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Speaker 1: Good morning, and welcome to the Bloomberg Daybreak Asia podcast.

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Speaker 1: I'm Doug Prisner. Here are the stories we're following today.

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Speaker 1: We begin today with a conversation with Bank of America

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Speaker 1: CEO Brian moynihan. He's in Sydney and he's stopped by

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Speaker 1: the Bloomberg Studios to chat with Bloomberg's Heidi Stroud wants

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Speaker 1: let's listen in.

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Speaker 2: Brian, really great to have you with us, and we

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Speaker 2: appreciate you joining us. You're here to celebrate a significant milestone.

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Speaker 2: What's the mood music been.

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Speaker 3: Like, Well, it's been a great time to be here.

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Speaker 4: A team is soebrating sixty years in this country and

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Speaker 4: they're all excited about it.

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Speaker 3: That we have a great.

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Speaker 4: Business here and Joe and the team do a great job.

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Speaker 4: And yeah, the mood's pretty strong. I mean, everybody's worried

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Speaker 4: about geopolitics and all this stuff, but the day to

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Speaker 4: day business activity that people seem confident. Our team's having

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Speaker 4: a good year in the market's business and a corporate banking,

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Speaker 4: investment banking business. We wish IPOs and going fast around

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Speaker 4: the world. But overall it's pretty good in terms of.

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Speaker 2: How you characterize the Australian market. How do you see it?

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Speaker 2: Is it a growth market for the business?

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Speaker 3: It is?

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Speaker 4: It is we basically if you think about the last

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Speaker 4: decade or so, we triple the size of our exposures

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Speaker 4: here following our clients. We do corporate investment banking for

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Speaker 4: large companies, treasury services to move money around the world

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Speaker 4: for those companies, and then we do markets for equity

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Speaker 4: investors and fixed income investors from around the world and

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Speaker 4: Australian investors investing around the world. And so those businesses

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Speaker 4: are strong growth business in our company and growing here.

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Speaker 4: And it's simple way to think about as we triple the

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Speaker 4: size of the risk CARTICU in the last ten years.

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Speaker 2: It's fascinating time for markets at the moment. It has

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Speaker 2: been over the past few years. But I think the

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Speaker 2: last time we saw treasury sale after this extent, Alan

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Speaker 2: Greenspan was in the middle of orchestrating ourself landing.

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Speaker 5: You guys are in the no landing camp.

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Speaker 2: Do you think what's going on with momb markets A

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Speaker 2: recent relentlessly resilient string of data.

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Speaker 5: Does that just bolster that view for you?

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Speaker 4: Yeah? And I think we not only have all the

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Speaker 4: general economic work we have the top research team in

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Speaker 4: the business.

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Speaker 3: They do a great.

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Speaker 4: Job Candish Bounding Plant leading them and all the colleagues

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Speaker 4: around the world. But we also have as sixty American

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Speaker 4: consumers and so when you think about the US economy,

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Speaker 4: you have great insight on what's going on. If you

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Speaker 4: look at that consumer spending this year the month of

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Speaker 4: October so far versus last year, or third quarter versus

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Speaker 4: last year's third quarter, it's up in a four to

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Speaker 4: five percent range, which is consistent with a low inflation,

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Speaker 4: low growth economy. That's across about a trillion and a

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Speaker 4: quarter dollars to twenty and a half dollars spent in

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Speaker 4: a quarter, So it's a big sample and the people

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Speaker 4: moving around they spend it each quarter on all different things,

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Speaker 4: but generally growing consistent where we were pre pandemic, when

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Speaker 4: you had fed funds rate at the two percent level

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Speaker 4: of two and a half percent level, you had inflation

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Speaker 4: and control, and you had growth in the two percent level.

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Speaker 4: So that that gives us confidence that our experts to

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Speaker 4: do all analysis are backed up by the data we see.

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Speaker 3: In our clients. And that's what we see for.

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Speaker 5: The consumer, is there of a degree of bifurcation.

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Speaker 4: The demographically, it's less about bifurcation because I'd assume that

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Speaker 4: they're sort of too. It's look, inflation hits people in

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Speaker 4: the lower brackets more than it does others because but

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Speaker 4: the good news is gas prices come down, food prices

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Speaker 4: have tipped over inflations, and controls down in the three

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Speaker 4: percent range as opposed it was running pretty hot, and

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Speaker 4: so that helps.

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Speaker 3: But if you have.

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Speaker 4: Auto debt, that debt and you want to get a

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Speaker 4: new car, that debt is higher. If you have mortgage

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Speaker 4: debt and you already had a mortgage loan, it's very low.

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Speaker 4: And so it really depends on the consumer and really

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Speaker 4: where they are. But the average American consumer has more

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Speaker 4: money than they did before the pandemic, is in better

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Speaker 4: credit quality before the pandemic, still has the money and

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Speaker 4: accounts from some of this stimulus in the pandemic and

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Speaker 4: is spending money. And that's all good stuff for the

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Speaker 4: US economy because we're such a consumer. That's the unique

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Speaker 4: thing about it's a consumer driven economy. It's a consumer loticonomy.

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Speaker 2: Are you thinking about making allocations or allowances with stress

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Speaker 2: at this point?

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Speaker 4: We always do that. So every quarter we run stress tests,

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Speaker 4: you know, thousands of them every day. We run them

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Speaker 4: into market's business stuff. We always look at it and

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Speaker 4: so what's the case if it turns out the wrong way.

