The Impact of Tariff Threats on China
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. On today's episode, a look at how the threat of U.S. tariffs is impacting the economy in China. Plus, we'll get some reaction to those minutes of the last Fed meeting. Coming up, we'll be hearing from Eric Lynch. He is managing director at Sharf Investments. But we begin in Hong Kong.

Joining me now is Jenny Marsh, who leads Greater China EcoGov coverage for Bloomberg News. Jenny joins from our studios in Hong Kong. So we know that the U.S. did hike tariffs by 10 percent on all Chinese imports in early February. Is it fair to say that that came a little bit before Beijing was prepared for tariffs?

I would imagine Beijing was prepared for tariffs on day one. You know, I remember that first day Trump took office and sort of actually the surprise was there was nothing on China on day one. Then, of course, on day two, he started talking about tariffs.

But, you know, I think despite all of the sort of claims he's made about tariffs on chips and steel and the threats with Canada and Mexico, China is the only country right now that Trump has actually enacted a tariff on since he came into office. And so while it's only 10% right now, they are sort of actually the first in the firing line. And there's plenty more reason to think that more is to come with that April 1 deadline hanging over them for reviewing the first trade deal that Trump has ordered.

So, Jenny, I'm curious, how is the impact of these U.S. tariffs impacting sentiment right now in China? It's actually kind of interesting because, you know, the trade war's been there for a long time. But when you speak to economists and sort of

People onshore in China what they're actually talking about right now is deep seek And so this sort of surprise AI breakthrough from deep seek which was and the consumer platform was unveiled the day Trump came into office that has sort of given this massive sort of boost to animal spirits and

So, it sparked, I think it was a $1.3 trillion rally in China's stocks. And then Xi is trying to capitalize on that momentum by meeting Jack Ma for the first time since the crackdown on his company back in 2020 and a whole other range of tech luminaries earlier this week.

I think the negativity from the prospect of tariffs is built in, and people have been very prepared for that for a while. And really, they were facing a lot of pressures

under Biden, too. So in terms of sentiment, it isn't this sort of gloomy, worried sentiment permeating China necessarily. What actually is capturing the mood right now is the AI breakthrough and the sort of momentum behind tech. And finally, some hopes that the private sector might be getting back into swing.

So I'm understanding that as a way to say that Xi is capturing this moment to maybe make the case that China can be less reliant on its export economy and become a little bit more domestically driven on the demand side, which is something that he's been after for quite some time. Exactly. And the meeting earlier this week, you know, he had...

the bosses from BYD, Xiaomi, DeepSea, Jack Ma was there. It was really a display of like, these are all of our national champions which are rolling out world-beating innovations.

there's plenty of reason to believe in this economy. And they have said that boosting domestic demand is the number one priority this year. And that is the best way they can insulate themselves from these tariffs that are coming, by really sort of revving up demand at home. So next month in China, we'll have the annual plenary sessions. That's when the National People's Congress and the Chinese People's Political Consultative Conference hold their annual meetings. This is known as the two sessions.

Is it likely that the relationship between the U.S. and China comes up for discussion during this period? Well, Foreign Minister Wang Yi will have his annual briefing. And that is actually one of the only times in China that any sort of senior official takes questions from foreign journalists.

Obviously, it's all very scripted and the questions are submitted in advance, but for sure the trade war will come up during that session. And I imagine Wang Yi, who is a very, very seasoned top diplomat, he'll be very, very cautious in how he responds. But it's going to be one of the top talking points, I imagine, behind closed doors as well.

I remember when President Xi met with President Biden in San Francisco a while back, and one of the things that Xi aimed to do was try to increase foreign direct investment into China. And some of the latest figures that we have seen on inbound investment

in China, I think it's the weakest start that we have seen in about four years right now. What do you think that China can do that will allow capital, if this is even a possibility, to allow capital from the U.S. to flow into China?

I think if they want to win back the confidence of American investors, they have to stabilize the business environment. And I think foreign companies, for a start, have been asking for a long time for a level playing field for their companies. So,

the same access to procurement and bidding on deals that state-owned companies get, the same preferences, but also just stability. That was really the big signal from Xi meeting Jack Ma earlier this week. Jack Ma was the face, if you like, of the regulatory crackdowns because he was the biggest target. That meeting was taken by economists to signal that era of crackdowns is truly over.

