August 20, 2025 • 24 mins
US tariffs are seen as broadly inflationary at home and disinflationary abroad, so countries across Asia – where central banks have already begun a cycle of easing – face increased pressure on economic growth and prices.
The levies loom at a time when China is mired in deflation, and Japan is trying to reinflate prices that are also weak in other Asian economies. Should investors be worried about disinflation across the region? How will that influence central bank decisions? And does it complicate the path forward for Japan's policymakers?
Gareth Leather, senior Asia economist at Capital Economics, joins John and Katia to discuss China's overcapacity, the government's failure to address the issue, how it could export deflation to the region, and Japan's success at engineering price growth.
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Speaker 1 (00:01):
One of the big questions this year is how Trump's
tariffs will impact prices at home and abroad, especially in Asia,
a region highly dependent on trade with the US. Tariffs
are likely to be inflationary in the US, and they're
usually disinflationary for other countries, weakening growth and demand.
Speaker 2 (00:19):
That impact will be felt at a time when much
of the region was already preparing for more interest rate
cuts as inflation eases. China has been mind with deflationary
pressure for years. Meanwhile, Japan is trying to reinflate prices
after the lost decades.
Speaker 1 (00:37):
You're listening to Asia Centric from Bloomberg Intelligence. I'm Kye
Tidmytriva on Hong Kong.
Speaker 2 (00:41):
I'm John Lee also in Hong Kong, and today.
Speaker 1 (00:44):
We're looking at the landscape for inflation across Asia. Joining
us is Gareth Leather, Senior Asia economist a Capital Economics.
Thanks for joining us today.
Speaker 3 (00:52):
It's a pleasure to be here. Thank you for having
me on.
Speaker 1 (00:55):
So maybe we should get started with a very big economy.
We're talking about all the inflation today. While China is
in deflation, it's been in that position for a few
years now. You said in the past that it's largely
due to over capacity in a certain sector. So you
know over two hundred EV companies, more than one hundred
(01:16):
AI large language models. Can you just walk us through
why China has so much overcapacity and overproduction, like how
we got here?
Speaker 3 (01:25):
Yeah, So China's deflation problem is a symptom of both
very strong supply and very weak demand. I think in
terms of the demand side, the government really hasn't been
doing enough to try and get consumers to spend, whereas
on the supply sign there's just been this glut of production,
which is partly related to what happened during the pandemic
(01:48):
that Chinese companies increased investments triun cater for strong Western
demand for consumers when they were locked down. But also
as well, it's kind of government, kind of local governments
putting pressure on their kind of favored industry champions to
try to be the next Tesla, to be the next Apple,
and so you've seen this splurgeon production for companies trying
(02:11):
to basically become the next kind of global champion, and
that's led to this huge increase in supply which the
domestic market hasn't been able to soak up. And so
they've been engaged in quite vicious price walls, which is
causing basically prices across the board to four. You mentioned
in particular automotives, and that's worn. I think there's only
a couple of automotive companies in China actually making money
(02:32):
at the moment, but it's across the board solar panels
as another one, electronics too, but it's a widespread problem.
I've got interesting statistic for you if you wanted it. It
was that about a decade ago, ten percent of manufacturing
companies in China were losing money, whereas now it's around
a third. So it just kind of goes to impress
upon you the amount of capacity and that that companies
(02:53):
are producing with very little financial reward.
Speaker 2 (02:57):
Why isn't there consolidation If all these companies are losing money,
shouldn't they go out of business? And they shouldn't they
be mergers and acquisitions.
Speaker 3 (03:06):
I think that's what you'd expect in a normal economy,
that if companies are making sustained losses, they'd struggle and
go out of business. I think the problem is in
China that they're quite often backed by local governments who
are kind of trying to champion these companies as the
next you know, as I said, the next Tesla or whatever,
and they're worried that if they did pull the plug
on these companies, you get a big rise in unemployment
(03:28):
and the shops slow down and economic growth. So, although
they're being put under some pressure by the central government
to try to do more to consolidate, it's very difficult
just because they are champions of local governments and so
it's proving a very difficult process.
Speaker 1 (03:43):
Doesn't that mean, though, that the Chinese government needs to
rethink how they treat not just the private sector, but
industry in general. I mean, there seems like a problem
that's entrenched in the system itself.
Speaker 3 (03:58):
Yeah. I think it's basically a symptom of a very
strong industrial policy that you've got in China, where the
central government has been putting kind of or making targets
for China to be the next industry leader in various
different sectors. Local governments have responded by putting out subsidies,
and that you've had this the emergence of so many
(04:19):
different industries and so many different companies trying to do that,
and it's finally it very difficult to work its way out. Ideally,
you would have in a market economy that the companies
that are losing money either out of business or consolidate
emerged with stronger ones. But that hasn't happened in China.
Speaker 2 (04:35):
The government seems to be tackling this issue. You know,
the government is pushing for this anti involution push, which
is trying to restrict the aggressive pricing policies of many
of these companies. Do you think it's going to.
Speaker 3 (04:48):
Work, Well, it's not working so far. The other side
of this coin, of course, is stronger demand. If they
can't focus enough or cramply down enough on strong supply,
they need to do more to boost con sumption or
alternatively export more. I think on consumption. You know, the
government may argue that it's actually running a large budget deficit,
so it's doing as much as it can to boost demand.
