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Joining us now on the program is Michelle Lamb, Greater China economist for Associated General, to take a closer look at the Chinese economy. After yesterday we got some PMI numbers from both Taishin and from the government the official PMI that were better than expected and well above fifty. Michelle, thanks very much for joining us here for some discussion on the economy. So you had exports that were pretty positive, manufacturing looking better, not great, but better, but consumer spending
still a little bit week. Where are we in this process of resuming strength in the economy.
I think for the Chinese economy this year, it would be fair to say that on a cylical basis it should be better compared to twenty twenty three. After all, we've had the government issuing one trillion special cgbs to support more infrastructure investments, which should be coming food in the first quarter second quarter this year. And at the same time, as for example, you look at the US manufacturing PII number yesterday, it seems that the external demand is also on a better on a better path for
this year. So I think that would also be stilled back to the China's manufacturing sector. But the only thing is that for the consumer demand, it is still pretty weak. And there's really to do with the fact that the property sector is still in a very bad shape in China right now.
Yeah, no doubt about that. Deflationary pressures do and strong credit expansion has been very very weak. So the question is, if you're the authorities in China, what do you do to try to rekindle the animal spirit so to speak? I mean, is there a policy that you can imagine, maybe it's more fiscal than monetary, but is there a prescription here that can resuscitate the economy in a more durable way.
I think there's a prescription, but right now I think there's still pretty strong hesitation for the government to use it, which is to issue some consumption coupons to encourage the people to spend, or to actually cut some payments on the national contributions for example, or cutting some taxes to encourage to support a household income which would feed through to household consumption even though timeburary. But I think that's too strong hesitation for the government.
To really use this in looking at the pmis generally around Asia. We had some improvement in Taiwan and Japan. We had a little bit of weakness in South Korea and Vietnam. So mixed, I suppose, But in one sense, the policy makers seem to be reasonably patient. So if I could draw comparison between the FED, which is showing or asking for patients on dealing with inflation, it's willing to see some slow progress in getting to the goal, and it seems like Chinese policymakers are urging a bit
of patients. Is that wrong? Should they look for more acute action in the near term?
I think in some sense they're trying to make a policy room for the worst. So if you listen to some of the speeches by the top policy makers, they always advertise on this bottom line mentality, which is their books.
Sample. The US election at the end of the year could be at risk.
We don't know whether trouble in the presidency or if he does, if he's if he's going to impose any more parists on Chinese goods. So I think that in some sense the postimakers also try to make some room for further party stimulus, and at the same time they also understand that if they keep stimulating the investment or the supply side of the economy, it's not going to
be sustainable. They want to emphasize on sustainability, So that's why they're also being pretty careful and cautious in not to do the big bat stimulus that some people expecting, like what they did in two thousand and a or twenty fifteen.
So in some sense, I think this is a reasonable fair approach.
Brian and I were talking a short while ago about this speech given by President she resurfaced, and it kind of suggestion just that maybe there's room for the PBOC to begin trading government bonds to regulate liquidity. I mean, it seems a little bit like what the FED has done in terms of quantitative easing on a number of occasions, once during the US financial crisis and more recently at
the onset of the pandemic. In your view, is this something that's conceivable where the PBOC could adopt something similar to quantitative easing as a result or way of getting more risk into the market.
So in some sense, I think for China they have always been. There are also other ways to support the put it this way, So if you talk about the PBOC buying the government bonds, it could be some kind of open market operations that to smooth the to smooth the liquidity, to avoid the volaticity in liquidity that we are seeing in China right now due to text pay for example, and we could see the more less much less volatile path in the short in the interbank bates for example.
And I think that's one way to do it.
And the other way that people discussing about that which is is China hoping to do monetary financing.
And on this I think I'm.
A bit skeptical on this because actually there are many
ways that China can always finance the physical deficits. For example, the p BOC has this tool called the PSL which is in some way for the PBOC to lend to the policy banks, which in turn the policy banks can actually channel the credit to the economy, So I think actually there's already an existing framework for the for the government actually to do a so called court scie fiscal financing if they wish to so in some sense, I would be skeptical of why the government need to purchase
the government bonds to do.
