February 5, 2025 • 40 mins
After many months of threats, the US has imposed 10% tariffs on all Chinese goods coming into the country and China retaliated immediately, launching an investigation into Google and putting its own levies on a range of American goods including LNG. Thus begins a new era of protectionism.
The tariffs and any additional moves are set to slow economic growth in China, which is already struggling to boost consumer spending, reboot its property sector and lure more foreign investment. This is likely just the beginning, with higher levies to come in a repeat of the 2018-19 trade war. Despite the headwinds, Chinese President Xi Jinping still has a lot of tools at his disposal.
Helen Qiao, chief economist for Greater China at Bank of America, joins John Lee and Katia Dmitrieva to gauge the impact in the world's second largest economy and what could lay ahead.
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Episode Transcript
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Speaker 1 (00:02):
You're listening to Asia Centric from Bloomberg Intelligence, the podcast
that explores the big ideas and trends moving money across
the region. I'm Katy Dmitrieva here in Hong Kong, and I'm.
Speaker 2 (00:12):
John Lee on assignment in Seoul, South Korea. Katya, the
trade war is finally upon us.
Speaker 1 (00:18):
Yes, it feels like it's been a long time coming,
but it has finally happened. It's kicked off. We're recording
this on February fourth. We should know it for our
dear listeners, because a lot could happen between now and
when the episode airs. But as of right now, what
we know is that Mexico and Canada, two of America's
largest trading partners, have managed to escape tariffs, at least
(00:41):
they're on hold for now. And as for China, well
that's where the trade war is actually kicking off. The
US has imposed ten percent tariffs on China across the board,
and China has fought back.
Speaker 2 (00:52):
Everything's still in a flux at the moment, lots of uncertainties,
but what we do know is that the world's two
largest economies, in US and China, are in a trade war,
and that has huge ramifications for the whole global trade.
Speaker 3 (01:06):
Yeah.
Speaker 1 (01:06):
Absolutely, and I can't think of a better time to
have our guest here today to walk us through all
this and definitely what it means for Asia as a whole.
Joining us today is Helen Chow. She's the chief economist
for Greater China Bank of America. Welcome to the show, Helen.
Speaker 4 (01:22):
Nice meeting you all.
Speaker 1 (01:24):
Helen. I wanted to start with the topic of the day.
We're going to be talking a lot about China, but
tariff specifically. So we know that the deadline passed, We've
now got ten percent tariffs on Chinese goods. China's retaliated
as well, So what's going to be the impact.
Speaker 4 (01:42):
Well, I would say, first of all, the start of
this tariff imposition overnight was probably nothing too surprising. It
was well telegraphed so that actually people were largely expecting it.
So I would say also the second thing is that
this is not the first time that China is seeing
the the tariffs of being imposed on Chinese imports into
(02:02):
the US, mainly because that if you look at what
has been imposed back in twenty eighteen and then later
in twenty nineteen, most of those tariffs actually remained in place.
So in other words, we are seeing just on top
of an existing set of on average about twenty percent
of the tariffs on the Chinese products being imported into
the US, we're seeing a blanket edition of about another
(02:26):
ten percent on top of that. So this is actually
what we see an escalation of what is already in place,
rather than a completely introduction of something new. That said,
I would say that still going to hurt the Chinese
economy even with the expectation, even with the fact that
this is not completely new, we are expecting the overall
growth to be hurt, probably more visibly starting from a
(02:50):
second quarter.
Speaker 1 (02:51):
How much do you think we are.
Speaker 4 (02:53):
Expecting that in sequential terms, potentially removing as much as
more than two percent points Q and Q analyzed terms,
so in year terms it's probably much less. So, you know,
moving the GDP growth from five percent as of you know,
last year or the last quarter five point four percent
to maybe in first quarter now, I think the risks
(03:15):
are increasingly higher that we're seeing the possible negative impact
maybe in Q one already hurting the numbers, and we
could see this number coming below five percent for the
first quarter and for the second quarter, I think the
risks are that we can see it going a little
bit bigger over time. In Q three and Q four,
I think it could probably look a bit better when
(03:36):
Chinese exports find alternative routes to send the products, probably
you know, without being counted as Chinese director exports to
the US, or they can figure out some exemptions, and
therefore I think the impact on growth might be a
little bit less. And secondly, also because of the potential
Chinese policy easing measures that they're going to introduce that
is also going to help offset the headwinds coming from
(03:59):
export side. So for those reasons, I think that Q
three and the Q four will look better and the
risks are still probably I was say, relatively balanced on
either side around our GDP growth forecast this year at
four point five percent.
Speaker 1 (04:12):
I want to let John ask another question. I know
something you wanted to ask, but just given your answer
just now, I wonder if you can just quantify for
listeners how big of a deal this is. At the beginning,
you know that it was ten percent tariffs, much lower
than the sixty percent promise during the campaign trail, and
China retaliated, but not to the degree that the US
(04:34):
has imposed heariffs, So like, how do you quantify this?
Maybe on a scale of like one to ten. How
should we be thinking about this?
Speaker 4 (04:42):
Well, great question. I do recall that many of our clients,
many of our colleagues, have been asking about how about
sixty percent up front? Right? That probably was seen as
one of the you know, very likely but worse scenario
compared to what we currently see. I would remind everyone
that not only there was this potential scenario where there
(05:04):
could be a sixty percent up front, there was also
this mentioning during the campaign rally that President Trump back
then also mentioned one hundred percent on Chinese products, And therefore,
I would like to remind everyone then maybe compared to
one hundred percent, ten percent is indeed a very small
amount of teriff punishment. But the problem is two things.
(05:28):
Number one is that the tariffs on Chinese products, probably one,
compared to those on the Mexican and Canadian imports, tend
to be more permanent, which means if they are introduced,
they probably will not be taken away. In other words,
you know, if you look at the Mexico and also
the Canadian twenty five percent, it was set out to
(05:50):
be higher. However, it was avoided basically a few hours
before it is going into action, and even if that
goes into action, it probably wouldn't stay very long, mainly
also because of the fact that this would hurt the
US economy and especially on the consumer side a bit
more visibly. But for China, I think now that ten percent,
(06:12):
you know, while it does not necessarily look like as
bad as one hundred percent, I think it has the
potential challenge that here it also implies that it is
going to stay on top of those existing twenty and
therefore will end up with thirty, so that is definitely
more hurtful. And secondly, I would say beyond these headline numbers,
(06:32):
I think we also need to see into the details.
For example, you know, on China, what happens to the
exemptions of the previous you know tariffs that a lot
of the products, the producers of those products have been
applying and actually got waived of those tariffs temporarily many
of them were expiring and we probably are about to
expire in twenty twenty five. So whether those exemptions can
(06:55):
be granted were extended I think could also be something
to explore, which we do not know at the answer
to number three. I think also, you know, the role
on the small package, especially the TERRAFF waiver policies in
the past on those small packages I think now have
been revoked. So does it mean that these you know,
(07:18):
small packages would have a completely different way of reporting
to the customs? Are they going to buy the ten
percent or are they going by the ten percent plus?
You know, some average consumer goods are subject to about
four percent of terraffs, so is that going to be
on average fourteen percent? We still do not know. There
are too many things right now. As you said, many
(07:39):
things are still developing, and you know, it's hard to
tell how it would be exercise. But so far, I
think we have already found that in almost every single
dimension there are many things that.
Speaker 1 (07:49):
We do not know.
Speaker 2 (07:51):
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Speaker 3 (08:12):
Chair Helen, you mentioned that the China's economy is likely
to fall to some like four point five percent this
year from five percent last year. How will these tariffs
impact the different sectors which will be hurt the most well?
