Live from Hong Kong: Why China Can Afford to Wait for a Deal, and the US Can’t
31:02 Share

This is an iHeart Podcast. Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future, while also creating opportunities to give back along the way. Visit Thrivent.com to learn more.

Thrivent, where money means more.

Ready to bring your visions to life? Learn how at AmazonBusiness.com.

In business, plans change fast and your brand has to keep up. That's why teams rely on 4imprint for promotional products that deliver. 4imprint offers thousands of options including apparel, drinkware, tech, and trade show gear. Many available with 24-hour turnaround, helping you move quickly and never compromising quality. You'll enjoy free samples, expert support, and every order backed by their 360-degree guarantee. So it arrives right and on time. Explore more at 4imprint.com. 4imprint.

Blumberg Audio Studios. Podcasts, radio, news. China's not easy. We want to open up China. It'll be a great thing for China, a great thing for the rest of the world. ♪

I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and welcome to Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next.

This week, we're recording Trumponomics in front of an audience from Bloomberg Invest Hong Kong. And we're looking at what Trumponomics means for this part of Asia, notably mainland China and Hong Kong. We've seen the latest round of trade talks in London between the US and China conclude with what our Bloomberg Geoeconomics Analyst Michael Deng has called a tactical de-escalation but not a strategic reset.

So we're none the wiser on where tariff rates will end up or how deep the much discussed decoupling of the world's two largest economies will go. But we have plenty to discuss and I'm sure plenty of theories as to what direction we're going about all of that and maybe also the future of the dollar.

I have some great guests to help me talk this through. My colleague, Rebecca Chong-Wilkins, Asia economics and government reporter for us at Bloomberg. Hao Hong, managing partner and chief investment officer at Lotus Asset Management. And Robin Ching, the chief China economist at Morgan Stanley. Thank you.

Rebecca, I'll take advantage of you as the reporter in the room. Take us up to speed on how you're reading that statement we had out of London. And I think we're still expecting a statement from the Chinese about those talks as well.

Yes. I mean, not a lot of detail, in fact, from both sides. Largely all of the detail coming from the US side here. But more than 20 hours of negotiations over two days, both the sort of heavy hitters from the US and the China side. Essentially, we are back to, I think, that point in the Geneva truce where both sides were sitting down saying, yeah, maybe something can happen. Maybe we can do a deal. We're going back to that pause.

But it's important to understand why there was that sort of breakdown in the Geneva truce in the first place. And it really fundamentally is over this issue of rare earths. China introduced restrictions on seven different rare earths. These were global restrictions, essentially requiring licenses from companies all over the world now, not just US, but in addition

there was effectively a shadow ban on US requiring these licenses. Now, as part of the Geneva truce, a really critical part of that truce was this agreement that the Chinese side would effectively lift that shadow ban and allow licenses.

The whole disagreement and the reason why we saw this breakdown between the US and China side is precisely what that meant. What does it actually mean for Beijing to expedite these licenses? How quickly is that going to come through? On the China side, of course, we are talking about an entirely new system of export controls over seven different substances. It's a global program. It's deeply complex. 45 days of a review process.

etc. And it does seem on the US side that there was an expectation that once that Geneva Agreement was made, that there would be a much more rapid introduction implementation. So that's really at the crux, it seems of where there was a sort of breakdown in relationships between the US and China. So now it seems it seems I said very tentatively, because we don't have a lot of details, but it seems like there is a quote unquote framework

to allow this expedited process or allow these rare earths to continue being exported into the US. We do not have any details on what that might mean, and the both sides still do need to go back to their respective leaders and effectively run this by their bosses.

But on the other side, there had been some excitement in the last couple of days when the Commerce Secretary, Howard Lutnick, actually mentions export controls and was also apparently thinking about some of the U.S. export controls on China, which have been a very sore point for the Chinese. Do we have any clarity on which of those controls were discussed? Because there's some are much more important than others.