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Speaker 4: So even how we set our reserves, we have a

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Speaker 4: modeled series of cases we put in, so it's not

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Speaker 4: all base case space cases. About half and the rest

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Speaker 4: are stress cases, and the ATOM all together actually set

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Speaker 4: our reserves as if unemployment was going to be a

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Speaker 4: five percent at the end of next year, not what

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Speaker 4: the market predicts at four point three. So there's a

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Speaker 4: conservatism built in to that, and then we look beyond that.

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Speaker 2: Those those are some potential complications for the FED depending

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Speaker 2: on what happens in just under two weeks time. Right,

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Speaker 2: it does a fiscal scenario, particularly under another Trump administration,

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Speaker 2: but also certainly there are risks when it comes to

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Speaker 2: the Harris camp as well.

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Speaker 5: Is that something that you're thinking about?

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Speaker 4: So I would separate a very near term question of

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Speaker 4: the FED getting the trajectory. Our experts have them cutting

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Speaker 4: again a couple more times this year, one hundred basis

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Speaker 4: points this year, and another one hundred basis points more

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Speaker 4: evenly spread a quarter each quarter next year. It gets

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Speaker 4: to three to three point twenty five as a terminal rate,

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Speaker 4: and then inflation comes down to the two point three

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Speaker 4: percent as we move in the twenty five and the

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Speaker 4: twenty six. And so that is a well engineered fed change.

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Speaker 4: And so the dangers that data or they go too

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Speaker 4: fast or too slow, and that risk is higher now

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Speaker 4: than it was six months ago. And so as they move,

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Speaker 4: everybody's going to watch them. And you see the self

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Speaker 4: in territories one day, and you see the rally the

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Speaker 4: other day. Everybody's going to watch all that. That is

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Speaker 4: completely different from and I don't think that'll be impacted

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Speaker 4: by the elections at all. The fiscal problem in the

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Speaker 4: United States, And to give you the sound bite, the

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Speaker 4: US just finished the fiscal year.

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Speaker 3: The budget deficit for that year.

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Speaker 4: Was equal to the entire economy of the country of

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Speaker 4: Australia one point eight trillion dollars. So think about the

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Speaker 4: size of that, and we've got to get back in line.

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Speaker 4: These are good times and we should be managing more carefully.

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Speaker 4: And you know, frankly, we need to have the politicians

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Speaker 4: to set those budgets, fund those budgets, and run tax

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Speaker 4: policy against those budgets to figure out how to make

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Speaker 4: this work. It's probably gonna be raising revenue and cutting

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Speaker 4: expense or some combination. It's not a new problem, but

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Speaker 4: it's one we got to start to wrestle with. Not

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Speaker 4: that it's critical tomorrow morning, but it will be critical

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Speaker 4: over the next few years.

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Speaker 5: But given that risk, do you think the FOEDE went

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Speaker 5: too big too soon?

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Speaker 3: No.

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Speaker 4: They were late to the game and they admit that.

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Speaker 4: So it's nothing that we're saying. It's they were late

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Speaker 4: and they had to move fast because inflation got ahead

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Speaker 4: of them. And they've done a good job of bringing

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Speaker 4: it back down from probably a digit rate down to

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Speaker 4: about three percent last quarter three and a quarters.

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Speaker 3: They're getting close to it.

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Speaker 4: And it's never you're the inflation average from if one

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Speaker 4: of my teammates told, fromnineteen ninety to twenty twenty four

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Speaker 4: was two and a half percent, the inflation average from

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Speaker 4: nineteen from two thousand twenty two and a half percent.

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Speaker 4: It's four and a half percent just in the last

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Speaker 4: twenty twenty to twenty four, and so we've got to

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Speaker 4: get back in line.

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Speaker 3: And so they're on that path. They were late to

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Speaker 3: the game.

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Speaker 4: They've got to make sure they don't go too hard now,

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Speaker 4: and that's what they are all trying to figure out

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Speaker 4: watching the data. But whether it's it's a terminal rate,

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Speaker 4: that's the key, and that we think is around three percent.

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Speaker 4: That's a whole different indust rate environment in the US

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Speaker 4: and other markets than it's been in the last fifteen

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Speaker 4: years or so. We haven't come close to that level

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Speaker 4: of front end rate in a long time. And if

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Speaker 4: that's what is done, that'll make that's a better place

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Speaker 4: for you.

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Speaker 3: Has to be.

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Speaker 2: Frankly, during the most recent earnings you said you'd provide

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Speaker 2: guidance when it comes to that interest income for twenty

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Speaker 2: twenty five next quarter.

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Speaker 5: What data points are you waiting on at this point?

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Speaker 4: The difference of a FED cut or not, I mean

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Speaker 4: three or four hundred million dollar a quarter for said stuff,

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Speaker 4: so when they come, how fast they come, and all

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Speaker 4: that stuff.

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Speaker 3: And then also just getting closer to the the near term.

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Speaker 4: We try to if you predict, we try to stay

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Speaker 4: what's really relevant investors, which is the near term path,

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Speaker 4: the long term path. We have about a two point

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Speaker 4: zero zero percent one point ninety three percent net margin.

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Speaker 4: That's a percentage spread that should move back to two

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Speaker 4: point two to two point three that will happen over time.

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Speaker 4: The path of that will be determined by all the

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Speaker 4: different things going on the environment around us.

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Speaker 3: But we are growing or and I not very many

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Speaker 3: people are.

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Speaker 4: So we grew from the second quarter to the third

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Speaker 4: quarter into what people grow from the third quarter to

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Speaker 4: fourth quarter.

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Speaker 3: That's unusual. Most people are flat to down, and we're

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Speaker 3: starting to grow.

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Speaker 2: We really strong numbers both on income and on margin.

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Speaker 2: Is that sustainable?

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Speaker 3: Well?

