Charting China's Economic Road Ahead
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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. We want to begin with China after the annual parliamentary session. President Xi Jinping seems to be determined to push ahead with a very ambitious growth goal of around 5% this year, despite the trade war with the U.S.,

Now, we know the tariffs on Chinese imports to the U.S. are at 20%. And if President Trump were to boost that rate further, analysts are saying that Beijing will definitely need to unleash some big stimulus in order to hit that growth target. Let's bring in Katya Dmitrieva. She is Bloomberg News Asia economy reporter joining us from our studios in Hong Kong. Thank you. I'm sure it's been busy where you are.

Yeah, very busy few days. Right. Can we talk about the growth target? Does that seem realistic at this point? Depends who you ask. Chinese officials definitely think they can make it. It's the exact same target they set in 2024. They've met their targets for the past three years.

So history would suggest that once they set something, they're going to do everything they can to meet it. The Bloomberg survey of economists, if you ask economists, however, we've got a Bloomberg survey and it says that China's more likely to hit 4.5%. Now, the question is really how...

how much the stimulus can help revive consumption. I know that's always the question, but this year in particular, because from Premier Li Cheng's speech, it's very clear that they're doing a couple things. So they're boosting how much they're going to be spending in their budget deficit or how much they're comfortable with spending this year. What is that percentage right now?

So they've got a fiscal deficit target of 4%, which means that they're going to be spending a lot more on a number of programs. We only know kind of a handful of what those will be. They're raising the pension payout levels. There's a public subsidy for medical insurance that they're going to be boosting. The question, though, is what else are they going to do? And if history, again, serves as a guide, we know that throughout the year, the first few months...

Growth is quite strong. They roll out these programs. And then about halfway through the year, they're forced to do more because the numbers aren't aren't stacking up. Do you think that leadership in Beijing is operating under the assumption that it is inevitable that more U.S. tariffs or at least higher U.S. tariffs are on the way?

Absolutely. And you can see that in their reaction. So if you just look at Trump's previous statements, everything from 60% to 100% tariffs on China, which he said during the campaign trail. Now, 100% take that with a grain of salt.

But I think 60% was mentioned enough that that's what a lot of economists and analysts and people in Beijing are now pricing in. And so the reason why this NPC was particularly important is because it was the first chance that Chinese officials could react to that eventuality or what is perceived to be that eventuality.

raising the fiscal deficit target and also raising the fiscal deficit target and also focusing on the consumer is a sign that they're not going to be or trying not to be as reliant on exports, right? Because if you have these tariffs coming in from the U.S. and you have this growing protectionism really globally, then you can't rely on those tariffs or

You can't rely on trade. You can't rely on exports as much because it's just going to contribute to deflation. It's not going to get your growth to about 5%. So talk to me about this split screen that we saw happen yesterday. That would be Wednesday where you are, Tuesday here in the U.S., where Trump on one hand was addressing a joint session of Congress. And then we had Chinese Premier Li kind of detailing the work report, right?

It was pretty incredible, especially if you had the two screens on at the same time, because at a certain point, it was something like 60 seconds apart between the premier finishing and President Trump standing up and saying, America is back. And I think it's a really good image of what the next few years are going to look like, especially for China, because you have all these efforts domestically in China to boost growth.

and to get the country out of deflation, this dangerous spiral of deflation, and trying to steady the property sector and doing all of these things that were announced during the NPC over those few hours speech. And then right after you had President Trump

doubling down on tariffs, mentioning reciprocal tariffs, which are coming in April, and mentioning China by name, as well as several other countries in Asia, like India and South Korea. But the point being that it was just a reminder of how limited, in some ways, China's policies are, because at the end of the day,

You have the U.S., the biggest economy, and one of China's biggest markets saying, well, actually, we're going to make it a lot more difficult for you. If Chinese leadership has to do more on the stimulus side, are people talking about the risk that may be associated with that? I'm thinking about the debt levels that are maybe problematic already. Yeah, there's going to be a lot of debt issuance for sure. And, of course, fiscal deficit increasing potentially.

But this is kind of with China is a special case in some ways. And in some ways, it's also not. So it's a special case in that they have more control over these things. So we're going to see a lot more bond issuance. There's some response in markets. They're still hungry for that debt. So the government, from what I understand, is also planning to raise defense spending by about 7.2%. That seems to be...

the same thing that occurred last year, right? Not a big surprise on that front, but does it send a message?

