May 22, 2024 • 25 mins
Featuring:
Linda Lew, Bloomberg's China Autos Reporter, discusses a potential Chinese plan to raise tariffs on imported American and European vehicles.
Peter Elstrom, Bloomberg Executive Editor for Asia Technology, on ASML and TSMC's ability to disable chipmaking machines in Taiwan.
Carl Tannenbaum, Chief Economist at Northern Trust, joins the program from our Hong Kong studio for a look at the global economy.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:09):
This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
You can join Brian Curtis and myself for the stories,
making news and moving markets in the APAC region. You
can subscribe to the show anywhere you get your podcast
and always on Bloomberg Radio, the Bloomberg Terminal, and the
Bloomberg Business app.
Speaker 3 (00:27):
A China trade lobby group says that China may consider
raising temporary tearriffs to twenty five percent on imported cars
with large engines. Joining us now for some discussion of
this is Linda lu Bloomberg China Cars Reporter. So, Linda,
you say in your story that we had two hundred
and fifty thousand cars with engines more than two and
(00:47):
a half liters imported into China twenty twenty three. I'm
curious whether most of those come from the US and
Europe And sounds like a big number, quarter of a million,
is it.
Speaker 1 (01:00):
Yeah, it's interesting looking at this right now, we're trying
to figure out from the custom stata which automakers will
be impacted. But if you compare that to the number
of electric vehicles that China exports, it's actually still smaller.
China exported one point five million evs last year, with
(01:20):
about six hundred and thirty eight thousand going to Europe
and North America. Like with the US, which already had
a high tariff, last year, they only received about fifty
two thousand evs from China.
Speaker 2 (01:34):
So I'm imagining names like BMW, Audi, Mercedes, Benz and
then from the US side, Cadillac some of the luxury models.
Would that be a safe assumption.
Speaker 1 (01:45):
Yes, that's right. China now is such a big automaking country,
they more than capable of essentially filling audio demand for
cars domestically. But obviously there's some luxury models that are
not made in China, and like you said, those brands
would be the usual suspects when you're looking at imported
(02:06):
cars into China.
Speaker 3 (02:08):
So this came from an interview from Leopin who is
the chief expert of China Automotive Technology and Research Center.
It was in the Global Times newspaper, and I think
I'm not sure whether or not we would have picked
up on it so much except for the China Chamber
of Commerce to the EU talked about this and said
that there would be implications, what would have to happen
(02:28):
next for this to become policy.
Speaker 1 (02:30):
Yeah, we also were looking at the Global Times interview
yesterday and not sure how much of an indication this
is that China may eventually move to raise the tariffs.
We're all really waiting to see whether an official director
will come from one of China's government agencies, such as
(02:53):
the Ministry of Commerce or Customs, where they will officially
announce the raising of the tariffs.
Speaker 2 (03:00):
It feels like we're in a new phase of a
trade war, wouldn't you say, when it comes to vehicles,
particularly evs that are maybe exported from China to other markets,
and now we're looking at possible punitive tariffs, temporary though
they may be, that would target European and American manufactured
luxury cars.
Speaker 1 (03:20):
Yes, I completely agree. And actually since the EU launching
the anti subsidy investigation into Chinese evs, we've seen a
whole series of tips for tat between China and the
EU and obviously the US and January does ye China
announced in anti dumping investigation into Brandy, which we think
(03:43):
maybe a response to the EU investigation, and then with
the US essentially quadrupling the imput tariffs for Chinese evs.
Then in recent weeks we also saw China announcing another
investigation into chemicals are being dumped from the EU. So
there's a whole series of moves that I would say
(04:03):
is really just developing this trade war.
Speaker 3 (04:08):
Behind the scenes here, Linda, how much is this affecting
the status of some of the jvs in China that
involves so many foreign companies, you know, pairing up with
local companies.
Speaker 1 (04:19):
I would say with these tariffs, it's probably not going
to have such a big impact on the jvs because
a lot of their sales in China come from locally
manufactured vehicles, and there the trenders in the Chinese market
these days. The jvs such as General Motors, are the
(04:40):
one with Ford, as well as the European joint ventures.
They're all essentially suffering a hit to their sales because
of China's fast transitioned to evs, and that's something they
don't have strong offerings in and they're trying very hard
to catch up.
Speaker 2 (04:56):
Linda, do you have a sense of what this may
mean for Tesla, an American company with a factory in
Shanghai making vehicles not only for the domestic market, but
for exportation as well.
Speaker 1 (05:07):
Yeah, things could be dicey for Tesla because, as Elon
Musk himself has said, the Shanghai factory is one of
Tesla's most efficient and they turned out about half of
Tesla's global deliveries last year. And so if the EU
were to levy tariffs on Chinese made EV's going into
(05:29):
the block, that could be a hit to Tesla. As
for the US North American markets, I think Tesla's local
factories there supply that market. But obviously with Chaye tensines
getting worse, it's not going to be good for any
business that's trying to do business over the world.
Speaker 3 (05:49):
And just because we're talking about two and a half
leaders here on cars and these are larger engine cars,
so are a lot of the jvs and local domestic
manufacturers that produce these types of cars as well.
Speaker 1 (06:02):
Yes, I would say they produce a whole range of cars,
you know, from very few efficient smaller vehicles to really
beg gas guzzlers.
Speaker 3 (06:12):
So they would presumably benefit if some of the foreign
models are closed out a bit by much higher costs.
