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Welcome to the Daybreak Asia podcast. I'm Doug Prisner. We want to begin with China. After the annual parliamentary session, President Xi Jinping seems to be determined to push ahead with a very ambitious growth goal of around five percent
this year, despite the trade war with the US. Now we know the tariffs on Chinese imports to the US are a twenty percent, and if President Trump were to boost that rate further, analysts are saying that Beijing will definitely need to unleash some big stimulus in order to hit that growth target. Let's bring in Katya Dmitrieva. She is Bloomberg News Asia Economy reporter, joining us from our studios in Hong Kong. Thank you. I'm sure it's been busy where you are.
Yeah, very busy few days, right.
Can we talk about the growth target? Does that seem realistic at this point?
Depends who you ask. Chinese officials definitely think they can make it. It's the exact same target they've set in twenty twenty four. They've met their targets for the past three years, so history would suggest that once they set something, they're going to do everything they can to meet it. The Bloomberg survey of economists. If you ask economists, however, we've got a Bloomberg survey and it says that they're
likely China is more likely to hit four point five percent. Now, the question is really how much the stimulus can help revive consumption. I know that's always the question, but this year in particular, because from Premiere Li Cheng's speech, it's very clear that they're doing a couple things. So they're boosting how much they're going to be spending in their budget deficit or how much they're comfortable with spending this year.
What is that part percentage right now?
So they've got a fiscal deficit target of four percent, which means they're going to be spending a lot more on a number of programs. We only know kind of a handful of what those will be. They're raising the pension payout levels, there's a public subsidy for medical insurance that they're going to be boosting. The question, though, is what else are they going to do? And if history again serves as a guide, we know that throughout the year,
the first few months growth is quite strong. They roll out these programs and then about halfway through the year they're forced to do more because the numbers aren't stacking that.
Do you think that leadership in Beijing is operating under the assumption that it is inevitable that more US tariffs or at least higher US tariffs are on the way.
Absolutely, and you can see that in their reaction. So if you just look at Trump's previous statements, everything from sixty percent to one hundred percent tariffs on China, which you said during the campaign trail, Now one hundred percent, take that with a grain of salt, But I think sixty percent was mentioned enough that that's what a lot of economists and analysts and people in Beijing are now
pricing in. And so the reason why this NPC was particularly important is because it was the first chance that Chinese officials could react to that eventuality, or what is
perceived to be that eventuality. So raising the fiscal deficit target and also raising the fiscal deficit target and also focusing on the consumer is a sign that they're not going to be or trying not to be, as reliant on exports, right, because if you have these tariffs coming in from the US and you have this growing protectionism
really globally. Then you can't rely on those tariffs, or you can't rely on trade, you can't rely on exports as much because it's just going to contribute to deflation. It's not going to get your growth to about five percent.
So talk to me about this split screen that we saw happen yes today, that would be Wednesday, where you are Tuesday here in the US, where Trump, on one hand, was addressing a joint session of Congress, and then we had Chinese Premier Lee kind of detailing the work report. Right.
It was pretty incredible, especially if you had the two screens on at the same time, because at a certain point it was something like sixty seconds apart between the premiere finishing and President Trump standing up and saying America
is back. And I think it's a really good image of what the next few years are going to look like, especially for China, because you have all these efforts domestically in China to boost growth and to get the country out of deflation, this dangerous firal of deflation, and trying to study the property sector and doing all of these things that were announced during the un PC over those few hours speech, and then right after you had President
Trump doubling down on tariffs, mentioning reciprocal tariffs which are coming in April, and mentioning China by name, as well as several other countries in Asia like India and South Korea. But the point being that it's just was just a reminder of how limited in some ways China's policies are. Because at the end of the day, you have the US, the biggest economy and one of China's biggest markets, saying well, actually, we're going to make it a lot more difficult for you.
If Chinese leadership has to do more on the stimulus side. Are people talking about the risk that may be associated with that, I'm thinking about the debt levels that are maybe problematic already.
Yeah, there's going to be a lot of debt issuance for sure, and of course fiscal deficit increasing. But this is kind of with China is a special case in some ways, and in some ways it's also not so it's a special case and that they have more control over these things. We're going to see a lot more bondishuans. There's some response in markets. They're still hungry for that debt.
So the government from what I understand is also planning to raise defense spending by about seven point two percent. That seems to be the same thing that occurred last year, right, not a big surprise on that front, but does it send a message.
Yeah, it is the same level as last year, But again, given how big China's economy is and how much they're spending already on it, it's significant. And this just goes to how China has said in the past and repeats officials repeat quite frequently, they would like the defense sector, the military in China to match US and America spends among so many countries, among the top ten biggest countries, spends more on their military than any other nation. And
so that's a pretty big ask. So you think of this kind of spending and it tends to drive economic growth, and it tends to be. It tends to be what we saw with Germany for example this week as well with this Bazuka expandis with their military like it does help growth. However, of course, geopolitically, it could further increase tensions between the US and China. We didn't see Trump
reacting to that. We didn't really see any major officials raising a red flag and saying, hey, this actually indicates that China is very much a threat and we need to actually go forward and maybe add more tariffs aside from the ones we already added this week.
