You're listening to Asia Centric from Bloomberg Intelligence, the podcast that explores the big ideas and trends moving money across the region. I'm young leaving Hong Kong.
I'm Kajdmitrieva, also in Hong Kong. The Fed last week delivered a much awaited interest rate cut, but they moved by fifty basis points, not twenty five, which is what most economists had anticipated. This is going to have ramifications across the world, but perhaps nowhere more so than in Asia. And joining us today to break down the potential effects across the region is Alicia Garcia Herrero. She's chief economist for Asia Pacific at Ina Texas.
Welcome, Alicia, really a real pleasure to be with you all here today.
Well, big news last week, the Fed cut by half a point that was largely unexpected by most economists who saw a twenty five basis point cut. Was surprising for you.
Well, it was surprising for our US team if you asked me at No Texas. But basically they've been very cautious on the cuts in twenty twenty four, and I think rightly so, because we had this inflation data right before. You know, it wasn't really so clear that inflation was fully under control, or inflation service inflation.
Secondly, I mean.
Retail sales data was good, so the whole idea of a very rapid deceleration or heart landing for me, was out of the questions. But taking that into consideration, to me, when I read and especially the press conference, I felt it was very like a political decision. I kind of sense that they really wanted to do two things. They wanted to really sign off a new era, so we are on an easy era, and we want to do
this convincingly and frankly. Probably also US elections, and you know, having a lot done at the beginning might make their lives easy as the date of the elections gets closer. So for these two reasons, it was more say, it was so economically driven as maybe I would imagine. I mean the size of the cut, of course, not the
actual cut, which was long over deal. I mean, we've been waiting for this for so long, and age and economies have been waiting for it for so loon, which is what we're going to this cust next.
I'm sure.
Yeah, I was just about to ask you, making my job very easier, just about to ask you about that exact thing. A lot of central banks, especially across Southeast Asia East Asia, have been waiting for this easy cycle to begin. So what is next? We have the FED cutting by fifty basis points? Does that change the math on or your outlook? Maybe before the cuts on who's next and by how much they'll cut?
So first of all, I would say that there's a couple of out liars in Asia. I'm sure everybody was rejoicing, but some less than others. And I think the say the BOJ, but even the Central Bank of China CBC.
They are in a different situation.
BOJ needs to get out of this massive FeAs in and I think having a big cut by the FED just makes it very difficult for them to hike because it's a very rapid reduction of the spread and that will push the end. And I think if there is something that government that doesn't really want to see happening again, is that black Man Day and a very rapid application
of the end. So I think for the BOJ, I would say, well, I'm not sure it was such good news if you see what I mean, Because I think paced FED would help the BOJ center back of China. I mean, the column is booming in Taiwan, and they never hiked enough as you know, I mean the intergate differential they kept while the FED was hiking because this is a low interest rate environment.
They just couldn't follow the Fed.
And now of course they don't have any room to cut, you know, because they are in booming and frankly with a high underlying inflation. We might not see it in the day, but it's there as a price inflation. And so for these two times, I actually think it's bad news with the bad news, because all of the rest is relatively good news. But yes, it's not coffee for everybody, if you see what I mean, Like, some are not happy, and I think and Central Bank of China are the key examples of this situation.
Central Back of China being the Taiwan. So Taiwan and Japan odd ones out.
Yeah, Taiwan is just because the economy is on a very different cycle than the FED, and you know they are semi packed, so that doesn't help them at all. We expect, for example, for RBI, we expect very little for India because you know some might not Again I mentioned Taiwan as you know, an even clear example some might not necessary benefit for a huge reduction of rates, so you have to be careful with that, and then you could have a bubble on top of a bubble.
So think about India.
You know, up until the elections, you don't want to see an overheated market. Think about India with the with the booming luxury real estate market at the moment, So do you want to cut rates aggressively. So again, the FED is important, but it's not everything under the sun. I mean, these central bands have to cope with very different situations at the moment.
What about the good news?
The good news is that some bunking nation, you know, they cut even before the FED.
