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This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis along with Doug Krisner. Join us each day for the stories making news and moving markets in the Asia Pacific. You can subscribe to the show anywhere you get your podcasts and always on Bloomberg Radio, the Bloomberg Terminal, and The Bloomberg Business app.
Earlier in the day, we heard from Fed shair J. Powell, and he was saying that the Central Bank needs to be patient as it weights some more evidence that high interest rates are doing a job on curbing inflation. At the same time, mister Powell seemed to double down on the need to keep those borrowing cost higher for longer.
I don't think that it's likely, based on the data that we have, that the next move that we make would be a rate hike. I think it's more likely that we'll be at a place where we hold the policy rate where it is.
Fedchhair Ja Powell, speaking earlier today at an event in Amsterdam, he said that he expects inflation will move lower on a monthly basis. However, price figures in the first quarter have tempered that confidence.
Just a bit.
He spoke right after the PPI data that we had here in the US for the month of April. It showed that inflation at the wholesale level rose last month, more than forecast.
Let's get to Sean Darby, Managing director at Mizuho Securities Asia, to talk a little bit more about the impact that that report has and also how he sees markets moving over the short term. Sewan, thank you very much for being with us here in our studios on a holiday but his birthday in Hong Kong, but nice to have
you join us here. So when we look at that producer prise data, of course the headline data for month on month was kind of hot, but then you had these other mitigating factors on balance, neutral in your view or what.
Well, certainly the boommark it took it reason to be well, so the curve actually dropped across all of the duration. I think one of the interesting thing aspects of the producer prices is actually corporates are attaining very very strong pricing power, and that doesn't really mean that we're going
to be seeing a recession that soon. Companies are not in a position at the moment to having to either protect margins particularly or indeed feeling that they're going to have to lower prices to either clear infantry or garner demand.
So all of this really, I think reinstates fairchairperson's power view, which is that it's going to be higher for longer, and we're not going to be really seeing rate cuts potentially really until fourth quarter, and certainly the equity market isn't going to get any relief from a very big series of rate cuts and perhaps until twenty twenty five.
You don't seem to be too surprised by that notion. Were you expecting the fair to be on hold for the foreseeable future.
I really feel that at the moment, if you look at things like producer prices or credit spreads, credit spreads are very very tight. For where we are on the cycle, you have an inverted Yelk curve, credit spreads tight. They have not really presaged a recession at all over the
last year. In fact, it's failed. I think the FED recession model has been at sixty percent for nearly twelve months now, and the reason for all that is that as people enter the workforce, they actually produce goods that economic output picks up and you get a sort of an enduring profit cycles people as wages feedback into the economy. So ironically, at the moment it's been more of a
labor problem in this cycle than anything else. And certainly, certainly in that respect, you're not really going to see economic activity fade until sometime in twenty twenty five.
Yeah, And that seems to be most important because the earnings appear to be tied to economic growth and also the efficiency of companies and such. And as long as inflation doesn't get a lot worse, if it starts to go to the other direction, then all bets are off, I suppose, because higher interest rates on the FED would definitely get markets jangled. But as long as we see growth, sort of with the job growth of one hundred and seventy five thousand, that's not bad news is good news,
that's like ok news is good news. Yeah.
I think the reality is that globally we've had a enormous period of immigration, and the OECD wrote about this and its outlooked I think two weeks ago that one of the important factors that's allowed the economic recovery to be extended was the fact that immigration has returned as being a big swing factor for labor markets in places like the US, UK and Australia, and that has been perhaps the savior actually for these central banks in a
sense that they've not had to face recessionary problems. I think the other thing to remember is that the two cycles proceeding, so the cycle before the COVID was a deflationary one. COVID itself was a defe inflationary experience, but actually all the cycles preceding those have actually been inflationary, and we're just sort of going back to learn what it looks like or how things are during a period
where you are fighting inflation rather than fighting deflation. I think that's also been part of the problem for the bomb market. Nobody really has had the experience, including myself as well.
Let's talk a little bit about geopolitics, because we have these new tariffs now on certain Chinese goods being implemented by the Bide administration. Not surprising that Beijing is going to blow back just a little bit and vow measures of its own. How do you kind of evaluate where we are right now in terms of US China tensions.
