Trump Says He'll Set Unilateral Tariffs; China's Biotech Boom
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krizner. So U.S.-China trade talks remain our number one topic. And today, Treasury Secretary Besset was saying that Beijing has not threatened to cut off pharmaceutical exports to the U.S. In a moment or two, we'll check in with Bloomberg Opinion for a look at how biotech is advancing in China. I'll be joined in a moment by Bloomberg Opinion columnist Chuli Ren in Hong Kong.

Meantime, President Trump declared a trade framework with China has been completed, and he said Beijing will supply rare earth materials and magnets up front.

The president also said the U.S. will allow Chinese students into American colleges and universities. Tariffs, meantime, for these two countries will be maintained at their current lower levels. But remember, that number is still much higher than when the president took office in January. Bloomberg's Jennifer Welch says that Beijing has learned some things.

"China now realizes they have this major hammer in the form of these critical mineral export controls that they can leverage, and I think that really dilutes the U.S. ability to push China towards the deal that Washington says it wants." Jennifer Welch of Bloomberg Economics. By the way, Presidents Trump and Xi must still formally sign off on this agreement.

So let's take a look at the market action right now. Maybe a little bit about tariff action as well. I'm joined by Zachary Hill, head of portfolio management at Horizon Investments. Zach, thank you for making time to chat with us. Could you weigh in on your reaction to what you've been hearing about this agreement that was reached in London a couple of days ago?

Yeah, Doug, great to be with you today. You know, I think this agreement broadly kind of hits on all the points in the market was already expecting. So really seems like a status quo met expectations, but did not exceed them. And

In the context of how much risk premium has come out of the market over the last month and a half or two months, it wasn't enough to push equity indices higher today, which kind of speaks a little bit to the fact that we're pretty fully valued here above $6,000 in the S&P. So, Zach, I'm curious about how you're navigating the current terrain when it comes to tariffs, given what we know so far.

It's interesting, today on Truth Social, President Trump posted the U.S. is getting a total of 55% tariffs. China is getting 10%. So let's say that those levels do remain in place for a period. How is this going to impact your decision-making when it comes to putting money to work?

Yeah, I mean, those levels are pretty large and are likely going to have to be, you know, force companies to adjust in terms of their cost structure and the way that they're sourcing, you know, inputs. And so, you know, we do think that that's going to, you know, weigh on economic activity. It's not...

likely large enough to put us into a recession, but it is likely something that we're going to feel a growth slowdown. And so from a positioning perspective, we're trying to keep things pretty tight and pretty close to home and keep a little bit of dry powder because we do think, especially in the summer months after a pretty exhausting period of trading to start the year, that this low liquidity environment is likely to

uncover some opportunities for us to put some capital to work. Let's change gears, Zach, talk a little bit about what's happening in Washington with respect to the tax bill. I know that the Senate is now trying to negotiate a few things, and there is still concern about the level of deficit spending, I guess, that we could say. Double-line capitals, Jeff Gundlach was saying today that America's debt burden and interest expense have become untenable. The bond market at this point really doesn't seem to be as upset as it was

a month ago or so it would appear when the House was negotiating its version. How do you make sense of that?

Yeah, I think, you know, the way that we make sense of that is just this narrative volatility we've had on the macro front. You know, tariffs come and go. You know, Doge was a thing that the market was talking about for quite a long period of time. And now it's no longer relevant. And the concern about, you know, budgets and the deficit bill and long term interest rates has been something that's waxed and waned. You know, I would agree with you with that importance in the market situation.

narrative has has faded and you know likely is not going to come back unless we see a material ups upside surprise to the deficit so you know nobody really thinks that we're going to be cutting the deficit from current levels if we expand it in a really material way that might cause some indigestion in the long end of the bond market but it seems like a lot of that at least in the near term is already in the price and we've seen the curve steepen pretty dramatically

Rates were down today across the curve. Remember that we did have that benign reading on May consumer prices first thing in the morning and kind of goes to the notion that maybe we can get more than one Fed rate cut in this year. I think the swaps market is fully pricing in 25 basis point cut in October and now maybe a 75% probability we get a cut in September as well. How are you feeling about the Fed as a part of this story?