This now, and well, they'd like to get consumer spending and housing could be a key part of that time. In a few moments ago in our media review that in Hong Kong we've seen a pick up in the purchase of homes, so they spent a lot more transactions, the most we've seen in eleven years or so. They removed a lot of the restrictions on buying. To what
extent have the authorities remove those restrictions in China? And is there any hope to you know, come up with something that repeats the story we're seeing in Hong Kong.
First of all, I think the situation for Hong Kong, there's some improvement in the new transactions, which I think I would still be skeptical to see if it is sustainable, because of course, when the policies relaxed, of course it's reasonable for those who have been wanting to purchase that there is a short term improvement, but afterwards we need to see the microeconomic situation like where the house, the income, the confidence are improvement, which I think is really the
situation for China right now because the job and income expectations are still pretty pretty poor and the prices are still correcting. So I would think that even though some of the top tier cities they could be removing the relaxation restriction, yeah, the pressures restrictions, we could see some short term rebound that maybe at the same afterwards, we really need to focus back on the fundamentals and see if this is sustainable, and I think I'm still skeptical
of whether it is. It is going to work, and I think there's still going to be some downward pressure for the prices to correct and the top city system that they're still pretty over valued.
So very quickly and Michelle about twenty seconds, what's the next move on the part of the PBOC.
For April.
I don't expect them to do much because we've seen some improvement in the marsh pm I and I think for the first quarter GDP is going to be the pretty pretty decent as well. The next move going to be just wash the PSL if they are ramping up that to support the urban ridge the b development.
Yeah, okay, well thanks for how much for joining us, Michelle, Very good stuff there, Michelle Lamb, Greater China economist at Associate General.
Well, the Japanese government has approved up to three point nine billion dollars in subsidies to the Chip Venture Rapidness Corporation. This is a nineteen month old startup. It's amy to compete with companies like TSMC and Samsung in the market for contact chip making. Let's take a closer look now with Bloomberg's Peter Elstrom. He is our executive editor for Asia Technology and he joins us from Tokyo. Peters, it's always a pleasure. Can you help me understand what's going on here?
Now?
We've been talking about trying to lessen the reliance on chip manufacturing and Taiwan. I get that. And it's kind of curious because quite a number of years ago Japan did quite a bit when it came to the manufacturing of sem conductors.
What's going on right, right, it was not that long ago that the US was very concerned about the rising power of Japan and semiconductors. We've come a long way since then. Right now we have advanced semiconductor manufacturing concentrated in just a couple of locations. Taiwan is by far
the most important. South Korea is also very very important because of the COVID pandemic disruptions to the supply chain, because of some concerns over China's claims to Taiwan, We've now seen many countries push ahead with trying to build up their domestic capabilities in the semiconductor industry. The US, of course, is doing that. They've got the chipsack where they're allocating tens of billions of dollars to chip companies, and here in Japan they've been very very aggressive too.
They do have that foundation from a few decades ago where they were one of the most advanced countries in terms of chip making, and they're trying to rebuild some of those capabilities in a number of different areas. They are giving money to TSM, see the Taiwanese chip company that leads the way in what are known as logic chips in this case with rapidest. This is as you mentioned,
it's a brand new venture. It's a domestic company that's backed by the government, and their goal is to build an advanced semiconductor fabrication facility up on the northern island of Hokkaido to produce custom made chips contract. It's contract manufacturing, so you specifically devise chips for customers to their designs. This is what TMC now does for customers like Apple and Nvidia and rapid ESC's case, they'd like some of
those contracts also in say artificial intelligence. They also want to make sure that they're able to make those kinds of advanced chips for domestic companies like Toyota and the rest of the automotive industry, which is a real foundation of the economy here.
Yeah, you sort of phased into what was going to be my first question about whether or not this was more support for RAPIDUS or actually just in establishing japan com on that because they've offered billions to TSMC and I think Micron as well. Right, so let's talk a little bit about this specific company young as it is. It's teaming up with researchers at IBM on exactly what right.