Speaker 4 (08:28):
When we are having this forecast on GP we do
not specifically make by industry forecast or by sector, but
we would imagine that this year the external sectors will
probably be hurt more compared to the more domestic oriented
ones because we are expecting such uncertainty around the tariffs,
(08:49):
especially coming from the US, could potentially derail this external
sector recovery that we saw from last year. A lot
of those sectors in the in last year were actually
I think benefiting from the fact that while domestic demand
has been quite weak and the PPI has been staying
in the deflationary territory and therefore their causes relatively low,
(09:11):
what they have seen is rather robust demand coming from
the US and elsewhere. I would say that for those
that rely particularly on the US demand, I think the
challenges that this year whether they would be able to
go through twenty twenty five, especially against a very high
base in twenty twenty four, when many of those US
importers probably frontloaded there in their orders and try to
(09:35):
take more inventory. At that point, they should have already
thought about twenty twenty five when such peak demand goes over,
and they probably need to prepare for some period of
quietness or think about trade diversion. So that, I think
is the most important thing that we are actually putting
in our forecast without explicitly giving let's say a sector
(09:59):
growth or production activity growth forecast. Second, I would also
mention that while the external sectors, you know, for those
that are actually more reliant on US demand seems to
be more under pressure last year, China's export rebound was
not completely based on just the US. If you look
at what we have published, we actually were saying that
(10:21):
last year a lot of the demand that came from
the global South rather than global North. We basically put Japan, US, Europe,
and also Australia and Canada together and look at China's
exports and we found that for these destinations export growth
have held up reasonably well, but they did not jump up.
(10:42):
What has jumped up and overtaken their large share from
the past was actually the global South. If we look
at you know, Latin America, Africa, Asian countries thousand countries
are becoming very important nowadays, as well as Russia, India
and the Middle East countries as well as the Eastern
European countries. We also saw a lot of the exports
(11:05):
going there. I think that is partly related to the
Chinese companies going overseas them so that I think could
be more sustainable coming back. And you know, looking at
the tariff impact, I would say that we probably cannot
be just putting everything into one block and say that
external sector is going to face a very tough time.
I think depending on the destination market, if it is
(11:28):
the US and primarily the US, I think that this
is probably the time that we need to see some diversion.
But otherwise I think that for the Global South, I
think those exportsers are probably still going to do well. Meanwhile,
if we look at the domestic economy, those that are
you know, more reliant on the domestic demand. For example,
(11:49):
you know a lot of people were saying that the
consumer subsidies in China are finally coming and in the
first three days of the Chinese New Year, we actually
saw the data from t MAOL saying that they have
seen these cell phone sales going through the roof growing
by more than fifty percent, you know, year on year
compared to the first or three days of the last
(12:09):
Golden Week holidays around Lunar New Year in twenty twenty four.
And this is probably because that there was this subsidy
by as much as fifteen twenty percent from the local
governments that if you buy a cell phone, then you
can be subsidized, and that I think could probably be
you know, some of the spotlight areas that we should
be looking out for this year within Chinese economy to
(12:32):
see that when policy comes out to help offset the
pain from the tariffs impact, which sectors could potentially do better.
Speaker 1 (12:39):
Is there a limit to that though, like in terms
of the stimulus that China can do, like what level
of tariffs I guess or economic pain would kind of
cross that threshold to where Chinese officials, you know, are
kind of stuck. They can't necessarily give more of these
incentives to consumers or change the mortgage rates or whatever
(13:01):
other subsidies or stimulus they have.
Speaker 4 (13:04):
So Kadia compared to twenties eighteen twenty nineteen, China probably
has less. I would a levers to pull given that,
you know, the domesa demand is less robust, you know,
and then the room for easing on both physical and
monetary policy fronts seems to be more limited right now. However,
I wouldn't necessarily say that we are going to run
(13:26):
into a constraint in any time in the near future.
For example, on the monetary side, we're expecting potential tripleard
cuts as well as interest rate cuts. We're expecting as
much as forty basic points of seven day reverse report
rate cuts this year.
Speaker 1 (13:41):
And what is that, just for listeners who aren't familiar.
Speaker 4 (13:45):
That is the policy interest rate in China. It's comparable
to the federal funds deposit rate. The federal fund rate
cuts in the US would generally be seen to be
conducive to more accommodative financial conditions, and so is the
rate cut in China. Policy rate cut lowers the cost
potentially for the borrowing in the interbank market, so that
(14:06):
actually it could be seen as being helpful to ultimately
reducing the borring cost for households as well as corporate
And if they cut it by let's say twenty basis
points each time, and we have probably at least twice
as much of twice of such cuts. Going forward, I
think we could potentially see a boost to boast the
(14:27):
investment as well as a consumer demand at the same time.
Physical deficit is another area where China can do more
of well. You know, of course, not all the deficit
will be put onto the consumer subsidies that we just
mentioned on home appliances, cell phones, paths, or cars. I
think that a lot of that has also been put
(14:47):
into infrastructure investment, et cetera. So physical deficit that we're
expecting this year to grow from three percent last year
to three point five percent for economy that is growing
with a sub substantially you know, at a level that
is substantially lower than its long term potential. I would
say that China has been perhaps almost too disciplined on
(15:10):
the physical side, that they have not really borrowed as
much as they could, and they have kept the central
government's budget at a pretty conservative level with a deficit
running at only about three percent. We definitely see the
upset to it, and we think they can increase it
to at least at three point five this year, if
not higher. And could that be helpful well, depending on
(15:32):
how they use it, And there are many other, you know,
I would say potential policy tools that they can use
beyond the monetary policy and those physical deficits that we
just mentioned to relax the equidity conditions of the local
governments and potentially allow them to pay back their debt
to local companies as well as pay employees and the
(15:53):
boost to reboot the local economy. So we think that
there is quite a lot more that they can do.
But this is not all all for the sake of
offsetting the impact from the tariffs. I think that Chinese
domesad economy is in a state that requires and the
warrants more policy eating, so that they definitely should do more.
Speaker 3 (16:12):
Helen. It feels like we've been talking about this issue
for a number of years now a week domestic economy
in China. Now, a lot of global investors have been
anticipating like almost like a big bang in terms of stimulus. Now,
all these stimulus measures that you just mentioned, do you
think there'll be enough to appease or satisfying.
Speaker 4 (16:30):
Investors, Well, it's a jo I think that's a little
bit hard to guess. How much is the institutional investors
expecting and you know by when the market will be
saying Oh, that's good enough. Clearly that China is not
delivering something like a Basuoka package that many probably have
been hoping for. For example, many were in the past
(16:53):
probably two years, have been hoping for China to deliver something,
you know, along the lines of giving helicopter dropping ash
to everyone, so that you know, like what the US
did to the American household, writing the blank checks, so
that you can actually get an immediate boost to consumer
demand right away. That I think has pretty much been
(17:13):
seen as being very unlikely by now. But you can
see that there are alternative measures that have been adopted
that are actually designed to do something similar. For example,
the subsidy program, right the consumer product trade in So
this treateding program started last year and then it covers
from cars to home appliance and also now to technology products.
Speaker 1 (17:35):
Pretty successful, right.
Speaker 4 (17:37):
I think so. Even some of your colleagues over here
told me that she bought quite a lot using the
subsidies because she was getting married, so I trust her.
I wasn't able to use it, but I have heard
a lot of people saying that that has been pretty
effective because they probably were still hesitating in terms of
if they should buy a new one or they stay
(17:58):
put with the existing gear. But then this really gives
them the push to say that okay, let me frontload
the person decision and let me get it done. So
I think that those turn out to be pretty effective,
and according to the Ministry of Commerce, it has really
boosted retail sales quite substantially, especially in the second half
of last year. But I would say would that be enough.
(18:21):
Probably not, especially not only from a market perspective to
make all the investors happy, which tend to be more transient.
I think it's more important to see if we are
seeing all these boosts to the economy to ultimately deliver
the productivity growth that we were looking for, the technology
progress that we were hoping to see, so that ultimately
(18:44):
we can see more sustainable growth down the road. That's
actually where we mentioned that we need to see probably
more than just a consumer subsidy program, more than the
physical deficit expansion, and not just the interest rate and
trip our cuts. Beyond that, we need to see that
actually if there could be some measures being taken to
(19:06):
promote the positive incentives in our view, in the system
so as to allow people to work towards their individual
goals more efficiently. When we mentioned that, I think a
lot of people were saying, what kind of positive incentives
are you talking about? Well, what we mean is it's
not just about these headline you know, physical and monetary
(19:27):
policy measures, but instead we hope to see that for
governmental officials, for SOE managers, as well as private individuals,
business owners and households. We hope to see more upside
so that they could potentially work harder and more willingly
take risks, and therefore we could see a stronger economy
(19:49):
when the investment demand comes back. That I think is
probably more crucial then let's say a fifty basic points
of a physical deficiting expansion.
