China's 'Two Sessions' Kick Off Ahead of Trump Tariff Barrage
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Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Daybreak Asia podcast. I'm Doug Krisner. So markets are gearing up for President Trump's long-promised tariffs on China, Canada, and Mexico. These new levies are set to go into effect at 12.01 a.m. Wall Street time. Coming up in a moment or two, we'll be speaking with Patrick Kennedy,

He is founding partner at AllSource Investment Management. But let's begin in China, because all eyes today will be on the two sessions meetings. This is the National People's Congress and the Chinese People's Political Consultative Conference. They will hold their meetings beginning today. For a closer look, I'm joined by Shahzad Qazi. He is the COO, also managing director at China Beige Book. Joining me in the interactive broker studio here in New York. Good of you to drop by.

What are markets going to be looking for from the two sessions, do you think? Well, I think the biggest thing that markets are looking for is how big or how robust a stimulus package are they going to unveil at this meeting, what the fiscal and budget deficits are going to look like for the next year. So do you think a growth target of 5% is something that leadership will offer up?

Most likely they'll at least hint at it. Um, you know, I think they've had a change of mind for suggesting that they were going to do away with annual growth targets, but never actually doing that. And now seemingly setting them every year. Anyway, uh, again, 5% seems to be what they're going to most likely highlight, uh,

I think markets are more or less agreed on that. So there may not be very many surprises there. But doesn't leadership have to agree to expand the deficit to meet that growth target? Are we likely to see that happen? Or do you think the accumulation of a little bit more debt is something that China is really trying to avoid right now? Let me just...

quickly say that, first of all, this new 5% target that they've been going after is starting to look a lot like that old 6.8% where the economy would just grow 6.8% quarter after quarter and year after year. Which is to say that you really don't put a lot of—you don't believe it? I think markets should take it with a grain of salt, maybe two, three. Yeah.

So I think that's number one. Number two is, yes, of course, they are absolutely going to have to throw some money at it. Now, the economy is not doing nearly as terribly as I think a lot of the consensus would have had, you believe, late last year. So the deficit spending may not actually have to be as large. Of course, we'll see what the numbers look like. You could make the case that the leadership is being very prudent in trying to unwind the

a lot of the excess that may have built up vis-a-vis the property market. Do you think that what is happening right now is basically sound economic policy, or is China taking a big risk maybe going into something that's going to be a little bit more protracted and difficult from which to extract?

They're sort of in a trouble spot here. On the one hand, they are trying to bring the economy back to life, especially the property market. I think they've slowly tried to resuscitate it. And there are signs that they are being successful there. Their biggest challenge that's been talked about for well over a decade at least is how do you transform the economy so that you can actually spur more consumption and less savings among Chinese households?

They don't seem to want to do anything about that from a policy standpoint. So it's not so much that they're being prudent. I think that political will to make some of those tough decisions and to really say we're going to actually transform our policymaking in order to become a consumer-driven economy in 5, 10, 15 years down the road, they're just not able or willing to do it.

The risk of a trade war, we're getting some headlines right now as I'm talking to you about how China strongly opposes these new tariff measures. We're in something that feels like a lot more than a trade war. I mean, we can talk about decoupling if that's the way that you see this, a bit further decoupling. How problematic is this right now in terms of what the U.S. is trying to achieve and the way in which that may hold back Chinese growth?

Yeah, look, I think they expected tariffs to hit. They were hoping perhaps that the tariffs would hit later in the year or could and therefore potentially could be avoided with an interim deal. Now, that's all out the window, at least as far as we're concerned now. They're going to try to counteract that by supporting their manufacturing base, by supporting the exporters in China, whether it's through cheap credit, whether it's through other subsidies and so forth.

Now, this really comes down to how much more do we see the tariffs getting ramped up? We know 10% hit. We know another 10% is coming down the road. And then, of course, what follows after that, which is, of course, the big unknown for now. Would you be optimistic that there can be dialogue given the current cast of characters?