They were like already cheering.
And why And I think this is very important is that if you calculate the real interestrate, this is true for China, but this is true across the board. The real interest rate in Southeast Asia is just very high because inflation never reached the levels you know reached in the US, and therefore they had to cope with these high interest rates on the real economy. And I think they've been waiting. They thought it would be very temporary,
but it wasn't. It became entrenched so they got into this situation with nominal rates, they couldn't cut an inflation that was below the rest of the world. I think, you know, the fact also that China has been underwhelming wise didn't help because you know, these economies weren't supported.
By Chinese imports.
So the combination of high real interest rates the weak Chinese economy, you know, kind of made them despair for this cut from the Fed. Yeah, and I think this is why we've seen the stock markets. I mean, it's clearly very positive, let alone from Hong Kong. If you ask me which economy should rejoice the most, I mean probably is China and Hong Kong. These were economies Hong Kong in particular, since you know you're sitting there so I'm sure you feel it. Yeah, it's like they just
couldn't cope with these rates. Sending over look at the state of the real estate sector in both economies. For Hong Kong, this straight jacket at such a difficult moment, even in terms of retail sales, et cetera, was just too much too bear. So for Hong Kong, I would say you, if I have to rank the biggest beneficiaries in terms of the room. That's obviously Hong Kong, and I think the handstand is proving this right.
Yeah.
Asia Centric is produced by Bloomberg Intelligence, when more than five hundred experienced analysts and strategists work around the clock to bring you timely, world class research. Our coverage spans two hundred market indices, currencies, commodities, and industries, as well as over two thousand equities and credits. If you like what you hear, don't forget to subscribe and chair Alicia
for the benefit of the listeners. Now, Hong Kong is an interesting case because the currency is pegged to the US dollars, so Hong Kong pretty much had to raise interest rates along with the FED, even though there wasn't an inflation problem.
Right exactly, So yes, for the benefit of the listeners. You're absolute right. Let me try to go through this case. Hong Kong not only respect to the dollar that would be in itself you know, as you said, that would oblige Hong Kong to follow the FED to keep its change rate. Actually, we have a one percent badge to
be you know, fully clear with our listeners. They do move, I mean the exchange rate move a little bit and the interest rate on the Hong Kong dollar so called hyber can also go up and down a little bit depending on.
The exchang rate expectations.
Yeah, this, this little band, the Hong Kong economy now is extremely depending on the mainland, not on the US, even for financial flows. So we actually made some estimation even before COVID, and I was surprised to see. I mean, the real economy, well know, Hong Kong, you know, because of visitors from the mainland, et cetera, is very linked to the mainland. But I thought financial flows would be
more linked to the US. I thought so, and it wasn't the case, even in twenty nineteen, stock connect, bond connect, you name. It is just so linked to the mainland now even financially that following the US as.
Far as interest rates are concerned. And of course the currency is.
Increasingly costly in terms of you know that this location of where the economy is and where your financial conditions are. So for Hong Kong, this cut is coming from heaven really, because the economy is still doing poorly. And I'm not saying this will solve all of the problems, but there was no other way. The Mainland is a different case. There were other ways. They just didn't stimulate the economy. They could have that more fiscal they could have even
cut rates. To be frank, Hong Kong had no choice but to follow. And I think this is extremely important given the state of the real estate sectoring.
So Hong Kong needed the FED cut, China needed the FED cut. Japan makes it harder for them to hike Taiwan. You said, the economy is booming, So which economy, which central bank is next? Who's up next in terms of cutting in your view? In Asia?
Well, I mean I could tell you a little bit. You know, the straight off cuts we have. So as I said, already cut, I mean Hong Kong obviously immediately. We do have cuts for literally everybody except MALAYSI yeah this we are not Yeah, not Malaysia. We have a
cat in South Korea, we have Australia. Australia is tricky because we were expecting a cat in October and then well lift it because of inflation expectations, you know, being a little But now the question is if the FED cuts again by October, will the RBA manage to keep that call until next year?
So you know, it's like I think.