Well, I think the way to succinctly put it is things are not getting better and they're getting worse. And for me, I think we're still going to be in a cycle even after the US elections, in which the whole trade sanctions and restrictions are going to be an
ongoing theme. Actually, so I think the way to put it is that we're going to have to live with further restrictions, further tariffs, and particularly at the high end on the technology end, I don't see any glimmer of light in which the US is going to relax any of those exports or restrictions on semiconductors. So again, I think we're in a there's no sort of endgame in this. This is going to be a theme that's going to continue for the next three to four years.
And US China rivalry on semiconductors brings Taiwan into the picture. Now. Next week will be an important week. William Lai will
be inaugurated as Taiwan president. He supports the status quo with China Sean, but he calls himself a pragmatic worker for Taiwan independence, and the way that he gets at that is that Taiwan has de facto independence now and that's what the status quo means, But I'm curious whether or not you think we might see a Taiwan discount to be applied to the equity market there if he gets plucky.
I think the unusual thing at the moment is that, for first of all, Taiwan and China's economies are inextricably linked. So if you look at the pmis over a three or four year period, they generally sort of follow each other.
There's a symbiotic relationship between the growth rates. The second thing is that in many respects, the economy now is in its own sort of inflationary boom, which is similar to what Japan is, where you have a very undervalued currency, you have a central bank that's pretty much quite far behind the curve and raising rates in contrast to everyone else. And thirdly, everywhere you look, whether it's from land prices or producer prices or CPI core CPI, actually Taiwan's is
actually inflating still. So in that respect, the political or geopolitics is actually being sort of surpassed by the fact that's actually the economy is doing very well and on a very different path to what everyone else is experiencing globally. They've also got labor shortages and an extremely low unemployment rate. So I think in the sense, geopolitics is actually being pushed to one side because the economy is actually doing pretty well in Taiwan.
But I'm curious about the outlook. If we can agree that there is just so much concentration of semiconductor of production visa v TSMC, and if countries like the US are a little uneasy about the level of concentration, and other chip makers seek to diversify away from Taiwan, including TSMC, which is actually helping to create facilities in the United States, might the economy go into a lower gear as the
world becomes less dependent on chip manufacturing from TSMC. Or is it simply too early to make that call.
No, that's a fair point, I think at the moment, as I said, you have this sort of inflationary bio which is working through the economy, mainly be caused by a very cheap exchange rate. But your point is well taken.
The irony is that the competitive part of Taiwan semiconductors is to some extent being hollowed out through this sort of off you know, sort of on shoring in the developed world, and in that respect, you're not going to get the same level of output growth that you would have had in pre proceeding cycles, you know, sometime in two or three years from now, so that you know, in fairness that time one is going to sort of see below trend growth from from twenty twenty five twenty
six purely because they don't have that same facilities in situ.
But you are sounding like a Taiwan bull and you're you're also quite bulled up on the hanksayg Tech Index, it is up thirty four percent since February first. When is enough enough? Well?
I think the interesting thing about the Hansen Tech Index is that it's a pure or look at everything that is more on the exports side and nothing to do with real estate or finance. So it's a very clean way of getting to grips of how China's sort of other part of the economy is doing. And in fairness, the companies, I think we we calculated eighty percent of them have cat net cash from the balance sheet free
cash flow yields on average seven percent. It was a sort of outstanding bargain and in that respect, I think there was a fair degree of catch up for the HS tech compared to all the other global indices in the past past two quarters.
All right, Sean, thanks very much for joining us here on a holiday in our studios in Hong Kong. Sean Darby, Managing director at Mizuho Securities.
Earlier today in the States, President Biden unveiled sweeping tariffs and an increase in terraffs on a range of Chinese imports. We're going to take a closer look now with our own John lu Bloomberg Executive editor, joining us from our studios in Beijing. John, it's always a pleasure. I'm going to go out on a limb and say that this really didn't go down too well in Beijing. Is that a fair statement.