So that's something that we can watch, you know, in
terms of investing Linda, thank you for joining us on
the program. Linda lu Bloomberg China Cars Reporter, looking more
closely at the potential here of extra tariffs on importing
(06:34):
large cars.
Speaker 2 (06:41):
The world's most sophisticated chip making machines in Taiwan can
be remotely disabled in the event China invades the island.
This is a Bloomberg exclusive. We are told the remote
shut off applies to a line of extreme ultraviolet machines
made by ASML, and those machines are used by Taiwan
Semiconductor Manufacturing Company or TSMC. Here's Bloomberg's Tom McKenzie from London.
Speaker 4 (07:07):
Essentially, this is a kill switch that would be applied
to these ASML machines, these extreme ultraviolet lithography machines that
process and produce, and they are essential to production of
the most sophisticated chips that TSMC, that makes the biggest
foundries over in Taiwan is dependent on. And TSMC's the
biggest buyer of these euvs that are made and produced
(07:27):
by SML.
Speaker 2 (07:28):
That is Bloomberg's Tom McKenzie. Now we are also told
that American officials have privately expressed concern to both companies
about what happens if Chinese aggression escalates into an attack
on Taiwan. TSMC is responsible for producing the vast majority
of the world's most advanced semiconductors ran well.
Speaker 3 (07:48):
Joining us now for some discussion of this is Peter Elstrom,
Bloomberg Executive editor for Asia Technology. Peter, thank you for
joining us. The two companies say they can disable these machines,
and I suppose we have to take them at their
word on this, but it will make people nervous, and
it also raises the question of how much of this
is priced in, And we saw trading in a stock
(08:10):
didn't do all that much. But at least at the moment,
there are no signs of invasion, so presumably there would
be time. But are you hearing from people that they
see a need to discount this further?
Speaker 5 (08:22):
Yeah, So this is to be clear that companies are
not talking publicly about these capabilities, and the relationship is
Taiwan Semiconductor makes the world's most advanced chips largely in Taiwan,
and ASML supplies the most advanced equipment for making those chips.
So what sources have been telling us is that there
(08:44):
have been concerns about what happens if China gets more
aggressive around Taiwan, if there's even an escalation into an
attack on the island. Again, the story does not go
into the prospects for that. We think that that obviously
that is something that the companies are not involved and
(09:05):
wouldn't know anything about. But ASML has been approached by
the Dutch government about the possibility of what would happen then,
and ASML has told those government officials that they are
able to disable these machines remotely if something like that happens. Essentially,
this is a remote kill switch so that they could
(09:27):
stop these machines from producing advanced chips if something happens
around Taiwan. More broadly, they'd be able to do that
sort of thing. Also in addition to that, so it's
an extra level of caution and security that I think
the government in the Netherlands in the US would see
as a sign of reassurance of these advanced chip making
(09:51):
machines won't fall into long Peter.
Speaker 3 (09:53):
We stated that in our story. But what I was
getting at is this discounted. I mean, are you hearing
from people that that this is a serious concern or
that no, it's not so much a serious concern.
Speaker 5 (10:04):
Well, that's sort of the question is sort of predicated
on how likely is it that China actually takes some
military action against Taiwan. I think the companies are not
privy to the discussions at the most advanced levels of
the US government or the Dutch government for that matter,
So the companies are preparing for these kinds of contingencies
(10:26):
not really knowing what the chances are that something like
this would happen. Obviously, the tensions between the US and
China have been escalating over the past few years, and
there have been concerns about this. China continues to claim
that Taiwan is a breakaway province and that eventually there
should be some reunification of the two locations, and the
(10:48):
US government has pushed back on that assertion.
Speaker 2 (10:50):
Peter, I remember a while back our colleagues in Washington,
d C. At Bloomberg News reported that the Bide administration
was looking at ways to potentially destroy this equipment should
there be an invasion of Taiwan on the part of
mainland China. And I think it's important to point out
that under current export controls that China cannot access this
(11:13):
very advanced technology that is produced by TSMC.
Speaker 5 (11:16):
Yeah, that's exactly right. Yeah, the US government's beginning with
Donald Trump's first administration and then the Biden administration, have
been tightening the restrictions on China's ability to get both
chips and then the machines that actually make those chips.
You're referring to a type of machine that ASML makes
(11:37):
called extreme ultraviolet machines or UV machines. Those machines are
used to make the most advanced semiconductors out there, including
the chips that go into iPhones, the chips that Nvidia
uses for AI training. China has never been able to
buy those kinds of machines. Those have been prohibited, but
more recently there have been tighter restrictions on others of
(12:00):
chips and other kinds of machines that China and Chinese
companies have been able to buy. So, yeah, that's an
increasingly tightened restrictions. What we've seen in reaction to that
is that China's investing a large amount of money into
its own chip industry. It's trying to build up some
of these domestic capabilities, and Smick, the leading maker in
China of semiconductors, has made quite a bit of progress,
(12:22):
as we saw last year with a chip that was
found in Huawei smartphone. They've been able to reach seven
nanimeter production, which is not at the cutting edge, but
it's quite close.
Speaker 3 (12:32):
So one of the areas that we've covered here in
this discussion this morning is is whether or not China
could get its hands on this equipment. And we were
talking about how there's a kill switch to it, and
that's fine. What I think is even bigger really is
is how much does this then disrupt TSMC and all
the automated systems of the world and all the high
(12:53):
tech companies that use these chips. I mean, this is
what I was getting at by asking about how much
is priced in about the impact on the entire semiconductor sector.
