Breaking Down Chinese Eco Data, Latest on US Tariffs
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. On today's episode, we'll take a look at how deflation seems to be gripping the Chinese economy, plus a look at how looming tariffs will shape the trading week ahead. In a moment, we'll be speaking with George Shultze. He is founder of Shultze Wealth Management. But we begin in the Asia-Pacific.

Over the weekend, we learned China's consumer inflation fell in February by far more than expected. The consumer price index was down seven-tenths of one percent from last year, falling below zero for the first time in 13 months. For a closer look now, I am joined by Chi Lo. He is APAC Senior Market Strategist at BNP Paribas Asset Management. Chi is on the line from Hong Kong. Thank you for making time to chat with us. It's always a pleasure.

So how do you make sense of this reading? Is it an anomaly? I was looking at data from Goldman Sachs. A couple of people are interpreting this reading in a different way. But can we walk away? Can we ignore the fact that China seems to be just trapped in deflation right now?

We cannot really walk away. It is very clear that the Chinese economy is still weak, especially the private sector. Confidence is still not fully recovered. When you look at private sector investment growth, it's been close to zero, hovering between negative and zero for the past two and a half years. So this CPI negative reading, yes, granted, partly because of the base effects due to the distortion effect,

of the Chinese New Year, but fundamentally we are still not really seeing a turnaround in public sentiment, in private sector spending, and the overall momentum of the economy, which argues for further and more aggressive policy easing by Beijing.

It seems that the government is aware of that and we're hopeful that in the coming months we'll see more assertive easing just to make sure the growth momentum in the Chinese economy doesn't falter further. Does it have to be a massive type stimulus program, do you think? It does have to be more aggressive than what we saw in the past two years, i.e. different from the incremental easing

stance that Beijing had been pursuing until late last year. The point here is that because the private sector is not spending, consumers are still not confident in spending more. So it's a simple economic step when the private sector is not moving ahead. The public sector has to step in, get things going, kick-started.

just to rebuild confidence. So we do need to see Beijing to be more aggressive. How aggressive? Well, definitely more aggressive than what we saw in the past two years, as I said earlier, but not necessarily in big spending stimulus that we saw in the past cycles, because the trick here is to find the point that can turn around

private sector confidence. And it seems that we see some green shoots in the economy recently. We may be close to the point that the private sector is turning around, but that needs more help from the government. That's the point. This is undoubtedly being complicated by an increase in trade tension between Washington and Beijing. We're talking about new tariffs that will take effect on Monday from the China side.

Is it really a critical moment right now if you're a leader in Beijing and you have to kind of try to balance the risk here? How critical is this moment in time?

Well, indeed, the tariff factor is another drag from the external side on Chinese growth. But at this point, if the tariff rate still remained at additional 20%, it is still manageable from China's perspective because the estimated drag that we calculated on the back of the envelope

is that the 20% tariff on Chinese exports to the US would trim Chinese growth by about 0.6%, maybe a little less.

Now, but when you look at Beijing's announced fiscal spending, the fiscal deficit and so on, we estimated that the net fiscal stimulus to the Chinese economy at the current fiscal spending package is around 1.6% of GDP. So that would be more than enough to offset the tariff drag on growth.

So that is still manageable. But the point here is, as I said, if China's private sector is not turning around, and then if the tariff factor adds to destroying confidence further, then it would be a serious issue that Beijing has to rethink about.

But in the end, I still think that if Beijing wants to do it, they can do more. They have the tools to do it and expand the domestic sector further. So it's a policy choice down the road. We do see that Beijing is shifting to more stimulus. So we've talked about the big negative, weak demand.

Bad sentiment and deflation. Now, let's talk about the positivity as it relates to the deep seek narrative. And from that, the interest in AI driven buying of some of the companies, smaller firms in China that are high tech related and what that has meant for foreign money coming into China. What kind of flows are you seeing right now?

We do see some selective flows going back to the Chinese market, partly because there are investors who hold a view like us that the probability of more stimulus going forward by Beijing is going to turn around things. But there are also cautious and suspicious investors there. So the selective flows going back to China now are more tactical. And many of them, no doubt, as you alluded to, have gone

have gone into the tech sector for the simple fact that Chinese tech has been beaten down for more than three years. And now with the dip seek shock, I just call it a shock because it does shake up the global tech sector and ask investors to reevaluate the

developed market tech companies, the Magnificent Seven, so to speak, questioning their earnings outlook, their business model, their costs, and so on. So when you look at this China shock on the tech sector, there is indeed a positive implication on Chinese tech stocks.

First, because of the valuation. And secondly, the Chinese can do similar things like the big tech Western companies can do at much cheaper. And that means there is more opportunity in the Chinese tech sector to grow and rebound. And if you add on the Chinese government's expected stimulus, that is a good story for portfolio flows going back to the Chinese market and also especially going to the Chinese tech stock.