I think that is a fair statement. This adds additional pressure on a relationship that is already very tense, that is already full of fractious disagreements, and so this is not making things any easier in any way.
John, Is it also fair to say the flip side of it, that this may be a little bit more political on both sides than it is a real teeth in the action.
I think some of these tariffs were designed for maximum political advantage, and maybe not so much for the impact on the economy. For example, there are not really many Chinese electric cars being exported to the United States from China, and putting quadrupling the tariffs on those shipments is not going to have that big of an impact on bilateral trade.
I think we saw something earlier when the Biden administration talked about putting additional tariffs on Chinese steel and aluminum, which the US buys very little of from China, and so a lot of this is more show than it is impact.
But I'm wondering if the subtext here is what we need to be talking about, which is the issue of overcapacity. I mean, that's been right out in the open from both sides, right, not just from Treasury Secretary Yellen, but the German Chancellor all Off Schultz as well.
That is a big issue because the concern is that Chinese factories are making far more than can be consumed domestically, and so the obvious answer for China when it comes to what to do with all these goods being produced
is to export them. And if cutting the prices, exporting those things at a cheaper price helps to get moved, the move the product, and that is an obvious strategy, and that is something that would of course concern the Germans, the French, the Americans, lots of different markets around the world.
And of course we started out with talking about China's response. We haven't seen it yet. It may amount to something quite material. It could be something directed at Tesla and companies like Apple. Have you been sort of looking at this and what are we thinking?
So the Chinese have come out so far and said that they will take action to protect their rights. I think as they're trying to figure out what they should do next, they are going to have to balance a number of different factors. One, going after companies like Apple or Tesla. That's not going to be good for China's own economy because those companies are such large presences here because they employ so many people. Discouraging foreign investment in China is not going to help Hug get the economy
booming again. And so he's going to have to try and find some action that is both going to appease a domestic audience which thinks that the government needs to stand up for China, but then also not shoot China in its own foot.
Don't we need to also take a look at proportionality. I mean the leverages that we're talking about here from the US that covers around eighteen billion in goods for an eighteen trillion dollar economy, So this is literally a drop in the bucket.
Well, I think the Chinese will take that into consideration, and I think there is a lot of mutual understanding that ahead of this year's presidential election in the United States that the rhetoric coming out of Washington is going to be more heated than normal. And I think also factoring into this is, of course the other candidate in the race, former President Trump, and some of the more aggressive tariffs that he's talked about taking or putting into
place if he were elected president. So there's a number of things in play here.
John. Obviously, trade is a big issue for China, but Taiwan is probably the biggest issue. And we have William Lai to be inaugurated next week as president. He supports the status quo, but he's always kind of leaned a little bit toward Taiwan independence. He calls himself a pragmatic worker for Taiwan independence. Should we be concerned that Taiwan, the economy, semiconductors, everything may get a little bit of a downgrade going forward as a result of that tricky relationship.
So I think Taiwan is definitely the most dangerous, dangerous flashpoint in this relationship between the United States and China. Whether William Laie's ascendence to the presidential office will be the spark that sets off some sort of conflict, I think that looks relatively unlikely at the moment. We are expecting him to stick to the line from the previous administration of Taiing I. He has said that publicly he
plans to be a continuity president of anything. I think the speech that he will be giving his inauguration will be tuned to try and both show him and his party is defending Taiwan, but also not to cause any upsetness in Beijing or Washington.
John, it's always a pleasure. Thank you so much for making time to chat with us. Covered a lot of ground there with John Lou Bloomberg executive editor in Beijing. We go to China next. And those big earnings reports that we have been waiting for ten Cent Holdings, on one hand, reported better than expected earnings, a sixty two percent surge. Okay, so that's the good news. On the other hand, Ali Baba with a plunge and profit. We're
talking about net income tumbling eighty six percent. That's after an unexplained write down for losses in Baba's publicly traded holdings. There was a little bit of commonality though, among these two giants. Both ten Cent and Ali Baba reported better than expected revenue growth, although it was in the single digits. However, there was divergence when you look at the share prices
here in New York. The ADRs and ten Cent up about four point seven percent, but the ADRs and Baba were down six percent.