Speaker 5 (13:03):
Well, KSMC still is largely dependent on its base of
production in Taiwan. That's where it makes the vast majority
of its chips, and it certainly its most advanced chips.
But you have seen the company begin to diversify geographically
at the urging of governments around the world, including the
US government. It's building a chip fabrication plant here in Japan,
(13:28):
it's building another one in the United States. It may
also build something in Europe at some point, So that does,
I think to your point, that does create additional expenses
because they need more plants in more different areas to
kind of have the geographic diversity that would minimize the
risks of anything happen to their Taiwan production plants. But
(13:50):
make no mistake, what they have right now in Taiwan
has not been replaced yet and probably won't be replaced
for many, many years. The company's strategy for a long
time was to make everything in Taiwan because they have
their best equipment there, their most advanced equipment. They also
have their best engineers. They can share knowledge about how
to run the production lines, the whole production process that
(14:13):
allows them to reach high yield so that they get
a high percentage of their chips that are workable. At
the end of that, when you start to do that
in three different countries for four different countries, gets much
more complicated. That's one of the strategic challenges for TSMC
right now.
Speaker 3 (14:27):
Absolutely the impact could be you know, it just could
be enormous. Peter, thanks so much for joining us. Peter Elstrom,
Bloomberg Executive editor for Asia Technology. Six FED officials spoke
in Unison today about keeping interest rates higher for longer.
(14:49):
Governor Christopher Waller wants to see three to five months
of good inflation data before considering cutting rates. In the meantime,
Atlanta as Rafae Albostik said, the FED is actively re
thinking it's view on the neutral rate. Here's Bloomberg's Michael McKee.
Speaker 6 (15:04):
Fed officials are speaking with one voice now that they
don't think they're going to be cutting rates anytime soon.
There's a slight disagreement about how many they might get
in this year, if any at all, but they all
seem resigned to the fact that this is going to
be a long process and that the US is going
to be the outlier. The ECB can go ahead first,
maybe the Bank of England, but the FED is going
(15:24):
to sit tight for several.
Speaker 3 (15:25):
Months Bloomberg's Michael McKee. In the meantime, ECB President Christine
Legard is forecasting June rate cut for Europe if the
price path holds. Joining us now. In our studios in
Hong Kong is Carl Tannenbaum, chief economist at Northern Trust.
Carl the implications of the economy and also the markets
(15:46):
holding up pretty well with interest rates steady here at
a pretty high level. Seems to be that the neutral
rate has moved higher. Your thoughts on that and where we're.
Speaker 7 (15:56):
Heading, Well, first, good morning, Brian. It is not a
surprise to me that the Fed formed a bucket brigade
to pour cold water on the market's assumption that easing
would come more approximately. This is the second round that
we've had with over optimism from investors this year, and
I think they want to make sure that their intentions
are not misunderstood. In addition, the American economy has continued
(16:17):
to sustain momentum far beyond expectation, leading some to think
that the amount of restraint that is required to achieve
the inflation target is higher. That's the science behind the
neutral rate, And so again it looks to us as
well as the markets, like it will be late this
year at the earliest before we get that first easing
from the Fed.
Speaker 2 (16:36):
And between now and then more dollar strength. And I
would imagine Carl and the conversations that you're having there
in the Apac region, there are some people that are
a little annoyed with that fact.
Speaker 7 (16:47):
There's little doubt. While it's been good for me, I
was actually able to afford breakfast in Singapore for the
first time and a number of visits. The fact is
is that there are central banks in emerging markets who
have settled inflation, they have growth struggling, and who would
like to ease interest rates to help those conditions. But
to do so would risk appreciating the currency and making
(17:07):
the things they import more expensive. So there are central
banks around the world that are very much fed dependent.
Speaker 3 (17:14):
So, Carl I was interested to hear you say that
you felt as though the markets were overextended to a
certain degree. And that's not what I want to ask
you about. I want to ask you about the economy,
because you get this feeling that some people still hold
out that a recession could happen sometime later this year
or early next year. In other words, there's a lot
(17:34):
of uncertainty. How strong is the economy and how durable
and sustainable is it in your view?
Speaker 7 (17:41):
Well, looking backwards, American economic growth has exceeded expectation for
seven quarters in a row, and not by a little,
and the tracking here in the second quarter also looks
very positive. I think the common over the thing that
people have overlooked is the consumer strength. I know that
the markets got a little excited that our unemployment rate
has gone up to three point nine percent, but for
(18:03):
most of my career that would have been an amazing level.
And real wages are growing, giving the kind of spending
power that sustains economic activity. Consumers have turned out their debts,
so of corporations, and so monetary policy hasn't bitten as much,
hence the need to keep rates higher for longer.
Speaker 2 (18:20):
Carl, I'm curious, how are you making sense of the
inversion of the yield curve as persistent as it has been.
Speaker 7 (18:28):
One of the things I've pointed out to our clients
at Northern Trust is that an inverted yield curve is
consistent with a soft landing as well as a recession.
And if you take a look at the history of
the yield curve as a recession indicator, it's quite mixed.
There have been times we've had inversions without a recession,
and at times the curve has inverted and we haven't
seen a downturn for almost two years afterwards. So I
(18:50):
think it's important to look at other indicators as a
compliment to that one gauge.
Speaker 3 (18:55):
There's also this fear, perhaps that the consumer is weakening
a little and particularly at the lower end. And you
need only look at a stock like Visa, which is
actually down over the past three months. It's not up.
