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Joining us now in our studios in Hong Kong is David Chu, Bloomberg China economist. David We mentioned there that that cut in the mortgage reference rate, the five year loan prime rate of twenty five basis points, while being greater than expected, was met with kind of I don't know if it's a yawn or a little bit of disdain even in the market. Is that fair?
Well?
I have to say that it was not such a big surprise to the market because the PBOC has had it delivered to some of the indication via some media before the reduction in the five year LPR. But actually I have to say people didn't expect that it was cut so much, because we expected that it could be five or ten BIPs, but it turned out to be twenty five. Well, I have some reasons for the twenty
five business point cut. Although the base the policy rate, which is the one year MLF rates was steady because in last year August, when the people cut the policy rate by fifteen bibs, the five year LPR remained steady. It didn't change, so that it allowed the five year LPR to have at least fifteen business points to cut in this year. So another reason, apparently the commercial banks had another ten bibs for the reduction, so that it's
total to be twenty five. So one thing we are talking about, we are thinking is that whether this can stimulate, try or raise China's housing market. That is the key question because as we just decided that the five year LPR is the base or the benchmark for the mortgage rate. And apparently that it seems that the authorities are trying
to help the housing market. But to be honest, we are not so optimistic on this because if you look at the housing market in China, it has been sleeping over the past two years, and the sentiment in the market is very weak, especially in the lower tier cities such as the Tier three and Tier four cities. So and also we see the oversupply in the housing market, so that putting all this together, we think, yes, it will help, but the help should be very limited.
I'm wondering whether anyone is concerned about the pressure that this would put on banks. I mean, obviously when you lower interest rates, it puts a little bit of pressure on your margins. Is that a chief concern or will it be let's call it a sacrifice that has to be made as authorities try to rescue or unwine this property crisis.
Well, I agree with you that that the banks are not so happy with this. Actually, in January I had a travel in Beijing and Shanghai and to see some bankers and they told me that they were worried about the narrowing of their interest to margin. But it seems that, as you said, that it is a more political decision to to to press the interest margin further because I think maybe, uh, the leaders think that the bankings actor should do something to help the economy as a whole.
Yeah, it's about affordability, and even you know, pressure is building here in Hong Kong for the government to relax some of the restrictions on buying homes that we've seen for almost a decade now, and we're even seeing that pressure coming from pro China parties, and we're talking about things like the stamp duties, some of the friction that's in there, for instance, also the size of the down payment.
In some cases you have put fifty percent down, then you have to pay a fifteen percent stamp duty, and it's on and on and on. Do you think that the time is ripe now for both Hong Kong and China to think about relaxing some of these restrictions.
Actually, I think it's not about the timing, because for both, especially for mainland China, they have been cutting the down payment ratio and also the mortgage rates and also relaxed the Home Purchase.
Act yourself, Is it working?
Yeah, that is the question whether it works. But honestly, it hasn't worked so much in China.
Do you think things are so desperate now that there's going to be a major initiative unveiled at the National People's Congress, which I guess is set for early March. My authorities wait for that moment in time to unveil something that's a little bit more sweeping in scope. I mean, clearly there is just declining center it not just as it relates to the property market, but the equity market as well.
Yes, I think for both the housing sector or housing market and the equity market, people have the same concern. It is whether China is still still views the growth as the top priority. I think that would be a signal that we can see from the the People's Congress in the coming months. But to be honest, I don't think that even the government or the authorities release the signal that we still view it very important. I really doubt how much the market can buy it.
I'm going to going to ask you a question. You're an economist, and you're going to say, oh boy, you know, that's kind of a political question. But it seems like what we have here is an issue that comes down to societal considerations versus economic considerations. We understand that a lot of what President Chijenping is trying to do is good for the common man, but that may not be in the shorter term, what's good for the economy. How do you decide?
Yeah, that is a kind of it could be a trade off, because if you want to make the common prosperity, or in other words, you want to help the common people.
You want to make property more affordable to the average person, but then it slows down the economy to the point where the average person may not even have a job. You know what makes more sense?
That is the question, you know, because I think what caused the pain. It was the timing, because I think personally, I think it was a bit late for the government to do so. They should have done that ten years ago to do it. But if you leave the problem today, you must have some price for that, right.
David, I'm wondering whether or not you could see a world where authorities, let's say at the Central Bank, began to adopt something that both Japan and the US have used, where the Central Bank has used its balance sheet through quantitative easing to address the problems that the China is facing with so much bad credit right now. Is that something that you think they might experiment with.