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Speaker 4: Yes, and that we're actually running up margins that are

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Speaker 4: actually underneath our typical margins larger because an editored income

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Speaker 4: has to spread back out, and so as that moves up,

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Speaker 4: we can get back to operating leverage for five years

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Speaker 4: in a row where you had operating life average before

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Speaker 4: the pandemic, and then a couple of years in the pandemic,

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Speaker 4: and then we picked it up for about six or

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Speaker 4: seven quarters.

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Speaker 3: We've got to get back and operating levers.

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Speaker 4: How you grow in your revenue a little bit faster

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Speaker 4: in your expenses, not a lot faster, just a little

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Speaker 4: bit faster. And as NII kicks in and the loan

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Speaker 4: deposits kick in, and a three point three trillion.

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Speaker 3: Dollars bounteet, you know, that's what drives it.

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Speaker 4: So we earned about you know, six point nine billion

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Speaker 4: after tax for one of the few companies that's earned

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Speaker 4: that much money many years in a roads is our

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Speaker 4: tenth year earn more than fifteen billion dollars after tax.

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Speaker 4: All good stuff, but the rowity is we still have

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Speaker 4: a lot more on these growth ahead of us.

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Speaker 5: What are you saying when it comes to deals? Confidence?

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Speaker 2: You know brought a capital market activity at the moment.

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Speaker 2: Do you feel like it's going to be an acceleration

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Speaker 2: into the end of the year or maybe a slow down?

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Speaker 3: I just fort the deck.

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Speaker 4: Capital markets are aggressive, you know, strong, and there's a

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Speaker 4: lot of issue that's going on. We just issue today

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Speaker 4: and everybody that's going on the equity capital markets.

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Speaker 3: It's some good views of what some IPOs are getting done.

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Speaker 3: You're starting to see it set up.

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Speaker 4: It appears the IPO calendar will be strong for profit

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Speaker 4: making companies going public because investors are sitting a lot

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Speaker 4: of cash and the IPOs over the last six twelve.

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Speaker 3: Months have worked.

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Speaker 4: In other words, they come out to the market and

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Speaker 4: gone the right direction. Therefore, investors are getting confidence at

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Speaker 4: the quality of companies and what they see. We think

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Speaker 4: there's a pretty good prospect for that on a go

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Speaker 4: forward basis. On m and as it's solid, but with

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Speaker 4: a certainly around the world on regulatory policy, getting deals done,

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Speaker 4: to pace at which you can get deals done, and

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Speaker 4: whether it's in Europe, in the US or other places,

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Speaker 4: all this has slowed the activity down.

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Speaker 3: But our clients are sort of chomping the bit.

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Speaker 4: They see opportunity, they see opportunity to buy companies and

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Speaker 4: increase the quality their platform. And so there's a good pipeline.

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Speaker 4: It's just that we've got to make sure that it

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Speaker 4: gets done.

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Speaker 5: And the central bank cycle certainly helps in restoring some

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Speaker 5: of that confidence.

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Speaker 2: Right.

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Speaker 5: What about politics, So.

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Speaker 2: Do you get a sense that maybe people are staying

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Speaker 2: by the sidelines now until the outcome post November.

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Speaker 5: Is better better zone?

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Speaker 4: I think if you think about what's really affecting the

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Speaker 4: small medium sized business in the United States and other countries,

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Speaker 4: as you had this rapid increase in rates, because the

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Speaker 4: US has a fixed income, a fixed mortgage market, it

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Speaker 4: really doesn't affect landowners act quickly.

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Speaker 3: It takes time to get through that.

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Speaker 4: Auder loans go up, credit cards go up, but they're

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Speaker 4: already pretty healthy rates. So it does affect consumers on

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Speaker 4: the rate structure when it goes up, confidence wise, opportunity wise.

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Speaker 4: It really affects small medium sized businesses. If your base rate,

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Speaker 4: so for was fifty basis points and now it's five

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Speaker 4: and a half, that difference is all cost of funds

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Speaker 4: for them to borrow, So that's had more of a

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Speaker 4: damper under activity than anything else. Are they waiting for

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Speaker 4: election to get done so they can figure out what

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Speaker 4: the policy is going to be under whatever administry?

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Speaker 3: It's going to be a new administration, frankly on both sides, right,

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Speaker 3: because yeah.

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Speaker 4: Even though vice president here was a vice president now

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Speaker 4: shieldly president or Donald Trump has been out office for

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Speaker 4: four years who were back being president. So both those

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Speaker 4: policy platforms are not well understood by businesses. But the

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Speaker 4: big driver of their reluctance has been waiting to make

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Speaker 4: sure a final demand state in waiting to make sure

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Speaker 4: the rates structure came down for their activity. So they're

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Speaker 4: not using their lines as so they were in normal times,

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Speaker 4: and that's part because the costum is higher, so you're

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Speaker 4: going to be more assure the outcome. Are they investing capital, Yes,

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Speaker 4: but not as strong as they will as the rate

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Speaker 4: structure comes down, does.

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Speaker 2: Recession Bristowster replay or is that in the background. Now

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Speaker 2: do you think if the lipmarkle holds up, it's going

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Speaker 2: to be okay? Yeah.

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Speaker 4: With an unemployment rate at four percent plus four to one,

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Speaker 4: with a wage growth rate of three percent, and with

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Speaker 4: inflation down around three percent, it is really hard to

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Speaker 4: have an economist convince the world that there's going to

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Speaker 4: be a recession.

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Speaker 3: Now, none of that takes an account. All the prey

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Speaker 3: to horror was it could go on a given day.