I mean people think, oh, every stock is up in
the United States, this is the everything, Raley, It is
not really the case. Some consumer even Meta is actually
(19:18):
a little bit lower over the past three months. I'm
wondering how healthy is the consumer really.
Speaker 7 (19:24):
Over And I think you've hit on something that's very important,
and that is you can look at things in aggregate,
but the details matter. The incomes. Let's say the lowest
forty percent of income groups in the United States, they've
exhausted their pandemic savings, and while they're still working, they're
spending a little bit faster than they should. And we've
seen an accumulation of consumer debt that's back to levels
that we saw prior to the pandemic. Associated with that,
(19:46):
we've seen some debt delinquencies, which also suggests that maybe
some belt tightening is on the horizon. One reason why
I would anticipate consumer spending in America to taper off
to a much lower rate of growth as we move
through twenty twenty four.
Speaker 2 (20:00):
One of the things that we've been focusing on a
lot on this program. Is the divergence between kind of
what the markets may be signaling and the soft landing
that you've been kind of outlying there. Do you think
that there is a risk that markets need to recalibrate,
that maybe there is on the equity side, at least
a little too much enthusiasm.
Speaker 7 (20:21):
I wouldn't think so. Again, the economic outlook is very solid.
The earnings outlook has been very, very good in certain
sectors that have been leading our markets as well as others.
There's a lot of optimism about what the next generation
of machine learning and artificial intelligence might bring. That's really
been the big driver. The other question that I get
a lot is we do have an election coming up,
and people are concerned about how that might affect markets,
(20:43):
but the history shows that that impact is relatively small.
Speaker 3 (20:49):
Both gentlemen running seem to want to spend a lot.
Is that something like debts and deficits don't matter at
the moment, but does that come into the picture sometime soon.
Speaker 7 (21:00):
Well, it's frightening. Neither one of them is serious about
fiscal policy. One would probably like to reduce taxes further
and claim that that pays for itself. The other would
like to continue spending but characterize it as an investment
whose returns would also leave the budget net neutral. And
I hear that said, and then I look at the
national debt of thirty four trillion that's likely to triple
over the next twenty years if policy isn't changed, And well,
(21:23):
I'm looking around for somewhere else to live, just in
case the worst happens in the USA may maybe here
in Hong Kong.
Speaker 2 (21:30):
Who knows one of the candidates too, seems to be
implying that maybe the FED shouldn't be an independent body.
How do you feel about that?
Speaker 7 (21:39):
Yeah, that story came out I think a few weeks ago.
Let me reassure our listeners. Structurally, from a legal perspective,
it would be very difficult for an administration to have
undue power over the FED absent a congressional change reopening
the Federal Reserve Act itself, which I find highly unlikely.
In the structure within the FED where I used to
work is one that feels it's independence is really critical
(22:02):
to economic and market performance, and they will safeguard that
to their last breath.
Speaker 3 (22:09):
You know, I'm curious to get back at some of
these uncertainties that persist, and my ultimate question to you
will be what's an outlier? But let me just lay
some groundwork here. First, I was interested to hear Morgan
Stanley's Mike Wilson on Surveillance, excellent program. I always like
to catch that before I go to sleep at night.
And you know, he was a long standing bear. He's
(22:30):
raised his targets, but he still sounds pretty bearish, pretty
downbeat in many ways. So he says, look, we just
don't know, We can't know. And anybody who says they know,
you know, they're fooling themselves. Is it really that, Alista?
What really keeps you awake at night? What are you
most concerned about as a risk for the economy?
Speaker 7 (22:52):
If I were to try and untangle that statement, that's
one that a lot of us have. First, the markets
have performed very well, multiples are at the up end
of their acceptable ranges, of volatility has been low, and
yet we're concerned. And I suppose the way you square
that circle, Brian, is that there are a lot of
potential tail risks. We have high levels of geopolitical uncertainty,
(23:12):
two wars going on, and other both economic and political
conflicts likely, and I think that that leads some to
suspect that the risk premium resident in markets right now
is not sufficient to cover if one of those tail
events becomes a reality.
Speaker 2 (23:27):
Maybe a third war and let's call it a trade
war between the US and China. What type of impact
do you think that may have? And we've already seen
a lot in terms of export controls and the threats
of tariffs, new tariffs being imposed. Where is this going.
Speaker 7 (23:43):
Well, war is probably an extreme term given the kinetic
activity that we have, but the trade frictions between China
and the United States continue to escalate. It actually as
one of the few policy areas where Republicans and Democrats
are in unison, so unlikely to see much of a
change there. The challenge there is that that could be
inflationary for everyone. It could narrow the path to development
(24:05):
for smaller economies and for entrepo economies like Hong Kong Singapore.
In this region, that friction is not helpful either to
financial or commercial activity.
Speaker 3 (24:14):
Carl, thanks so much for joining us, for being here
in Hong Kong and taking out the time to come
into our studios. Later off, Mike, I can recommend some
areas in Hong Kong if you're really seriously thinking about
joining us here. I know you said that partially tongue
in cheek, but it's great to have you with us
on the program. Carl Tenenbaum, Chief Economist at Northern Trust.
Speaker 2 (24:35):
This has been the Bloomberg Daybreak Asia podcast, bringing you
the stories making news and moving markets in the Asia Pacific.