Well, I have to say that I have been asked about this question at least a dozen of times over the past year. But I have to say that for China, the PBOC always have some quantitative tools. So when the PBOC is doing easing or tightening, it is doing so in both the price and the quantitative side. For example, the PBOC can raise or cut the triple R, which is definitely a quantitative tool. And also the PBOC can do something to inject the more money via the MLF
or the PSL DOT two tools are also qutitative. So for the PBOC it is not a quite enough whether a quantitative eating or not. They always do that.
Yeah, all right, David, thanks very much. I enjoyed this session quite a lot. David Chu, Bloomberg China economist. Joining us now is Shuly your En Bloomberg opinion columnists to take a look at market sentiment on Chinese and Japanese markets. She wrote a piece citing two articles from Barons and one of them talked about how Toyota Motor Company was looking like a growth stock, whereas in China it's a totally different story. Let's get to Shuley. Thanks very much,
Shuley for joining us here on the program. Is that still the case even after the big run up in Japanese shares? And you know, how long can this continue?
We don't know, but it does seem to be the case, especially early this year January and February. Like over the last decade, basically a lot of global investors have plowed their money into Chinese stocks, a lot of them trading in Hong Kong, right, and everyone knows that the China's economy has some structural issues that cannot be solved there within perhaps even a year or two, So that's why they're.
Looking everywhere else.
And India has become very expensive, So of course Japan is the other big liquid market that for investors can go to.
That's why they're going.
What I'm listening to comes to mind is the corporate reform that has taken place in Japan, which may be underpinning the rally that we have seen in Japanese equities. And on the other hand, the situation in China where the regulatory regime is so mercurial and shifting, such a lack of clarity on what policy is going to be for the foreseeable future. Does that come into play in any way? Do you think that dichotomy?
Yes?
Absolutely, I mean, like in China, like I think investors at this point, they're not even looking for stimulus, They're just looking for some predicted predictability and the stability. I mean with Japan, the corporate reform story is actually quite old. It started with has basically a decade ago. And I do want to say that the Japan you know that the investment narratives that we are seeing Japan, these are not news stories.
They have been around for a decade.
It's just that the investors being burned by China in such a dramatic fashion that they're willing to give Japan a second look. And it's not clear to me that Japan can finally come out of this deflationary environment.
I remember you from your days at Barons. It was more than a decade ago. And yeah, so this piece about about you know, Japan looking like the growth story in China looking like a value play. You say that it's value trapped, not a value play, particularly I suppose because of policy and is it likely to change sometime soon? I mean you are starting to see almost daily developments with the policy makers in China. Now do they realize it?
I think there is some good trend. For instance, the new security is watchedot he sounds a little bit more humble. He's willing to hear opinions from market participants, and that could be a good trend. Butruct structurally, China's property sector used to account for twenty five percent of the GDP, and structurally, this property sector has not found its bottom. I mean, let's just compare the home prices right from peak to trial to now. Basically, home prices have come
downly about twenty percent. During the US subprime crisis in twenty two thousand and eight, the price came down by forty percent.
So we just feel that there is no bottom yet.
So regardless of how the Chinese government changes, it's tom economy is economy, right, it's the fundamentals.
Yeah.
The other thing that's interesting is to after thirty years, we're getting an indication that Japan is leaving a deflationary trap, and it seems like Chinese is now firmly you know, under one or one is firmly underway in China right now.
Yes, but I do want to say that it looks like Japan is coming out of the deflationary trap, but not quite right, Like if this inflation is ongoing globally, I mean Japan's it's unclear how much inflation Japan can have. And also global investors are not expecting Japan to Japan's economy to grow slowly but not so fast that the Bank of Japan changes is quantity easy, and that is a very blue sky scenario.
The policy makers in China are hinting that deflation is just about run its course. Do you believe them?
No?
I mean at this point, like China has a statistics is all very opaque, right, Like we don't know what's in the like a CPI basket, but just from anecdotal experiences, everything is kind of un sale in China, Like if you go to restaurants, there are always discount steals, you know, home prices, secondary home sales that there are always you know, some kind of under the table coupunsen et cetera.
So we don't believe that. No Chinese believes that.
So before you were barons, you were here in the US working for a major investment bank whose name I will not mention. So you have some familiarity with the banking industry overall. And I'm wondering, is there a way to compare and contrast what is likely to happen for Japanese banks versus Chinese banks, given the situation that you've been kind of laying out for US.