And there's a stable business environment here. The government is going to give enterprises, private enterprises, a freer hand.

take his foot off the pedal and really let enterprise flourish. You don't have to worry about raids on foreign consultancies or the rug being pulled under an industry you just invested in. But with also the specter of a trade war hanging over bilateral ties, it is a hard job that Xi has to convince American investors in particular and American companies they're welcome. Particularly when the retaliation that China took towards Trump's initial tariffs

included an antitrust probe into Google. And that was mostly symbolic because Google doesn't do much business in China right now. But it was a signal to other American companies that if this continues, then they're fair game in the tit-for-tat responses. Jenny, before I let you go, I have to ask you about President Trump's advisor, Elon Musk. We know that Tesla, his electric vehicle company, has a big presence in Shanghai.

What is Musk's relationship with Trump and Musk's relationship with Beijing? How does that kind of come together in understanding the dynamics that may end up playing out as we look to the future? You know, I think Musk is probably one of the most sort of

dovish on China voices in Trump's ear. And it's really notable, actually, that since Trump came to office, Musk has said nothing about China. In the interview with Sean Hannity that was aired yesterday, there was one question that was put to Musk that was framed in a China context, and he didn't answer. He mentioned the Taliban, I think, in response instead. He has huge business interests

in China, very, very good ties with the Chinese government. When he visits Beijing, they roll out the red carpet, he gets meetings with Premier Li Chang. And I think the Chinese government see him as a very, very useful person in this administration because they have an interlocutor who is directly into Trump's ear, who is a business person with huge interest in China. So someone who has a vested interest in maintaining business ties,

and who actually is aligned with President Xi Jinping on many, many sort of policy points, including their position on Taiwan. So I think for Beijing, Musk is a very useful person. It'll be interesting to see how that sort of plays out. Oh, no doubt about that. Jenny, thank you so much. Jenny Marsh there, team leader for Greater China EcoGov, joining from our studios in Hong Kong here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So stateside, we got minutes of the last Fed meeting, and they show that officials want to see further progress on inflation before making additional adjustments to the target range for the Fed funds rate. For a closer look, I'm joined now by Eric Lynch. He is Managing Director at Scharf Investments.

Eric joins from Silicon Valley. He's on the line from Los Gatos, California. Eric, thanks for making time to chat with us. We know now that the Fed seems intent on holding rates steady. Do you think that's a reasonable approach?

Yeah, I do. In fact, if you think about it, since those minutes were recorded, we've had another CPI print and that print was going in the wrong direction. We've now had four consecutive months of increasing headline CPI, quarter remains above three as well.

And now you have threats of tariff, immigration, fiscal spending trajectory is still a concern. And that was referenced in the minutes. So, yeah, I think that the focus is still on inflation risk. One of the most interesting things that I found in the minutes, the idea that maybe the Fed pauses or at least slows down the runoff of the balance sheet, at least until the debt ceiling drama is resolved.

With that news today, we had a lift in prices on the Treasury market and in turn yields lower right across the curve today. Not a lot, but I think it set the tone here. And one of the things I think that has been out there in the marketplace, particularly with a lot of the commentary that we have heard from Treasury Secretary Besant, that the Trump administration is less concerned about what the Fed does with the Fed funds rate

And the administration is a little bit more focused on the 10-year yield. So what do you think the Fed is doing here in maybe adjusting the thinking on the unwind of the balance sheet? You know, I think it could just be giving a little bit of support, a little bit looser monetary support.

policy just because there is such a lack of visibility surrounding policy, whether that's in trade, whether that's in the fiscal spend and the budget, the debt ceiling, as you referenced. There are immigration and what that's impact. So there's just an incredible amount of executive orders and news flows, and it's very hard to dimension. And so that does seem like a prudent kind of way to

kind of split the balance between maintaining the Fed funds rate where it is, but also providing some loosening via the slowing down the runoff of the Fed's balance sheet. So if you look at the price action today, there was weakness in home builder and construction material stocks.