Visit the Bloomberg Podcast channel on YouTube to get more
episodes of this and other shows from Bloomberg. Subscribe to
the podcast on Apple, Spotify, or anywhere else you listen,
and always on Bloomberg Radio, the Bloomberg Terminal, and the
(24:56):
Bloomberg Business app.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:09):
This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
You can join Brian Curtis and myself for the stories,
making news and moving markets in the APAC region. You
can subscribe to the show anywhere you get your podcast
and always on Bloomberg Radio, the Bloomberg Terminal, and the
Bloomberg Business app.
Speaker 3 (00:27):
A China trade lobby group says that China may consider
raising temporary tearriffs to twenty five percent on imported cars
with large engines. Joining us now for some discussion of
this is Linda lu Bloomberg China Cars Reporter. So, Linda,
you say in your story that we had two hundred
and fifty thousand cars with engines more than two and
(00:47):
a half liters imported into China twenty twenty three. I'm
curious whether most of those come from the US and
Europe And sounds like a big number, quarter of a million,
is it.
Speaker 1 (01:00):
Yeah, it's interesting looking at this right now, we're trying
to figure out from the custom stata which automakers will
be impacted. But if you compare that to the number
of electric vehicles that China exports, it's actually still smaller.
China exported one point five million evs last year, with
(01:20):
about six hundred and thirty eight thousand going to Europe
and North America. Like with the US, which already had
a high tariff, last year, they only received about fifty
two thousand evs from China.
Speaker 2 (01:34):
So I'm imagining names like BMW, Audi, Mercedes, Benz and
then from the US side, Cadillac some of the luxury models.
Would that be a safe assumption.
Speaker 1 (01:45):
Yes, that's right. China now is such a big automaking country,
they more than capable of essentially filling audio demand for
cars domestically. But obviously there's some luxury models that are
not made in China, and like you said, those brands
would be the usual suspects when you're looking at imported
(02:06):
cars into China.
Speaker 3 (02:08):
So this came from an interview from Leopin who is
the chief expert of China Automotive Technology and Research Center.
It was in the Global Times newspaper, and I think
I'm not sure whether or not we would have picked
up on it so much except for the China Chamber
of Commerce to the EU talked about this and said
that there would be implications, what would have to happen
(02:28):
next for this to become policy.
Speaker 1 (02:30):
Yeah, we also were looking at the Global Times interview
yesterday and not sure how much of an indication this
is that China may eventually move to raise the tariffs.
We're all really waiting to see whether an official director
will come from one of China's government agencies, such as
(02:53):
the Ministry of Commerce or Customs, where they will officially
announce the raising of the tariffs.
Speaker 2 (03:00):
It feels like we're in a new phase of a
trade war, wouldn't you say, when it comes to vehicles,
particularly evs that are maybe exported from China to other markets,
and now we're looking at possible punitive tariffs, temporary though
they may be, that would target European and American manufactured
luxury cars.
Speaker 1 (03:20):
Yes, I completely agree. And actually since the EU launching
the anti subsidy investigation into Chinese evs, we've seen a
whole series of tips for tat between China and the
EU and obviously the US and January does ye China
announced in anti dumping investigation into Brandy, which we think
(03:43):
maybe a response to the EU investigation, and then with
the US essentially quadrupling the imput tariffs for Chinese evs.
Then in recent weeks we also saw China announcing another
investigation into chemicals are being dumped from the EU. So
there's a whole series of moves that I would say
(04:03):
is really just developing this trade war.
Speaker 3 (04:08):
Behind the scenes here, Linda, how much is this affecting
the status of some of the jvs in China that
involves so many foreign companies, you know, pairing up with
local companies.
Speaker 1 (04:19):
I would say with these tariffs, it's probably not going
to have such a big impact on the jvs because
a lot of their sales in China come from locally
manufactured vehicles, and there the trenders in the Chinese market
these days. The jvs such as General Motors, are the
(04:40):
one with Ford, as well as the European joint ventures.
They're all essentially suffering a hit to their sales because
of China's fast transitioned to evs, and that's something they
don't have strong offerings in and they're trying very hard
to catch up.
Speaker 2 (04:56):
Linda, do you have a sense of what this may
mean for Tesla, an American company with a factory in
Shanghai making vehicles not only for the domestic market, but
for exportation as well.
Speaker 1 (05:07):
Yeah, things could be dicey for Tesla because, as Elon
Musk himself has said, the Shanghai factory is one of
Tesla's most efficient and they turned out about half of
Tesla's global deliveries last year. And so if the EU
were to levy tariffs on Chinese made EV's going into
(05:29):
the block, that could be a hit to Tesla. As
for the US North American markets, I think Tesla's local
factories there supply that market. But obviously with Chaye tensines
getting worse, it's not going to be good for any
business that's trying to do business over the world.
Speaker 3 (05:49):
And just because we're talking about two and a half
leaders here on cars and these are larger engine cars,
so are a lot of the jvs and local domestic
manufacturers that produce these types of cars as well.
Speaker 1 (06:02):
Yes, I would say they produce a whole range of cars,
you know, from very few efficient smaller vehicles to really
beg gas guzzlers.
Speaker 3 (06:12):
So they would presumably benefit if some of the foreign
models are closed out a bit by much higher costs.
So that's something that we can watch, you know, in
terms of investing Linda, thank you for joining us on
the program. Linda lu Bloomberg China Cars Reporter, looking more
closely at the potential here of extra tariffs on importing
(06:34):
large cars.