Absolutely. So sort of yes and no here. We think that some of the immediate retaliatory export controls that the U.S. rolled out when they believe that the Chinese side were not living up to their expectations and the agreement on rare earths will be lifted. So that includes restrictions on things like software technology for developing semiconductors, nuclear materials, chemicals, some jet engine parts. So these are the latest restrictions.

package of retaliation measures that we've seen coming out of the US since that breakdown in the Geneva truce. It's unclear if this will involve some of these more fundamental issues over export controls over semiconductors. That, of course, is the big sticking point. These restrictions that were rolled out under Biden and continue to be expanded.

Well, Robin Singh, of course, Rebecca has to stick to absolutely what she knows. But you get to just speculate wildly on the basis of very serious economic analysis. How are you reading where we've got to? And I guess, what will you be looking for in terms of the economic impact of these ongoing talks? Thank you, Stephanie. I like the word you used, speculating, given all these flip-flops about trade talks.

So far, the bid-ask gap between US and China is still very wide. If you look at the readouts from the US side, they are later focusing on trade deal, on upcoming logistics for real earth, as Rebecca, you elaborated.

the chinese version beijing's readout covered a much bigger picture they want to reset the grand relationship between u.s and china covering tech curbs student visa geopolitical issues so apparently beijing wanted a grand bargaining deal so i think there is a huge gap between the bid ask and that means the ongoing talks won't be easy maybe they can extend these

trade tariffs deton, but what Beijing wanted is beyond tariffs. And Rebecca, you mentioned the real earth. Now China is using it more like a strategic card. So what you said is like Beijing thinking, if you cut our chips, I will cut your magnets. And over the last seven years, since the first trade war in 2018, China has strengthened its dominance in key

supply chains like real earth. Today they control more than 80% of real earth refining capacity, more than 90% of the magnet production, which is widely used in next generation of tech and the supply chain, including EV cars,

humanoid robotics, even modern defense system. So now China is using that in exchange for potential relaxation of tech curbs. That's also part of Beijing's strategic play, sending a message to US allies, making them think twice about aligning too closely to the tech curbs on China. So I do think all of this shows China wanted a grand bargaining deal covering not just the tariffs,

but the tech and geopolitical issues, given that's not going to be easy. You may see continued uncertainty on trade talks. So our base case is by end of this year, the US terminal tariff rate on China will probably stay similar to today's level, 30% to 40%, given all these difficulties and the divergence of Beijing and Washington's readouts.

And that's going to cost the foreign firms margins, cost the Chinese exporters jobs. So it's still a downside risk to the economy. HONG LIU: Hao Hong, I mean, it feels like the US side

had not fully grasped how reliant key parts of the US supply chain was on these rare arts. And I'm kind of reminded of the depiction someone had of the ongoing debate, which is the US has decided they absolutely want to divorce from China in 10 years' time, but live together in the interim for the entire 10 years. You know, that is the challenge that you see in some of these talks. Yeah, well, I think it's...

similar to a couple fighting through a divorce process, right? So the two parties don't see each other in the future, but then at the same time, they still have to live with the consequence and how to divide up the assets.

Rebecca and Robin mentioned about the rare earth. It is because the counteroffer from the US part is probably not good enough for China. So I think as a result, even though China has agreed to restart the approval process for rare earth exports at the Geneva session, the Chinese can always

run the slower than expected process to approve it. So normally it takes probably one to two weeks to approve to get a permit for exports and now it takes two months. Then that way, on the surface, on paper, China is not violating the agreement but then at the same time you're still not getting your key ingredient for your GPUs. So I think China can do a lot of these things to slow down the process and also at the same time people have to recognize the situation that

the American consumers probably can't live for much longer at the higher prospect of much substantially higher inflation. And at the same time, because of the process of this trade war and how this trade war started, it actually

somehow united the Chinese people together. So if you're in mainland China, you can really feel the atmosphere rooting for President Xi and also rooting for China in this negotiation process. So I think the Chinese people is very famous for "eat bitter." So in the Chinese culture, "eat bitter" means you can endure substantial hardship for a very long time. So as a result, as you can see, this group of people is ready to fight. But then at the same time,

The American consumers really want to get cheap goods. So then that way you can see that China can afford to wait. And so I think it's setting a stage for the negotiation. So I think one shouldn't be too surprised that as China's jet gone, then the Americans would have to give more concession during the process. And then towards the end, we probably get a result that is more favorable than expected for the Chinese people.