(05:10):
I think the problem is that in China there are
a lot of this extra demand. Extra government spending is
going towards investment rather than consumption. And it's just the
way that the Chinese government operates as they're very reluctant
to do more to boost consumption because they don't see
or they find it quite difficult to know where do
you get the payback, where's the money going to come
from to pay back these loans, whereas with investment you
(05:31):
can at least see if the company makes a profit,
they can then pay back the loan, So that would
be I think the alternative is much stronger demand. The
other side, of course, is that China can export, and
that has been exporting its domestic surplus onto third markets,
but that of course is running into problems itself. You've
seen the big tariffs that the US is introduced against China,
(05:51):
that the EU as well as fighting back, and there
is also signed that some emerging economies are also fighting
back against some big surge in Chinese exports too, because
it's hurting their domestic manufacturing sectors as well. So there's
a kind of an international side to all this too.
Speaker 1 (06:07):
Are there signs that it's causing a disinflationary impulse across Asia?
Speaker 3 (06:14):
Yet?
Speaker 1 (06:15):
Like are we seeing that in the data? And how
much deflation is China going to export?
Speaker 3 (06:22):
Well, yeah, this is the concern, isn't it like kind
of ten years ago that China is now kind of
a deflationary force for the global economy. I'm not sure
we're there yet, and certainly for Asian economies that data
don't back that up quite yet, but you can certainly
see a scenario that over the next kind of two
or three years that if this continues, then then it
(06:43):
could be one. Yes. But if you look at the
Asian data at the moment, certainly that the headline figures
are very very weak, below one percent we had in
the Philippines this week. Thailand is in deflation, Taiwan's only
one and a half percent. Inflation is weak across the board,
but a lot of this at the moment at least
is due to temporary factors. So fuel price inflation is
(07:07):
very low. Food price inflation has come right down as well,
but core inflation, which is a better measure of underlying
price pressure in the economy, is still relatively high. So
there's no sign a bit there yet at least.
Speaker 2 (07:20):
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(07:43):
If you like what you're hear, don't forget to subscribe
and share. So, Gareth, do you think China is entering
or is in a deflationary spiral ARKA similar to what
he was like in Japan for many years.
Speaker 3 (07:58):
Well, that's certainly our forecast for the next couple of years.
So the Junia headline data that we got it showed
a very small increase in the inflation rates, so positive inflation,
but it's likely that was very temporary and that for
the next year or two at least, we'll see prices
continuing to decline. I think the difference between China and
Japan is that in Japan's case is due almost exclusively
(08:20):
to very weak domestic demand and for a crash in
the economy, whereas China it's mostly supply driven. So the
solutions to the two are going to be very very different.
But certainly we see China's remaining in deflation for the
next couple of years, just because we don't think the
government is doing enough to clamp down on supply and
boost demand enough.
Speaker 1 (08:40):
On that point, like this deflutionary spial there's this idea
that at some point it just becomes nearly impossible to
get out of that spiral. Do you see this happening?
And what signs would you be looking for to track that?
Is it? You know, a certain reading on price data?
Speaker 2 (09:00):
Is it?
Speaker 1 (09:00):
You know, the economy failing to shift towards the consumer, Like,
I guess how dangerous is it? Because right now, at
least as a consumer in China, you're probably like, great,
the prices aren't going up. This is okay, as long
as you don't lose your job, of course.
Speaker 3 (09:16):
Yeah. So in the kind of very near term, consumers
are benefit in them this because there's a big price
war going on, which means they can buy you know,
electric vehicles or mobile telephones for very low prices. And
initially that was the government's response, that you know, deflation
is good for consumers, why is it necessarily a bad thing?
But as we saw for example, that with Japan's case
for the past almost the past twenty years, that deflation
(09:38):
wants it becomes ingrained can be very damaging for the
economy and also as well importantly for policy makers, very
difficult to get out of. You have long periods of
negative interust rates that hasn't done enough or it didn't
do enough in Japan's case to get the country out
of deflation. And there's a concern that China is in
deflation at the moment. But rather than kind of temporary
(09:59):
from becomes perm and in terms of where to look
at in the data, I'd suggest looking at wages. That
if businesses have enough power, consumers don't feel as if
they've got enough pricing power that they can't demand strong
wage increases, then it becomes a kind of self fulfilling
propercy almost that the wages remain low, so costs remain low,
(10:20):
so they don't need to increase prices. So I think
that would be the one area that i'd look for
to see if this is becoming ingrained.
Speaker 2 (10:26):
And consumption is all about confidence, and a lot of
Chinese households have lost some wealth due to the weak
property market. How important is a property market and the
potential rebound for consumption going forward.
Speaker 3 (10:41):
I think that there's two ways, isn't there, So there's
the kind of wealth effect. If prices decline, then consumers
feel porous and don't spend as much. Also, but also
when people move houses, you know, they typically byload of
consumer goods as well to kind of refurnish their property too.
So I think that the downtown the property market is
probably having an impact on the consumer market too. Yeah.
Speaker 1 (11:01):
One of the things we had talked about was, of
course the issue is not just domestic. There's a possibility
of exporting this impulse across the region. And one of
the other things globally impacting prices in the region is
of course tariffs. So we now have a bit more
certainty on what teriff levels will be globally with the
lists we got on August first, they're in forced now.
(11:24):
So how do you think of tariffs first of all globally?
You know, do you see inflation in the US as
a result? Do you see disinflation elsewhere as a result?
How do you kind of think about it in the
whole price realm.
Speaker 3 (11:38):
Yeah, so the main impact of these tests was probably
going to be felt on the US. If you look
kind of historically, it's either the consumers or businesses in
the US that will pay for these I think what's
been interesting so far is that the data in the
US hasn't shown a big increase in inflation, and our
sense is that that's because there's still a bit of
(11:59):
uncertain about what's going to happen with final tariff rates,
so businesses have been reluctant to pass on the increase.