Brian Well joining us now to discuss this as Lad Savov, Bloomberg Tech editor, who is looking very closely at the ten Cent and Baba earnings and was on our blog, really getting to all the comments as they came. Vlad,
nice to have you with us in our studios. Let's start off with Ali Baba first, because one of the things that we observed over the past many, many weeks was that Ali Baba faces a lot more stiff competition at the moment than ten Cent does, and so ten cents earnings had to beat and we can talk about
that too. But Ali Bab a couple of things. Doug mentioned one that basically there was some unexplained losses in its holdings of public companies, and that's one thing, but it also had to spend more to fight off the competition and it was costly.
Absolutely, Brian, and I think you got to exactly right. Ali Baba's competitive landscape is so different from ten cents.
In years past.
It used to be that Ali Baba was the big dog in e commerce and in the same way that ten Cent is with games publishing, and ten Cent situation is still the case. It's still the world's biggest games publisher. He's the biggest by far in China. It one has Netty's to compete with, whereas Alibaba. On the other hand, you have by Dance coming in, you have PDD. Everyone is getting into its turf. So one of the things that stood out from Ali Baba's announcement was they mentioned,
with respect to Timo and Talbau price competitive. They mentioned a couple of times in their announcements. So really what they're saying is it costs us money to compete. These guys are undercutting us, so we need to undercut them back.
You know, sometimes the candy. I mean, at least these days for the market has been any mention of artificial intelligence. Where do Baba and Tencent come down? Visa VI you know this move into AI, right.
That's another commonality for both of them. They consider AI a central pillar. Now the detail is where it becomes interesting, and we don't have enough to EATA from either company. I mean, one of the things that Ali Baba has mentioned for a couple of quarters now is that they will deploy generative AI to help make its e commerce more appealing.
I don't see how that's happening. I mean, these are two very different things.
Generaty of AI is something that's still very nascent, very early, and nobody's really figured out exactly how to deploy it. Whereas e commerce there are proven ways to entice people to buy stuff. And actually at the moment, the thing that's really doing it is short video is stuff like TikTok and dowy in and that's the thing that Tencent is leaning into with wechair and it's we chat video. So one of the big figures that Tencent reported is
eighty percent growth. Can use the time spent in we chat video accounts and what really that says we chat vide account. You can equate that to ten cents TikTok. The more people use in that service, the more that ten Cent commnetize, the more it can introduce e commerce opportunities.
So, in other words, we should not read that twenty six percent rise in ad sales by ten Cent. We probably shouldn't take that as a good barometer on the Chinese economy. It's more like the algorithm. It's more like what they're doing to attract and keep Wi Chat users with those short form videos.
That's right, Brian.
If you want to flatter a Tencent for their execution, you're free to do that.
But I think you're right. I think you're correct.
Well, I was going to flatter you by saying you're the big dog looking at these big tech companies.
Well, here's the thing.
Ali Baba's chairman, Joe Zie He said that the company is seeing positive signs of the Chinese consumer being willing to spend. Again, that was not the same sentiment coming out of Tencent. Martin Laud, the president of Tencent. He said that the Chinese economy is mixed, and therefore the advertising landscape necessarily is also mixed. So ten Cent itself
is taking the credit for this as well. They're saying that they're doing better, and they do give some credit to AI helping them optimize ads on and other platforms.
So when you're a company like Ali Baba Vlad and you're struggling, is the remedy, at least in the short term stock buyback? Is that enough to kind of get the market a little enthused?
Well, Brian said it. I mean, you said it yourself. The stock market is not reacting positively. They did announce a four billion.
Dollar buyback, so everyone is quite serious.
One of the really interesting things across the tech ecosystem, no matter the geography, is that everyone's doing a buyback right now. We're talking Sony in Japan, Ali Baba, Tense has one in ongoing. Apple announced the world's biggest buyback ever Google Meta. Everyone is doing it right now because they have been sitting on these big cash piles and at the same time as they investing heavily in AI.
And this is true both for Tense and Ali Baba.
One of the ways that they can, like you say, you sustain the share price and give some satisfaction to investors is to give some money back.