Speaker 2 (06:41):
The world's most sophisticated chip making machines in Taiwan can
be remotely disabled in the event China invades the island.
This is a Bloomberg exclusive. We are told the remote
shut off applies to a line of extreme ultraviolet machines
made by ASML, and those machines are used by Taiwan
Semiconductor Manufacturing Company or TSMC. Here's Bloomberg's Tom McKenzie from London.
Speaker 4 (07:07):
Essentially, this is a kill switch that would be applied
to these ASML machines, these extreme ultraviolet lithography machines that
process and produce, and they are essential to production of
the most sophisticated chips that TSMC, that makes the biggest
foundries over in Taiwan is dependent on. And TSMC's the
biggest buyer of these euvs that are made and produced
(07:27):
by SML.
Speaker 2 (07:28):
That is Bloomberg's Tom McKenzie. Now we are also told
that American officials have privately expressed concern to both companies
about what happens if Chinese aggression escalates into an attack
on Taiwan. TSMC is responsible for producing the vast majority
of the world's most advanced semiconductors ran well.
Speaker 3 (07:48):
Joining us now for some discussion of this is Peter Elstrom,
Bloomberg Executive editor for Asia Technology. Peter, thank you for
joining us. The two companies say they can disable these machines,
and I suppose we have to take them at their
word on this, but it will make people nervous, and
it also raises the question of how much of this
is priced in, And we saw trading in a stock
(08:10):
didn't do all that much. But at least at the moment,
there are no signs of invasion, so presumably there would
be time. But are you hearing from people that they
see a need to discount this further?
Speaker 5 (08:22):
Yeah, So this is to be clear that companies are
not talking publicly about these capabilities, and the relationship is
Taiwan Semiconductor makes the world's most advanced chips largely in Taiwan,
and ASML supplies the most advanced equipment for making those chips.
So what sources have been telling us is that there
(08:44):
have been concerns about what happens if China gets more
aggressive around Taiwan, if there's even an escalation into an
attack on the island. Again, the story does not go
into the prospects for that. We think that that obviously
that is something that the companies are not involved and
(09:05):
wouldn't know anything about. But ASML has been approached by
the Dutch government about the possibility of what would happen then,
and ASML has told those government officials that they are
able to disable these machines remotely if something like that happens. Essentially,
this is a remote kill switch so that they could
(09:27):
stop these machines from producing advanced chips if something happens
around Taiwan. More broadly, they'd be able to do that
sort of thing. Also in addition to that, so it's
an extra level of caution and security that I think
the government in the Netherlands in the US would see
as a sign of reassurance of these advanced chip making
(09:51):
machines won't fall into long Peter.
Speaker 3 (09:53):
We stated that in our story. But what I was
getting at is this discounted. I mean, are you hearing
from people that that this is a serious concern or
that no, it's not so much a serious concern.
Speaker 5 (10:04):
Well, that's sort of the question is sort of predicated
on how likely is it that China actually takes some
military action against Taiwan. I think the companies are not
privy to the discussions at the most advanced levels of
the US government or the Dutch government for that matter,
So the companies are preparing for these kinds of contingencies
(10:26):
not really knowing what the chances are that something like
this would happen. Obviously, the tensions between the US and
China have been escalating over the past few years, and
there have been concerns about this. China continues to claim
that Taiwan is a breakaway province and that eventually there
should be some reunification of the two locations, and the
(10:48):
US government has pushed back on that assertion.
Speaker 2 (10:50):
Peter, I remember a while back our colleagues in Washington,
d C. At Bloomberg News reported that the Bide administration
was looking at ways to potentially destroy this equipment should
there be an invasion of Taiwan on the part of
mainland China. And I think it's important to point out
that under current export controls that China cannot access this
(11:13):
very advanced technology that is produced by TSMC.
Speaker 5 (11:16):
Yeah, that's exactly right. Yeah, the US government's beginning with
Donald Trump's first administration and then the Biden administration, have
been tightening the restrictions on China's ability to get both
chips and then the machines that actually make those chips.
You're referring to a type of machine that ASML makes
(11:37):
called extreme ultraviolet machines or UV machines. Those machines are
used to make the most advanced semiconductors out there, including
the chips that go into iPhones, the chips that Nvidia
uses for AI training. China has never been able to
buy those kinds of machines. Those have been prohibited, but
more recently there have been tighter restrictions on others of
(12:00):
chips and other kinds of machines that China and Chinese
companies have been able to buy. So, yeah, that's an
increasingly tightened restrictions. What we've seen in reaction to that
is that China's investing a large amount of money into
its own chip industry. It's trying to build up some
of these domestic capabilities, and Smick, the leading maker in
China of semiconductors, has made quite a bit of progress,
(12:22):
as we saw last year with a chip that was
found in Huawei smartphone. They've been able to reach seven
nanimeter production, which is not at the cutting edge, but
it's quite close.
Speaker 3 (12:32):
So one of the areas that we've covered here in
this discussion this morning is is whether or not China
could get its hands on this equipment. And we were
talking about how there's a kill switch to it, and
that's fine. What I think is even bigger really is
is how much does this then disrupt TSMC and all
the automated systems of the world and all the high
(12:53):
tech companies that use these chips. I mean, this is
what I was getting at by asking about how much
is priced in about the impact on the entire semiconductor sector.
Speaker 5 (13:03):
Well, KSMC still is largely dependent on its base of
production in Taiwan. That's where it makes the vast majority
of its chips, and it certainly its most advanced chips.