Also the fact that they've been able to run down
in ventories too, so they haven't had the need to
increase prices. But you know, with these tariffs now becoming
seemingly permanent, that's unlikely to last forever, so we do
(12:20):
see prices inflation in the US increasing. In terms of
the rest of the region, obviously, it's a big exporter
to the US, the most trade dependent part of the
global economy, and so tariffs will have an impact, but
I'd caution that they may not be as severe as
some people seem to think. I think the first point
(12:41):
to make is that that certainly most of Southeast Asia
and Northeast Asia has been hit by a blanket tariff
of around about twenty percent, so they haven't experienced a
loss of competitiveness compared with other non US producers. So Vietnam,
for example, has been hit with the same tariff as
the Philippines, Thailand, and so act, it doesn't experience a
big loss of competitiveness compared to those countries, so that's
(13:03):
the first point to make. Also as well, that countries
very significantly in how exposed they are to the US economy.
So Vietnam, for example, is by head and shoulders in
Asia the country most dependent on US demand, and with
car growth forecast for Vietnam for this year and next
year to reflect that. But for countries such as for example, Indonesia,
the Philippines, they're not especially externally driven economy, so they
(13:26):
should be able to withstand tariffs much better, we suspect.
Speaker 2 (13:30):
So Gareth, just to summarize your points, global tariffs will
be inflationary in the US and you think you'll start
seeing possibly the CPI start to rise over the next
few months, But outside the US it will be deflationary.
Speaker 3 (13:45):
Is that correct? The US tariffs that Trump has introduce,
they won't have any direct impact on Asia themselves. The
way that they could still impact is if Asia decided
to retaliate itself so it increased tariff on US imports,
but it hasn't done that. The other ways, of course,
is that they could cause growth across Asia to slow,
(14:06):
so the economy's weakest. There's less price pressures that way,
and that the final channel will be through the exchange rates.
Auasian currencies have generally appreciated against the US dollar, so
that's going to mean the price of imports is a
bit weaker, so that it could affect prices that way.
To the extent that it does have an impact on prices,
it's likely to be mildly deflationary, but not by very much.
Speaker 1 (14:31):
So you're saying that basically you do expect over time
that inflation is going to go up in the US
as a result of these tariffs. We haven't really seen
that yet in CPI, but I guess the natural question is, well,
what are the implications for the FED, because of course
central banks in Asia can ease. I mean they have
been easing, even though the FED hasn't. But what are
(14:52):
sort of the implications for the rest of the year
if the FED cuts once, if they choose not to
cut because it's not coming through into the data as
much as they expected, what are sort of the implications
for Asia central banks?
Speaker 3 (15:06):
Yeah, we'll start with a FED. I think it's in
a bit of a bind at the moment that it's
concerned about the potential inflationary impacts, even though it hasn't
seen a big spike yet, but also as well, they're
concerned about the impact on growth that we saw from
the US jobs report that there are signs that it's
starting to have an impact on confidence and possibly the
(15:26):
broader economy. So against that backdrop of potentially higher prices
but also weaker growth, what does the FED do? I
think the expectations certainly since the jobs have shifted towards easing,
but I suspect they will do so very gradually until
they can get if they do so at all, until
they can get greater clarity on what the implications are
(15:47):
for inflation. In terms of the rest of the region,
I think they're looking mainly at the impact on growth.
We said that they'll be very minimal implications for inflation,
so they're all looking what this means for growth, and
by and large they're going to be negative. There'll be
a much bigger impact for the very open economies such
as for example, Vietnam, Thailand later they're probably the most
(16:12):
exposed ones, much less of an impact save for Indonesia
the Philippines. But you know, nesting all of this out,
I suspect it generally means more inter strate cuts and
probably coming a little bit sooner than maybe we'd expect
as well as a kind of insurance policy, they want
to bring this easing forward. And that is by and
large what we've seen over the past year that if
(16:32):
you look at the Central Bank statements, very close to
the tariffs are a big concern for them, and that
the easing has generally coming maybe a little bit sooner
than we'd been expected as well.
Speaker 2 (16:43):
So, Gareth, in this environment, which Asian countries do you think,
you know, will perform better and worse, you know, across
the board economically into the GDP growth.
Speaker 3 (16:56):
Well, I think probably in terms of what we were
kind of concerned about on you know, early April, on
Liberation Day, when Trump announced these large scale tariffs, that
Vietnam was going to initially hit hit by forty six
percent tariffs, and just given how much of its economy
is dependent on US demand, we were kind of in
the process of writing down GDP growth forecasts by quite
(17:19):
significant mounts, maybe kind of two percentage points or so.
Then they had the ninety day reprieve, and since then
we've had the trade deal with Vietnam, which gives it
a twenty percent tariff, which is more or less in
line with other countries. So I think in terms of
which countries come best out of these negotiations, it's probably
Vietnam because it's now being hit with the same tariff
as everyone else. In terms of the countries that are
(17:41):
going to be kind of hit hardest and that have
done least well out of these negotiations, I think you'd
have to say India that at the start of the process,
you know, they were seen as being a strong US allies.
There was reasons why the US might want to go
soft on them. Everyone thought that the trade deal with
them might be quite straightforward. Is now looking as if
they're going to have fifty percent tasks, which should be
(18:03):
higher than what we're expecting on China as well. So
I think India has done very badly out of these negotiations.
And I guess the kind of one saving grace for
India at least is that it's not especially trade dependent economy,
so the hit will be manageable. But in terms of
you know, all the kind of China plus one talk
and India doing doing well and being a kind of
(18:24):
friendshuring destination and stuff like that, that's looking a lot
less rosy now than the kind of predictions from a
month or two ago, do.