We saw a little bit of caution in games for Tencent to walk us through some of the details there.
Well, I mean, this is the other really interesting thing to hear Tencent talk about his business. It keeps about high quality growth and how it's kind of shifting away from games. But then to hear the analysts on the analysts call and their priorities and questions, they keep focusing on games.
And here's the thing. Tencent is now.
Talking more about grocery septs as well as revenue, which kind of muddies the picture. So if you look at domestic games, they were up three percent in grocery septs but down two percent in revenue.
So those are the growth figures.
Much like e commas for Ali Baba, that everyone is really paying attention to gaming is still the biggest thing, and that growth rate is never rising above three four percent each quarter.
And it's tricky.
It's tricky for Tencent to do anything about this because they are relying on a lot of evergreen games and they don't really have that games pipeline that's necessary to fire up new growth.
You know, when I think about Ali Baba and the fact that we had put so much stock in the possibility of some spinoffs here IPOs of different divisions. I mean that seems to be really off the table right now. I mean, is that kind of eventually occur. Do you think is it in Baba's best interest to spinoffs of these divisions.
Well, never say never on that happening again. But let's bear in mind that that was under the leadership of Daniel Jiang who was the previous CEO, and the new CEO, Eddie Wu, and even the earnings announcement last night very much stressed the synergy. I mean, this is the funny thing we talked about IPOs and spinning stuff off. Now Alibaba is all about synergy. One of the ways that
they highlighted this was Kaine out the logistics unit. They said several times it's doing a lot to help both e commas domestically, but also the international arms things like Ali Express. A lot of the growth for the logistics unit is coming out of helping the international e commerce, which is actually the one with the healthiest growth.
That grew by forty five percent.
I'll give you some numbers here, which I know you know, but the audience may not. That's quite astounding. Ten cents. Revenue was roughly twenty two billion ali Baba's thirty one billion, yet ten cents market cap is double that of Ali Baba.
That tells you a lot.
Oh absolutely well, I mean as a gamer, I can just say that it tells you a lot about the value of games. But really the way that you should think about this is games software. These are things with a low cost base, Like the marginal cost of selling another game is nothing basically versus Ali Baba having to do all the logistics, having to do all this investment in data centers and so on in order to provide its AI.
Services to people.
And the really interesting thing with Tencent, and it's something that they kind of picked up on in the call, was the fact that they can entice people via we chat via all these consumer services into it's broader ecosystem of services that includes AI, generative AI and such other subscriptions that they might be able to provide.
So vilaib when you consider guidance, I mean, is this something that was played up a lot? I mean, and what do we know about the trajectory of growth that these companies see right now in the current environment.
Well, I don't know that we've got great visibility from either company, I mean, Ali Baba's said that they will keep investing in Taubau and team or the team, or they will keep competing with the likes of PDD that I mentioned.
As with Tencent.
They do anticipate things improving in the second half, they said. And one of the interesting things, I mean, they mentioned a number of games that they consider kind of flagship games that are going to fire up growth in their estimation. I'm not really sure about this because the blockbuster games that we see on the global stage half the time, they're kind of unpredictable. I mean, we had a game
like Powell that came out of nowhere. So the thing again with the gaming ecosystem is you're not really sure what is going to be an absolute runaway hit. So we kind of have to play that as it goes.
And just briefly, I know you're peripherally familiar with ant group as well. Quarterly earnings down nineteen percent, struggling, struggling to find new drivers of growth.
And honestly, I kind of explained that one because being based here in Hong Kong, anytime I get to a checkout, I see Alipay as an option, not so much.
We chat pay.
So as far as Ali Baba announce, getting the distribution, getting the reach, and getting the retailers to embrace their payment system.
Even here in Hong Kong, it's kind of.
Ubiquitous and probably that is the strongest indicator to the earlier point Brian about the Chinese consumer. So maybe Ali Baba tells us is seeing signs of it recovering, but the facts that telling us otherwise.
Yeah, all right, thanks Flad, Let's have off with us, Bloomberg Tech editor talking Ali Bomba and ten Cent and even a little there on.
End.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you'll listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.