Speaker 1 (19:59):
What do you think is about this time around between
monetary policy? Like, I know you had mentioned the potential
for more essentially interest rate cuts in the years ahead,
the sort of counterbalance as impact of tariffs, But doesn't
that risk the currency? Like, how do you think the
government is thinking about that balance? Well?
Speaker 4 (20:18):
I do think that the government is probably trying to
stabilize the exchange rate as much as possible. I think
there are easy options at this point. Right if China
has seen this tariff increase, it could potentially relax the
controls on effects and let the women be depreciate. But
so far we do not necessarily see a lot of
this being used as a weaponry basically by the PBOC
(20:43):
to offset the pain from the tariffs. I think this
is probably due to the going concerns. Number one, the
effects of depreciation is probably easy to implement. However, you
know that probably raised a question to your other trading
partners that what are you trying to do here?
Speaker 1 (20:59):
Right?
Speaker 4 (20:59):
You know, nobody wants to see a bigger side neighbor
type of situation with a competitive exchangeerate depreciations. And at
the same time, I would say that the depreciation may
not necessarily send the right signal to people holding the
one assets or REMAMBI assets on shore were offshore, because
nobody wants to hold on to a currency that is depreciating.
Speaker 1 (21:23):
Uh.
Speaker 4 (21:23):
And it seemed to be continue to be this depreciating
over time, and therefore it may trigger more capital outflows
uh And therefore you know, kind of increasing the pressure
on the effects. So I don't necessarily think that the
exchange rate approach, well, let's say depreciation would be an
easy and efficient approach to really address the domestic issues
(21:45):
over here, and that is why in our view that
the Chinese government probably so far has been refraining using
that as the most important tool to address the growth
concerns well going forward, Whether they would continue to hold
on to the current level in USDC and white terms,
we're not so sure because that also depends on what
the dollar does.
Speaker 3 (22:06):
Right.
Speaker 4 (22:06):
If the dollar actually substantially appreciates against other currencies, I think,
you know, then if the PBOC looks at the c
FATS and they consider the nominal effective exchange rate, they
might need to do something different. But at the moment,
if we're seeing a relatively stable dollar index, I think
that we could potentially see the central bank probably being
(22:27):
willing to hold on to a relatively stable exchange rate
level and at the same time probably use more a
combination of quannotative as well as price based approach domestically
to boost the growth. Many people are saying, oh, you know,
would they be able to do so? Because there is
this famous impossible trinity theory that if you would like
(22:49):
to control your exchange rate, then you probably need a
capital control to help you, you know, at the time
when you want to have your monetary policy independence. But
at this point I think that the PBOC is probably
trying to strike a balance between those two while maintaining
the domestic monetary policy at a level to address the
(23:11):
domestic growth support issues.
Speaker 1 (23:14):
John had mentioned consumer spending. How you know, we just
talked a lot about levers that could be pulled and
things that have worked in the past. I wanted to
ask you about the property sector, and I wonder to
what extent tariffs or this trade war that is escalating
now delays the process of the property market coming back
(23:36):
to life in China.
Speaker 4 (23:39):
Indirectly, not directly. I would say that if the overall
aggregate demand is still going to be seeing this hit
from the tariffs without being you know, fully addressed by
domestic policy easing or further easing, then yes, household income
growth is unlikely to recover anytime soon, and therefore people's
(24:01):
expectations for housing sectors to recover would also be postponed.
So under the big if that China does not fully
address this demand problems at home, then we could potentially
see the delay in the property sector recovery. But I
don't necessarily think that it's necessarily the case. If China
(24:22):
would be able to intensify policy easing in time. You know,
we could see quite some stabilization in the near term,
especially if let's say this Terff shock turns out to
be short lived and you know, the impacts them to
be relatively limited, then we probably could see that it
was China's stimulus. Then there could be more a faster turnaround,
(24:43):
let's say in the property sector. We think that that
could probably take place in the second half of this year,
if let's say we do not see much further Terraff
shock from what we have seen so far in the
very near future. But I think on that different economists
may have different views to someeople may think that they
have to wait until twenty twenty six.
Speaker 3 (25:03):
Well, well, Katia earlier mentioned that Beijing has been relatively
restrained in retaliating against the US in terms of tariffs.
They've imposed some tariffs limited in amount. But if things
do get worse in US relations, what levers does China
have retaliating.
Speaker 4 (25:22):
Well, at the moment, we think that the measures that
we have seen, the reactions have been more measured compared
to even the twenty eighteen time. I think at that
time we have seen probably especially rhetorically more aggressive kind
of exchange of tariff increased spreads, et cetera that this
time we have seen less of. But in the report
(25:43):
that we publish on potential retaliations China could have if
let's say the US imposes are ten percent, twenty up
to sixty or even one hundred percent tariffs, we think
that there are potentially other means that China could could use.
One is the tariff's re act. Have seen a little
bit of you know today, which is China is imposing
(26:04):
tariffs on the imports from the US, including on energy products,
So that I think could probably be one area where
we can see that China can turn up the dial
a little bit, which is if you're seeing the you know,
what US is importing in China is about three times
as much as what China is importing from the US.
And therefore, by definition, you know, even if that China
(26:26):
is imposing the same amount of terraffs on the US imports,
you wouldn't necessarily hurt the US exports that buy as
much simply because China is not buying as much. Right second,
we can also see the export sanctions, for example on
rare earth and other important industrial or special purpose used materials.
(26:46):
And then number three, we could also see let's say,
certain measures being taken on US businesses operating in China.
So I think that at this point we can probably
still safely that there is more US business interests in
China operating than Chinese businesses operating in the US. So
(27:07):
that could be one area that China could be looking at,
But obviously they need to be very careful because that
also could send a message to others, you know, are
you actually hurting you foreign businesses in China? If that
is the case, then would businesses from Europe or Latin
America from Japan feelm still secure?
Speaker 1 (27:25):
Right?
Speaker 4 (27:26):
So those are the measures that we think could potentially
be wielded, but we don't necessarily think that there is
a lot of freedom for China to use it very freely, though,
mainly because that more aggressive use of those measures could
potentially challenge you know, the let's say, the recovery that
China was hoping to see. And beyond that, we can
see other measures such as exchange rey depreciation as well
(27:49):
as threatening to sell US treaty bonds. But I think
those measures are probably seen to be more aggressive, and
therefore China would way more carefully when it comes down
to using such options.
Speaker 1 (28:01):
How long have you been covering China for now? Can
I say, what decorade? Two decades?
Speaker 4 (28:05):
Yes?
Speaker 1 (28:06):
Wow?
Speaker 4 (28:06):
Since two o five?
Speaker 1 (28:07):
So you started when you were twelve? Yeah, exactly, started
at a very young age. So, Helen, you've been covering
China for about two decades. I wanted to ask you
this to get your thoughts because we were just talking
about the reaction that China's had And if you're looking
at this reaction or this retaliation compared to previous years,
(28:31):
what message do you think it sends? You know, we
just spoke about how it's a bit more of a
moderate response maybe, But how would you if you were
looking at the kind of opening gambit or opening moves
of these two nations, how would you kind of define
it or look at it?
Speaker 4 (28:49):
Well, Kadia, I will say that, you know, just at
the face value, the Chinese retaliation so far probably is
not at a very high level as we you know agreed. However,
we're not so sure if they are going to stay
over here right going forward. Neither do we know that
if the tariffs on Chinese products are going to be
(29:09):
added just by ten percent or you know, let's say
a month later be increased by another twenty right. So,
I think with those uncertainties in mind, we can see, however,
that there is still some healthy conversations between the two sides,
especially at a very high level, which I think could
probably be read as the telltale sign that there could
(29:30):
be more negotiations and things are not in the words
shape compared to, for example, twenty twenty. At that point,
I think there was a lot of you know, ultimatum
threatening and a lot of bad will basically in that
relationship of the two most important economic powers in the world.