Speaker 1 (18:31):
You think we will end the year at about these
tariff levels? Like, I'm curious as an economist, you're looking
out across this trade landscape. There's a lot going on,
you know, every minute of every day. But I wonder
when you look towards let's say we're sitting here in December,
end of December, what kind of rates do you expect
(18:51):
we'll be in this ballpark as well? Like should we
take solace in the list we saw on August first?
Speaker 3 (18:58):
I think we've got a little bit more certain now
than we did, for example, have on April or second
on Liberation Day. I think for most countries we can
be relatively sure the tariffs of about twenty percent on
most of their goods will be what we can expect.
I think there will be certain negotiations for carve out
on certain sectors. For example, it doesn't make much sense
(19:20):
for the US to be imposing big tariffs on products
that it can't provide domestically, especially commodities, so Malaysia and
Indonesia may be able to negotiate carve outs. I think
there's still quite a bit of uncertainty about what India
will be facing in December. You know, this fifty percent
tariff that Trumpers announced twenty five plus twenty five. They've
(19:42):
got until the end of the month to agree some
kind of deal. It's possible that if you get a
peace agreement in Ukraine, then he won't obviously need to
clamp down on countries that are buying Russian oil. So
there's a possibility that India won't be facing such high tariffs.
I think the big uncertainty as though regardless electronics and semiconductors.
We can have heard the latest threats today of one
(20:04):
hundred percent tariffs on semiconductors. Does he go ahead with
those which countries will be able to negotiate calves out
Taiwan seems pretty confident that TSMC won't be hit by
these tariffs, and is it just going to be semiconductors
or electronics More broadly, I think that's for Asia where
the big kind of uncertainty lies. So by December maybe
(20:26):
something around what we're getting. But the big uncertainly is
in dear and electronics and.
Speaker 2 (20:32):
Gareth, what are the potential big risks both on the
upside and the downside. You know, potential blackswans you see
coming over the next say, six or twelve months.
Speaker 3 (20:42):
Well, I guess the first one will be electronics. That
if Trump really did decide to clamp down not just
on semiconductors, but electronics more broadly, so you know, kind
of computers, tablets, iPads, that kind of stuff, then that
would really hit Asia quite hard. I think Taiwan's the
most exposed in that respect, but it's kind of you know,
countries across the board will be hit quite drastically by that.
(21:03):
I think the second one maybe concerns the kind of
outlook for interest rates in the US that if you
do get I think most people are now expecting rate
cuts over the next few months, but if you do
get inflation in the US spiking quite sharply, I think
the FED would find it very difficult to cut interest
rates in that kind of environment, and that might entel
(21:26):
a kind of repricing of financial markets across the board,
from kind of bonds to currencies, and there could be
some fallout for Raisian financial markets from that as well.
Speaker 1 (21:36):
You know, earlier we were talking about sort of price
trends in the region. One thing we didn't talk about,
you know, because we had talked about deflation, disinflation, inflation.
We haven't talked yet about reflation, which is what Japan
has been trying to do. So after their last decades,
they're trying to get inflation back. You know, what's your
report card for the Japanese government, the central bank? I mean,
(21:58):
how are they doing on that path?
Speaker 3 (22:01):
Yeah? So Japan's a very interesting case, isn't it That
for years it's been stuck in deflation. People or economists
were wondering, how is it going to get out of it?
This cut interest rates in negative territory, it doesn't seem
to be working. And now the opposite problem almost is
that the inflation is too high that the central banks
raising trace is noticeable that pretty much out of every
(22:23):
major economy in the region, inflation is now higher in
Japan than elsewhere.
Speaker 1 (22:28):
Yeah. What a world.
Speaker 3 (22:30):
And in terms of how we got there, I think
you had the first of all, the kind of pandemic
related shock of supply chain disruptions which pushed up the
price of goods everywhere. You also had the shock from
the Ukraine War pushing up the price of oil and
natural gas, and then also the impact of the weak
(22:50):
pushing up import costs. Now all of those should have
proved temporary. But what's happened is it's come across or
it's kind of fed through to a kind of a
waged price viral as well, so that you know, consumers
household see the prices of goods increasing, they try and
demand higher wages. Because wages are now higher, that companies
(23:10):
have to charge more. So this kind of this virtuous circle,
which hopefully means Japan and the kind of the era
of prolonged deflation is now at an end. And it's
quite interesting as well that businesses are also kind of
changing their behavior as well. For years, they're very reluctant
to raise prices that were concerned it would lose the
market shared, but that seems sort of changed as well.
So the situation in Japan has kind of, you know,
(23:32):
in the past kind of five years, has changed quite
considerably and for the better.
Speaker 2 (23:37):
And what's your expectations for the BOJ over the next
twelve months.
Speaker 3 (23:40):
Well, I think further ray hikes are likely. We've got
one penciled in for October. I think at the moment
that's a kind of fifty to fifty cores, but certainly
kind of a steady, gradual tiping of policy seems the
most likely outcome.
Speaker 1 (23:53):
There, Japan leading the world and price growth.
Speaker 3 (23:57):
I would have thought, yes, it's not something you'd have
said for five years ago.
Speaker 1 (24:02):
What an interesting discussion. Thank you so much for joining
us today, Gareth.
Speaker 3 (24:05):
Thank you very much for having me. It's a pleasure.
Thank you, Thanks so much.
Speaker 2 (24:08):
You've been listening to ASI Eccentric from Bloomberg Intelligence. I'm
John Lee in Hong Kong and.