And just to follow up on that, the World Bank's obviously brought out some new forecasts this week. And it's cut the growth forecast for 70% of the world's economies, almost all of the world's biggest economies. It's halved this year's forecast for the US. The only country that it hasn't cut the forecast for this year next is China. So I guess to come back to you, Hao Hong, at this point, is China winning the trade war? Is China coming out of this certainly much better than the US? Yeah, well, I think it's...

much better than the Trail World Phase 1 in 2018, right? So I think

During the current trade war, China is more prepared than before. And also China is ready to use the asymmetric retaliation towards the US counterpart. So I think as a result, on the surface, the Chinese growth is steady. Chinese exports are steady. And if you look at the Chinese domestic economy, you're seeing two parts of the economy. One part is export manufacturing driven. That is doing really well. So even though the exports to the US has been down like one third, but then to the rest of the world is really booming.

And then at the same time, if you want to bearish on the Chinese economy, you can look at the consumer sector, which is

way below expectation and it's still not recovering. And then if you look at the housing sector, the housing bubble bursting process is still dragging on. So depending on which part of the Chinese economy you look at, and then you can draw very different conclusions. We have debates in Bloomberg and with The Economist as well, because we'll have analysis of the growth trajectory being lower for China and what that means in terms of people's expectations after years of double-digit growth.

But alongside that sort of pessimism around the Chinese economy, you know, we'll also be reading the latest release of the breakthrough with DeepSeek or the latest incredible charging technology for electric cars where China seems to be powering ahead much faster than people expected. So how do you deal with that schizophrenia day to day when people are asking you, how's the China economy?

Well, I think to Haohong's point, to a certain extent, it really depends where you look. And clearly there are areas where we've had most notably high quality manufacturing, where enormous amounts of investment have been pouring in. And you do see the clear...

emergence of winners among Chinese firms. Think about electric cars. Think about deep-seek AI. These are investments that have been going in for the last decade or so. We can think about the China 2025 plans, for example. By and large, aside from semiconductors, China has met all of its aspirations in becoming either a global leader or one of a global leader in those key sectors.

So in some ways, China is meeting its own tests. But on the other hand, to Hao Hong's point, there is still this quite painful transformation that is being ushered away from a debt-driven property investment-led society. And that clearly does still provide drags on the economy. I know at Morgan Stanley that you have your own sort of social metric index of content in China, if that's one way to put it. But

Another way is when you kind of look, for example, at private data sets at protests in China. Now, they're relatively small scale. We're talking about in the hundreds. But by and large, we have seen those continue to climb, particularly over the course of this year. They tend to be very economic focused. These are economic issues. They're rarely political, in fact, actually. They're often around housing issues. They're often around unpaid wages. So

to that point of knowing sort of where to look is you can see these pockets of real tension, particularly at the local government level where finances are really strained. And then overall, when we think about the consumer mood, of course, most consumer indexes will still show that we are pretty far from where we were pre-pandemic as well. So overall, that mood is different. But to Hao Hong's point, I will say there has been a remarkable

transformation and how this is all viewed as a result of the trade war. When we think about last year, there were all of these stories about deflation. Robin wrote extensively about concerns about the property market, when we're going to see a bottom. And really, the

cost for ordinary people of President Xi Jinping's push to transform the economy? Was this really going to pay off the end of the boom years? And with these sort of quite existential questions we are asking, now we are seeing this extraordinary support from many parts of the economy for President Xi backing China, standing up, and this sort of resurgence of sort of a nationalism and a nationalist feeling and patriotic feeling as well.

So, you know, in some ways that's nothing to do with the Chinese economy. We're talking about the sort of enemy that the US has created for itself. That has changed the national mood in China, I think. Well, Robin, I think we've established that Rebecca is a very careful reader of your work. But I'm interested in how you see that. And I think also we see maybe a change in the mood supporting the leadership movement.