The fifty bps accelerates the decisions in a way because if they feel that the FED is going to front load, they may have issues about their change rate. You know, everybody has to run a little bit faster. So yeah, so we questioned Mark on October for the RBA.
In my view, Alicia, we should tell the audience that we're recording this podcast on the twenty fourth of September, just literally hours before the RBA decision. So I know most economies don't expectes.
Of course, I'm not expecting anything today, You're right, I need to explain also the audience here that I'm in Berlin, so you know, I know, it's like none in on Kong. I believe that when we'll know more about RBA, but for me it's kind of it's really far in time. We're not expecting any cuts for RBA today. I'm talking of October, and that I think will depend very much on how much more the fact might do, but also how much the Australian economy decelerates.
We wrote a little watch for today on the RB.
I think the most important thing to note, beyond the fact that inflation is indeed quite sticky still now is that disposable income is indeed decelerating in Australia. Labor market is quite okay, but disposable income is. So, you know, I think it's like saying, quite frankly, that households do need lower mortgage. I would put it this way. You know, it's like they've been quite resilient.
Frankly.
You know, if you think about what we thought would happen, it didn't happen. The real sector in Australia, the housing market actually reacted quite well for what was expected to happen if you recall. But I think by now it's a question of can you keep this much much longer? So, you know, I would imagine that the RBA would have to review this today's decision, which I think is going to be paused in the light of deccelerating dis possible income for the months took up.
This is for me, the key issue for RBA.
Arguably the consumer in Australia and possibly also a career as well. They've been impacted probably more by these high interest rates because in the US, you know, people have a mortgage, probably took out a fixed twenty year long so they probably took it out when interest rates were low, but places in like Australia that would hit automatically with high interest expense.
Yes, and remember that there were also some I would say even worse in the sense that at the beginning during COVID, you remember there was this decision to facilitate the repayment of mortgages so they were protected, and then suddenly rates started to hike. You know, it's like an unprotected so you know, it's like a double womy if you are a household. And this is why I actually
think that the Australian economy has been extremely resilient. Let's not forget that all of it happened at the time where you know, you had the lingering effect of the trade work with China, which then was resolved, but you had all of those shocks.
Yeah, and I.
Actually think that Australia did really really well. And the other issues that during COVID, they didn't have any increasing population, which is a big driver of growth in Australia because you know, all the sorts were closed. So yes, there was a little bit of a push through population increased through immigration, which of course South Korea didn't have. South Korea's solution came from the turn in the semiconductor cycle and AI revolution, but not everybody benefits from that, and
this is the same things. I want to be frank, I don't have figures, but I'm convinced that income distribution worsened in South Korea and in Taiwan.
You know, it's not the same type of growth as Australia.
So the social implications of high rates in South Korea, I'm sure stronger than in Australia, and that makes the decision to cut highly politically, if you see. So it's a different cut. I just want to clarify that. I think South Korea's cut is more like coming from the social pressure of households, as you said, really not being
able to cope any longer. I think for Australia, yes, this possible income is dicelebrity, but it's much smoother and I think more across the board employment is being created. It's a different it's a different ballgame. And we had export date. Actually it was really negative for South Korea, but I think it's about the number of days. So experts are still okay, notwith something that that data that we just had, but that doesn't help everybody, So I
agree with you. I think we have a problem with the high rates.
In Korea's interesting point there that you make about how each of the economy is potentially cutting for different reasons. It's not a one size fits all. Now is this sort of a new era as well as the fact ease as we're getting into the cycle. But it seems like each economy kind of is focusing on domestic issues and they're all ideosyncratic indeed.
So this is why I think probably markets we see that are reacting very positively. Ahia has a high growth environment, so you know, all of these cuts are just in a way. You know, if you are into an index or a passive investor, you may not care about the arguments we're making. Now, you know, just go ahead and we'll just find ahiav area appealing because of the cuts. But if you think longer term, how you know these
markets are going to react longer term? I think we need to see first do they need the cut and why do they need the cut? And in the case of Hong Kong, I think yes, this will help, but I'm not sure the market will act positively for very long. Now we have two positive needs for Hong Kong, the China stimulus and the fat so it should be like party time.