Yeah, so they are using some technology from IBM. They've also had engineers go out to the state of New York to do training with IBM to try to be able to build advanced semiconductors that will be two to three nanometers at the cutting edge of chip making today, probably won't quite be at the cutting edge when they plan to come online. They've got a long ways to
go here. Just to lay out some of the enormous challenges ahead for the company right now, TSMC leads this market and being able to make three nanometer chips for things like the iPhone, and Samsung has been trying to compete in that business with TSM, and it has been struggling. Frankly, they haven't been able to get customers at the kind of rate that they expected. They haven't been able to
build up their foundry business very successfully. So Rapidess, again, a company that only was formed a couple of years ago and does not have that track record of being able to manufacture chips successfully, is targeting and advanced advanced technologies to be able to build cutting edge chips, and it's not at all clear that they're going to be able to fine tune the manufacturing processes to be able to compete with leaders like DSMC.
Well, they rely on equipment manufactured by ASML, it's a.
Very good question. The reason that Rapidess has gained so much support internally here in Japan is because they have a lot of domestic expertise within the country and within the staff. They're being led by an executive from Tokyo Electron, which makes chip making equipment, and Japan is actually very very critical at and phases of the semiconductor supply chain, including in what's known as photo resists many of the
chemicals and materials that go into the chip making supply chain. ASML, of course makes the most advanced chip making equipment out there. It makes its highest m machines are EUV machines, which help make three nanometer in the future two nanimeter technology for customers like Nvidia and Apple in Tokyo Electronics a little bit behind that, but Rapidus plans on leaning on all of those customers to be able to make these advanced chips.
So I guess going back to the original question about Japan doing this not just to support Rapidness, but to try to establish its own credentials as a place to make fabs and to advance and move forward in semiconductor manufacturing. Where is it on that along that road in that process.
Yeah, it's a very good question, and it's an interesting time where we have governments becoming much more active industrial planning. In past years, of course, the United States and Japan sort of the government entities backed out of the market and let private corporations really lead the way. That's in contrast to say, Taiwan and South Korea in particular, where the governments have been quite successful and helping to support
some of these local providers. In Japan, they of course had a long history of a very active government hand in all sorts of sectors, including semiconductors. At this point, they are trying to rebuild some of the capabilities that they had in the past. Right now, they don't have a leading edge logic chip manufacturer like a TSMC, for example,
or an Intel in the US. Even they do have players in the memory chip market, notably Kyoshow, which competes with Samsung in memory chips and heinis and memory chips, but they're not at the cutting edge anymore. So they
have quite a bit of ground to make up. As you alluded to earlier, they are helping to subsidize Micron, another memory chip maker, an American memory chip maker that is building out a fab here, but they have some ground to make up, both on the memory chip side and on the logic chip side of the industry.
Fascinating stuff, good conversation. Thank you so much, Peter. Peter Elstrom, Bloomberg Executive Editor for Asia Technology, helping us understand the investment being made by the Japanese government in the way of subsidies for this new chip venture Rapidness Corporation. David Finnerdy is with us. David is Bloomberg FX and rate Strategisty joins us from our studios in Singapore. A lot of ground to cover here, David. Let's begin with this
HM number that we had for the US. In terms of the PMI data, we're seeing expansion on the manufacturing side for the first time since twenty twenty two. And the report, maybe a little concerning to the FED, is that the cost of materials and other outputs increased a bit. Do you think it's enough to really change the calculus when we talk about the FED cutting interest rates? Should we be looking at not three, but maybe two or maybe even one?
I think definitely, well, certainly I think this step by step. I think two is definitely a possibility. I think there's no question about that. You know, how it plays up between two and three I think obviously depends how data comes out. I think arguably more certainly the is and
manufacturing is important, but really it's the services economy. So I think the services data that comes out I think it's on Wednesday will arguely more important, and obviously the payroll data as well, so let's see how those come out. But having said that, the predictions of that will come out quite solid. Payrolls about two hundred, the service and manufacturing about fifty two point eight, so certainly solid data
which backs up this idea. As as fed Chepal said that we're in no hurry to cut, not that they won't cut, but there are no hurry to cut, and beg the question, if you keep getting this solid data, how many more cuts do you need this year? So the market has actually down its pricing to think sixty five basis points at the moment, and I think if the data stays strong, you could certainly make a good case say, look, actually only two rate cuts it's needed
this year. If it continue strong, then it gets to your further point of is actually just one needed, and I don't think that could be written off at the moment, but certainly for the moment, I think we'll go for two to three is the most probable.