Yeah, you know, the Fed has been kind of on the sidelines for a while because of all the uncertainty around, you know, what the economy, how the economy is going to evolve and how inflation is going to evolve. And it's actually interesting, the end of year interest rate implied in the futures market is about the same as it was to start the year. So about 50 basis points worth of cuts.

And so, you know, one of the things that we're watching is the potential now that we've had a few good inflation prints in a row after a series of bad inflation prints to end the year and to start this year to see if that emboldens some of the doves, you know, in this in this vacuum that we have right now to start pushing for the idea that interest rates are too high.

It's not our base case scenario and the economy seems to be doing just fine with interest rates above 4%. But from the way the Fed looks at things, they do still think that they need to be cutting at some point. And so that's something that we're going to be paying quite a bit of attention to over the next few weeks to see if that narrative of the Fed needs to start acting. And they're not going to act this summer because it's too soon, but they could potentially act pretty forcefully in the fall. And so that's something that we're going to be watching closely.

as the news flow evolves. So President Trump was saying that he is very, very close to releasing the name of a nominee to replace Fed Chair Jay Powell. And a number of market participants were saying the probability of Trump appointing someone that is uber dovish is very, very high, given Mr. Trump's stance on being pro-growth. What would that do in your mind if we get an uber dovish Fed chairman?

Yeah, I don't think that would be good for market sentiment, generally speaking, because it's going to cause, you know, some pretty material steepening in the yield curve. And that's going to be felt in equity valuations. And similar to some of the price action that we've seen, you know, at parts this year, you know, higher long-term interest rates will be met with a lower dollar and not a higher one as the typical relationship would hold. And so, you know, we don't think that would be good for markets. And there's a potential, you know, like you said, that if we get an announcement, you know, more

In the near future, we could have that shadow Fed chair idea, which is something that investors have not ever had to deal with in the U.S. And so, I don't think that's something, generally speaking, that would be well-received by the market. Let's talk a little bit about the equity space right now. Are you still constructive on U.S. stocks?

We are constructive on U.S. stocks, but not nearly as much as we were to start the year. Actually, our favorite and our highest conviction call that we have is that we're likely to see continued dollar weakness, especially against large companies.

international economies like Europe and Japan. And so, you know, develop markets is a part of the global equity universe that we favor. And within the U.S., you know, kind of keeping things pretty neutral, not going on the defensive side of things.

maintaining some tech exposure and playing offense in the domestic financials and the banks. We think that's the area of the market that has the clearest deregulatory tailwinds. Are those the same things that you would employ if you went offshore, financials and tech?

Well, the composition of the offshore market is a good bit different. And so, you know, a lot of our favoring international markets more than we have over the last few years is due to the dollar dynamics that we think are to continue to be in play. You know, the sector composition of those markets is a good bit different.

It's a good bit different than what you get in the U.S. And so we do think, especially in this kind of environment where risk is higher than it has been in some time, that international stocks are going to offer a lot more diversification than they have in the past. U.S. investors have been pretty disappointed with the benefits of global diversification really for the last 10 plus years. But we do think this is an environment where that's going to continue to pay dividends in terms of reducing inflation.

overall portfolio risk and potentially improving returns. I'm curious as to how you're thinking about Chinese equities right now. Obviously, the deep seek moment was a big one for the equity space. In a moment, we're going to be taking a look at what's going on with biotech in China. How do you view Chinese equities?

Yeah, I mean, China is one place in terms of equity market composition where you can actually get a lot of high growth tech names. The problems there, you know, are potentially existential, however, in terms of, you know, the feud between the U.S. and China, which, while it seems to be on a better page today, you know, two and a half months ago was in a very, very dark place. And so, you know, we're a little bit cautious on EM as a whole. And we don't necessarily think that that

kind of dollar weakness trend that we expect is going to extend across the EM universe more broadly. And so, you know, not really embracing the EM trade. We prefer developed markets. Zach, we'll leave it there. Thank you so much. Zachary Hill is head of portfolio management at Horizon Investments. Joining us here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. China has offered a few deep-seek moments so far this year, and it really shows the country is more than just the world's largest factory. China has clearly demonstrated it can compete with the U.S. on the technology front in areas from artificial intelligence to military defense. And now Chinese biotech is having its day in the sun.