So we're dealing with a trade war right now. And one of the things that I thought was very interesting is Beijing reiterating this stance on opening up markets to foreign investors. Where is this foreign capital going to come from, in the mind of Chinese leadership, other than the US.
They're hoping it'll come from all over the US, maybe Europe, but Southeast State and Asia in particular. You've seen since twenty eighteen really solidifying of trade and foreign direct investment ties between China and Asia, especially as companies kind of pulled back from the States in Europe and there were a lot more restrictions in those regions and kind of the Western world. So there is a sense that Asia could contribute.
A lot more.
You know, think of India, think of even South Korea, and a lot of the Southeast Asian economies that are growing at a much faster clip and sort of minting new companies and millionaires and billionaires every day. So I think the thinking is that the investment will come from there, however, it'll be a pretty tall order to get foreign investment to come back. There's still a lot of questions about the property sector bottoming out. In fact, if you speak
to any investor, they will flag that particular issue. The data shows the opposite, that domestic investors are taking their money out of China at a much faster clip and money is going into China at a much slower rate. So it's not looking optimistic for that.
I think we're going to get figures in the week ahead on foreign direct investment for China. But what are some of the important data points that you are looking at in the coming days. I know over the weekend we'll have some inflation numbers, also new loans data. But is there anything in particular that you think can shed a light on the vibrancy or the lack of vibrancy in the Chinese economy Maybe in the next week.
I think three things. There's three indicators that I always watch when it comes to China. There's the CPI and PPI, which I'm wrapping into one as inflation. There's housing and in particular how in particular ular home sales, home prices for some of the biggest cities. So we get that, we get the inflation data this week, we get new home prices, used home prices in a couple of weeks, and then I would say the third thing is retail spending.
So talk to me about the behavior of the Chinese consumer. It's going to be some time, a few days, I think, before we get the monthly activity data. Do we know anything about how well retail spending has been performing.
It has been very weak. In fact, the last few months in particular have been surprisingly weak. Given that the start of the year we had a major holiday. We thought spending was going to lift as a result of that, but actually to end the year there was this unexpected slow down and sort of starting the year as well. I mean, in general, the issue is that there's still
a two speed economy, right. You have industrial product that's picking up, you have retail sales and consumption that's flatlining, and growth is just nowhere near where it should be to support economic growth, and certainly nowhere near where it needs to be to support five percent growth, especially if you're going to be relying on the consumer.
Specifically, if we're talking about stimulating domestic demand very quickly, can you imagine what that might look like.
Yes, and it has to do with stimulating households more directly, in other words, providing childcare subsidies. That's a big one that economists and analysts have been asking for or looking for as a pretty significant way to not only boost consumption but also addressing this issue of aging and the
demographics shift. So if you provide things like childcare subsidies, or you know, take a chapter out of South Korea's book and just provide direct checks are funding for new couples or housing subsidies for families, I think that's something that would immediately change the game.
Okay, we'll leave it there, Katya, thank you so much for joining us. Katya Dmitrieva there, joining from our Hong Kong studio here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Prisner. So markets are now looking ahead to the US jobs data do Friday morning. The latest reading on private payrolls showed that hiring among US companies slowed in February to the slowest
pace in July. And on top of that, we know that government workers are in the process of being dismissed. So what do we think we will learn from the February jobs data. Joining me now is George Sippoloni's portfolio manager at Penn Mutual Asset Management, joining from Philadelphia here on the Daybreak Asia podcast. George, it's always a pleasure than thank you for making time to chat with us. So what is your sense of the labor market right now? Is it churning a bit?
Let's feel that way, Doug. It's great to be with you again, yes, but it does. So the labor market has a few key segments that are about to get weaker. Number one obviously government jobs, which you mentioned in which everybody is talking about. We're hearing some pretty big potential reports coming out even from the Veterans administration maybe cutting back as well. In addition to that is obviously immigration
and that impact on the job market. So we are seeing some churn and I really do feel for corporate managers out there today. So if you think about anyone that's the steward of capital investors, companies, countries, they're dealing with a lot of uncertainty here. So it is harder now to set and make long term plans regarding employment, manufacturing, just about anything today.
So talk to me about what you're seeing in the bond market. Yields have been coming in recently, and I wonder whether that is a function of the growth scare. Doesn't seem like the bond market is too concerned about the potential for stubborn inflation. Do I have that right?