But right now we can see that the negotiations are
(29:52):
probably happening behind the scene. Then maybe we're not being
allowed to view what exactly happened so far. I think
that right now there are some interesting evidence that there
is still some conversation and things are probably going to
be held at a reasonably rational level. For example, I
think if we're looking at what has been addressed to
(30:15):
TikTok right so far, I think that has been seen
as a commercial decision and both sides has exercised a restraint.
Another thing is that on the the most important TV
show in China, which is on the lunar New Year
Eve that is watched by more than five hundred million
Chinese and my family watched as well. And there was
(30:36):
an interesting episode where an American you know, was invited
to be the host temporarily to introduce some some program,
some performances, and and this American was actually seen as
the you know, the person who brought back not only
brought back to China and donated a very important album
from the Second World War, but also that he is
(30:58):
seen as the symbol of a friendship. This is a
very important gesture. It does not happen very often, you know.
To be honest, I do not recall any other time
in the recent past that an American would be so
high profilingly like introduced at this show. So I think
that this is probably suggesting that the current bilateral relationship
(31:22):
is not as bad as some may have been postulating
and thinking that it has to be a sixty percent
up front tariff, you know, to to to hurt China,
to put China to the corner and start a war.
I don't think that it looks that bad. There probably
is some kind of conversation behind the scene, and we
still believe that rational thinking is over over time, it's
(31:45):
still going to trimuth.
Speaker 1 (31:47):
So if rational thinking will prevail, what could a potential
deal look like between the US and China? I mean,
where where does the relationship go from here?
Speaker 4 (31:57):
Well, I think it's very likely to be an exchange
of interest. And as we have actually put down in
our reports, you know, repeatedly previously, we are expecting, for example,
that China could promise something that the US is very
much hoping to see, especially President Trump is willing to see.
I think that increasing such tariffs and pushing up CPI
(32:19):
inflation in the US could be probably not necessarily a
welcoming sign or a welcoming headline anywhere. However, if let's
say China can promise to buy more oil and gas
from the US and deliver maybe more of it's a
phase one deal, I think that could potentially be something
that the US would be interested in. At the same time,
(32:41):
I think there could be also many other areas where
China can offer to work together with the US, as
President Trump recently were suggesting, you know, on many issues together,
you know, geo, political wise, environment wise, etc. So I
think that at this point we could see that, you know,
if China could add actually proposed to probably purchase more
(33:03):
from the US and probably on the US treasuries, maybe
suggest that that they would keep the market relative stable
by not dumping into the market. That would be helpful.
Promising that you know, riman be to the dollar would
remain relatively stable. That would be another very welcoming gesture.
So I think it's probably going to be a combination
of those measures that would probably help repair the relationship.
(33:26):
In the meantime, the US could probably come more towards China,
not only to remove those tariffs, but also possibly you know,
make adjustment on the technology, sunctions or other type of
issues that are you know, at the moment hurting were
becoming the roadblocks of the economic relationship of the two countries.
Speaker 1 (33:45):
So you were talking about the how they're kind of
where the relationship could go from here and how the
US and China could coordinate. Is that your base case though,
like this scenario you're just laid out. Do you think
that's going to happen?
Speaker 4 (34:00):
Well, I think that's the bookcase scenario for a basic
case scenario. I think the two sides are going to negotiate,
but we're not placing hope on the potential reduction of
teriffs on the Chinese products going into the US. So, yes,
that has been the hopeful scenario that the two sides
could negotiate with each other, hopefully starting soon. But I
(34:21):
would say that it's interesting to see that at this point,
let's say, starting from November last year, and you know,
increasingly now we're seeing, for example, the market is probably
having their views going up and down with the headline news.
And also we're seeing that my competitors are sales side
has been also going up and down with the tariff assumptions.
(34:43):
So at this point it is hard to tell what
turns out. Let's say only ten percent, you know, and
the staying here for another six months, would that necessarily
be a positive surprise for the market. If you look
at the H share today, the equity market, and also
the fxys, I think it seems to be suggesting, yeah,
it is better than investors we're thinking. But how much
(35:03):
longer are we going to see this? You know, market
sentiment staying at this level, could it be affected by
further news and especially potentially bad news on the tariff front.
Speaker 1 (35:13):
We do not know.
Speaker 4 (35:15):
So I'm afraid that at this point we can only
see that, you know, the we are hoping, keeping our
fingers crossed and hoping that the two sides could come
to a resolution sometime soon. But I would say that
judged by the experience we had from twenty eighteen twenty nineteen,
I wouldn't hold my breath for it a.
Speaker 3 (35:35):
Realist, Helen, We've been talking a lot about tariffs, but
I wanted to discuss sanctions. And the reason why I'm
asking is that last week there was major news China's
Deepsek launched an AI model that pretty much rivaled usps
but at a fraction of the cost. Now, this is
(35:55):
raising some questions that perhaps US sanctions on China tech
is not working.
Speaker 4 (35:59):
What do you say to that, Well, I think at
this moment it's probably too early to say that that
the US sanctions on Chinese technology companies are not working yet. However,
I would say that it is important to see that
such technology breakthroughs probably still suggests that there are interesting,
you know, uncertainties still in the environment where you know,
(36:22):
I think that people largely form the consensus view that
China would not necessarily be able to develop as much
of a technology when they are being put under such sanctions.
So I think that at this point the necessity really
drove the much of the innovation and therefore I think
contributed to the technology progress, and that I think could
(36:45):
be used not only by Chinese companies but also by
globally by any companies right since it is open source.
So I think that at this point, from a macro perspective,
I'm not so sure about the corporate level, But if
we speak from the thirty feet birth eye view, I
think this is basically saying that, you know, there are
indeed things that US and China could do together to
(37:08):
push the technology frontier to a higher level instead of
trying to contain each other. And could we actually see that,
you know, being the best example, that we could do
something together and achieve something greater. I certainly hope so.
But at this point, I think there is still a
lack of institutions maybe between the two countries, and probably
(37:32):
potentially some willingness as well to achieve that. But I
think that, you know, at this point, it's interesting to
see that the technology driver of growth, which economists like
Solo probably saw as the most important driver rather than investment,
is still having a chance to come back to China
and contributed to its growth recovery, and that very encouraging and.
Speaker 1 (37:57):
From a macro level, if you're looking at this company
and the reaction globally to what it does and what
it can do from a macro view, from a thirty
thousand for view, you know, as you're modeling economic growth
or looking at forecasts, like did it influence at all
how you think about China in the next couple of years,
and you know, things from GDP to productivity to technology development.
Speaker 4 (38:23):
Good question if we look at the growth purely from
the perspective on the supply side, and people think of, okay,
how much investment you are going to put in more
capital or how much more labor growth are we going
to see, you know, not much because of aging or
at the same time human capital. How much more cramming,
you know, exams and training can you put into one's heads.
(38:46):
I think that we all see constraints. So the only
hope that we're placing in is on TFP total factor productivity.
This is saying that beyond those factory inputs we just mentioned,
there is still this possibility that we can achieve higher
productivity through technology progress, through better allocation of resources through
(39:06):
achieving better scale of the economy, and I think that
China is probably not necessarily going to look that bad
if we look back in five years time on what
we're seeing now, I think, interestingly, in contrast to the
very verish consensus on the Chinese economy, by then we
probably could say that China is, you know, at this
(39:28):
point in twenty twenty five, still preparing to get to
the next level of technology, of economy, of scale through
going overseas, for example, and that I think could probably
be quite interesting, given that right now the consensus is
too one way and pretty much saying that, you know,
nothing could work out of the current Chinese economic development. However,
(39:51):
I think that we have seen more and more evidence
that as capital stock in China goes up, as human
capital stock has been showing also like to be accumulating
very quickly, we would probably see not immediately one after
the other, but occasionally, you know, every few months, some
surprising project like deep seek in different areas that China
(40:14):
could potentially push the technology frontier forward, and hopefully that
could happen in the global context where we could see
more cooperation rather than trade wars.
Speaker 1 (40:26):
Well, it's been an interesting discussion, lots more to unpack
in the days to come, I'm sure. Helen, thank you
so much for joining us today.
Speaker 4 (40:33):
Thank you for having me.