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Speaker 4: The escalation of physical wars, trade wars, bad policy of

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Speaker 4: the fiscal situation in countries percolating more.

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Speaker 3: Those are all things that could happen.

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Speaker 4: But if you look at it from standpoint United States,

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Speaker 4: people are working, they're getting paid, and they're spending money.

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Speaker 4: And that's a virtuous circle because when they spend money,

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Speaker 4: that means people are working, and so.

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Speaker 3: That's pretty good.

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Speaker 4: And we resorted a lot of workers over the last

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Speaker 4: few years and put them to work. It is hard

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Speaker 4: to particular recession with this low unemployment and this much

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Speaker 4: wage growth. That doesn't mean it can't happen fast. If

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Speaker 4: people lose confidence, businesses confidence, So what you should be

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Speaker 4: watching is consumer confidence small business confidence, and they're solid.

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Speaker 4: Although they came down a little bit and then when

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Speaker 4: it cut rates, the consumer went up a little bit.

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Speaker 4: The small business is still hanging in there. So let's

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Speaker 4: let's watch that play out of the next few months.

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Speaker 4: If they get confidence that the cost of capital for

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Speaker 4: them from a dead side is coming down, you know

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Speaker 4: they'll move faster. Do you.

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Speaker 2: We talked a little bit around politics and the election.

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Speaker 2: Have you spoken at length with either candidate?

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Speaker 4: We give our advice to everybody, so you know, I

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Speaker 4: think people always ask me, you know what about this?

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Speaker 4: Or you have a desk drawer for candidate A or

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Speaker 4: destroyer for category. We can't do that. Our company's been

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Speaker 4: around since the seventeen eighties, so as I say, there's

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Speaker 4: been a lot of tough elections in United States since then,

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Speaker 4: including that one in eight two hundred, which they made

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Speaker 4: a great play about called Hamilton. I mean, this is

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Speaker 4: the United States goes through this every four years, as

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Speaker 4: your country goes through every three years.

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Speaker 3: It's just part of what we do. Is this one different.

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Speaker 4: Everyone's different, and our job is to advise the candidates

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Speaker 4: before and after as to what the best policies are

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Speaker 4: for the good of the American economy, in the good

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Speaker 4: of America's role in the world, and we'll do that.

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Speaker 4: We've been doing that for years as CEO, I've worked

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Speaker 4: with even before I CEO, I've worked with presidents on

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Speaker 4: task over the course of time.

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Speaker 3: We'll continue to do it.

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Speaker 5: A lot of your peers have endorsed a candidate. Do

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Speaker 5: you have a view whose policies might be better for

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Speaker 5: the economy.

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Speaker 4: We'd have a view of that, but it has nothing

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Speaker 4: to do with the doors of candidate. We the United

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Speaker 4: States have to focus on the debt situation we talked about.

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Speaker 4: We have to create the conditions of growth in the

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Speaker 4: core industries we have. And that's not only good for

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Speaker 4: the United States, it's good for the world. If United

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Speaker 4: States is in solid conditions, the rest of the world

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Speaker 4: can adapt to that. And because the size of our

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Speaker 4: consumer economy helps the wrest the world, the size of

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Speaker 4: our business economy helps arrest the world, and we're codepend

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Speaker 4: on them.

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Speaker 3: They help us, we help them, So I think I

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Speaker 3: wouldn't get into that.

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Speaker 4: It's always the problem that if we say someone's good

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Speaker 4: and someone's bad, somebody overreads what it is. So our

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Speaker 4: job is still stay out, let the American people decide,

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Speaker 4: and then we'll go work to make what's best for

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Speaker 4: America and the world honestly, and what's.

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Speaker 2: Best for America is that you working within an administration.

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Speaker 2: I know you get asked this all the time, but

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Speaker 2: is that something that is still an open door.

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Speaker 4: Our job is to get the private sector to keep

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Speaker 4: driving what we're working here in Australia with the Sustainable

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Speaker 4: Markets Initiative that I work on the ASPEC of King

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Speaker 4: Charles and we worked with him with a bunch of

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Speaker 4: private sector CEOs to help move the transition faster and

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Speaker 4: a cooperative, coalitional willing basis our jobs to work with

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Speaker 4: others and other types of settings to do that. So

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Speaker 4: I do love what I do and I'll keep doing

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Speaker 4: it as long as they'll have me. It's a big

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Speaker 4: week for Australia. We've got both the Royals and Bryan

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Speaker 4: you in town as well.

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Speaker 5: But I'm glad you.

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Speaker 2: Talked about the Sustainable State Sustainability Initiative because this has

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Speaker 2: felt like a year that's been quite depressing when it

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Speaker 2: comes to that energy transition.

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Speaker 5: Do you know from where you sit, where do you

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Speaker 5: view the impetus here.

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Speaker 4: I would not argue with you that because that's what

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Speaker 4: you read and feel. But the reality is the work

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Speaker 4: that's going on because the commitments companies are made, and

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Speaker 4: then up and driving those commitments, people sort of divorce

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Speaker 4: what you're seeing as the AI revolution hits all these

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Speaker 4: initiatives to use clean energy or even clean nuclear energy

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Speaker 4: and restarting you know, nuclear plants or small body of

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Speaker 4: the nuclear or solar or wind. You know, all these

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Speaker 4: activities are going on strong and so well, you know,

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Speaker 4: well people are debating about this and more the public. Meanwhile,

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Speaker 4: you've gone from literally three or four offshore windmills operating

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Speaker 4: the United States to about fifteen or twenty now and

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Speaker 4: a bunch of them approved, and they're going on the ground.