Yeah, it is the same level as last year. But again, given how big China's economy is and how much they're spending already on it, it's significant. And this just goes to how China has said in the past and repeats, officials repeat quite frequently, they would like the defense sector, the military in China to match U.S. And

America spends among so many countries, among the top 10 biggest countries, spends more on their military than any other nation. And so that's a pretty big ask. So you think of

this kind of spending and it tends to drive economic growth and it tends to be, it tends to be, you know, what we saw with Germany, for example, this week as well with this bazooka expansion of their military. Like it does help growth. However, of course, geopolitically,

It could further increase tensions between the U.S. and China. We didn't see Trump reacting to that. We didn't really see any major officials raising a red flag and saying, hey, this actually indicates that China is very much a threat. We need to actually go forward and maybe add more tariffs.

aside from the ones we already added this week. So we're dealing with a trade war right now. And one of the things that I thought was very interesting is Beijing reiterating this stance on opening up markets to foreign investors. Where is this foreign capital going to come from in the mind of Chinese leadership other than the U.S.?

They're hoping it'll come from all over the U.S., maybe Europe, but Southeast Asia and Asia in particular. You've seen since 2018 really solidifying of trade and foreign direct investment ties between China and Asia, especially as companies kind of pulled back from the States and Europe. And there were a lot more restrictions in those regions and kind of the Western world.

So there is a sense that Asia could contribute a lot more. You know, think of India, think of even South Korea and a lot of the Southeast Asian economies that are growing at a much faster clip and sort of minting new companies and millionaires and billionaires every day. So I think the thinking is that the investment will come from there. However, it'll be a pretty tall order to get foreign investment to come back.

There's still a lot of questions about the property sector bottoming out. In fact, if you speak to any investor, they will flag that particular issue. In fact, the data shows the opposite, that domestic investors are taking their money out of China at a much faster clip and money is going into China at a much slower rate.

So it's not looking optimistic for that. I think we're going to get figures in the week ahead on foreign direct investment for China. But what are some of the important data points that you are looking at in the coming days? I know over the weekend we'll have some inflation numbers, also new loans data. But is there anything in particular that you think can shed a light on the vibrancy or the lack of vibrancy in the Chinese economy maybe in the next week? I think...

three things. There's three indicators that I always watch when it comes to China. There's the CPI and PPI, which I'm wrapping into one as inflation.

There's housing and in particular home sales, home prices for some of the biggest cities. So we get that. We get the inflation data this week. We get new home prices, used home prices in a couple of weeks. And then I would say the third thing is retail spending.

So talk to me about the behavior of the Chinese consumer. It's going to be some time, a few days, I think, before we get the monthly activity data. Do we know anything about how well retail spending has been performing? It has been very weak. In fact, the last few months in particular have been surprisingly weak, given that the start of the year we had a major holiday. We thought spending was going to lift significantly.

as a result of that. But actually, to end the year, there was this unexpected slowdown and sort of starting the year as well. I mean, in general, the issue is that there's still a two-speed economy, right? You have industrial production that's picking up. You have retail sales and consumption that's flatlining. And growth is just nowhere near where it should be to support

If we're talking about stimulating domestic demand very quickly, can you imagine what that might look like? Yes, and it has to do with stimulating domestic demand.

households more directly. In other words, providing childcare subsidies. That's a big one that economists and analysts have been asking for or looking for as a pretty significant way to not only boost consumption, but also addressing this issue of

of aging and the demographics shift. So if you provide things like childcare subsidies or take a chapter out of South Korea's book and just provide direct checks or funding for new couples or housing subsidies for families, I think that's something that would immediately change the game. Okay.

We'll leave it there. Katya, thank you so much for joining us. Katya Dimitrieva there, joining from our Hong Kong studio 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 markets are now looking ahead to the U.S. jobs data due Friday morning. The latest reading on private payrolls showed that hiring among U.S. companies slowed in February to the slowest pace in July. And on top of that, we know that government workers are in the process of being dismissed.

So what do we think we will learn from the February jobs data? Joining me now is George Cipollone. He is portfolio manager at Penn Mutual Asset Management, joining from Philadelphia here on the Daybreak Asia podcast. George, it's always a pleasure. Thank you for making time to chat with us.

So what is your sense of the labor market right now? Is it churning a bit? Let's feel that way, Doug. It's great to be with you again. Yes, but it does. So the labor market has a few key segments that are about to get weaker. Number one, obviously, government jobs, which you mentioned and which everybody is talking about. We're hearing some

pretty big potential reports coming out even from the Veterans Administration maybe cutting back as well. In addition to that is obviously immigration and that impact on the job market. So we are seeing some churn, and I really do feel for corporate managers out there today. So if you think about anyone that's a steward of capital, investors, companies, countries, they're dealing with a lot of uncertainty here. So it is hard.

harder now to set and make long-term plans regarding employment, manufacturing, just about anything today. So talk to me about what you're seeing in the bond market. Yields have been coming in recently, and I wonder whether that is a function of the growth scare? Doesn't seem like the bond market is too concerned about the potential for stubborn inflation. Do I have that right?