Speaker 1 (40:35):
You've been listening to Asia Centric from Bloomberg Intelligence. You
can find more episodes on Apple Podcasts, Spotify, or wherever
you get your podcasts. I'm Katy Dimitrieva again, and you
can find me on LinkedIn or on the Bloomberg terminal.
Speaker 2 (40:49):
And I'm John Lee.
Speaker 3 (40:50):
You can also find me on LinkedIn. And this podcast
was produced and edited by Clara Chen And thanks for listening.
You're listening to Asia Centric from Bloomberg Intelligence, the podcast
that explores the big ideas and trends moving money across
the region. I'm Katy Dmitrieva here in Hong Kong, and I'm.
Speaker 2 (00:12):
John Lee on assignment in Seoul, South Korea. Katya, the
trade war is finally upon us.
Speaker 1 (00:18):
Yes, it feels like it's been a long time coming,
but it has finally happened. It's kicked off. We're recording
this on February fourth. We should know it for our
dear listeners, because a lot could happen between now and
when the episode airs. But as of right now, what
we know is that Mexico and Canada, two of America's
largest trading partners, have managed to escape tariffs, at least
(00:41):
they're on hold for now. And as for China, well
that's where the trade war is actually kicking off. The
US has imposed ten percent tariffs on China across the board,
and China has fought back.
Speaker 2 (00:52):
Everything's still in a flux at the moment, lots of uncertainties,
but what we do know is that the world's two
largest economies, in US and China, are in a trade war,
and that has huge ramifications for the whole global trade.
Speaker 3 (01:06):
Yeah.
Speaker 1 (01:06):
Absolutely, and I can't think of a better time to
have our guest here today to walk us through all
this and definitely what it means for Asia as a whole.
Joining us today is Helen Chow. She's the chief economist
for Greater China Bank of America. Welcome to the show, Helen.
Speaker 4 (01:22):
Nice meeting you all.
Speaker 1 (01:24):
Helen. I wanted to start with the topic of the day.
We're going to be talking a lot about China, but
tariff specifically. So we know that the deadline passed, We've
now got ten percent tariffs on Chinese goods. China's retaliated
as well, So what's going to be the impact.
Speaker 4 (01:42):
Well, I would say, first of all, the start of
this tariff imposition overnight was probably nothing too surprising. It
was well telegraphed so that actually people were largely expecting it.
So I would say also the second thing is that
this is not the first time that China is seeing
the the tariffs of being imposed on Chinese imports into
(02:02):
the US, mainly because that if you look at what
has been imposed back in twenty eighteen and then later
in twenty nineteen, most of those tariffs actually remained in place.
So in other words, we are seeing just on top
of an existing set of on average about twenty percent
of the tariffs on the Chinese products being imported into
the US, we're seeing a blanket edition of about another
(02:26):
ten percent on top of that. So this is actually
what we see an escalation of what is already in place,
rather than a completely introduction of something new. That said,
I would say that still going to hurt the Chinese
economy even with the expectation, even with the fact that
this is not completely new, we are expecting the overall
growth to be hurt, probably more visibly starting from a
(02:50):
second quarter.
Speaker 1 (02:51):
How much do you think we are.
Speaker 4 (02:53):
Expecting that in sequential terms, potentially removing as much as
more than two percent points Q and Q analyzed terms,
so in year terms it's probably much less. So, you know,
moving the GDP growth from five percent as of you know,
last year or the last quarter five point four percent
to maybe in first quarter now, I think the risks
(03:15):
are increasingly higher that we're seeing the possible negative impact
maybe in Q one already hurting the numbers, and we
could see this number coming below five percent for the
first quarter and for the second quarter, I think the
risks are that we can see it going a little
bit bigger over time. In Q three and Q four,
I think it could probably look a bit better when
(03:36):
Chinese exports find alternative routes to send the products, probably
you know, without being counted as Chinese director exports to
the US, or they can figure out some exemptions, and
therefore I think the impact on growth might be a
little bit less. And secondly, also because of the potential
Chinese policy easing measures that they're going to introduce that
is also going to help offset the headwinds coming from
(03:59):
export side. So for those reasons, I think that Q
three and the Q four will look better and the
risks are still probably I was say, relatively balanced on
either side around our GDP growth forecast this year at
four point five percent.
Speaker 1 (04:12):
I want to let John ask another question. I know
something you wanted to ask, but just given your answer
just now, I wonder if you can just quantify for
listeners how big of a deal this is. At the beginning,
you know that it was ten percent tariffs, much lower
than the sixty percent promise during the campaign trail, and
China retaliated, but not to the degree that the US
(04:34):
has imposed heariffs, So like, how do you quantify this?
Maybe on a scale of like one to ten. How
should we be thinking about this?
Speaker 4 (04:42):
Well, great question. I do recall that many of our clients,
many of our colleagues, have been asking about how about
sixty percent up front? Right? That probably was seen as
one of the you know, very likely but worse scenario
compared to what we currently see. I would remind everyone
that not only there was this potential scenario where there
(05:04):
could be a sixty percent up front, there was also
this mentioning during the campaign rally that President Trump back
then also mentioned one hundred percent on Chinese products, And therefore,
I would like to remind everyone then maybe compared to
one hundred percent, ten percent is indeed a very small
amount of teriff punishment. But the problem is two things.
(05:28):
Number one is that the tariffs on Chinese products, probably one,
compared to those on the Mexican and Canadian imports, tend
to be more permanent, which means if they are introduced,
they probably will not be taken away. In other words,
you know, if you look at the Mexico and also
the Canadian twenty five percent, it was set out to
(05:50):
be higher. However, it was avoided basically a few hours
before it is going into action, and even if that
goes into action, it probably wouldn't stay very long, mainly
also because of the fact that this would hurt the
US economy and especially on the consumer side a bit
more visibly. But for China, I think now that ten percent,
(06:12):
you know, while it does not necessarily look like as
bad as one hundred percent, I think it has the
potential challenge that here it also implies that it is
going to stay on top of those existing twenty and
therefore will end up with thirty, so that is definitely
more hurtful. And secondly, I would say beyond these headline numbers,
(06:32):
I think we also need to see into the details.
For example, you know, on China, what happens to the
exemptions of the previous you know tariffs that a lot
of the products, the producers of those products have been
applying and actually got waived of those tariffs temporarily many
of them were expiring and we probably are about to
expire in twenty twenty five. So whether those exemptions can
(06:55):
be granted were extended I think could also be something
to explore, which we do not know at the answer
to number three. I think also, you know, the role
on the small package, especially the TERRAFF waiver policies in
the past on those small packages I think now have
been revoked. So does it mean that these you know,
(07:18):
small packages would have a completely different way of reporting
to the customs? Are they going to buy the ten
percent or are they going by the ten percent plus?
You know, some average consumer goods are subject to about
four percent of terraffs, so is that going to be
on average fourteen percent? We still do not know. There
are too many things right now. As you said, many
(07:39):
things are still developing, and you know, it's hard to
tell how it would be exercise. But so far, I
think we have already found that in almost every single
dimension there are many things that.
Speaker 1 (07:49):
We do not know.
Speaker 2 (07:51):
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Speaker 3 (08:12):
Chair Helen, you mentioned that the China's economy is likely
to fall to some like four point five percent this
year from five percent last year. How will these tariffs
impact the different sectors which will be hurt the most well?
Speaker 4 (08:28):
When we are having this forecast on GP we do
not specifically make by industry forecast or by sector, but
we would imagine that this year the external sectors will
probably be hurt more compared to the more domestic oriented
ones because we are expecting such uncertainty around the tariffs,
(08:49):
especially coming from the US, could potentially derail this external
sector recovery that we saw from last year. A lot
of those sectors in the in last year were actually
I think benefiting from the fact that while domestic demand
has been quite weak and the PPI has been staying
in the deflationary territory and therefore their causes relatively low,
(09:11):
what they have seen is rather robust demand coming from
the US and elsewhere. I would say that for those
that rely particularly on the US demand, I think the
challenges that this year whether they would be able to
go through twenty twenty five, especially against a very high
base in twenty twenty four, when many of those US
importers probably frontloaded there in their orders and try to
(09:35):
take more inventory. At that point, they should have already
thought about twenty twenty five when such peak demand goes over,
and they probably need to prepare for some period of
quietness or think about trade diversion. So that, I think
is the most important thing that we are actually putting
in our forecast without explicitly giving let's say a sector
(09:59):
growth or production activity growth forecast. Second, I would also
mention that while the external sectors, you know, for those
that are actually more reliant on US demand seems to
be more under pressure last year, China's export rebound was
not completely based on just the US. If you look
at what we have published, we actually were saying that
(10:21):
last year a lot of the demand that came from
the global South rather than global North. We basically put Japan, US, Europe,
and also Australia and Canada together and look at China's
exports and we found that for these destinations export growth
have held up reasonably well, but they did not jump up.