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Speaker 4: We do we do several billion dollars of tax credit

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Speaker 4: deals in the United States. So the investment rate today,

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Speaker 4: the financing rate. We committed to train and a half

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Speaker 4: dollars to fund around trillion dollars to fund around the

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Speaker 4: environmental change for about four hundred billion. Our clients are

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Speaker 4: demanding it. That activity is going on, and they're all

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Speaker 4: working a thousand different ways on driving it. And so

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Speaker 4: I think despite the debate about you know, the public

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Speaker 4: setting and stuff. We believe that oil and gas and

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Speaker 4: things like that are critical, and we believe that green

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Speaker 4: energy is We've got to make it all work together

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Speaker 4: in a country like Australia has that. You see it

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Speaker 4: play out in front the page of papers with the

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Speaker 4: energy some are going on. It's that classic dog. We

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Speaker 4: got to keep good energy, we've got to keep good power.

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Speaker 4: We've got to keep the economies going. At the same time,

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Speaker 4: we've got to make a transition, and the private sector

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Speaker 4: is driving that. So I don't get to press at all.

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Speaker 4: The amount of activity I see is unbelievable.

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Speaker 2: I want to know how much you can sustain that

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Speaker 2: energy for in terms of being, of course, already one

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Speaker 2: of the longest held roles on Wall Street, and you've

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Speaker 2: been around for a long time and also happy Bertha.

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Speaker 2: I know that you turn sixty five and this month.

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Speaker 2: How long do you plan on sticking around for?

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Speaker 5: Foresee?

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Speaker 3: Well, I said until the board.

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Speaker 4: I serve at the on a day day basis for

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Speaker 4: the board, and my planners will continue to working for

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Speaker 4: a substantial period of time here to help the team along.

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Speaker 4: But the real job I have is to continue to

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Speaker 4: build a team that will succeed me because this company.

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Speaker 5: Is to succession. Can you give us any names?

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Speaker 3: No, No, we wouldn't do that. That's not for public consumption.

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Speaker 4: But we have a plan and we work on it

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Speaker 4: all the time, and it ebbs and flows and people

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Speaker 4: come in and out. But the idea is, it's not

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Speaker 4: just the CEO, it's the whole management team and who

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Speaker 4: will be there for that CEO to rely on, to

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Speaker 4: like and drive the company forward. And so we're here

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Speaker 4: for a moment in time. Our company's been here for

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Speaker 4: two hundred and forty years almost, and so it'll go

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Speaker 4: on for another several hundreds and hundreds of years.

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Speaker 3: And so the idea is, we moved the.

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Speaker 4: Woodpile and hopefully met left a little bigger, and we

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Speaker 4: got to leave. One of the pieces that's got to

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Speaker 4: be bigger is another management capability across not only the CEO,

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Speaker 4: but the rest of the team.

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Speaker 2: One last question is speaking of Stalwart's Warren Barfett continues

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Speaker 2: to reduce his dake in Bank of America.

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Speaker 4: Have you spoken team, No, it's because it wouldn't be

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Speaker 4: right to speak to him about his share ownership when

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Speaker 4: he owns that much of the company.

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Speaker 3: But he's been a great investor.

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Speaker 4: He invested seven hundred million dollars or seven hundred million

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Speaker 4: shares in twenty eleven and bought another three hundred million,

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Speaker 4: and I think he isn't talking about it. We wouldn't

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Speaker 4: talk about it, but he's been a great support of

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Speaker 4: our company and we benefit by that support.

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Speaker 2: Ran so great to have you with us, and thank

445
00:17:52,720 --> 00:17:55,000
Speaker 2: you so much for joining us here in Sydney. Brian Oneahan,

446
00:17:55,040 --> 00:17:57,440
Speaker 2: who's a chairman and CEO at the Bank of America.

447
00:18:00,600 --> 00:18:05,760
Speaker 6: Bloomberg Opinion informed perspectives and expert data driven commentary on

448
00:18:05,960 --> 00:18:06,800
Speaker 6: breaking news.

449
00:18:07,560 --> 00:18:09,960
Speaker 1: It's time to check in with Bloomberg Opinion, and we

450
00:18:10,040 --> 00:18:13,400
Speaker 1: are joined now by Bloomberg Opinion columnist Juli Wren, who

451
00:18:13,480 --> 00:18:17,480
Speaker 1: has been writing about the stimulus programs in China. Suly

452
00:18:17,640 --> 00:18:20,080
Speaker 1: is joining us from our studios in Hong Kong. So

453
00:18:20,200 --> 00:18:24,120
Speaker 1: you write that debt restructuring basically is a central part

454
00:18:24,160 --> 00:18:27,959
Speaker 1: of everything that Beijing is trying to do right now,

455
00:18:28,160 --> 00:18:31,919
Speaker 1: and investors should be patient and sophisticated.

456
00:18:32,000 --> 00:18:36,199
Speaker 7: Explain that to me, Well, this roundness stimulus is going

457
00:18:36,280 --> 00:18:38,480
Speaker 7: to be very, very different from what we saw in

458
00:18:38,560 --> 00:18:42,240
Speaker 7: tand A and twenty fifteen, two thousand and eight, after

459
00:18:42,359 --> 00:18:46,240
Speaker 7: the global financial crisis, China basically launched a whole bunch

460
00:18:46,320 --> 00:18:50,639
Speaker 7: of infrastructure projects and then provide a job for micro workers.