I think a deal is not as close as markets may have presumed after President Trump was elected. The theory was that they're going to be able to clinch a deal pretty quickly. I don't think that happens anytime soon. I think between now and a potential deal at some point, if a big deal is even possible, you're going to get more...

potentially muscular foreign investment restrictions. More export controls are being discussed. Of course, we're seeing the new report out from USTR where they're wanting to levy essentially fees on Chinese ships. So I think a lot more tension and friction is ahead of us. And that pushes back prospects of a deal currently. We've seen a change in sentiment, particularly since the story on DeepSeek.

and a lot of the technology companies in China that have been capturing the interest of Xi Jinping. I think there were some meetings that he was a part of a couple of weeks back. Is that enough to change sentiment in China right now, a story on high technology? Are the problems far greater than that? Well, I think in the short run, there's no question that that has created a lot of optimism, and we should see a lot of positive sentiment. I think within the real economy, not just within markets.

The real question ultimately is, as usual, I think what's happening here is that the private sector and their creative and innovative juices, I suppose, are probably going to be used to empower the state and to strengthen the Chinese state, and not just for the sake of having a successful business and for the sake of just making money or selling in creative ways to Chinese consumers or so forth. And that

has a very different upside potential than what you would have, for example, in a more freer economy like ours. When you speak with your contacts on the mainland, what are they saying about current business conditions? Yeah, look, business conditions are getting a lot better, and the year has actually started out a

quite positively. I mean, you know, in the month of January, for example, when China Beige Book data came out, we saw very clearly in the results that there was improvement across the board, across multiple sectors. We were quite, you know, surprised and a positive upside surprise there in the property market. Consumer spending in the lead up to the new year looked

quite decent. So I think the business climate, as I said, is not nearly as bad. And I think that brings down a lot of the pressure on leadership today to have to unveil these big spending plans and try to rescue the economy. So I think that's the key question, is it not? I mean, what comes out of the two sessions and whether or not anything that is positive right now in terms of momentum

is sustainable. Shehzad, thank you so much. Shehzad Qazi there, COO, also the managing director at China Beige Book, 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.

Thank you.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. There's no room left for Canada and Mexico to avoid tariffs. Those are the words of President Trump. He said the countries could not negotiate any reprieve from 25% tariff scheduled to take effect at 12.01 a.m. Wall Street time. Also today, Trump signed an order to raise the tariff on Chinese goods to 20% from the current 10%.

And on top of that, the day's economic news was bearish. U.S. manufacturing approached stagnation during February. Joining me now for a look at the price action is Patrick Kennedy. He is founding partner at AllSource Investment Management. Patrick joins from just outside Hartford, Connecticut.

Can we begin by talking about the manufacturing PMI? When you look at a reading of 50.3 for the month of February, that's barely positive. And I'm sure in your mind, it's raising a lot of concern.

Hi, Doug. Thanks so much for having me back on. I think that the way to look at it is the trend, right? So six months ago, we were on the program and we were talking a lot about hot inflation and sticky inflation. And at the time, I'm sure you remember, most analysts out there were expecting six cuts this year. And we had came on, we said, we don't expect any cuts. If anything, a hike could be possible.

Right. So you fast forward to today and inflation has been very sticky. Right. It's been very, very sticky. It's been around that 3% level and they just haven't been able to break it. And sure enough, we went from six cuts down to four cuts down to no cuts to now potentially even a hike.

The reason why the market is selling off in our view is the market can handle the inflation data coming in a little hotter than expected. What it can't handle is a growth scare on top of that. So now we're looking at the stagflationary environment, right? You had jobs data fairly weak last week when it came in, and now the PMI data is trending lower.

So I think all eyes are going to be on the jobs data coming out Friday. But the reason why the market is so worried is you're putting together now these data points and you're starting to look at an overall trend of growth weakening, but inflation staying sticky. Right. Typically, when you have growth coming down, you have inflation coming down with it.

and you get the benefit of inflation at least coming off a bit and rates potentially lowering and that sort of thing. If inflation stays hot and growth comes in weak and starts to fall, the Fed is not going to be able to let their foot off the gas pedal with stickier inflation. So there's going to be very little we can do about a big potential growth scare, which I think the market is pricing in now. It's interesting that you make that point because as a part of the ISM data, the prices paid component really jumped, I think, a reading of 62.4%.

which was the highest level since mid-2022. So explain to me if the dynamic is really one of stagflation that you're kind of sketching out there. Why are yields moving lower across the curve? Don't you think there would be a little bit more resistance in the bond market?

I think it's more of a knee-jerk reaction at this point, right? And I think people are still kind of looking at where we settle here, both in growth terms and inflation terms, right? So if we get a few more hot inflation prints or if the trend starts going up, I think yields react pretty quickly to that. What you're seeing right now is yields pricing in the last three weeks of growth data coming in lighter than expected. I think very quickly, if we start to see inflation data continue to come in hot,

So, deals will be pricing that data and accordingly over the growth scare simply because it has longer term effects than the growth scare does.

