a big giant in the Asia Pacific region is slowing down.
Speaker 3: That's definitely the higher rates in the non Chinese economy somehow,
Speaker 3: you know, react with of a slowing demand from China
Speaker 3: to create a really really negative situation in the region.
Speaker 3: So definitely that's something that bears watching too.
Speaker 1: Yes, having your eye Alvin Tann on Asia's economy. Let's
Speaker 1: say you could pull over Jerome Powell and tell him
Speaker 1: a few words whisper something in his ear about interest rates.
Speaker 1: Maybe it's a piece of advice. What would you tell
Speaker 1: Jerome Powell, the US FED Chairman?
Speaker 3: I would say he has to be careful about moving
Speaker 3: rates a lot higher from here. But frankly, that's something
Speaker 3: that the Fed is very concerned about. They've been talking
Speaker 3: about the banking sector and the risk to the banking
Speaker 3: sector for a few months now. When you have situations
Speaker 3: where interest rates are high and rising, when US treasuries
Speaker 3: are offering over four percent risk free returns, that's going
Speaker 3: to cost pressure on the banking sector. It's just snails,
Speaker 3: it's quite straightforwards. Fundamentally, it will cause pressure on the
Speaker 3: mangu sector, so that's something the FED needs to keep
Speaker 3: him very close on.
Speaker 1: Sounds to me like you're convinced the FED is just
Speaker 1: about where it needs to be on rates.
Speaker 3: I think it definitely makes sense that the FED has
Speaker 3: to keep rates where they are, and I'll haul this
Speaker 3: in fact, that they'll have one more hike, but they'll
Speaker 3: go stop that, but they'll keep the rates that you
Speaker 3: know until well on the next year. But it makes
Speaker 3: sense because the US economy in fact is doing relatively well.
Speaker 3: If you look that the macro indicators, look at unemployment level,
Speaker 3: you look at various measures, particularly the housing market appears
Speaker 3: to be heating up again.
Speaker 1: It's showed a lot of resilience, hasn't it.
Speaker 3: Yes, absolutely, the housing market in the US has surprised
Speaker 3: a lot of people by resilience. And because of this
Speaker 3: and the fact that inflation remains an issue, so the
Speaker 3: FED has to keep rates where they are for a
Speaker 3: lot longer, I think.
Speaker 4: Mind, I probably just want to talk about how the
Speaker 4: liquidityly res compare. For Singapore, it was just the big
Speaker 4: form of current banks because the reason why I said this,
Speaker 4: the regulator recently revised the LBI required for their current
Speaker 4: banks to be ninety five percent from ninety two percent
Speaker 4: effective from July to end of December this year. So
Speaker 4: we just wanted to point it out what we think
Speaker 4: the big four current banks liquidity is still healthy. They
Speaker 4: are comparatively much weaker than similarated in upon banks.
Speaker 1: Okay, great, thanks Verna. Our guests have been Alvin Town
Speaker 1: of RBC Capital Markets and Rina Quok Asia financials credit
Speaker 1: analysts with Bloomberg Intelligence. It's been a wide ranging conversation
Speaker 1: on Korea, China, interest rates, and almost everything in between.
Speaker 4: Thank you, Thank you.
Speaker 1: I'm Tom Corbett in Hong Kong.
Speaker 2: And I'm John Lee. This podcast was edited by Clara
Speaker 2: Chen and you've been listening to the Asia Centric podcast