Speaker 1 (24:13):
I'm latching me Treva, also in Hong Kong. You can
find more episodes on Apple Podcasts, Spotify, wherever you listen.
Our show was produced and edited by Claire Chen. Let's
see you next time.
One of the big questions this year is how Trump's
tariffs will impact prices at home and abroad, especially in Asia,
a region highly dependent on trade with the US. Tariffs
are likely to be inflationary in the US, and they're
usually disinflationary for other countries, weakening growth and demand.
Speaker 2 (00:19):
That impact will be felt at a time when much
of the region was already preparing for more interest rate
cuts as inflation eases. China has been mind with deflationary
pressure for years. Meanwhile, Japan is trying to reinflate prices
after the lost decades.
Speaker 1 (00:37):
You're listening to Asia Centric from Bloomberg Intelligence. I'm Kye
Tidmytriva on Hong Kong.
Speaker 2 (00:41):
I'm John Lee also in Hong Kong, and today.
Speaker 1 (00:44):
We're looking at the landscape for inflation across Asia. Joining
us is Gareth Leather, Senior Asia economist a Capital Economics.
Thanks for joining us today.
Speaker 3 (00:52):
It's a pleasure to be here. Thank you for having
me on.
Speaker 1 (00:55):
So maybe we should get started with a very big economy.
We're talking about all the inflation today. While China is
in deflation, it's been in that position for a few
years now. You said in the past that it's largely
due to over capacity in a certain sector. So you
know over two hundred EV companies, more than one hundred
(01:16):
AI large language models. Can you just walk us through
why China has so much overcapacity and overproduction, like how
we got here?
Speaker 3 (01:25):
Yeah, So China's deflation problem is a symptom of both
very strong supply and very weak demand. I think in
terms of the demand side, the government really hasn't been
doing enough to try and get consumers to spend, whereas
on the supply sign there's just been this glut of production,
which is partly related to what happened during the pandemic
(01:48):
that Chinese companies increased investments triun cater for strong Western
demand for consumers when they were locked down. But also
as well, it's kind of government, kind of local governments
putting pressure on their kind of favored industry champions to
try to be the next Tesla, to be the next Apple,
and so you've seen this splurgeon production for companies trying
(02:11):
to basically become the next kind of global champion, and
that's led to this huge increase in supply which the
domestic market hasn't been able to soak up. And so
they've been engaged in quite vicious price walls, which is
causing basically prices across the board to four. You mentioned
in particular automotives, and that's worn. I think there's only
a couple of automotive companies in China actually making money
(02:32):
at the moment, but it's across the board solar panels
as another one, electronics too, but it's a widespread problem.
I've got interesting statistic for you if you wanted it. It
was that about a decade ago, ten percent of manufacturing
companies in China were losing money, whereas now it's around
a third. So it just kind of goes to impress
upon you the amount of capacity and that that companies
(02:53):
are producing with very little financial reward.
Speaker 2 (02:57):
Why isn't there consolidation If all these companies are losing money,
shouldn't they go out of business? And they shouldn't they
be mergers and acquisitions.
Speaker 3 (03:06):
I think that's what you'd expect in a normal economy,
that if companies are making sustained losses, they'd struggle and
go out of business. I think the problem is in
China that they're quite often backed by local governments who
are kind of trying to champion these companies as the
next you know, as I said, the next Tesla or whatever,
and they're worried that if they did pull the plug
on these companies, you get a big rise in unemployment
(03:28):
and the shops slow down and economic growth. So, although
they're being put under some pressure by the central government
to try to do more to consolidate, it's very difficult
just because they are champions of local governments and so
it's proving a very difficult process.
Speaker 1 (03:43):
Doesn't that mean, though, that the Chinese government needs to
rethink how they treat not just the private sector, but
industry in general. I mean, there seems like a problem
that's entrenched in the system itself.
Speaker 3 (03:58):
Yeah. I think it's basically a symptom of a very
strong industrial policy that you've got in China, where the
central government has been putting kind of or making targets
for China to be the next industry leader in various
different sectors. Local governments have responded by putting out subsidies,
and that you've had this the emergence of so many
(04:19):
different industries and so many different companies trying to do that,
and it's finally it very difficult to work its way out. Ideally,
you would have in a market economy that the companies
that are losing money either out of business or consolidate
emerged with stronger ones. But that hasn't happened in China.
Speaker 2 (04:35):
The government seems to be tackling this issue. You know,
the government is pushing for this anti involution push, which
is trying to restrict the aggressive pricing policies of many
of these companies. Do you think it's going to.
Speaker 3 (04:48):
Work, Well, it's not working so far. The other side
of this coin, of course, is stronger demand. If they
can't focus enough or cramply down enough on strong supply,
they need to do more to boost con sumption or
alternatively export more. I think on consumption. You know, the
government may argue that it's actually running a large budget deficit,
so it's doing as much as it can to boost demand.
(05:10):
I think the problem is that in China there are
a lot of this extra demand. Extra government spending is
going towards investment rather than consumption. And it's just the
way that the Chinese government operates as they're very reluctant
to do more to boost consumption because they don't see
or they find it quite difficult to know where do
you get the payback, where's the money going to come
from to pay back these loans, whereas with investment you
(05:31):
can at least see if the company makes a profit,
they can then pay back the loan, So that would
be I think the alternative is much stronger demand. The
other side, of course, is that China can export, and
that has been exporting its domestic surplus onto third markets,
but that of course is running into problems itself. You've
seen the big tariffs that the US is introduced against China,
(05:51):
that the EU as well as fighting back, and there
is also signed that some emerging economies are also fighting
back against some big surge in Chinese exports too, because
it's hurting their domestic manufacturing sectors as well. So there's
a kind of an international side to all this too.