(10:42):
What has jumped up and overtaken their large share from
the past was actually the global South. If we look
at you know, Latin America, Africa, Asian countries thousand countries
are becoming very important nowadays, as well as Russia, India
and the Middle East countries as well as the Eastern
European countries. We also saw a lot of the exports
(11:05):
going there. I think that is partly related to the
Chinese companies going overseas them so that I think could
be more sustainable coming back. And you know, looking at
the tariff impact, I would say that we probably cannot
be just putting everything into one block and say that
external sector is going to face a very tough time.
I think depending on the destination market, if it is
(11:28):
the US and primarily the US, I think that this
is probably the time that we need to see some diversion.
But otherwise I think that for the Global South, I
think those exportsers are probably still going to do well. Meanwhile,
if we look at the domestic economy, those that are
you know, more reliant on the domestic demand. For example,
(11:49):
you know a lot of people were saying that the
consumer subsidies in China are finally coming and in the
first three days of the Chinese New Year, we actually
saw the data from t MAOL saying that they have
seen these cell phone sales going through the roof growing
by more than fifty percent, you know, year on year
compared to the first or three days of the last
(12:09):
Golden Week holidays around Lunar New Year in twenty twenty four.
And this is probably because that there was this subsidy
by as much as fifteen twenty percent from the local
governments that if you buy a cell phone, then you
can be subsidized, and that I think could probably be
you know, some of the spotlight areas that we should
be looking out for this year within Chinese economy to
(12:32):
see that when policy comes out to help offset the
pain from the tariffs impact, which sectors could potentially do better.
Speaker 1 (12:39):
Is there a limit to that though, like in terms
of the stimulus that China can do, like what level
of tariffs I guess or economic pain would kind of
cross that threshold to where Chinese officials, you know, are
kind of stuck. They can't necessarily give more of these
incentives to consumers or change the mortgage rates or whatever
(13:01):
other subsidies or stimulus they have.
Speaker 4 (13:04):
So Kadia compared to twenties eighteen twenty nineteen, China probably
has less. I would a levers to pull given that,
you know, the domesa demand is less robust, you know,
and then the room for easing on both physical and
monetary policy fronts seems to be more limited right now. However,
I wouldn't necessarily say that we are going to run
(13:26):
into a constraint in any time in the near future.
For example, on the monetary side, we're expecting potential tripleard
cuts as well as interest rate cuts. We're expecting as
much as forty basic points of seven day reverse report
rate cuts this year.
Speaker 1 (13:41):
And what is that, just for listeners who aren't familiar.
Speaker 4 (13:45):
That is the policy interest rate in China. It's comparable
to the federal funds deposit rate. The federal fund rate
cuts in the US would generally be seen to be
conducive to more accommodative financial conditions, and so is the
rate cut in China. Policy rate cut lowers the cost
potentially for the borrowing in the interbank market, so that
(14:06):
actually it could be seen as being helpful to ultimately
reducing the borring cost for households as well as corporate
And if they cut it by let's say twenty basis
points each time, and we have probably at least twice
as much of twice of such cuts. Going forward, I
think we could potentially see a boost to boast the
(14:27):
investment as well as a consumer demand at the same time.
Physical deficit is another area where China can do more
of well. You know, of course, not all the deficit
will be put onto the consumer subsidies that we just
mentioned on home appliances, cell phones, paths, or cars. I
think that a lot of that has also been put
(14:47):
into infrastructure investment, et cetera. So physical deficit that we're
expecting this year to grow from three percent last year
to three point five percent for economy that is growing
with a sub substantially you know, at a level that
is substantially lower than its long term potential. I would
say that China has been perhaps almost too disciplined on
(15:10):
the physical side, that they have not really borrowed as
much as they could, and they have kept the central
government's budget at a pretty conservative level with a deficit
running at only about three percent. We definitely see the
upset to it, and we think they can increase it
to at least at three point five this year, if
not higher. And could that be helpful well, depending on
(15:32):
how they use it, And there are many other, you know,
I would say potential policy tools that they can use
beyond the monetary policy and those physical deficits that we
just mentioned to relax the equidity conditions of the local
governments and potentially allow them to pay back their debt
to local companies as well as pay employees and the
(15:53):
boost to reboot the local economy. So we think that
there is quite a lot more that they can do.
But this is not all all for the sake of
offsetting the impact from the tariffs. I think that Chinese
domesad economy is in a state that requires and the
warrants more policy eating, so that they definitely should do more.
Speaker 3 (16:12):
Helen. It feels like we've been talking about this issue
for a number of years now a week domestic economy
in China. Now, a lot of global investors have been
anticipating like almost like a big bang in terms of stimulus. Now,
all these stimulus measures that you just mentioned, do you
think there'll be enough to appease or satisfying.
Speaker 4 (16:30):
Investors, Well, it's a jo I think that's a little
bit hard to guess. How much is the institutional investors
expecting and you know by when the market will be
saying Oh, that's good enough. Clearly that China is not
delivering something like a Basuoka package that many probably have
been hoping for. For example, many were in the past
(16:53):
probably two years, have been hoping for China to deliver something,
you know, along the lines of giving helicopter dropping ash
to everyone, so that you know, like what the US
did to the American household, writing the blank checks, so
that you can actually get an immediate boost to consumer
demand right away. That I think has pretty much been
(17:13):
seen as being very unlikely by now. But you can
see that there are alternative measures that have been adopted
that are actually designed to do something similar. For example,
the subsidy program, right the consumer product trade in So
this treateding program started last year and then it covers
from cars to home appliance and also now to technology products.
Speaker 1 (17:35):
Pretty successful, right.
Speaker 4 (17:37):
I think so. Even some of your colleagues over here
told me that she bought quite a lot using the
subsidies because she was getting married, so I trust her.
I wasn't able to use it, but I have heard
a lot of people saying that that has been pretty
effective because they probably were still hesitating in terms of
if they should buy a new one or they stay
(17:58):
put with the existing gear. But then this really gives
them the push to say that okay, let me frontload
the person decision and let me get it done. So
I think that those turn out to be pretty effective,
and according to the Ministry of Commerce, it has really
boosted retail sales quite substantially, especially in the second half
of last year. But I would say would that be enough.
(18:21):
Probably not, especially not only from a market perspective to
make all the investors happy, which tend to be more transient.
I think it's more important to see if we are
seeing all these boosts to the economy to ultimately deliver
the productivity growth that we were looking for, the technology
progress that we were hoping to see, so that ultimately
(18:44):
we can see more sustainable growth down the road. That's
actually where we mentioned that we need to see probably
more than just a consumer subsidy program, more than the
physical deficit expansion, and not just the interest rate and
trip our cuts. Beyond that, we need to see that
actually if there could be some measures being taken to
(19:06):
promote the positive incentives in our view, in the system
so as to allow people to work towards their individual
goals more efficiently. When we mentioned that, I think a
lot of people were saying, what kind of positive incentives
are you talking about? Well, what we mean is it's
not just about these headline you know, physical and monetary
(19:27):
policy measures, but instead we hope to see that for
governmental officials, for SOE managers, as well as private individuals,
business owners and households. We hope to see more upside
so that they could potentially work harder and more willingly
take risks, and therefore we could see a stronger economy
(19:49):
when the investment demand comes back. That I think is
probably more crucial then let's say a fifty basic points
of a physical deficiting expansion.
Speaker 1 (19:59):
What do you think is about this time around between
monetary policy? Like, I know you had mentioned the potential
for more essentially interest rate cuts in the years ahead,
the sort of counterbalance as impact of tariffs, But doesn't
that risk the currency? Like, how do you think the
government is thinking about that balance? Well?