I was struck by news today that Singapore is investigating whether or not NVIDIA chips initially shipped to Malaysia ended up in China in violation of U.S. sanctions. We were told that the focus is on these servers, the AI servers from Dell Technologies and Supermicrocomputer. Now, these devices contain those high-end NVIDIA GPUs.

And we know that they're currently under export controls. But local media in Singapore was reporting that police have arrested several people for alleged...

roles in procuring and shipping these chips to the Chinese mainland. This goes to the deep seek story. I know there's been a lot of rumors, some speculation as to whether or not that AI model was adopted or built on the back of more sophisticated NVIDIA chips. But look at the price action in NVIDIA today, down by more than 8.5%. Does this kind of change your thinking about the AI trade at all?

It changes my thinking about these large multinational companies in general. So if you're doing business with China, which most of these companies are trying to tap into China, and you have tensions increasingly rising,

that's not a good outcome for any sector, right? Especially AI with the growth story behind it. But I think any multinational company right now has to be sitting down in boardrooms thinking about how a 10 or 20% tariff is not only going to affect the cost of chips, but anything else coming out of these countries. When you look at like Mexico and Canada, these are two of our core trading partners, right? So it's definitely going to have an impact on

not only on the chip industry, but we think across the board. Well, Taiwan Semiconductor was in Washington today. Their CEO, C.C. Wei, alongside President Trump, announcing plans to invest $100 billion of additional capital

into producing chip plants in Arizona. Now, we know that there have already been about $65 billion in funds that TSMC has allocated to kind of expand U.S. capacity. Do you think this is happening too late in the process in terms of kind of what you're describing, the risk of geopolitical stress, tensions, and perhaps more harsh tariff policy?

I do, unfortunately, Doug. I think it's going to have to take a lot more than just one story like that to move the market. So it's funny you mentioned DeepSeek because from that story when it came out until now, I think that's really the key point in which sentiment turned, right? So that's the first kind of kink into the AI chain that we've seen. You had a big sell-off coming off that news. And then the data on top of that, the macro data coming in week after

just created this downward trend, right? So I know that the current administration has been pointing at some of the stories around Apple investing big into the US and now Taiwan Semi. But as you can see, the price action in the market really just hasn't been adjusting to it whatsoever in a positive manner.

I think that we're really going to have to either see a flush out here, right? See a flush out in the VIX spike and all that good stuff. When you typically see a bottom, those technicals play out. If we don't see that, there's going to be half, there's going to have to be some progress on the tariff front, right? Either we come to an agreement with Canada and Mexico, or we don't go as heavy on China. There has to be some progress on that, right?

or at least some willingness to negotiate amongst parties, that CEOs will finally step out and say, okay, we feel good about making decisions again with some of these countries that we're doing business with and hence calming the market. Before I let you go, I want to go to Washington and get your perspective on the movement that Doge has been undertaking to reduce the federal workforce. Now, I know we get the employment report for the month of February, Friday. These numbers are

are not going to show up in this employment data. But give me your sense about what is unfolding in Washington right now and the knock-on effect that this could have for maybe the economy or markets more broadly. That's a great question, Doug. So the employment data is obviously going to be impacted by this, right? What we're going to be watching closely is what the bottom line impact is to the overall deficit, right?

If there's a meaningful impact to the deficit and you see an uptick in unemployment, then okay. But if you see a big uptick in unemployment and there's really not much of a dent to the deficit,

then we're going to start to be a little concerned about these efforts being more harmful than being good. So our big concern was around the debt as well last year. I'm sure you remember us discussing that a few times. The debt's gotten to this point now where it's ballooned and the deficit is really growing at a rapid rate. And we're at this crossroads where if we don't handle it, it can very quickly get out of control, not within like 20 years, but within the next five, 10 years.

So I think that the effort to cut waste is a great effort, but I just think that it needs to be truly impactful in order for it to be a real impact for the markets in a positive way. If it's not impactful to the deficit, but you see an uptick in unemployment, that's not going to be a good thing, obviously. Patrick, good stuff. We'll leave it there. Thank you so much. Patrick Kennedy, his founding partner at AllSource Investment Management, joining us from Hartford, Connecticut, 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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