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Hey it's David. Happy weekend.
Today we're bringing you a new episode from trump Andomics, Bloomberg podcast focused on the Trump administration's economic policies and plans. It's hosted by Bloomberg's Head of Government and Economics, Stephanie Flanders. This week, Trump Andomics recorded in front of a live audience at Bloomberg invest in Hong Kong, and the discussion centered on the latest round of talks in London between
the US and China. That agreement, which was short on detail, diffuse tensions, but left everybody wondering what the heck is going to happen next.
China is not easy.
We want to open up China.
It'll be a great thing for China, great thing for the rest of the world.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and welcome to Trumpanomics, the podcast that looks 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 Trumpnomics in front of an audience from Bloomberg invest Hong Kong, and we're looking at what trumpanomics 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. Have some great guests to help me talk this through. My colleague Rebecca John Wilkins, Asia Economics and Government reporter for US at Bloomberg, Howhong Managing Partner and chief investment officer at Lotus Asset Management, and Robin Ching, the chief China economist at Morgan Stanley. 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.
We 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 twenty hours of negotiations over two days, both the sort of heavy hitters from the US and the China side. Essentially, we are back too. I think that point in the Geneva truce where both sides were sitting down saying, yep, 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 earth.
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 bank and allow licenses. Now, 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, steply complex, forty five days, 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 it very tensatively because we don't have a lot of details, but it seems like there is a quote unquote framework to allow this EXPEDITEI process or allow these rare US to continue being exported into the US. We do not have any details on what that might mean, and 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 Litnik actually mentions export controls and was also apparently thinking about some of the US 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 US rolled out when they believe that the Chinese side were not living up to their expectations and the agreement on rare US 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 package of retaliatory 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 seeing you know, 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, it's definitely I like the word you used, speculating. Given all these flip flop 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 leaders focusing on trade, deer on upcoming logistics for real Earth, as Rebecca you elaborated, but the Chinese version, Beijing's readout covered a much bigger picture. They want to reset the grand relationship between US and China,
covering tech curves, students with geopolitical issues. So apparently Beijing wanted a grand buggaining 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 this is a trade tariff did on, 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 do you said. It's like Beijings thinking if
you cut our chips, I will cut your magnets. And over the last seven years since the first trade war in twenty eighteen, China has strengthened these dominance in key supply chains like Real Earth. Today they control more than eighty percent of Real Earth refining capacity, more than ninety percent of the magnet production, which is widely used in next generation of attack and supply chain including TV cards, humanoids, robotics, even modern defense system So now China is using that
in exchange for potential relaxation of tech curves. That's also part of Beijing's strategic play, sending a message to US allies. It's making them think twice about aling too closely to the tech curbs on China. So I do think all these showed China wanted a grand buggaining deal covering not just the tariff but attack and geopolitical issues. Given that's not going to be easy, you may see continue the
uncertainty on trade talks, so our base cases. By end of this year, the US terminal tariff rate on China will probably stay similar to today's level thirty percent forty percent, given all these difficulties and the divergence of Beijing and the Washington redoubts. And that's going to cost the foreign firms margins, cost the Chinese exporters the jobs. So it's still downside the risk to the economy how long.
I mean, it feels like the US side had not fully grasped how reliant key parts of the US supply chain was on these rares. So, and I'm kind of reminded of the piction someone had of the ongoing debate, which is the US has decided they absolutely want a divorce from China in ten years time, but live together in the interim for the entire ten years. That is the challenge that you see in some of these talks.
Yeah, well, I think it's similar to a couple of fighting through a divorced 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 counter offer from the US part is probably not good enough for China, right so I think as a result, even though China has agreed to restart the approval process for rare exports at the Geneva session, the Chinese can always run slower than expected process to approve it. Right, So normally it takes probably one to two weeks to approve to get a permit for exports, and now it
takes two months. Right then, that way, on the surface, on paper, China is not violating the agreement, but then at the same time it's still not getting your queen gredient 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 substantial higher invasion.