So I'm wondering about the extent to which the move up that we have seen in the market is being underpinned by expectations that we're going to see some central bank easing in China. We talked a little bit about the stimulus side. I get that from a kind of a fiscal point of view. But how much of the positivity is being supported by the notion that the PBOC is going to cut rates here?

The PBOC will continue to ease. Now, in my view, what's important for the stimulus program to work here is primarily fiscal spending, which we see Beijing is doing, supported or funded by special government bond issues.

And then secondary is monetary easing. This monetary easing's role here is to facilitate the fiscal spending and to make sure the system's liquidity will remain ample. It is not primary because there is deflationary forces in the Chinese economy. There's a lack of confidence.

If you rely mainly or only on monetary easing, in this situation, there's something like a liquidity trap, which means that monetary easing is like pushing on a piece of string. So we do need the fiscal spending coming in, but monetary easing is a facilitating factor, and we do need to see PBOC to ease further, mainly because when you look at the real policy rates in China, it is still way above 10-year average.

So from that perspective, there is room for the PBOC to continue to ease further. Are you finding more opportunity on the fixed income side in China than you are on the equity side?

At this point, I think both segments of the asset markets offer good opportunities. Now, if there is still a very sluggish recovery in confidence, which drags on economic growth and yet on the tariff factor and so on, so that means we're not going to see any significant

demand push on inflation in China, which would lead to monetary tightening. So that is not really a risk. Now in this environment, fixed income is good. But on the other hand, if our reading of the stimulus

that Beijing is putting in will eventually, sometime in the second half of this year, show signs of turning around the economy that would turn around investor sentiment quite sharply, leading to forward inflow back to China. So that will be good for the equity market.

So at this point, I would say sort of a 50-50 portfolio, 50% in equities, 50% in fixed income in China is an appropriate stance. But going into the second half of this year when we have a brighter outlook for equity performance there,

we can move back to the typical 60-40, 60% in equities and 40% in fixed income. Chi, thank you so much for joining us. Chi Lo there. He is APAC Senior Market Strategist at BNP Paribas Asset Management, joining us here on the Daybreak Asia podcast.

I'm Alpine skier Michaela Schifrin. I've won the most World Cup ski races in history. But what does success mean to me? Success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stiefel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there.

At Stiefel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stiefel has won the J.D. Power Award for Employee Advisor Satisfaction two years in a row.

If you're an advisor or investor, choose Stiefel. Where success meets success. Stiefel Nicholas & Company, Inc. Member SIPC and NYSE. For J.D. Power 2024 award information, visit jdpower.com slash awards. Compensation provided for using, not obtaining the award.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So in the U.S. last Friday, the equity market closed higher. This was after Fed Chair Jay Powell said he is expecting the path to 2% inflation to continue. Now, markets appear to take these remarks to mean any price increase as a result of tariffs could be temporary. Joining me now is George Schultze. He is founder and CEO of Schultze Wealth Management, joining from just outside of New York City.

Thanks for making time to chat with us, George. First of all, is Powell correct, do you believe, in assuming that any price shock as a result of these tariffs would be temporary? We think it is here at Schultz asset management. Yeah, there's been a lot of market uncertainty and volatility in the last few days, a lot of concern about tariffs and uncertainty specifically about how they're going to impact economic growth globally. But I think Powell has taken the right approach here. I mean, remember,

inflation has dropped a fair amount. And let's face it, many of these policies that Trump has issued

economic-friendly policies. They're pro-business policies. So we'll see how the specific tariffs all get rolled out and how many of them will roll off after we have negotiated new deals with different countries. But for sure, the Fed has some ammunition left. They can lower interest rates if it becomes a concern. And I think a little bit of this market volatility is a little premature. I had a colleague pointing out that Powell's remarks were

eerily similar to his remarks on transitory inflation made during the pandemic. They, of course, turned out to be a mistake. Do you want to be hedged against the possibility that inflation is still a little stubborn and sticky? Well, yes, inflation has been sticking. Remember how long it took to increase inflation? I think it took about 10 years. So, yes, we think it probably makes a little sense to have some hedging, you know, against inflation.

Specifically, I think there's some interesting short-selling opportunities as well with certain companies that are facing higher costs that seem to be persistent. And again, with the tariffs, I think certain industries, for example, automakers that import a lot of product, they'll be facing risk of higher prices on their input prices. But on the other hand, many of them will be able to push through some of those price increases to their customers. And some of their customers will be...

you know, price elastic and willing to pay, you know, to buy new vehicles, even with higher component parts. So the rhetoric around tariffs combined with the Fed being maybe higher for longer, I think that's fair to say at this point. One of the things that those two factors have contributed to is a much stronger dollar. And I'm wondering whether you think that that will still be a significant headwind for any U.S. multinational.