In your view. Is the FAED kind of fudging the two percent target at the moment.
I don't think so. Look it's saying it wants two percent. It says that it's going to go be forty percent, which makes sense. I mean, you want the trend going down there. And I think the fact that you could look at that dot plot it was very fifty to fifty. I mean you had I think ten people going for three or more cuts and you're nine going for two or less cut. So I think the FED saying, look, we'll do what we need to do to get it down there, and if we need to cut less to
get that target done, we will. So I don't think it's it's fudging this at the moment.
So we had a little bit of an upswing in China's economy at least if you look at the official PMI data for the month of March released over the weekend, the numbers coming in above estimates, What does it say to you about how well China is doing?
I think look, it's certainly a positive I think you know, when you factory in you know, lunar year and all this sort of effects around that, you want, you know, one piece of data doesn't make a trend. Shall we say, well, suddenly it's positive. I think you obviously want a few more pieces of data to support that and corroborate that idea that it's rebounding the coast for China. So even if it's rebounding, it's slowing. It was just in you know, over fifty it wasn't like fifty three or fifty four
where strong growth. So has it kind of potentially plateaued in terms of weakness? You go yes, But it doesn't all go well that it's like really, you know, churning a head on a very strong footing, certainly not the same footing that the US economy appears to be on.
Yeah, well we had good export data too, so the manufacturing and the export data kind of go together. But it suggests that the economy is a little bifurcated. Consumer activity is still not quite up to snuff. Whereas you know, you're getting this little bit of pickup on the industrial side. You have a lot of people calling for and the reason they say that consumers are not spending is because the housing market isn't fixed. So how do you fix
the housing market without taking on more debt? Some people think debt isn't even bigger problem when you look at that. I mean, this is all sort of big picture stuff. How do you separate the big picture from you know, the short term.
I think it is tricky. I mean, I mean it makes good points. I think because some parts economy performing better than the others, and you said the consumers saying lagging a bit compared to other parts. So it is tricky to eventuate the two, particularly because the market when he does look at a macro picture, and at the end of the day, it's you know, how's the big
picture doing. You can't just focus on one specific bit because there's always going to be something that doesn't perform how as well as you like it too, So I think you have to look at the big picture. Having said that, the property is always something that's worrying. Trend and well, it seems to have improved over the last few months, should we say from the everground and other companies, Yeah, those obviously could resurface. I think they do reservice, particularly
consumers being a bit sluggish. That wouldn't bode well for consumer sentiment. You'd have to guess which could see another downturn in the Chinese economy. So I think the market would definitely like the property sector to be improving more quickly, should we say.
So if you look at a potential policy response. Brian was talking earlier about something he read where maybe you have the central bank using its balance sheet in a way that would resemble quantitative easing. I know when we've talked about this in the past that the people who are really close watchers of the Central Bank say no way that China would ever do that. But are we getting closer to some type of creative exercise here on the part of the PBOC.
Well, I think the market always wants to interpret anything positively that it can if I'm on it, So you can't and unfortunately a bit of a black box and we don't know exactly for sure what it's going to do. So the recent wording has potentially been interpreted that way, and you could go look at one. They've had different measures to come out to support the economy. So I don't think you can never say never I think that
would always be mistakes. They never say never, and are we heading in that way slowly potentially, But I don't think it's something that's going to happen overnight. And I think that's the best way to put it.
Yeah, we've got the Bank of Japan's story as well, possible intervention looming with the end continuing the week and dolly en one fifty one sixty four people talk about one fifty two maybe as a line. The authorities said they generally don't try to drive the end in a certain direction, maybe just to send some warning signals. What are you expecting there?
Well, I think what was so interesting is I think with Susuki came out today in the Finance Minister and we're saying we're looking for excessive moves. Dolly End's gone nowhere, I mean really over the last few days. It's just it's one fifty two range. So you know, I think they're obviously very worried that they keep banging this over when it's not even really moving. So I think the next port of call I want to be seen to
rate check come out soon. I think one fits to his key because if it does go, it will trigger some barriers to be triggered with in options. Okay, you see some short covering, so may asascerbate.
One five to two. That's the number from David Finnerty in Dollar Yen. David Finnerty from Singapore. Here on Daybreak Asia. This is Bloomberg.
This is 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 listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.