Speaker 1 (06:07):
Are there signs that it's causing a disinflationary impulse across Asia?
Speaker 3 (06:14):
Yet?
Speaker 1 (06:15):
Like are we seeing that in the data? And how
much deflation is China going to export?
Speaker 3 (06:22):
Well, yeah, this is the concern, isn't it like kind
of ten years ago that China is now kind of
a deflationary force for the global economy. I'm not sure
we're there yet, and certainly for Asian economies that data
don't back that up quite yet, but you can certainly
see a scenario that over the next kind of two
or three years that if this continues, then then it
(06:43):
could be one. Yes. But if you look at the
Asian data at the moment, certainly that the headline figures
are very very weak, below one percent we had in
the Philippines this week. Thailand is in deflation, Taiwan's only
one and a half percent. Inflation is weak across the board,
but a lot of this at the moment at least
is due to temporary factors. So fuel price inflation is
(07:07):
very low. Food price inflation has come right down as well,
but core inflation, which is a better measure of underlying
price pressure in the economy, is still relatively high. So
there's no sign a bit there yet at least.
Speaker 2 (07:20):
Asia Centric is produced by Bloomberg Intelligence, where more than
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(07:43):
If you like what you're hear, don't forget to subscribe
and share. So, Gareth, do you think China is entering
or is in a deflationary spiral ARKA similar to what
he was like in Japan for many years.
Speaker 3 (07:58):
Well, that's certainly our forecast for the next couple of years.
So the Junia headline data that we got it showed
a very small increase in the inflation rates, so positive inflation,
but it's likely that was very temporary and that for
the next year or two at least, we'll see prices
continuing to decline. I think the difference between China and
Japan is that in Japan's case is due almost exclusively
(08:20):
to very weak domestic demand and for a crash in
the economy, whereas China it's mostly supply driven. So the
solutions to the two are going to be very very different.
But certainly we see China's remaining in deflation for the
next couple of years, just because we don't think the
government is doing enough to clamp down on supply and
boost demand enough.
Speaker 1 (08:40):
On that point, like this deflutionary spial there's this idea
that at some point it just becomes nearly impossible to
get out of that spiral. Do you see this happening?
And what signs would you be looking for to track that?
Is it? You know, a certain reading on price data?
Speaker 2 (09:00):
Is it?
Speaker 1 (09:00):
You know, the economy failing to shift towards the consumer, Like,
I guess how dangerous is it? Because right now, at
least as a consumer in China, you're probably like, great,
the prices aren't going up. This is okay, as long
as you don't lose your job, of course.
Speaker 3 (09:16):
Yeah. So in the kind of very near term, consumers
are benefit in them this because there's a big price
war going on, which means they can buy you know,
electric vehicles or mobile telephones for very low prices. And
initially that was the government's response, that you know, deflation
is good for consumers, why is it necessarily a bad thing?
But as we saw for example, that with Japan's case
for the past almost the past twenty years, that deflation
(09:38):
wants it becomes ingrained can be very damaging for the
economy and also as well importantly for policy makers, very
difficult to get out of. You have long periods of
negative interust rates that hasn't done enough or it didn't
do enough in Japan's case to get the country out
of deflation. And there's a concern that China is in
deflation at the moment. But rather than kind of temporary
(09:59):
from becomes perm and in terms of where to look
at in the data, I'd suggest looking at wages. That
if businesses have enough power, consumers don't feel as if
they've got enough pricing power that they can't demand strong
wage increases, then it becomes a kind of self fulfilling
propercy almost that the wages remain low, so costs remain low,
(10:20):
so they don't need to increase prices. So I think
that would be the one area that i'd look for
to see if this is becoming ingrained.
Speaker 2 (10:26):
And consumption is all about confidence, and a lot of
Chinese households have lost some wealth due to the weak
property market. How important is a property market and the
potential rebound for consumption going forward.
Speaker 3 (10:41):
I think that there's two ways, isn't there, So there's
the kind of wealth effect. If prices decline, then consumers
feel porous and don't spend as much. Also, but also
when people move houses, you know, they typically byload of
consumer goods as well to kind of refurnish their property too.
So I think that the downtown the property market is
probably having an impact on the consumer market too. Yeah.
Speaker 1 (11:01):
One of the things we had talked about was, of
course the issue is not just domestic. There's a possibility
of exporting this impulse across the region. And one of
the other things globally impacting prices in the region is
of course tariffs. So we now have a bit more
certainty on what teriff levels will be globally with the
lists we got on August first, they're in forced now.
(11:24):
So how do you think of tariffs first of all globally?
You know, do you see inflation in the US as
a result? Do you see disinflation elsewhere as a result?
How do you kind of think about it in the
whole price realm.
Speaker 3 (11:38):
Yeah, so the main impact of these tests was probably
going to be felt on the US. If you look
kind of historically, it's either the consumers or businesses in
the US that will pay for these I think what's
been interesting so far is that the data in the
US hasn't shown a big increase in inflation, and our
sense is that that's because there's still a bit of
(11:59):
uncertain about what's going to happen with final tariff rates,
so businesses have been reluctant to pass on the increase.