Speaker 4 (20:18):
I do think that the government is probably trying to
stabilize the exchange rate as much as possible. I think
there are easy options at this point. Right if China
has seen this tariff increase, it could potentially relax the
controls on effects and let the women be depreciate. But
so far we do not necessarily see a lot of
this being used as a weaponry basically by the PBOC
(20:43):
to offset the pain from the tariffs. I think this
is probably due to the going concerns. Number one, the
effects of depreciation is probably easy to implement. However, you
know that probably raised a question to your other trading
partners that what are you trying to do here?
Speaker 1 (20:59):
Right?
Speaker 4 (20:59):
You know, nobody wants to see a bigger side neighbor
type of situation with a competitive exchangeerate depreciations. And at
the same time, I would say that the depreciation may
not necessarily send the right signal to people holding the
one assets or REMAMBI assets on shore were offshore, because
nobody wants to hold on to a currency that is depreciating.
Speaker 1 (21:23):
Uh.
Speaker 4 (21:23):
And it seemed to be continue to be this depreciating
over time, and therefore it may trigger more capital outflows
uh And therefore you know, kind of increasing the pressure
on the effects. So I don't necessarily think that the
exchange rate approach, well, let's say depreciation would be an
easy and efficient approach to really address the domestic issues
(21:45):
over here, and that is why in our view that
the Chinese government probably so far has been refraining using
that as the most important tool to address the growth
concerns well going forward, Whether they would continue to hold
on to the current level in USDC and white terms,
we're not so sure because that also depends on what
the dollar does.
Speaker 3 (22:06):
Right.
Speaker 4 (22:06):
If the dollar actually substantially appreciates against other currencies, I think,
you know, then if the PBOC looks at the c
FATS and they consider the nominal effective exchange rate, they
might need to do something different. But at the moment,
if we're seeing a relatively stable dollar index, I think
that we could potentially see the central bank probably being
(22:27):
willing to hold on to a relatively stable exchange rate
level and at the same time probably use more a
combination of quannotative as well as price based approach domestically
to boost the growth. Many people are saying, oh, you know,
would they be able to do so? Because there is
this famous impossible trinity theory that if you would like
(22:49):
to control your exchange rate, then you probably need a
capital control to help you, you know, at the time
when you want to have your monetary policy independence. But
at this point I think that the PBOC is probably
trying to strike a balance between those two while maintaining
the domestic monetary policy at a level to address the
(23:11):
domestic growth support issues.
Speaker 1 (23:14):
John had mentioned consumer spending. How you know, we just
talked a lot about levers that could be pulled and
things that have worked in the past. I wanted to
ask you about the property sector, and I wonder to
what extent tariffs or this trade war that is escalating
now delays the process of the property market coming back
(23:36):
to life in China.
Speaker 4 (23:39):
Indirectly, not directly. I would say that if the overall
aggregate demand is still going to be seeing this hit
from the tariffs without being you know, fully addressed by
domestic policy easing or further easing, then yes, household income
growth is unlikely to recover anytime soon, and therefore people's
(24:01):
expectations for housing sectors to recover would also be postponed.
So under the big if that China does not fully
address this demand problems at home, then we could potentially
see the delay in the property sector recovery. But I
don't necessarily think that it's necessarily the case. If China
(24:22):
would be able to intensify policy easing in time. You know,
we could see quite some stabilization in the near term,
especially if let's say this Terff shock turns out to
be short lived and you know, the impacts them to
be relatively limited, then we probably could see that it
was China's stimulus. Then there could be more a faster turnaround,
(24:43):
let's say in the property sector. We think that that
could probably take place in the second half of this year,
if let's say we do not see much further Terraff
shock from what we have seen so far in the
very near future. But I think on that different economists
may have different views to someeople may think that they
have to wait until twenty twenty six.
Speaker 3 (25:03):
Well, well, Katia earlier mentioned that Beijing has been relatively
restrained in retaliating against the US in terms of tariffs.
They've imposed some tariffs limited in amount. But if things
do get worse in US relations, what levers does China
have retaliating.
Speaker 4 (25:22):
Well, at the moment, we think that the measures that
we have seen, the reactions have been more measured compared
to even the twenty eighteen time. I think at that
time we have seen probably especially rhetorically more aggressive kind
of exchange of tariff increased spreads, et cetera that this
time we have seen less of. But in the report
(25:43):
that we publish on potential retaliations China could have if
let's say the US imposes are ten percent, twenty up
to sixty or even one hundred percent tariffs, we think
that there are potentially other means that China could could use.
One is the tariff's re act. Have seen a little
bit of you know today, which is China is imposing
(26:04):
tariffs on the imports from the US, including on energy products,
So that I think could probably be one area where
we can see that China can turn up the dial
a little bit, which is if you're seeing the you know,
what US is importing in China is about three times
as much as what China is importing from the US.
And therefore, by definition, you know, even if that China
(26:26):
is imposing the same amount of terraffs on the US imports,
you wouldn't necessarily hurt the US exports that buy as
much simply because China is not buying as much. Right second,
we can also see the export sanctions, for example on
rare earth and other important industrial or special purpose used materials.
(26:46):
And then number three, we could also see let's say,
certain measures being taken on US businesses operating in China.
So I think that at this point we can probably
still safely that there is more US business interests in
China operating than Chinese businesses operating in the US. So
(27:07):
that could be one area that China could be looking at,
But obviously they need to be very careful because that
also could send a message to others, you know, are
you actually hurting you foreign businesses in China? If that
is the case, then would businesses from Europe or Latin
America from Japan feelm still secure?
Speaker 1 (27:25):
Right?
Speaker 4 (27:26):
So those are the measures that we think could potentially
be wielded, but we don't necessarily think that there is
a lot of freedom for China to use it very freely, though,
mainly because that more aggressive use of those measures could
potentially challenge you know, the let's say, the recovery that
China was hoping to see. And beyond that, we can
see other measures such as exchange rey depreciation as well
(27:49):
as threatening to sell US treaty bonds. But I think
those measures are probably seen to be more aggressive, and
therefore China would way more carefully when it comes down
to using such options.
Speaker 1 (28:01):
How long have you been covering China for now? Can
I say, what decorade? Two decades?
Speaker 4 (28:05):
Yes?
Speaker 1 (28:06):
Wow?
Speaker 4 (28:06):
Since two o five?
Speaker 1 (28:07):
So you started when you were twelve? Yeah, exactly, started
at a very young age. So, Helen, you've been covering
China for about two decades. I wanted to ask you
this to get your thoughts because we were just talking
about the reaction that China's had And if you're looking
at this reaction or this retaliation compared to previous years,
(28:31):
what message do you think it sends? You know, we
just spoke about how it's a bit more of a
moderate response maybe, But how would you if you were
looking at the kind of opening gambit or opening moves
of these two nations, how would you kind of define
it or look at it?
Speaker 4 (28:49):
Well, Kadia, I will say that, you know, just at
the face value, the Chinese retaliation so far probably is
not at a very high level as we you know agreed. However,
we're not so sure if they are going to stay
over here right going forward. Neither do we know that
if the tariffs on Chinese products are going to be
(29:09):
added just by ten percent or you know, let's say
a month later be increased by another twenty right. So,
I think with those uncertainties in mind, we can see, however,
that there is still some healthy conversations between the two sides,
especially at a very high level, which I think could
probably be read as the telltale sign that there could
(29:30):
be more negotiations and things are not in the words
shape compared to, for example, twenty twenty. At that point,
I think there was a lot of you know, ultimatum
threatening and a lot of bad will basically in that
relationship of the two most important economic powers in the world.
But right now we can see that the negotiations are
(29:52):
probably happening behind the scene. Then maybe we're not being
allowed to view what exactly happened so far. I think
that right now there are some interesting evidence that there
is still some conversation and things are probably going to
be held at a reasonably rational level. For example, I
think if we're looking at what has been addressed to
(30:15):
TikTok right so far, I think that has been seen
as a commercial decision and both sides has exercised a restraint.