But have we also seen a change of direction from the leadership in terms of its commitment to rebalancing the economy? Or is that just wishful thinking on the part of the Americans? You know, a commitment from the top to a more consumption-led economy, which is, of course, what economists have been lecturing the Chinese about for many years.

Well, Stephanie, I think, Rebecca, you are spot on about the change of narrative. Of course, because she's been reading your face. I have been bothering him for many months. It's true. Rise and decline of readership of mind deflation report.

Last year, it was all dominated by deflation, housing adjustment, overcapacity. Then suddenly, as Rebecca, you mentioned, there is a changing narrative and how you also briefly touched it. At least right now, despite China is not in a sustainable recovery path yet, at least there is a

bifurcation of the narrative, a tale of two economies. You have a very dynamic tech economy. Every other week, you heard the new technology progress, either AI model or next generation of batteries or self-driving cars, or even recently, China's health care. Biotech had its own deep-seek moment, able to make fast-follow drugs at competitive quality at a fraction of the US cost.

So all of these are showing a very dynamic tech economy that helped Hong Kong. I think your Hong Kong conference today is becoming bigger, partially because Hong Kong is back with the ecosystem, private equity investing in tech, using Hong Kong as exit channel, creating new money. That animal spirit is largely back.

But once you take off your augmented reality glass, you look at conventional consumers as Ho mentioned, or housing, construction, they are pretty much stuck with deflation.

And as economists, we have to explain why this bifurcation happened. I think fundamentally China has not shifted from a supply-centric business model or policy approach towards consumption-centric. They did some baby steps, social welfare or consumer trading, but these are too little. Fundamentally, the local government incentives

The GDP KPI, the government revenue largely relying on VAT, which is linked to production, all of these are showing path dependency. They are still pretty much in supply-centric mentality. We proposed that they should upgrade their Made in China 2025 to something called an Open China Market 2030, focusing on boosting domestic demand and consumption growth.

in a sustainable way, providing deeper social safety net that social welfare household centric reform to unlock China's consumption potential. However, according to Bloomberg,

they are probably still debating on doubling down on tech and the supply side in the next five year plan. So I do think that's the reason of the bifurcation of the economy, a tale of two economies. Unfortunately, for a bigger part of the macro economy, they are still stuck with deflation. So volume growth is fine. Stephanie, you mentioned many people

maintained or upgraded their China forecast to 4.5% or higher for this year. But that's for real GDP. That's for volume. Once you look at the value or nominal side,

And we think China's nominal GDP growth will stay at the subdued level of 3.5% throughout maybe the end of next year, given the deflation problem. And the recent example of they did some interesting introduction of self-driving cars. But meanwhile, you see all these cuts through the pricing war during EV car-- among all these EV car firms. So that's a perfect example of this supply versus demand imbalance is quite persistent in China.

- And just to unpack a little bit for people listening who are not always listening to the sort of economist debates about this, when you talk about the rebalancing and when you talk about still focus on supply and some of the incentives, I mean, it's an economy that is geared around an extraordinarily high level of investment over many, many years.

and much lower consumption than you see in most economies, certainly advanced economies, but also economies of a similar income. And what you were saying, Robin, is that the local government officials are incentivized still around just pushing out output rather than getting income to households or providing welfare services.

Hao, I know when we discussed this before the session, you made the point that this was about not just rebalancing the Chinese economy, but also the U.S. economy. I'm not sure that's the way the U.S. sees that, but just explain that briefly to us. Yeah. Well, I think to rebalance, both sides have to work together. I think the Chinese consume too little, invest too much.

and then the U.S. is the reverse. If you want to rebalance this structure, the U.S. has to produce more, consume less, and then vice versa for the Chinese. I think for China, it's a monumental task in the sense that if you look at the domestic economy, just now we mentioned about the housing bubble bursting process. Now, in this process, indebted department of the Chinese economy is really the household. The household is borne up to their eyeballs. The non-financial debt-to-GDP ratio is about 300% in China.