Also the fact that they've been able to run down
in ventories too, so they haven't had the need to
increase prices. But you know, with these tariffs now becoming
seemingly permanent, that's unlikely to last forever, so we do
(12:20):
see prices inflation in the US increasing. In terms of
the rest of the region, obviously, it's a big exporter
to the US, the most trade dependent part of the
global economy, and so tariffs will have an impact, but
I'd caution that they may not be as severe as
some people seem to think. I think the first point
(12:41):
to make is that that certainly most of Southeast Asia
and Northeast Asia has been hit by a blanket tariff
of around about twenty percent, so they haven't experienced a
loss of competitiveness compared with other non US producers. So Vietnam,
for example, has been hit with the same tariff as
the Philippines, Thailand, and so act, it doesn't experience a
big loss of competitiveness compared to those countries, so that's
(13:03):
the first point to make. Also as well, that countries
very significantly in how exposed they are to the US economy.
So Vietnam, for example, is by head and shoulders in
Asia the country most dependent on US demand, and with
car growth forecast for Vietnam for this year and next
year to reflect that. But for countries such as for example, Indonesia,
the Philippines, they're not especially externally driven economy, so they
(13:26):
should be able to withstand tariffs much better, we suspect.
Speaker 2 (13:30):
So Gareth, just to summarize your points, global tariffs will
be inflationary in the US and you think you'll start
seeing possibly the CPI start to rise over the next
few months, But outside the US it will be deflationary.
Speaker 3 (13:45):
Is that correct? The US tariffs that Trump has introduce,
they won't have any direct impact on Asia themselves. The
way that they could still impact is if Asia decided
to retaliate itself so it increased tariff on US imports,
but it hasn't done that. The other ways, of course,
is that they could cause growth across Asia to slow,
(14:06):
so the economy's weakest. There's less price pressures that way,
and that the final channel will be through the exchange rates.
Auasian currencies have generally appreciated against the US dollar, so
that's going to mean the price of imports is a
bit weaker, so that it could affect prices that way.
To the extent that it does have an impact on prices,
it's likely to be mildly deflationary, but not by very much.
Speaker 1 (14:31):
So you're saying that basically you do expect over time
that inflation is going to go up in the US
as a result of these tariffs. We haven't really seen
that yet in CPI, but I guess the natural question is, well,
what are the implications for the FED, because of course
central banks in Asia can ease. I mean they have
been easing, even though the FED hasn't. But what are
(14:52):
sort of the implications for the rest of the year
if the FED cuts once, if they choose not to
cut because it's not coming through into the data as
much as they expected, what are sort of the implications
for Asia central banks?
Speaker 3 (15:06):
Yeah, we'll start with a FED. I think it's in
a bit of a bind at the moment that it's
concerned about the potential inflationary impacts, even though it hasn't
seen a big spike yet, but also as well, they're
concerned about the impact on growth that we saw from
the US jobs report that there are signs that it's
starting to have an impact on confidence and possibly the
(15:26):
broader economy. So against that backdrop of potentially higher prices
but also weaker growth, what does the FED do? I
think the expectations certainly since the jobs have shifted towards easing,
but I suspect they will do so very gradually until
they can get if they do so at all, until
they can get greater clarity on what the implications are
(15:47):
for inflation. In terms of the rest of the region,
I think they're looking mainly at the impact on growth.
We said that they'll be very minimal implications for inflation,
so they're all looking what this means for growth, and
by and large they're going to be negative. There'll be
a much bigger impact for the very open economies such
as for example, Vietnam, Thailand later they're probably the most
(16:12):
exposed ones, much less of an impact save for Indonesia
the Philippines. But you know, nesting all of this out,
I suspect it generally means more inter strate cuts and
probably coming a little bit sooner than maybe we'd expect
as well as a kind of insurance policy, they want
to bring this easing forward. And that is by and
large what we've seen over the past year that if
(16:32):
you look at the Central Bank statements, very close to
the tariffs are a big concern for them, and that
the easing has generally coming maybe a little bit sooner
than we'd been expected as well.
Speaker 2 (16:43):
So, Gareth, in this environment, which Asian countries do you think,
you know, will perform better and worse, you know, across
the board economically into the GDP growth.
Speaker 3 (16:56):
Well, I think probably in terms of what we were
kind of concerned about on you know, early April, on
Liberation Day, when Trump announced these large scale tariffs, that
Vietnam was going to initially hit hit by forty six
percent tariffs, and just given how much of its economy
is dependent on US demand, we were kind of in
the process of writing down GDP growth forecasts by quite
(17:19):
significant mounts, maybe kind of two percentage points or so.
Then they had the ninety day reprieve, and since then
we've had the trade deal with Vietnam, which gives it
a twenty percent tariff, which is more or less in
line with other countries. So I think in terms of
which countries come best out of these negotiations, it's probably
Vietnam because it's now being hit with the same tariff
as everyone else. In terms of the countries that are
(17:41):
going to be kind of hit hardest and that have
done least well out of these negotiations, I think you'd
have to say India that at the start of the process,
you know, they were seen as being a strong US allies.
There was reasons why the US might want to go
soft on them. Everyone thought that the trade deal with
them might be quite straightforward. Is now looking as if
they're going to have fifty percent tasks, which should be
(18:03):
higher than what we're expecting on China as well. So
I think India has done very badly out of these negotiations.
And I guess the kind of one saving grace for
India at least is that it's not especially trade dependent economy,
so the hit will be manageable. But in terms of
you know, all the kind of China plus one talk
and India doing doing well and being a kind of
(18:24):
friendshuring destination and stuff like that, that's looking a lot
less rosy now than the kind of predictions from a
month or two ago, do.