Another thing is that on the the most important TV
show in China, which is on the lunar New Year
Eve that is watched by more than five hundred million
Chinese and my family watched as well. And there was
(30:36):
an interesting episode where an American you know, was invited
to be the host temporarily to introduce some some program,
some performances, and and this American was actually seen as
the you know, the person who brought back not only
brought back to China and donated a very important album
from the Second World War, but also that he is
(30:58):
seen as the symbol of a friendship. This is a
very important gesture. It does not happen very often, you know.
To be honest, I do not recall any other time
in the recent past that an American would be so
high profilingly like introduced at this show. So I think
that this is probably suggesting that the current bilateral relationship
(31:22):
is not as bad as some may have been postulating
and thinking that it has to be a sixty percent
up front tariff, you know, to to to hurt China,
to put China to the corner and start a war.
I don't think that it looks that bad. There probably
is some kind of conversation behind the scene, and we
still believe that rational thinking is over over time, it's
(31:45):
still going to trimuth.
Speaker 1 (31:47):
So if rational thinking will prevail, what could a potential
deal look like between the US and China? I mean,
where where does the relationship go from here?
Speaker 4 (31:57):
Well, I think it's very likely to be an exchange
of interest. And as we have actually put down in
our reports, you know, repeatedly previously, we are expecting, for example,
that China could promise something that the US is very
much hoping to see, especially President Trump is willing to see.
I think that increasing such tariffs and pushing up CPI
(32:19):
inflation in the US could be probably not necessarily a
welcoming sign or a welcoming headline anywhere. However, if let's
say China can promise to buy more oil and gas
from the US and deliver maybe more of it's a
phase one deal, I think that could potentially be something
that the US would be interested in. At the same time,
(32:41):
I think there could be also many other areas where
China can offer to work together with the US, as
President Trump recently were suggesting, you know, on many issues together,
you know, geo, political wise, environment wise, etc. So I
think that at this point we could see that, you know,
if China could add actually proposed to probably purchase more
(33:03):
from the US and probably on the US treasuries, maybe
suggest that that they would keep the market relative stable
by not dumping into the market. That would be helpful.
Promising that you know, riman be to the dollar would
remain relatively stable. That would be another very welcoming gesture.
So I think it's probably going to be a combination
of those measures that would probably help repair the relationship.
(33:26):
In the meantime, the US could probably come more towards China,
not only to remove those tariffs, but also possibly you know,
make adjustment on the technology, sunctions or other type of
issues that are you know, at the moment hurting were
becoming the roadblocks of the economic relationship of the two countries.
Speaker 1 (33:45):
So you were talking about the how they're kind of
where the relationship could go from here and how the
US and China could coordinate. Is that your base case though,
like this scenario you're just laid out. Do you think
that's going to happen?
Speaker 4 (34:00):
Well, I think that's the bookcase scenario for a basic
case scenario. I think the two sides are going to negotiate,
but we're not placing hope on the potential reduction of
teriffs on the Chinese products going into the US. So, yes,
that has been the hopeful scenario that the two sides
could negotiate with each other, hopefully starting soon. But I
(34:21):
would say that it's interesting to see that at this point,
let's say, starting from November last year, and you know,
increasingly now we're seeing, for example, the market is probably
having their views going up and down with the headline news.
And also we're seeing that my competitors are sales side
has been also going up and down with the tariff assumptions.
(34:43):
So at this point it is hard to tell what
turns out. Let's say only ten percent, you know, and
the staying here for another six months, would that necessarily
be a positive surprise for the market. If you look
at the H share today, the equity market, and also
the fxys, I think it seems to be suggesting, yeah,
it is better than investors we're thinking. But how much
(35:03):
longer are we going to see this? You know, market
sentiment staying at this level, could it be affected by
further news and especially potentially bad news on the tariff front.
Speaker 1 (35:13):
We do not know.
Speaker 4 (35:15):
So I'm afraid that at this point we can only
see that, you know, the we are hoping, keeping our
fingers crossed and hoping that the two sides could come
to a resolution sometime soon. But I would say that
judged by the experience we had from twenty eighteen twenty nineteen,
I wouldn't hold my breath for it a.
Speaker 3 (35:35):
Realist, Helen, We've been talking a lot about tariffs, but
I wanted to discuss sanctions. And the reason why I'm
asking is that last week there was major news China's
Deepsek launched an AI model that pretty much rivaled usps
but at a fraction of the cost. Now, this is
(35:55):
raising some questions that perhaps US sanctions on China tech
is not working.
Speaker 4 (35:59):
What do you say to that, Well, I think at
this moment it's probably too early to say that that
the US sanctions on Chinese technology companies are not working yet. However,
I would say that it is important to see that
such technology breakthroughs probably still suggests that there are interesting,
you know, uncertainties still in the environment where you know,
(36:22):
I think that people largely form the consensus view that
China would not necessarily be able to develop as much
of a technology when they are being put under such sanctions.
So I think that at this point the necessity really
drove the much of the innovation and therefore I think
contributed to the technology progress, and that I think could
(36:45):
be used not only by Chinese companies but also by
globally by any companies right since it is open source.
So I think that at this point, from a macro perspective,
I'm not so sure about the corporate level, But if
we speak from the thirty feet birth eye view, I
think this is basically saying that, you know, there are
indeed things that US and China could do together to
(37:08):
push the technology frontier to a higher level instead of
trying to contain each other. And could we actually see that,
you know, being the best example, that we could do
something together and achieve something greater. I certainly hope so.
But at this point, I think there is still a
lack of institutions maybe between the two countries, and probably
(37:32):
potentially some willingness as well to achieve that. But I
think that, you know, at this point, it's interesting to
see that the technology driver of growth, which economists like
Solo probably saw as the most important driver rather than investment,
is still having a chance to come back to China
and contributed to its growth recovery, and that very encouraging and.
Speaker 1 (37:57):
From a macro level, if you're looking at this company
and the reaction globally to what it does and what
it can do from a macro view, from a thirty
thousand for view, you know, as you're modeling economic growth
or looking at forecasts, like did it influence at all
how you think about China in the next couple of years,
and you know, things from GDP to productivity to technology development.
Speaker 4 (38:23):
Good question if we look at the growth purely from
the perspective on the supply side, and people think of, okay,
how much investment you are going to put in more
capital or how much more labor growth are we going
to see, you know, not much because of aging or
at the same time human capital. How much more cramming,
you know, exams and training can you put into one's heads.
(38:46):
I think that we all see constraints. So the only
hope that we're placing in is on TFP total factor productivity.
This is saying that beyond those factory inputs we just mentioned,
there is still this possibility that we can achieve higher
productivity through technology progress, through better allocation of resources through
(39:06):
achieving better scale of the economy, and I think that
China is probably not necessarily going to look that bad
if we look back in five years time on what
we're seeing now, I think, interestingly, in contrast to the
very verish consensus on the Chinese economy, by then we
probably could say that China is, you know, at this
(39:28):
point in twenty twenty five, still preparing to get to
the next level of technology, of economy, of scale through
going overseas, for example, and that I think could probably
be quite interesting, given that right now the consensus is
too one way and pretty much saying that, you know,
nothing could work out of the current Chinese economic development. However,
(39:51):
I think that we have seen more and more evidence
that as capital stock in China goes up, as human
capital stock has been showing also like to be accumulating
very quickly, we would probably see not immediately one after
the other, but occasionally, you know, every few months, some
surprising project like deep seek in different areas that China
(40:14):
could potentially push the technology frontier forward, and hopefully that
could happen in the global context where we could see
more cooperation rather than trade wars.
Speaker 1 (40:26):
Well, it's been an interesting discussion, lots more to unpack
in the days to come, I'm sure. Helen, thank you
so much for joining us today.
Speaker 4 (40:33):
Thank you for having me.
Speaker 1 (40:35):
You've been listening to Asia Centric from Bloomberg Intelligence. You
can find more episodes on Apple Podcasts, Spotify, or wherever
you get your podcasts. I'm Katy Dimitrieva again, and you
can find me on LinkedIn or on the Bloomberg terminal.
Speaker 2 (40:49):
And I'm John Lee.
Speaker 3 (40:50):
You can also find me on LinkedIn. And this podcast
was produced and edited by Clara Chen And thanks for listening.
Hosts And Creators
John Lee
Tom Corbett
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