So when you have this department that is borrowing heavily to buy up properties, and then now we're in a property price deflationary process, it's very difficult for this department to deleverage because this department cannot print money. But then on the other hand, the U.S. is a different situation where you have the public department that is borrowing up a lot of debt, and then the U.S. household debt service ratio is still at all-time low.

In this kind of economic structure, then you will see an inflationary process. The US government can't keep its budget deficit down, but then at the same time, you're facing higher and higher inflationary pressure. And then in China, it's the opposite. If you really want to rebalance, it's a global rebalance process. It's not just about China. If you look at China,

So, the way we manage our economy, right, so we try to rebalance it for like decades. I remember still since 2007, right, so when the ex-government was in charge, there was this thing about the Chinese managing Chinese economy is about, it's like riding a bicycle, right, so if you're too fast or too slow, it will tip over.

I think if you look back now almost 20 years later, we look at the Chinese economy, it's actually more investment driven than before and less consumption. So it's telling you that whatever happened in the past two decades hasn't been successful. We have to change the way of thinking for China just rebalancing on its own. It hasn't been successful. I think it's a global rebalancing process.

I want to just say something a bit about not just the rebalancing of the individual US and China economies, but I would say globally there's a sort of rebalancing in markets that's happening. We're seeing the dollar fall relative to every currency, but certainly many around here. And we are seeing a reallocation of investment. People are still heavily invested in the US. It's hard to avoid. But certainly at the margin, we're seeing money flow

Particularly perhaps into this region. Rebecca, just tell us a little bit about how you see the impact for Hong Kong as a financial system for the relative role of the dollar here and investment sentiment.

In this part of the world, not just in Hong Kong, but in Asia, this broader question of the role of the US dollar going forward. There'll be people in this room who over the last year, whether it was trading the Taiwan currency, whether it was trading the Japanese carry trade, who have been on the forefront of feeling this sort of

the shift in the tectonic plates. Essentially, there was a big debate over whether or not actually we were seeing some kind of reversal of the Asian financial crisis, essentially declining confidence in the dollar, strengthening local currencies, and whether or not that would essentially mean a massive return of capital back home. Now, that sort of phenomena hasn't really started already yet in massive numbers, but certainly we are already starting to see that playing out.

And I think for many Asian countries, broadly speaking, economically, there's this question of how that impacts their export-driven economies that have, of course, so relied on that currency disparity. But also from a sort of financial markets point of view, there will be this question of how deep and liquid home markets are and their capacity to absorb back.

that home currency and whether if they are sort of mature enough to start adapting that back. But by and large, there is a potential good news story that we will see this sort of reinvestment back into home currencies.

I took a trip to the US not so long ago. I spoke to a lot of US fund managers, particularly outside of New York and places in New England and so on. And what struck me that was really remarkable is anecdotally, although a lot of them are persisting with their various macro and global trades and bullish on the US, they still believe in the US exceptionalism story. By and large, almost every single one of them told me that when it comes to their personal investments, they were all worried about overexposure to the dollar.

They're all worried about thinking about where else I diversify. What other currencies? Do we go to gold, even though it's too late? I just had this conversation come up again and again and again. It's so interesting taking that into the Asian context and how that resonates with traders and investors here as well.

Robin, you mentioned the role of Hong Kong, but do you also see just a long-term shift, this reversal of the Asia financial crisis, if you like, for this region? Hong Kong benefited from three waves of inflows. You mentioned about the capital flows. First wave since September last year. Policymakers in Beijing...

I believe stock market is a very important confidence vote, confidence of privacy. So in terms of national team or reserve management or China's sovereign wealth allocation, now they value Hong Kong more than ever before. That was a stage one, more driven by government.

Then after this earlier this year deep-seek moment, people realized, okay, China still has these innovation capabilities. And due to the legacy issues, a lot of big tech names are listed in Hong Kong, not in onshore China. So Hong Kong benefited from that narrative change. Okay, China innovation and animal spirit in tech is back.