I think you do, Doug. And so a couple of the data points to watch. Obviously, this is a growth scare so far. And if you just look at the Atlanta Fed GDP number, that number was pretty stark and it's pretty telling in terms of just the general tone. That's one stat. And it went negative for the first time in a while and pretty sharply and pretty quickly. The other thing is that Besson obviously has talked about lower rates. And I was always wondering how he was going to do it because the 10-year is a market rate.

In Trump's first administration, he was beating up Powell about short-term rates. That kind of made sense, I guess, to some respect, because that's more of a controlled rate where the 10-year is not. So it looks like, yes, bringing in some of these growth fears, whether it was intentional, 4-D chess, whatever the administration is doing, has worked so far.

You make a very interesting point there. So I'm going to ask you this. Could you imagine a world where President Trump, to use your term, beats up on Fed chair Jay Powell to use the balance sheet as a way of bringing down market rates? Certainly could. So I think one of the things is obviously he's using this bully pulpit across the board, whether you can talk about trade or you can talk about rates or just about anything right now. So, yes, I think he could potentially do that.

Now, again, I think the biggest thing to watch is this 10-year. Where does it go? But now I think they are playing with fire, though, because you don't want to get the market too concerned about growth because it could really unravel here and we could get even more volatility. And that, I think, could be a big concern. A couple of the big houses on Wall Street in the last week.

a signal that they are increasingly concerned about the risk of recession. A model from J.P. Morgan showing a higher probability of that fact. Similarly, Goldman Sachs has a model that suggests the risk is edging higher. Is that something that you're concerned about? We're talking about growth scare. I know that. Is it a bridge too far to say that we're on the verge of a recession?

I don't think it's a bridge too far just because, again, this uncertainty is going to cause a lot of managers to kind of pause. And we're already seeing an earning. So if you just look, we are bottom-up managers for our fund. And one of the things we do is we listen to management teams all day long. And what we're seeing is a pretty good contrast from the fourth quarter down to the first quarter, where we are starting to see a rollover of earnings expectations. And it's pretty much just about every sector. And that's

different. So again, I think if there's more uncertainty, that's going to make managers pause, and that could lead to even worse EPS results moving forward. So hopefully it's not recessionary. I will say full disclosure, I do think this administration does want to be pro-growth, but I do think if there's going to be any weakness or slowdown, they're going to want it earlier in Trump's second tenure versus later. So George, where are you seeing opportunity? I'm curious.

This is the perfect lead into what we're doing today. Now, obviously, this volatility is kicking up a lot. What is that doing to asset prices? It's moving them all around. I will say one of the areas, so bonds have rallied. So we did increase duration a few months ago, which was very beneficial. The other area, Doug, that most people probably don't participate in or look at are convertible bonds. We're seeing some price moves down of 40 to 50 to 60 points in some of these convertible bonds.

And that's one area where we can invest in for our fund because it is so flexible. That's an area that we're spending a heck of a lot of time in right now. Small caps, again, I say small caps a lot, but if you find four of our five best performers last year were small caps and they were up anywhere from 80 to 100%. And there is still a lot of value there with this recent decline. So that's where we're going to spend most of our time today.

Are you lightening your position if you are exposed to mega cap tech, let's say the Googles, the alphabets, the Microsoft, the Apple? Are you kind of dialing back from that exposure? So we tend to avoid peaks in cycles and tops. And that's one, you know, so we did have a decent amount of, even though we're value investors, we did have some exposure to whether it's subcomponent companies that would support this AI move. And we did trim back on a heck of a lot of those because they moved up a lot.

at the end of last year and in November and into December. And so, yes, we do have an elevated cash level. Part of that is in the bond side of the fund. Part of that is on the equity side of the fund. So we do have dry powder, which I'd love to have excess cash when markets get volatile because that's when we tend to have some fun. But again, going back to it, yes, I do think we tend to avoid cyclical peaks. And that could be a cyclical peak in chemicals or it could be in tech where we are agnostic in that.

from that standpoint. Are you looking for exposure offshore right now in this current environment in any way, whether it's Asia or Europe or South America?

So that's an interesting thing, Doug. If you remember last year, international stocks were getting walloped relative to U.S. stocks. And so that was a pocket where we found a decent amount of, so all of the companies that we own have to be U.S. denominated and trading U.S. dollars. And so we can buy ADRs. And we did increase our ADR exposure last year just because they were so significantly cheap relative to U.S. stocks. And a lot of those have gapped up and rallied. And

you know, if you look at foreign markets, whether it's Germany today, their stock market has rallied a lot. Japan rallied a decent amount. And even China now is after years of just sluggish stock movement has finally started to

pick up. So yes, to your point, we do have some exposure there starting from last year, and we're happy we did that. George, we'll leave it there. It's always a pleasure. Thank you so much for making time to chat with us. George Cipollone there. He is Portfolio Manager at Penn Mutual Asset 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.