Toll Brothers late Tuesday after the bell with a miss on revenue and a very disappointing forecast. And then today we learned that U.S. housing starts slowed down in January. So the builders are beginning to kind of blame maybe higher mortgage rates as part of the problem. Where are you when you look at...

the residential real estate market and perhaps the indication that that may be giving you in terms of putting more money to work in certain areas of the U.S. equity space? Yeah, that's a great question. You know, this has been a risk on market for a long time, Doug. You

Multiples have expanded, you had the return of meme stocks, Bitcoin ran up. We do think it's time to be a little bit more conservative. Interest rate sensitive, hire for longer type plays like home building durables, they are suffering as you referenced in the Toll Brothers report and the Housing Star numbers.

But here's the thing, which we don't think is getting enough airtime. Q4 earnings season is coming to an end soon. And the current run rate is about 17%, 1.7 year-over-year earnings growth. So there are actually seven of the 11 S&P sectors that are growing their earnings by 8% or more. It's being led by financials. It's being led by health care. It's being led by communication services. And not just meta and alphabet, but things like T-Mobile and Disney and Netflix.

and Fox News even. So this is a broad-based earnings recovery. And our opinion is you want to stick with things that have quality earnings.

because of this very lack of visibility and all this policy. Let's talk a little bit about the AI trade. We know that it had legs for quite some time and really helped to power the market higher in the fourth quarter of last year. Throughout much of 2024, as a matter of fact, NVIDIA, a big part of that story. We're going to get earnings from NVIDIA soon. What are you expecting to hear from this company?

You know, I expect it to still be very strong, Doug. You know, they've basically already kind of forecast that they've sold out all of their Blackwell, their next generation AI chips for calendar 25. They've consistently outperformed their guidance the last four or five quarters by several percentage points.

If you look at the CapEx read-throughs from Meta and Alphabet and the like from Q4, they are increasing CapEx generally by a third and 25 versus calendar 24. So I think this is going to be a very good quarter. The real question is what happens to NVIDIA in the outer years, in the outer quarter, should I say? How much inference computing do we really need? What does the deep-seek kind of news mean for NVIDIA?

competition going forward to Nvidia. Well, you mentioned deep seek that takes us to China. Are you interested in opportunities offshore right now? Yeah, we certainly think that there's been a historically widespread and multiples between U.S. stocks and non-U.S. stocks. China obviously has some structural issues and economic issues at play there. So we're a little bit less interested in China.

But we do like some of the Asian countries' stocks, Korea, Japan. Europe seems to have trough. Japan is finally getting inflationary again. Economy is kind of lukewarm as well as Europe, but things do seem to have troughed. And so you've got earnings estimates increasing overseas.

off of multiples that are about 10 turns lower than the S&P 500, 8 to 10. So that does set up for a good risk-reward. And in case in point, a lot of these stock markets, I think of Germany, think of France, are up much more than the U.S. markets here today.

I'm wondering whether or not you think it's maybe a little too risky to take a position in the bond market. If we can agree that there is a risk of inflation being stubborn here, the Fed seems to be on hold for the time being. The market may be looking at

one more rate cut sometime in 2025, perhaps at the latter end of the year. Are you avoiding the bond market right now? Yeah, we would still be playing around the short end of the curve. You know, that's still a pretty nice yield. There obviously is a

a place for very conservative investors, asset allocations, to have some exposure to high-quality bonds, more short-term in nature, in our opinion, intermediate at best. But yeah, generally speaking, we still think because you had such concentration in the tech names, in the US mega cap names the last several years, what you're seeing in the market in the equities year to date is, you know, MAC 7 is up 1%, S&P is up 4%, value stocks are up 6%.

Small caps are up around three or four. There's a lot of good things that you can buy outside of the concentrated expensive stuff in the tech space that offer better risk rewards. In our opinion, if inflation stays sticky, interest rates are higher for longer.

probably get a better risk you know better uh risk reward and that than you do in bonds okay we'll leave it there eric always a pleasure eric lynch there he is managing director at sharp investments joining us from california 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 stories 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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