For a closer look, I'm joined by Bloomberg Opinion columnist Shuli Ren. She's on the line from Hong Kong. Shuli's been writing about how China's biotech industry is gaining momentum. Shuli, it's always a pleasure. Can we begin by having you give me a sense of scale here, perhaps a few examples of how biotech in China is advancing? Sure.

Well, the revelation came really just a month ago when Pfizer agreed to pay a record 1.25 billion upfront to license an experimental cancer drug from a Chinese company called 3S Bio. Two weeks later,

Bristol BioSquib said it will pay BioNTech another $1.5 billion to license a similar cancer drug. And that cancer drug was an acquisition from BioNTech. That cancer drug was bought by BioNTech from a Chinese company just late last year for $800 million. So what we are seeing is that big pharma are paying billions of dollars licensing Chinese drugs.

It's interesting because when we think about artificial intelligence, obviously military defense, I think these are areas where the government is kind of working with the private sector to accelerate a lot of development. Is the same true in biotechnology? Is the government involved in some way?

Not really. I mean, biotech is having a winter globally, right? Like what we are seeing is that the biotech companies in the U.S. are not getting that much venture capital funding. And the situation is even dire in China. I mean, venture capital has lost its shine since the government cracked down on big

tech starting 2021. And what we are seeing is that the biotech startups are basically coming up with innovative drugs on their own. So are we to understand then that this pace of deal making and a lot of the appetite for biotech in China is going to last? Is it durable, do you think?

I think so. And I think President Donald Trump's unpredictable economic policies plays a huge catalyst. I mean, look at Big Pharma. Trump has talked about cutting prescription drug prices by 59 percent at the minimum, right? And his big, beautiful tax and spending bill has Medicare and Medicaid cuts.

What that means is that big pharma are just not going to be as profitable as before. And that gives them incentive to outsource research and development to cheaper destinations such as China. So within China, give me a sense of how the labor market is supporting the biotech industry. Are young college grads moving into the field? Are there opportunities?

Absolutely. In China, there is this popular phrase called the engineer dividend. And basically it talks about in the last decade or so, China has been producing a ton, millions of STEM science students. For instance, like engineering, medicine are two of the most popular degrees for graduate school studies. And all these young and fresh graduates

engineers, bioengineers, medical students, they're coming to market, right? And they are going to come to work for biotech startups for pretty cheap prices compared to the U.S. When you look at the way in which some of these stocks have been performing, perhaps on the mainland or in Hong Kong, have they been doing remarkably well?

remarkably well. The Hansen Biotech Index is up 60% this year. By comparison, S&P Biotech Index is in the red, right? And what investors are banking on is that big pharma are not only going to

licensed billion dollar deals, they're also going to buy equity stakes in those smaller biotech companies. For instance, the Pfizer deal, 1.25 billion, like a licensing deal with 3S Bio, they're also putting a $100 million equity investment in the Chinese company.

When I think about R&D, drug development in this country, I think about the Food and Drug Administration. What is the regulatory regime like in China? And if you had to compare, let's say, Chinese standards versus U.S. standards, what conclusion would you arrive at?

I think the Chinese are also quite strict with approving drug use. And the Chinese regulatory body is actually pretty open-minded about introducing Western drugs because they do see that Western drugs are

often seen as better quality. So in a way, for the Chinese biotech companies to go to market, it could be just a little bit better for them to partner up with the U.S. big pharma. Shuli, we'll leave it there. It's always a pleasure. Thank you so much. Bloomberg Opinion columnist Shuli Ren.

She's writing about how China's biotech industry is gaining momentum. And you can read Shuli's writing if you have a Bloomberg terminal. The function is OPI and go. Shuli Ren 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 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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