But you have seen the company begin to diversify geographically
at the urging of governments around the world, including the
US government. It's building a chip fabrication plant here in Japan,
(13:28):
it's building another one in the United States. It may
also build something in Europe at some point, So that does,
I think to your point, that does create additional expenses
because they need more plants in more different areas to
kind of have the geographic diversity that would minimize the
risks of anything happen to their Taiwan production plants. But
(13:50):
make no mistake, what they have right now in Taiwan
has not been replaced yet and probably won't be replaced
for many, many years. The company's strategy for a long
time was to make everything in Taiwan because they have
their best equipment there, their most advanced equipment. They also
have their best engineers. They can share knowledge about how
to run the production lines, the whole production process that
(14:13):
allows them to reach high yield so that they get
a high percentage of their chips that are workable. At
the end of that, when you start to do that
in three different countries for four different countries, gets much
more complicated. That's one of the strategic challenges for TSMC
right now.
Speaker 3 (14:27):
Absolutely the impact could be you know, it just could
be enormous. Peter, thanks so much for joining us. Peter Elstrom,
Bloomberg Executive editor for Asia Technology. Six FED officials spoke
in Unison today about keeping interest rates higher for longer.
(14:49):
Governor Christopher Waller wants to see three to five months
of good inflation data before considering cutting rates. In the meantime,
Atlanta as Rafae Albostik said, the FED is actively re
thinking it's view on the neutral rate. Here's Bloomberg's Michael McKee.
Speaker 6 (15:04):
Fed officials are speaking with one voice now that they
don't think they're going to be cutting rates anytime soon.
There's a slight disagreement about how many they might get
in this year, if any at all, but they all
seem resigned to the fact that this is going to
be a long process and that the US is going
to be the outlier. The ECB can go ahead first,
maybe the Bank of England, but the FED is going
(15:24):
to sit tight for several.
Speaker 3 (15:25):
Months Bloomberg's Michael McKee. In the meantime, ECB President Christine
Legard is forecasting June rate cut for Europe if the
price path holds. Joining us now. In our studios in
Hong Kong is Carl Tannenbaum, chief economist at Northern Trust.
Carl the implications of the economy and also the markets
(15:46):
holding up pretty well with interest rates steady here at
a pretty high level. Seems to be that the neutral
rate has moved higher. Your thoughts on that and where we're.
Speaker 7 (15:56):
Heading, Well, first, good morning, Brian. It is not a
surprise to me that the Fed formed a bucket brigade
to pour cold water on the market's assumption that easing
would come more approximately. This is the second round that
we've had with over optimism from investors this year, and
I think they want to make sure that their intentions
are not misunderstood. In addition, the American economy has continued
(16:17):
to sustain momentum far beyond expectation, leading some to think
that the amount of restraint that is required to achieve
the inflation target is higher. That's the science behind the
neutral rate, And so again it looks to us as
well as the markets, like it will be late this
year at the earliest before we get that first easing
from the Fed.
Speaker 2 (16:36):
And between now and then more dollar strength. And I
would imagine Carl and the conversations that you're having there
in the Apac region, there are some people that are
a little annoyed with that fact.
Speaker 7 (16:47):
There's little doubt. While it's been good for me, I
was actually able to afford breakfast in Singapore for the
first time and a number of visits. The fact is
is that there are central banks in emerging markets who
have settled inflation, they have growth struggling, and who would
like to ease interest rates to help those conditions. But
to do so would risk appreciating the currency and making
(17:07):
the things they import more expensive. So there are central
banks around the world that are very much fed dependent.
Speaker 3 (17:14):
So, Carl I was interested to hear you say that
you felt as though the markets were overextended to a
certain degree. And that's not what I want to ask
you about. I want to ask you about the economy,
because you get this feeling that some people still hold
out that a recession could happen sometime later this year
or early next year. In other words, there's a lot
(17:34):
of uncertainty. How strong is the economy and how durable
and sustainable is it in your view?
Speaker 7 (17:41):
Well, looking backwards, American economic growth has exceeded expectation for
seven quarters in a row, and not by a little,
and the tracking here in the second quarter also looks
very positive. I think the common over the thing that
people have overlooked is the consumer strength. I know that
the markets got a little excited that our unemployment rate
has gone up to three point nine percent, but for
(18:03):
most of my career that would have been an amazing level.
And real wages are growing, giving the kind of spending
power that sustains economic activity. Consumers have turned out their debts,
so of corporations, and so monetary policy hasn't bitten as much,
hence the need to keep rates higher for longer.
Speaker 2 (18:20):
Carl, I'm curious, how are you making sense of the
inversion of the yield curve as persistent as it has been.
Speaker 7 (18:28):
One of the things I've pointed out to our clients
at Northern Trust is that an inverted yield curve is
consistent with a soft landing as well as a recession.
And if you take a look at the history of
the yield curve as a recession indicator, it's quite mixed.
There have been times we've had inversions without a recession,
and at times the curve has inverted and we haven't
seen a downturn for almost two years afterwards. So I
(18:50):
think it's important to look at other indicators as a
compliment to that one gauge.
Speaker 3 (18:55):
There's also this fear, perhaps that the consumer is weakening
a little and particularly at the lower end. And you
need only look at a stock like Visa, which is
actually down over the past three months. It's not up.
I mean people think, oh, every stock is up in
the United States, this is the everything, Raley, It is
not really the case. Some consumer even Meta is actually
(19:18):
a little bit lower over the past three months. I'm
wondering how healthy is the consumer really.