And then at the same same time, because of the process of this trade war and how this trail will started, it actually somehow united the Chinese people together, right, So if you're in mainland Chines, you can you can really feel the atmosphere rooting for presidency and us also rooting for China in this negotiation process.
So I think the.
Chinese people is very famous for it bitter, right, So in the Chinese culture, it bitter means it can endure substantial hardship for a.
Very long time.
So as a result, 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 you can see the chinnel 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 Jet one than 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 Banks obviously brought out some new forecasts this week, and it's cut the growth forecast for seventy percent 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 how long
at this point, it's China winning the trade war. It's China coming out of this certainly and much better than the US.
Yeah, well, I think it's much better than the trailer phase one in twenty eighteen, right, So I think during the current trade war, Chinese more prepared than before and also Chinese ready to use the A thing metric retaliation towards the US counterpart. So I think as a result, on the surface, but the Chinese growth is steady, Chinese exports is 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 bury.
On the Chinese economy, you can look at the consumer sector, right, which is way below expectation and it's still not recovering. And then if you look at 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 economists 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 deep Seek 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 Howhong'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 twenty twenty five 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 how 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, Morgan Stanley that you have your own sort of social metric index of content in China.
That's one way to put it. But another way is when you kind of look, for.
Example, a 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 focus. These are economic issues. They're rarely political. In fact, actually they're off and 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 over 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 how Hung's point, I will say there has been a remarkable transformation in how this is
all viewed as a result of the trade war. When we think about last year, that all of these stories about deflation, Robin extensively about concerns about the property market when we're going to see a bottom and really the cost for ordinary people of Presidency Edimping's push to transform the economy.
Was this really going to pay off the end of the boom years. So with these sort of.
Quite existential questions we are asking, now we are seeing this extraordinary support from many parts of the economy for presidency 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 nowational mood in China.
I think, well, Robin, I think we've established that Rebecca is a very careful reader of.
Your 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. 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, it's definitely I think Rebecca you are bought on about the change.
Of course, because she's been reading your.
I have been right and the decline of readership readership of mind defletion.
Report last year.
What's are dominated by deflation, housing adjustment or a capacity Then suddenly, at Rebecca you mentioned and there is a changing narrative and how you also briefly touched it. At least right now, despite China is nothing a sustainable recovery path. Yet at least there is a biification of the narrative, a tale of two economies. You have a very dynamic
tach 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 healthcare bot tech had its own deepsick 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 tach economy that helped Hong Kong. I think in your Hong Kong conference today is becoming bigger partially because Hong Kong
is back with the ecosystem. Private acity investor in tech using Hong Kong as acts the channel creating new money. That animal spirity is largely back. But once you take off or augmented reality glass, you look at conventional consumers that are mentioned or housing construction, they are pretty much stuck with deflation. And as the economists, we have to
explain why these sifications happened. I think fundamentally China has not shifted from a supply centric business model 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 GDPKPI, the government revenue largely relying on AT which is linked to production. All of these are showing past dependency. They are still
pretty much in supply centric mentality. We proposed they should upgrade their Made in China twenty twenty five to something called and Open China Market tunicity, focusing on boosting domestic demand and consumption 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 bification of the economy a tale of two economies. Unfortunately, for a bigger part of the macroeconomy, they're still stuck with deflation.
So volume growth is fine.
Stephanie mentioned many people maintained or upgraded their China forecast to four and a half percent or higher for this year,
but that's for real GDP, that's for volume. Once you look at value or nominal side, we think China's normal GDP growth were stay at the subdued level of three and a half percent throughout maybe the end of next year, given the deflation problem and the recently example of they did some interesting introduction of self driving cars, but meanwhile you see all these cut through the pricing war during IV among all these TV cut firms. So that's a
perfect example of the supply versus a demand. That 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. How and then when we discussed this before the session, you made the point that this was about not just rebalancing the Chinese economy but also the US econom I'm not sure that's the way the US sees that, but just explain that briefly to us.