But the question is Hong Kong stocks of jumping up right now?
Yes, yes, I know, I know it's part of that I checked. But the issue is will it be permanent or how permanent will this be? And there I think we need to answer to questions how important are financial conditions for Hong Kong households. I mean, Hong Kong is
seventy percent consumption, so are there financially constrained? How big is this impact if you look at the date, Actually it's little the case that Hong Kong houses are financially constrained because of a number of reasons that payment, so will it last?
That impact?
And then on China, I think it all depends on whether the stimulus is for real and you know it changes the nature of growth at least cyclically.
You're talking or not about the FED cuts, but about the stimulus that was announced. People be listening to this on Thursday, but announced on Tuesday the various uh, you know are our our cut and cuts to the mortgage rates. It was a lot.
Yeah, the announcement is a lot, but let's not forget that so far we had Friday nothing. They didn't cut the long prime rate, which is the benchmark for mortgages.
So what has happened since Friday? You know, like then they cut which I think was a four signal, the fourteen days reverse ripple, and that is not I mean that the news was big cut is an irrelevant cut as everybody, I mean those dealing with the PVC now, because this is really just confirming the seven day cut because this is the reverse report, so you needed and they took so long for them to do that thing, which was kind of natural to cut the fourteen day after.
The seventh day.
So you know, when you observe all of this and you observe the announcement and I know stock markets are rejoicing, the question is who's in charge?
Because you know, you could have.
Done this in a more structure way and it sounds like a little bit I wouldn't say panicky, but it sounds like suddenly you come with this. You could have done it more naturally and I would have perhaps even used a third pleno to make a big story out of the stimulus.
Do you think they did it? Because the Fed cut by more than expected it kind of created some room for them, but they.
Could have cut on Friday, the long primary, So still did they not want to show that they would cut immediately after the FED. Then I wouldn't do it now. It's just too early. But for me, it sounds like a reluctant stimulus. I call it a reluctant stimulus. It seems like some are not into the stimulus, others are. There's no agreement, so they kind of drag their feet towards the stimulus, and those are not the stimuli that work best because you need to believe in it, you
need to be convincing about it. So I think the impact today is positive, but how long will it last? To me, it's really a big question mark because it doesn't look convincing that they're going to continue on this path. You have a long way to.
Go, Alicia. So with the China news, you don't expect economists to suddenly raise their economic forecast next year or this year.
Well, we just had like an influential forecast. Is the IIF problem because they're semi official and they just cut to four point seven simply because the second semesters expected to be much lower than the first real interesrates in China are too high, which is absolutely true. If you hold a mortgage in China, you know what real rates
are all about. I mean it's really high, much higher than anywhere else of any relevant economy in the world, because if you use the GDP inflator, for example, it's like you have five to six percent real rates on mortgages in China just to.
Pull back a bit. So with the combo of the FED cutting rates by fifty pips, maybe freeing up some space for China to cut as well. Plus this new package, will that move the needle for China's economy?
Do you think I think they need to really convince the market there in a new era exactly like Poweled it if you listen to I'm sure you have to Bowels state it's very clear. It's like nobody has any doubt the FED will cut again and again and again. The communication was clear. We know maybe for some they will cut one hundred, one hundred and twenty five for US seventy five, but everybody knows they're going to cut all the way even next year. In China, this is
not clear. It might be that they don't cut again. There's no consensus as to whether this is big stimulus. This is just one off cut again, because you know how long has it take?
Where's the cycle?
The PBOC has been cut in so slowly that I don't know where they started cutting. We say that they're starting now, or can we say that it started a year ago or.
Two years ago? There's no path, so they need.
To convince the market for the economy to recover that they say path that they're going to go.
They could do some forward guidance.
They could say, look, our real indust rates are at this level and our potential growth is x, so we need to bring them down one hundred basis points. We'll do this slowly and steadily according to data driven But this is our path that would be very different. That's not what they're doing.