Speaker 7 (19:24):
Over And I think you've hit on something that's very important,
and that is you can look at things in aggregate,
but the details matter. The incomes. Let's say the lowest
forty percent of income groups in the United States, they've
exhausted their pandemic savings, and while they're still working, they're
spending a little bit faster than they should. And we've
seen an accumulation of consumer debt that's back to levels
that we saw prior to the pandemic. Associated with that,
(19:46):
we've seen some debt delinquencies, which also suggests that maybe
some belt tightening is on the horizon. One reason why
I would anticipate consumer spending in America to taper off
to a much lower rate of growth as we move
through twenty twenty four.
Speaker 2 (20:00):
One of the things that we've been focusing on a
lot on this program. Is the divergence between kind of
what the markets may be signaling and the soft landing
that you've been kind of outlying there. Do you think
that there is a risk that markets need to recalibrate,
that maybe there is on the equity side, at least
a little too much enthusiasm.
Speaker 7 (20:21):
I wouldn't think so. Again, the economic outlook is very solid.
The earnings outlook has been very, very good in certain
sectors that have been leading our markets as well as others.
There's a lot of optimism about what the next generation
of machine learning and artificial intelligence might bring. That's really
been the big driver. The other question that I get
a lot is we do have an election coming up,
and people are concerned about how that might affect markets,
(20:43):
but the history shows that that impact is relatively small.
Speaker 3 (20:49):
Both gentlemen running seem to want to spend a lot.
Is that something like debts and deficits don't matter at
the moment, but does that come into the picture sometime soon.
Speaker 7 (21:00):
Well, it's frightening. Neither one of them is serious about
fiscal policy. One would probably like to reduce taxes further
and claim that that pays for itself. The other would
like to continue spending but characterize it as an investment
whose returns would also leave the budget net neutral. And
I hear that said, and then I look at the
national debt of thirty four trillion that's likely to triple
over the next twenty years if policy isn't changed, And well,
(21:23):
I'm looking around for somewhere else to live, just in
case the worst happens in the USA may maybe here
in Hong Kong.
Speaker 2 (21:30):
Who knows one of the candidates too, seems to be
implying that maybe the FED shouldn't be an independent body.
How do you feel about that?
Speaker 7 (21:39):
Yeah, that story came out I think a few weeks ago.
Let me reassure our listeners. Structurally, from a legal perspective,
it would be very difficult for an administration to have
undue power over the FED absent a congressional change reopening
the Federal Reserve Act itself, which I find highly unlikely.
In the structure within the FED where I used to
work is one that feels it's independence is really critical
(22:02):
to economic and market performance, and they will safeguard that
to their last breath.
Speaker 3 (22:09):
You know, I'm curious to get back at some of
these uncertainties that persist, and my ultimate question to you
will be what's an outlier? But let me just lay
some groundwork here. First, I was interested to hear Morgan
Stanley's Mike Wilson on Surveillance, excellent program. I always like
to catch that before I go to sleep at night.
And you know, he was a long standing bear. He's
(22:30):
raised his targets, but he still sounds pretty bearish, pretty
downbeat in many ways. So he says, look, we just
don't know, We can't know. And anybody who says they know,
you know, they're fooling themselves. Is it really that, Alista?
What really keeps you awake at night? What are you
most concerned about as a risk for the economy?
Speaker 7 (22:52):
If I were to try and untangle that statement, that's
one that a lot of us have. First, the markets
have performed very well, multiples are at the up end
of their acceptable ranges, of volatility has been low, and
yet we're concerned. And I suppose the way you square
that circle, Brian, is that there are a lot of
potential tail risks. We have high levels of geopolitical uncertainty,
(23:12):
two wars going on, and other both economic and political
conflicts likely, and I think that that leads some to
suspect that the risk premium resident in markets right now
is not sufficient to cover if one of those tail
events becomes a reality.
Speaker 2 (23:27):
Maybe a third war and let's call it a trade
war between the US and China. What type of impact
do you think that may have? And we've already seen
a lot in terms of export controls and the threats
of tariffs, new tariffs being imposed. Where is this going.
Speaker 7 (23:43):
Well, war is probably an extreme term given the kinetic
activity that we have, but the trade frictions between China
and the United States continue to escalate. It actually as
one of the few policy areas where Republicans and Democrats
are in unison, so unlikely to see much of a
change there. The challenge there is that that could be
inflationary for everyone. It could narrow the path to development
(24:05):
for smaller economies and for entrepo economies like Hong Kong Singapore.
In this region, that friction is not helpful either to
financial or commercial activity.
Speaker 3 (24:14):
Carl, thanks so much for joining us, for being here
in Hong Kong and taking out the time to come
into our studios. Later off, Mike, I can recommend some
areas in Hong Kong if you're really seriously thinking about
joining us here. I know you said that partially tongue
in cheek, but it's great to have you with us
on the program. Carl Tenenbaum, Chief Economist at Northern Trust.
Speaker 2 (24:35):
This has been the Bloomberg Daybreak Asia podcast, bringing you
the stories making news and moving markets in the Asia Pacific.
Visit the Bloomberg Podcast channel on YouTube to get more
episodes of this and other shows from Bloomberg. Subscribe to
the podcast on Apple, Spotify, or anywhere else you listen,
and always on Bloomberg Radio, the Bloomberg Terminal, and the
(24:56):
Bloomberg Business app.
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