Yeah, so a stronger dollar actually works out pretty well for many of the big US companies. I think the important thing is where you have your borrowings. I mean, if you're a multinational, you have borrowed in US dollars, and you have revenue and income coming from overseas, then you could have an issue. But certainly, a strong dollar is actually welcome right now. I mean, one of the things we're seeing with Doge and all this government expenditure cutting

is a new approach to focus on potentially balancing the budget going forward instead of just spending so much money like a drunk seller. So we think generally these are good business-friendly things. And to the extent they ultimately lead to lower taxes for individuals or corporations in the US, that could really be good for future economic growth.

So you mentioned Doge there, the brainchild of Elon Musk. His company, Tesla, has been struggling lately. The last figure that I saw on shipments in China showed a decline. I think they've been falling for about five consecutive months now. February sales, I think, down 49% compared to last year. And at the same time, you have a company like BYD on the mainland that is gaining market share, I think, significantly.

BYD last month saw, if you can believe this, 161% year-on-year increase.

Do you have to reconsider some of the, let's say, Mag7, the darlings? I use Tesla as an example, but maybe there are other situations where these companies perhaps are a little overextended in their growth prospects. I think that's right. I think you do have to be concerned about that. And people have been saying that for a long time, including us. You know, they've gone, they've just gone up parabolically. And now, you know, you wonder whether

there's really value for some of these Mag7 stocks. I mean, they've been on such a run and there's been so much money chasing them that now you're seeing other markets with big technology or high growth companies outperform like you're seeing in Hong Kong and other international markets, like for instance, in Germany, where you have a

close to a 20% return year-to-date for both those markets, versus in the US, you're flat to down. Looks like the NASDAQ is down already a fair amount so far this year. So it seems to be a bit of a rotation. We'll see how long it continues. But certainly, US investors in the MAG7 and other big stocks have done very well looking back over the last two years. And so I think we were probably due for a little bit of a correction there.

But we'll see how long this continues, whether it stops now or continues to get worse.

And we wind up having another year like we had in 2022. How are you positioning yourself offshore right now, if at all? We've made certain investments in certain countries where we think there's opportunity for more appreciation. You know, there are some interesting value investments in, you know, around Europe and also in Asia. In China, for instance, it's just been, you know, a lot of changes. And also in Japan, there are a lot of interesting changes, you know, structural changes in Japan, you

where companies are getting a little bit more shareholder friendly. In China, of course, we had this big property market correction

And now, there seems to be a good amount of stimulus and perhaps a more business-friendly attitude in an effort to combat risk of tariffs. In Europe, it seems that there's going to be a bazooka of spend for military and potentially infrastructure spending. So there are some interesting opportunities in overseas markets right now. And we think investors should be flexible and willing to look at other places.

if it's likely that you're going to lose money in the U.S. market. However, there are some very interesting and very cheap companies trading in the U.S. market that have been

I think, oversold in the last couple of weeks here with all this turmoil and all this market volatility. So I want to get your view on the macro then. Over the weekend, President Trump was saying the American economy does face a period of transition, although he declined to predict whether or not a recession will happen this year. What is your sense of whether or not we'll see contraction in growth? I don't think we're there yet. I mean, I think the economy is still growing. You know, we still have some inflation.

I think if we were close to there, Powell would have been indicating that we're probably going to start lowering rates more quickly. But I do think, as I said earlier, that the Fed has some dry powder now. In case we do get risk of recession here, he could lower rates or

maybe perhaps reduce quantitative tightening also. Not too many people talk about that, but you still have quantitative tightening that's going on month to month with the Fed still reducing the size of its balance sheet each month. So right now it doesn't feel really like the US is at big risk of recession. Sure, there's a lot of change. You have tariff policy uncertainty. You have immigration policies that have changed and certainly a lot of layoffs that are coming through with the government.

You know, I guess all of this is creating a certain amount of economic uncertainty and perhaps slowing spending in certain sectors.

But I don't think we're at the point where we're facing risk of recession yet. The economy is just too strong and growing too well. And there's some pretty good tailwinds still. So underneath that uncertainty, I'm wondering whether you're still optimistic that the strategy on imposing tariffs will contribute to a really significant move in reshoring. Do you think that's going to move the needle when you look at American manufacturing of products like steel and aluminum? Yes.

So there are big changes, and unfortunately, a change like this doesn't happen overnight. I mean, think of how long it took for all these manufacturing companies to get out of the US. It took decades, decades of really weak policies that allowed all the good industry to go overseas. So it's not going to happen overnight. And I think that's what Trump was trying to telegraph in his State of the Union address,

bear with me, it might not be so pretty in the short term, but over the long term, it's probably going to be better for the economy. I think that's true. Unfortunately, it doesn't happen overnight. But you are seeing certain indications. I think

A number of auto companies are talking about reshoring into the U.S. or expanding their production here and reducing production in Canada and Mexico. And you have periodic announcements of new multi-billion dollar investment plans coming in the technology space and others. I think that will continue. George, we'll leave it there. Thank you so much. George Schultze, founder and CEO of Schultze Wealth Management, joining us here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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