Recently, the April 2nd liberation day, and as you, Stephanie, and Rebecca mentioned, people are debating on the falling of U.S. exceptionalism, weakening U.S. dollar. And the third wave of inflows is not from global money yet. It's from Chinese offshore money.

high net worth individuals or exporters who packed too much of their money in U.S. assets in the last five years. They were too exposed to U.S. dollar assets. Now they are participating in things like Hong Kong assets or Hong Kong IPO, so-called high quality M&B assets listed in Hong Kong.

So Hong Kong benefited from that. But the final wave, the most important one, has not come yet-- global money allocated to China and Hong Kong. Well, China is participating in this debate on weak dollar. Maybe China can benefit from that. But I don't think they are fully ready to seize this moment. They need to improve policy transparency. They need to reflate and rebalance

try to get rid of the deflation problem. If Beijing can deliver this, I think they will benefit much more and fully seizing this opportunity of so-called diversification away from US dollar. But so far, Hong Kong money is mostly Chinese money, either from Beijing or from offshore Chinese. That's the way they benefited so far.

Hao Hong, we have the last word to you. Do you agree with Robin that we're just at the first stage of a process? There's quite a few steps to go if we're going to have this shift in the centre of financial gravity in this direction? Yeah, well, I think more likely than not, you know, the US dollar will continue its depreciation process over the next couple of years. I think a very strong US dollar has been a symptom of the global imbalance and also the Chinese currency is way too weak.

And I think one of the reasons why the Chinese currency was so weak was because, firstly, we have to maintain the edge in our export sector. And then at the same time, I think the Chinese currency rate is more driven by capital flow rather than trade flows.

So I think as a result, in the past couple of years, you're seeing capital keep flowing out of China and going into the U.S. capital market. And also for the U.S. dollars that the Chinese exporters have been receiving, they have been keeping it overseas to be reinvested in the U.S. market.

So I think as a result, you can see in the past couple of years, the Chinese currency has been weak. It's because the direction of the capital flow has not been favorable to the Chinese currency. But now the table has turned. I think the narrative of the Trump administration is making itself hostile not only to the Chinese economy, but also to the global economy, actually hitting hard on the allies as well. So I think in this process and also after the Russian and the Ukraine war,

I think people start to realize that the U.S. dollar holding may not be as safe as they once were. And now they have to think for themselves. So I think as a result, we're seeing money being reallocated out of the U.S. market. Otherwise, how could you explain? So after a very significant risk-off event on the Liberation Day, the U.S. dollar continued to depreciate. And I think the process could accelerate from here.

Well, this is making me feel a bit old talking about the full circle from the Asia financial crisis because my first ever trip to Hong Kong was in the autumn of 1997 with the US Treasury. I had just joined the US Treasury and it was the World Bank meetings and we were just getting to grips with, at that point, the crisis in Thailand. But of course, it became the financial crisis. I'm not sure we're full circle since then, but we've certainly come a very long way and in this region, probably...

most of all. Thank you very much for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders. I was joined by Bloomberg's Rebecca Chong-Wilkins, Morgan Stanley's Robin Singh and Lotus's Hao Hong with special thanks to the team at Bloomberg Hong Kong Invest. Thanks very much.

How can you free your team from time-consuming office tasks? Amazon Business empowers leaders to not only streamline purchasing, but better support their teams. Smart business buying tools enable buyers to find and purchase items fast so they can focus on strategy and growth. It's time to free up your teams and focus on your future. Learn more about the technology, insights, and support available at AmazonBusiness.com.

Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data and with it, unlimited possibilities. Start saving today with Verizon Business. Ranked number one in small business internet customer satisfaction by J.D. Power. Starting price for 25 megabits per second LTE internet plan with smartphone plan savings.

plus taxes, fees, and economic adjustment charge. Terms apply. For J.D. Power 2024 award information, visit jdpower.com slash awards. This is what the market used to sound like.

Pretty complex. But today, with iShares by BlackRock, investing is easier. With over 450 ETFs, iShares gives you easy access to countless market opportunities. iShares by BlackRock. The market is yours. Visit www.iShares.com to view perspectives, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Risk includes principal loss. Prepared by BlackRock Investments LLC and member FINRA. This is an iHeart Podcast.