461
00:18:51,000 --> 00:18:55,040
Speaker 7: And twenty fifteen they did this shantytown redevelopment program, basically

462
00:18:55,480 --> 00:18:59,760
Speaker 7: tearing down all buildings and paying off the urban villagers

463
00:18:59,800 --> 00:19:02,640
Speaker 7: of farmers and who in turn had money to spend,

464
00:19:02,720 --> 00:19:06,760
Speaker 7: et cetera. And this time, Uh, the previous two times

465
00:19:06,800 --> 00:19:08,680
Speaker 7: it was easy, right, like to come up with a

466
00:19:08,880 --> 00:19:11,639
Speaker 7: stimulus number. We just launched a bunch of projects and

467
00:19:11,840 --> 00:19:13,679
Speaker 7: tear down a bunch of buildings, and let's see how

468
00:19:13,760 --> 00:19:16,680
Speaker 7: much how much money we need and then like if

469
00:19:16,720 --> 00:19:18,760
Speaker 7: it's not enough, they will add out. But this time

470
00:19:18,880 --> 00:19:22,040
Speaker 7: it's very different because with that restruction, as we have

471
00:19:22,240 --> 00:19:24,800
Speaker 7: seen in the past in China and the US, it

472
00:19:24,960 --> 00:19:29,160
Speaker 7: always takes a long time, Like especially for complicated businesses.

473
00:19:30,480 --> 00:19:32,200
Speaker 7: First of all, you need to know how much that,

474
00:19:33,000 --> 00:19:36,240
Speaker 7: especially in China, hidden that there is in the first place, right, Like,

475
00:19:36,440 --> 00:19:40,560
Speaker 7: one issue with China's economy this year is a physical austerity.

476
00:19:40,960 --> 00:19:44,040
Speaker 7: Local governments. In the past, they were major stimulants in

477
00:19:44,080 --> 00:19:47,520
Speaker 7: the economy. They they were they were boothsto uh you know,

478
00:19:48,000 --> 00:19:53,440
Speaker 7: infrastructure spending, using all sorts of stimulus measures to to

479
00:19:53,600 --> 00:19:56,280
Speaker 7: help with the local economies, right, and this year they're

480
00:19:56,320 --> 00:19:59,919
Speaker 7: doing nothing because first of all, lens sales are way

481
00:20:00,119 --> 00:20:03,720
Speaker 7: down because the property downturn, and secondly they're busy repaying

482
00:20:04,040 --> 00:20:06,280
Speaker 7: interest on their previous debt.

483
00:20:06,640 --> 00:20:08,560
Speaker 6: So we need to figure out first.

484
00:20:08,600 --> 00:20:10,800
Speaker 7: How much debt and hidden that there is, and that

485
00:20:10,960 --> 00:20:13,879
Speaker 7: means a rough ordit at least, right, we need to

486
00:20:13,960 --> 00:20:16,640
Speaker 7: know the denominator before we can come up with the nominator.

487
00:20:16,760 --> 00:20:19,680
Speaker 1: Truly, why do you think it's taken the government so

488
00:20:19,840 --> 00:20:22,120
Speaker 1: long to react to a problem that we have been

489
00:20:22,200 --> 00:20:24,600
Speaker 1: talking about for months, if not years.

490
00:20:25,680 --> 00:20:30,840
Speaker 7: I think everyone has this procrastination issue, right, Like, you know,

491
00:20:31,000 --> 00:20:33,680
Speaker 7: this is a really big problem. And in the last

492
00:20:33,760 --> 00:20:36,840
Speaker 7: two years, if you see, like the central government was

493
00:20:36,920 --> 00:20:41,520
Speaker 7: pretty insistent on having local governments resolve their own debt

494
00:20:41,680 --> 00:20:45,719
Speaker 7: problem themselves. They they say, okay, you can issue special

495
00:20:45,840 --> 00:20:49,760
Speaker 7: refinancing bonds and to like do death swaps and then

496
00:20:49,880 --> 00:20:53,440
Speaker 7: have the capital markets, get capital markets engaged. But the

497
00:20:53,480 --> 00:20:56,919
Speaker 7: central government was just not willing to help because partly

498
00:20:57,040 --> 00:20:59,320
Speaker 7: because they know how much problem there is and no

499
00:20:59,359 --> 00:21:03,119
Speaker 7: one wants to deal with it. And another possibility is

500
00:21:03,200 --> 00:21:06,040
Speaker 7: that they don't want to have this moral hazard problem

501
00:21:06,119 --> 00:21:09,639
Speaker 7: down the road. President Jing actually, to his credit, a

502
00:21:09,800 --> 00:21:13,880
Speaker 7: decade ago, he did clean up local government debt. There

503
00:21:14,000 --> 00:21:16,560
Speaker 7: was a major debt swap that was a decade ago,

504
00:21:16,960 --> 00:21:20,600
Speaker 7: and he thought this problem was being resolved, but it wasn't,

505
00:21:20,960 --> 00:21:25,320
Speaker 7: and then local governments kept pounder borrowing. Right now we're

506
00:21:25,400 --> 00:21:29,320
Speaker 7: back to ground zero, actually worse than before. So he

507
00:21:30,320 --> 00:21:34,040
Speaker 7: probably didn't want to have a moral hazard problem. And

508
00:21:34,520 --> 00:21:38,680
Speaker 7: also the current death power is a lot bigger than

509
00:21:39,000 --> 00:21:42,040
Speaker 7: a decade ago, simply because China's economy is so much bigger.