So I have not.
Convinced that this will help. So the question is why are they cut in? Is it because consumption is underwhelming?
I doubt so. What's the trigger?
And if you ask me, the trigger is the state of Chinese banks, I mean their financial situation. If that's the trigger, is a liquidity move, you need to inject liquidity. They may cut are more, they may find some you know, like targeted instruments for bigger banks to lend to smaller banks, you name it. And that's a different type of cut because if people start reading, oh there's financial risk in China, maybe the economy won't recover.
So I'm not.
Sure this will hit the needle to reach the five percent target if that's what they want.
You mentioned you're in Berlin right now. I know you have a lot of meetings with companies with clients. I'm just wondering, after the FED cut by fifty basis points, what have been some of the top comments that you're getting from people that you're meeting with about this cut. How are people taking it?
Well, we're in the euro area, Katya, and people talk about the ACB here. It's probably the only place in the world where the FED is not the central Bank. And you know the ECB cut twice, Yeah, twenty five based responds, So you know that's very positive. But the problems of the European economy are structured, especially in Germany now, so the FED sounds like okay, fine, but you know it's very, very very far from what the issues are here at the moment. It helps, I mean, if you
are a big company and you borrowing dollar. You have operations in the US, you know many do, But I would say compared to Asia, this is by no means the same conversation, by no means at leasta.
I have to ask, you're in Germany, if I could just like ask a question outside of monetary policy. Yes, everything we read in the news, the Germans seem to be afraid of these cheap electric vehicle cars from China, Like, how big of a threat is China's cheap cars to Germany's auto industry.
Well, this is such a good question because I also thought Germans would be scared of Chinese selectric vehicles because of their industry. But it's just fascinating what happens in this country. And I've been here a couple of times the last couple of months, so I can only tell you that the reading about Chinese selectric vehicles is so
different across the different situences. So the large auto makers in Germany, which should be the ones asking for protection, are not because they are suffering the tariffs on their production in China. So they prefer to produce in China and export to Europe, which would have been unheard of only years ago. Is that the direction was the opposite, So they didn't want those tariffs. They prefer to produce in China and export to Europe. Germans remain very committed
to the green transition. They have this very strong view that Okay, no matter where the cars come from, no matter where the solar pantels come from, we need to transition.
The world is more important than who makes the money out of this.
So I would argue as an economist that I don't believe that these tariffs will make a difference in price because the numbers are quite clear.
You know one thing, I want to get your thoughts on the risks to what we're talking about, so you haven't easy cycle kicking off. But central banks across Asia are not just thinking about the feather, might be thinking about the US election and Trump versus Harris. Does that complicate things here? Ken central banks sort of hold out in Asia see how the fifty basis points plays out and wait until after the election. Is that a factor for them as well?
I think there's so much confusion about what Trump or Harris will do for Asia or against Asia, depends on how to look at it, that I'm not sure it's such a big factor at the moment. It's just so hard to tell. We've heard about tariffs from Trump, but at the same time we know that Trump is very pragmatic. We have the Taiwan issue. He looks much more accommodating. In my view on the Taiwan issue. That's good news for Asia because they get that out of the way.
So you know, the balance of benefits versus cast is to me not very clear. So I would argue central banks won't focus as much, but they will focus on the FED. So if the FED stays and that's cut because of the election getting closer, and try not to interfere either in the result or even right after the elections. Let's not forget what Trump said about the FAT. If I were power, that would just pause. Especially if you win the elections. You would just say, look, I'm not
helping you. The FED reaction to the elections is relevant, but I don't think they will over read the elections on their own site because that would be too complicated.
So I would just through the FAT. To answer your.
Question, Yeah, Katia, We've literally gone around the world today. We've discussed so many economies, Fed Asian central banks.
We had a pet stop in Germany.
Yeah, Lisia, thanks for coming on the show on such short notice.
I'm John Lee in Hong Kong and I'm Katted Mitriva.
This podcast was produced by Clara Chen and you've been listening to the Asia Centric podcast