Speaker 1 (18:31):
You think we will end the year at about these
tariff levels? Like, I'm curious as an economist, you're looking
out across this trade landscape. There's a lot going on,
you know, every minute of every day. But I wonder
when you look towards let's say we're sitting here in December,
end of December, what kind of rates do you expect
(18:51):
we'll be in this ballpark as well? Like should we
take solace in the list we saw on August first?
Speaker 3 (18:58):
I think we've got a little bit more certain now
than we did, for example, have on April or second
on Liberation Day. I think for most countries we can
be relatively sure the tariffs of about twenty percent on
most of their goods will be what we can expect.
I think there will be certain negotiations for carve out
on certain sectors. For example, it doesn't make much sense
(19:20):
for the US to be imposing big tariffs on products
that it can't provide domestically, especially commodities, so Malaysia and
Indonesia may be able to negotiate carve outs. I think
there's still quite a bit of uncertainty about what India
will be facing in December. You know, this fifty percent
tariff that Trumpers announced twenty five plus twenty five. They've
(19:42):
got until the end of the month to agree some
kind of deal. It's possible that if you get a
peace agreement in Ukraine, then he won't obviously need to
clamp down on countries that are buying Russian oil. So
there's a possibility that India won't be facing such high tariffs.
I think the big uncertainty as though regardless electronics and semiconductors.
We can have heard the latest threats today of one
(20:04):
hundred percent tariffs on semiconductors. Does he go ahead with
those which countries will be able to negotiate calves out
Taiwan seems pretty confident that TSMC won't be hit by
these tariffs, and is it just going to be semiconductors
or electronics More broadly, I think that's for Asia where
the big kind of uncertainty lies. So by December maybe
(20:26):
something around what we're getting. But the big uncertainly is
in dear and electronics and.
Speaker 2 (20:32):
Gareth, what are the potential big risks both on the
upside and the downside. You know, potential blackswans you see
coming over the next say, six or twelve months.
Speaker 3 (20:42):
Well, I guess the first one will be electronics. That
if Trump really did decide to clamp down not just
on semiconductors, but electronics more broadly, so you know, kind
of computers, tablets, iPads, that kind of stuff, then that
would really hit Asia quite hard. I think Taiwan's the
most exposed in that respect, but it's kind of you know,
countries across the board will be hit quite drastically by that.
(21:03):
I think the second one maybe concerns the kind of
outlook for interest rates in the US that if you
do get I think most people are now expecting rate
cuts over the next few months, but if you do
get inflation in the US spiking quite sharply, I think
the FED would find it very difficult to cut interest
rates in that kind of environment, and that might entel
(21:26):
a kind of repricing of financial markets across the board,
from kind of bonds to currencies, and there could be
some fallout for Raisian financial markets from that as well.
Speaker 1 (21:36):
You know, earlier we were talking about sort of price
trends in the region. One thing we didn't talk about,
you know, because we had talked about deflation, disinflation, inflation.
We haven't talked yet about reflation, which is what Japan
has been trying to do. So after their last decades,
they're trying to get inflation back. You know, what's your
report card for the Japanese government, the central bank? I mean,
(21:58):
how are they doing on that path?
Speaker 3 (22:01):
Yeah? So Japan's a very interesting case, isn't it That
for years it's been stuck in deflation. People or economists
were wondering, how is it going to get out of it?
This cut interest rates in negative territory, it doesn't seem
to be working. And now the opposite problem almost is
that the inflation is too high that the central banks
raising trace is noticeable that pretty much out of every
(22:23):
major economy in the region, inflation is now higher in
Japan than elsewhere.
Speaker 1 (22:28):
Yeah. What a world.
Speaker 3 (22:30):
And in terms of how we got there, I think
you had the first of all, the kind of pandemic
related shock of supply chain disruptions which pushed up the
price of goods everywhere. You also had the shock from
the Ukraine War pushing up the price of oil and
natural gas, and then also the impact of the weak
(22:50):
pushing up import costs. Now all of those should have
proved temporary. But what's happened is it's come across or
it's kind of fed through to a kind of a
waged price viral as well, so that you know, consumers
household see the prices of goods increasing, they try and
demand higher wages. Because wages are now higher, that companies
(23:10):
have to charge more. So this kind of this virtuous circle,
which hopefully means Japan and the kind of the era
of prolonged deflation is now at an end. And it's
quite interesting as well that businesses are also kind of
changing their behavior as well. For years, they're very reluctant
to raise prices that were concerned it would lose the
market shared, but that seems sort of changed as well.
So the situation in Japan has kind of, you know,
(23:32):
in the past kind of five years, has changed quite
considerably and for the better.
Speaker 2 (23:37):
And what's your expectations for the BOJ over the next
twelve months.
Speaker 3 (23:40):
Well, I think further ray hikes are likely. We've got
one penciled in for October. I think at the moment
that's a kind of fifty to fifty cores, but certainly
kind of a steady, gradual tiping of policy seems the
most likely outcome.
Speaker 1 (23:53):
There, Japan leading the world and price growth.
Speaker 3 (23:57):
I would have thought, yes, it's not something you'd have
said for five years ago.
Speaker 1 (24:02):
What an interesting discussion. Thank you so much for joining
us today, Gareth.
Speaker 3 (24:05):
Thank you very much for having me. It's a pleasure.
Thank you, Thanks so much.
Speaker 2 (24:08):
You've been listening to ASI Eccentric from Bloomberg Intelligence. I'm
John Lee in Hong Kong and.
Speaker 1 (24:13):
I'm latching me Treva, also in Hong Kong. You can
find more episodes on Apple Podcasts, Spotify, wherever you listen.
Our show was produced and edited by Claire Chen. Let's
see you next time.
Hosts And Creators
John Lee
Tom Corbett
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