510
00:21:42,160 --> 00:21:44,440
Speaker 1: It is much bigger. And you've been covering the credit

511
00:21:44,480 --> 00:21:47,120
Speaker 1: space for some time. Do you think is your instinct

512
00:21:47,160 --> 00:21:49,119
Speaker 1: that this is going to be successful or is it

513
00:21:49,760 --> 00:21:52,520
Speaker 1: just simply too early to tell. You talked about the

514
00:21:52,600 --> 00:21:56,320
Speaker 1: fact that this needs to unfold over years. Can you say,

515
00:21:56,480 --> 00:21:59,840
Speaker 1: based on the design the makeup of this restructuring that

516
00:22:00,200 --> 00:22:03,960
Speaker 1: it has the tendency maybe to win at the end

517
00:22:04,000 --> 00:22:04,400
Speaker 1: of the day.

518
00:22:05,480 --> 00:22:08,040
Speaker 7: I think she has done it once and he can

519
00:22:08,160 --> 00:22:11,159
Speaker 7: do it again. Last time in twenty fourteen when they

520
00:22:11,240 --> 00:22:14,960
Speaker 7: did death swap to clear up a local government that

521
00:22:15,160 --> 00:22:18,639
Speaker 7: it told them like about half a year to a

522
00:22:18,800 --> 00:22:22,440
Speaker 7: month to do the full audit, and then they will say, Okay,

523
00:22:23,040 --> 00:22:25,159
Speaker 7: this province has so much that and we'll try to

524
00:22:25,240 --> 00:22:27,400
Speaker 7: do some kind of swap so it can be done.

525
00:22:27,480 --> 00:22:33,320
Speaker 7: But currently, you know, star market is expecting some stimulus number,

526
00:22:33,400 --> 00:22:35,879
Speaker 7: big number, likely the next month or so. I just

527
00:22:35,960 --> 00:22:37,120
Speaker 7: don't think that's going to happen.

528
00:22:38,080 --> 00:22:40,520
Speaker 1: So it's interesting because one of the other things been

529
00:22:40,600 --> 00:22:42,760
Speaker 1: happening on the macro level is that China has been

530
00:22:42,800 --> 00:22:45,800
Speaker 1: stuck in deflation. And I'm just wondering whether or not

531
00:22:46,640 --> 00:22:50,920
Speaker 1: when you issue something like this an intention to restructure debt,

532
00:22:50,960 --> 00:22:54,159
Speaker 1: whether that's going to just mean that we're likely to

533
00:22:54,320 --> 00:22:58,520
Speaker 1: drift sideways in more of a deflationary trap for some time.

534
00:22:59,520 --> 00:23:02,560
Speaker 7: I think it's it's actually the same problem. I mean,

535
00:23:02,640 --> 00:23:05,720
Speaker 7: if the local governments are so indebted that they cannot

536
00:23:05,760 --> 00:23:08,639
Speaker 7: stimulate the economy, how can the economy come back up?

537
00:23:08,760 --> 00:23:11,479
Speaker 7: Right Like, when we say you have deflation, you need

538
00:23:11,600 --> 00:23:15,040
Speaker 7: monetary measures and the physical measures, and right now there's

539
00:23:15,119 --> 00:23:16,760
Speaker 7: only monetoring, no fiscal.

540
00:23:17,080 --> 00:23:19,800
Speaker 1: What about what happens in the marketplace, How are credit

541
00:23:19,920 --> 00:23:23,360
Speaker 1: markets reacting right now? And what can we learn when

542
00:23:23,400 --> 00:23:26,640
Speaker 1: you look at the behavior of particularly distress debt.

543
00:23:27,680 --> 00:23:30,040
Speaker 7: So the credit market is moving a little bit, but

544
00:23:30,280 --> 00:23:35,480
Speaker 7: the credit some say that credit investors have more bring

545
00:23:35,600 --> 00:23:39,880
Speaker 7: than the stock investors. The stock investors have all the heart,

546
00:23:39,960 --> 00:23:43,520
Speaker 7: and we've seen that already, right, So the credit market

547
00:23:43,600 --> 00:23:45,440
Speaker 7: is moving a bit, but not as much as the

548
00:23:45,520 --> 00:23:47,200
Speaker 7: stock market because.

549
00:23:48,400 --> 00:23:51,040
Speaker 6: As usual, like credit investors, they.

550
00:23:51,040 --> 00:23:51,720
Speaker 5: Know how.

551
00:23:53,160 --> 00:23:56,920
Speaker 7: Dragged out that restructure can be. Like it is, you

552
00:23:57,080 --> 00:23:59,399
Speaker 7: need a lot of patients, and it moves slowly.

553
00:24:00,080 --> 00:24:02,440
Speaker 1: Well, you mentioned the equity market, and I'm wondering if

554
00:24:02,640 --> 00:24:05,640
Speaker 1: one of the challenges here is to try to improve sentiment,

555
00:24:05,880 --> 00:24:09,480
Speaker 1: isn't a higher stock market kind of a prerequisite for that.

556
00:24:10,880 --> 00:24:14,520
Speaker 7: I think that's perhaps the government's intent. I mean, a

557
00:24:14,600 --> 00:24:17,240
Speaker 7: lot of Chinese household state don't own stock, so it

558
00:24:17,320 --> 00:24:22,239
Speaker 7: doesn't affect them directly, but it does affect the entrepreneur's mindset, right,

559
00:24:22,400 --> 00:24:25,919
Speaker 7: Like if you're a majority shareholder of a smallish company,

560
00:24:26,240 --> 00:24:29,520
Speaker 7: a smallish listed company, and your store price is doing well,

561
00:24:29,760 --> 00:24:32,760
Speaker 7: then you will feel like, Okay, I have the confidence

562
00:24:32,840 --> 00:24:34,440
Speaker 7: to go invest or hire people.

563
00:24:34,720 --> 00:24:35,439
Speaker 6: So maybe that.