Yeah, Well, I think to rebalance both sides has to work together. I think the Chinese consume too little invests too much, and then the US is the reverse. If you want to rebalance this structure, the US has to produce more, consume less, and then vice versa for the Chinese. I think for China is a monumental task in the sense that if you look at the domestic economy just now,
we've mentioned about the housing bubble bursting process. Now in this process, indebted department of the Chinese economy is really the household. The household is borrowed up to their eyeballs. The non financial that the GDP ratio is about three
hundred percent in China. So when you have this department that is boring heavily to buy up properties, and then now in a property priced inflationary process, it's very difficult for this department to deleverage because this department cannot print money. But then, on the other hand, the US is a different situation where you have the public department that is boring up all of that, and then the US households
deservice racial is it's still at odd time low. In this kind of economic structure, then you'll 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 high inflationary pressure.
And then in Chinese 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 two thousand and seven, right, so when the ex government was in charge, there was this saying about the Chinese managing Chinese economy. It's about it's riding a bicycle, right, so if you're too fast
or too slow, it will tap over. I think you know, if you look back now, almost twenty years later, we look at the Chinese economy, it's actually more investment driven than before and less consumption, so that 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 four 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 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 this shift
in the tectonic place. 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 that home currency and whether if they are sort of I suppose mature.
Enough to start to start adapting that back. But by and large.
There is this potential good news story that we will see the 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 front managers, particularly outside of New.
York and places in New England and so on.
And what struck me that was sort of 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, except I just heard 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.
Robert, 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 wives of inflows. You mentioned about the capital flows first wave. Since September last year, policy makers in Beijing believe stock market is a very important confidence vote, confidence progracy, so in terms of national team or reserve management or China's sovereign worth education. Now they value Hong Kong more than ever before that was
the stage one more driven by government. Then after this earlier this year deepsick moment, people realized that okay, China still has these innovation capabilities, and due to Lai issues, a lot of big tech laims are listed in Hong Kong, not in on shore China. So Hong Kong benefited from
that narrative change. Okay, China innovation and animal spirit in pact is back recently the April second deliberation day, and as you've definitely and rebeccommentioned, people are debating on the falling of US exceptionalism, weakening US dollar, and the third wave of influence is not from global money yet, is from Chinese offshore money. High networks individuals or exporters who parked too much of their money in US asss in the last five years. They were too exposed to US
dollar assets. Now they are participating in things like Hong Kong asses or Hong Kong ipo so called the high quality. They may be 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 allocating to China and Hong Kong. Well, China is participating in this debate on week dollar. Maybe China can benefit from that, but I don't think they are fully red need to
see this moment. They need to improve polery transparency, they need to refleate and the rebalance, try to get rid of the definition problem. If Beijing can deliver this, I think they will benefit much more and the fully feeling this opportunity of so called diversification away from US dollar. But sofa Hong Kong money is mostly Chinese money, either from Beijing or from offshore Chinese. That's the way they benefited the sofa.
How long we'll have the last word? Do you do you agree with Robin that we're just at the first stage of a process. That's quite a few steps to go if we're going to have this shift in the center 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 dollars 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 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, usually seeing the capital keep flowing out of China and going into the US capital market. And also for the US dollars that the Chinese export have been receiving, they have been keeping it overseas to be reinvested in the US market.
So I think as a.
Result, you can see, you know, in the past couple of years, the Chinese currentcy has been weak. You know, it's because of 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 it itself hostile not only to the Chinese economy, but also to the global economy, actually hitting
hard on the airlines as well. All right, So I think in this process, and also after the Russian and the Ukraine War, I think people start to realize that, you know, the US dollar holding may not be as safe as they once were, and now they have to thing for themselves. So I think as a result, you know, we're seeing money being reallocating out of the US market.
Otherwise how could you explain.
Right, So, after a very significant risk of event on the Liberation Day, the US dollar continue to depreciate, and I think the the process could accelerate from here.
Well, this is making me feel a bit old talking about the full circle from the age of financial crisis, because my first ever trip to Hong Kong was in the autumn of nineteen ninety seven with the US Treasury. I just joined the US Treasury. 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 stance 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 lotuses how Long, with special thanks to the team at Bloomberg Hong Kong invest Thanks very much,