I think you do, Doug, And so a couple of the data points to watch. Obviously, this is a growth scare so far. And if you just look at the Atlanta Fed GDP number, that number was pretty stark, and it's pretty telling in terms of just a general tone. That's one stat and it went negative for the first time in a while, and pretty sharply and pretty quickly.
The other thing is that best and obviously has talked about lower rates, and I was always wondering how he was going to do it because the tenure is a market rate. In Trump's first administration, he was beating up pal about short term rates. That kind of made sense, I guess, to some respect, because that's more of a
controlled rate where the tenure is not. So it looks like, yes, bringing in some of these growth fears, whether it was intentional for DCHSS, whatever the administration is doing has worked so far.
You make a very interesting point there, So I'm going to ask you this. Could you imagine a world where President Trump to use your term beats up on FED share J Powell to use the balance sheet as a way of bringing down market rates?
Certainly could so. I think one of the things is obviously he's using this bully pulpit across the board, whether you know, you can talk about trade or you can talk about rates or just about anything right now. So yes, I think he could potentially do that. Now again, I think the biggest thing to watch is this tenure. Where
does it go? But now I think they are playing with fire though, because you don't want to get the market too concerned about growth, because it could really unravel here and we could get even more volatility, and that I think could be a big concern.
A couple of the big houses on Wall Street in the last week a signal that they are increasingly concerned about the risk of recession, a model from JP Morgan showing a higher probability of that fact. Similarly, Goldman Sachs as a model that suggests the risk is edging higher. Is that something that you're concerned about? We're talking about growth scare. I know that is it a bridge too far to say that we're on the verge of a recession.
I don't think it's a bridge too far, just because again, this uncertainty is going to cause a lot of managers to kind of pause, and we're already seeing and earning.
So if you just look what we're we are bottom up managers for our for our fund, and one of the things we do is we listen to management teams all day long, and what we're seeing is a pretty good contrast from the fourth quarter down to the first quarter, where we are starting to see a rollover of earnings expectations and it's pretty much just about every sector and that's different. So again, I think if there's more uncertainty, that's going to make managers pause and that could lead
to even worse EPs results moving forward. So hopefully it's not recession ary, I do. I will say full you know, full disclosure. I do think this administration does want to be pro growth, but I do think if there's going to be any weakness or slow down, they're going to want it earlier in Trump's second tenure versus later.
So, George, where are you seeing opportunity. I'm curious, Uh.
This is so this is the perfect lead into you know, what we're doing today. Now, obviously this volatility is kicking up a lot. What is that doing the asset prices? It's moving them all around. I will say one of the areas, so bonds have rallied, So we did increase duration a few months ago, which was very beneficial. The other areas of that most people probably don't participate in
or look at, or convertible bonds. We are seeing some price moves down forty to fifty to sixty points in some of these convertible bonds, and that's one area where we can invest in for our fund because it is so flexible. That's an area that we're spending a heck
of a lot of time in right now. Small caps again I say small caps a lot, but you know, if you find four of our five best performers last year, we're small caps and they were up you know, anywhere from eighty to one hundred percent, and there are still there is still a lot of value there with this recent decline. So that's where we're going to spend most of our time today.
Are you lightning your position if you are exposed to megacap tech let's say the Googles, the Alphabets, the Microsoft, the Apple. Are you kind of dialing back from that exposure?
So we tend to avoid peaks in cycles and tops, and that's one. So we did have a decent amount of even though we're value investors, we did have some exposure to whether it's subcomponent companies that would support this AI move, and we did trim back on a heck of a lot of those because they moved up a lot at the end of last year and in November and into December. And so, yes, we do have an elevated cash level. Part of that is in the bond side of the fund. Part of that is on the
equity side of the fund. So we do have dry powder, which I'd love to have excess cash when markets get volatile, because that's when we tend to have some fun. But again going back to it, yes, I do think we tend to avoid cyclical peaks, and that could be a cyclical peak in chemicals or it could be in tech. We are agnostic in that. From that standpoint, Are.
You looking for exposure offshore right now in this current environment in any way, whether it's Asia or Europe or South America.
So that's an interesting thing, Doug. If you remember last year, international stocks were getting walloped relative to US stocks, and so that was a pocket where we found a decent amount of So all of the companies that we own have to be US denominated and trading US dollars, and so we can buy ad rs, and we did increase our ADR exposure last year just because there were so significantly cheap relative to US stocks, and a lot of
those have gapped up and rallied. And you know, if you look at foreign markets, whether it's Germany today, their stock market has rallied a lot, Japan rallied a decent amount, and even China now is after years of just sluggish stock movement has finally started to pick up. So yes, to your point, we do have some exposure there starting from last year, and we're happy we did that.
George, we'll leave it there. It's always a pleasure. Thank you so much for making time to chat with us. George Sippaloni there. He is portfolio manager at Pen Mutual Asset Management, joining us 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 story 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 Prisoner and this is Bloomberg