564
00:24:37,240 --> 00:24:40,760
Speaker 7: Kind of wealth effect can perhaps boost confidence in the

565
00:24:40,800 --> 00:24:42,040
Speaker 7: private sector quick.

566
00:24:43,000 --> 00:24:45,240
Speaker 1: So much of what we know to be the problems

567
00:24:45,320 --> 00:24:48,200
Speaker 1: for these local governments is very closely tied to the

568
00:24:48,240 --> 00:24:51,120
Speaker 1: problems of the property market. What is your sense now

569
00:24:51,440 --> 00:24:54,359
Speaker 1: when you look at the housing market overall, is a

570
00:24:54,440 --> 00:24:57,680
Speaker 1: bottom in place right now? Are we beginning to see

571
00:24:57,720 --> 00:24:58,360
Speaker 1: that process?

572
00:24:59,320 --> 00:25:01,720
Speaker 6: I think some cities could have buttoned.

573
00:25:01,840 --> 00:25:05,119
Speaker 7: I mean, but it all depends on the characteristics of

574
00:25:05,800 --> 00:25:08,160
Speaker 7: these cities, and it's very similar to what we're seeing

575
00:25:08,160 --> 00:25:12,280
Speaker 7: in the US, like I say, San Francisco VERSUS Phoenix City,

576
00:25:12,960 --> 00:25:18,760
Speaker 7: et cetera. Like, for instance, Shanghai, the luxury segment of

577
00:25:19,119 --> 00:25:23,520
Speaker 7: Shanghai's property market is doing well because it is China's

578
00:25:23,560 --> 00:25:25,520
Speaker 7: best city and all the rich people want to own

579
00:25:25,560 --> 00:25:26,160
Speaker 7: property there.

580
00:25:26,440 --> 00:25:28,800
Speaker 6: Or if you go to trans some cities are doing well,

581
00:25:29,080 --> 00:25:31,520
Speaker 6: but I think a lot of cities they have not buttoned.

582
00:25:32,160 --> 00:25:36,800
Speaker 1: We just saw this week the big We just saw

583
00:25:36,880 --> 00:25:39,160
Speaker 1: this week that the big banks in China reduced their

584
00:25:39,200 --> 00:25:40,920
Speaker 1: loan prime rates. Do you think that's going to have

585
00:25:41,000 --> 00:25:44,440
Speaker 1: a meaningful impact as we work through this process of

586
00:25:44,520 --> 00:25:48,280
Speaker 1: debt restructuring and kind of economic revitalization.

587
00:25:49,320 --> 00:25:53,880
Speaker 7: The PBOC government punk function said that the lowering mortgage

588
00:25:54,000 --> 00:25:56,520
Speaker 7: rate will affect fifty million households China.

589
00:25:56,760 --> 00:25:59,560
Speaker 6: I don't know how many households China has but I guess.

590
00:25:59,720 --> 00:26:02,679
Speaker 7: Some around two hundred and fifty to three hundred million, right,

591
00:26:02,800 --> 00:26:05,080
Speaker 7: because we have over over one billion people and the

592
00:26:05,280 --> 00:26:08,119
Speaker 7: one child policy, et cetera. So the point is that

593
00:26:08,320 --> 00:26:14,960
Speaker 7: the only perhaps thirty percent of the households have mortgage

594
00:26:15,119 --> 00:26:18,360
Speaker 7: that and that a lot of other households they basically

595
00:26:18,480 --> 00:26:21,119
Speaker 7: have no debt because they bought early right and they

596
00:26:21,200 --> 00:26:24,920
Speaker 7: paid it off. So this kind of wealth effect is

597
00:26:25,040 --> 00:26:29,120
Speaker 7: limited because people who have known that but already owned

598
00:26:29,119 --> 00:26:34,600
Speaker 7: their housing, they don't see any benefit from the mortgage raacup,

599
00:26:34,840 --> 00:26:35,119
Speaker 7: what is.

600
00:26:35,160 --> 00:26:37,800
Speaker 1: The biggest concern that you have right now as to

601
00:26:37,880 --> 00:26:39,680
Speaker 1: whether or not Beijing will succeed.

602
00:26:41,920 --> 00:26:46,760
Speaker 7: I'm not sure that the bureaucracy works as well as before.

603
00:26:47,240 --> 00:26:50,359
Speaker 7: China in the past could be very efficient if it

604
00:26:50,480 --> 00:26:55,119
Speaker 7: wanted to, but right now, the local governments they.

605
00:26:55,720 --> 00:26:58,359
Speaker 6: Are quite sleepy, and the people are very afraid of.

606
00:26:58,480 --> 00:27:01,639
Speaker 7: Doing things because they don't want to get caught up

607
00:27:01,800 --> 00:27:06,159
Speaker 7: in this anti corruption campaign. So I'm afraid that the

608
00:27:06,640 --> 00:27:10,720
Speaker 7: top down directive is clear, but the execution could be

609
00:27:10,800 --> 00:27:11,200
Speaker 7: a problem.

610
00:27:11,720 --> 00:27:13,840
Speaker 1: We'll leave it there, surely. It's always a pleasure. Thanks

611
00:27:13,880 --> 00:27:16,240
Speaker 1: so much for making time to chat with us. Bloomberg's

612
00:27:16,560 --> 00:27:19,680
Speaker 1: Shuley Wren, who is an opinion columnist for Bloomberg. And

613
00:27:19,760 --> 00:27:22,159
Speaker 1: if you want to read more of Shuley's writing and

614
00:27:22,280 --> 00:27:25,639
Speaker 1: you have a Bloomberg terminal, the function is OPI n go.

615
00:27:28,840 --> 00:27:31,399
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617
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623
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