I think with Japanese banks there their biggest obstacle is uh uh. I mean there has been no interest rate margin for Japanese banks because it's zero percent for the longest time, right, So, so their their problem is that some of them have gone overseas, like you know, more brokerages as well, no moral et cetera, and then they could have exposure to to the weakening global commercial real estate.
With Chinese banks, their problem is that their interest rate margins have are also compressing because the Chinese government wants the banks to give our loans very cheaply. But you know that that really contracts the Chinese banks profit margins and that that could hurt their capitalization ratios as well.
So if we look at China and try to figure out a way of getting out of this, you think that deflation is still pretty well entrenched and that households are you know, they're saving, they're not spending. Is there a way to transfer some of that wealth to households so that they can feel more comfortable? You know, we often think of tax cuts, that's not often considered in China. What about some other measures that would you know, move capital into the household sector.
I think at this point it's the sentiments, and I'm not sure about this because China has no opinion polls. But I have a feeling that the households are just doing this revenge non consumption because they were burned quite badly during the three years of COVID lockdowns, right and lot. Like just anecdotally, some people that I know who have no financial issues, they're still not willing to spend. They just think, why am I contributing to the economy, Like
the government can can take care of everything. Like it's almost kind of a revenge what the lockdowns. So if that is indeed the case, I mean, like we have to talk about psychology.
Oh yeah, great, measures.
Absolutely, that's a fascinating point. Surely, thank you.
One of our big stories in the past twenty four hours capital One Financial agreeing to buy Discover in a thirty five billion dollar all stock deal. The deal would create the largest US credit card company by loan volume. But there is a catch and joining us now is Adam Hag, Bloomberg Finance editor, to discuss more on this story. I find this a fascinating story because it goes to a lot of things business model. It could help capital One compete with amex here and lower its cost by
not having a process through MasterCard. And Visa, extra competition for MasterCard and Visa. You just go on and on. Of course, there's the ANI trust concerns as well. Maybe we can deal with that first. Is this the type of story, Adam, that you think ultimately gets blocked by a Biden administration, this sort of anti mega merger. Yeah.
Well, the thing to watch, of course is the timing of when any block would would take place. Obviously we're in an election year in the US, and there's a lot of political capital now going to go into scrutinizing this deal. And we've seen already Senator Elizabeth Warren of course come out quite quickly and make some quite clear comments on Twitter to raise the argument about how this not only threatens financial stability and reduces competition, she said,
but raises costs for Americans. Is a is a typical kind of language that you would expect to get this into the political discourse to try and examine some of the issues that we have. So the next few months will be will be crucial. But the timing whether this ends up getting postponed and is a post election decision or not, I think is crucial. There's obviously so many hurdles still to get through, so this could still drag on for quite some time.
I think the strategy is also interesting. If you're Capital One. Up until this point, you've been catering to a lot of some subprime borrowers. This is an opportunity because Discover is traditionally kind of gone after those of kind of a higher credit quality. But one of the things that I think is equally as interesting here is that Discover has kind of put itself in a very weak situation. I mean, I think the stock has been decimated over
a period of time. There were a lot of concerns here about management, and I'm wondering whether or not Capital one is basically capitalizing on another company's weakness.
Well that could that could be a lot of truth in that, and you see that often with with M and A transactions, where you know the company being acquired has been through quite some turmoil.
And so the advertised kind of premium on this deal is, you know, about thirty percent of that closing price on February sixteen, But of course you look at what's been happening to that stock and it's it's pretty clear the position that they are in. So so yes, I think there's a large degree of truth in that analysis that they are. You know, Capter one is coming in at at a time of real weakness for the company that
they're buying. But of course there may still be you know, a number of synergies, a number of kind of things that they can do to to for a long term shareholder for that still to be very very rewarding.
Discoverer has struggled in trying to compete with Visa, mag to card Let alone someone like American Express. So this would seem to be you know, almost stroke of genius in the sense that the two together could be a formidable competitor to the other two. And I wonder whether that runs a little counter to the kind of knee jerk reaction that we saw from Shert Brown and Elizabeth Warren. They couldn't possibly have had time to analyze, you know,
the impact on the marketplace. You have a duopoly, a virtual duopoly now with Master Garden Visa on the processing it even Capital One has to run its processing through them, Like you said, maybe some time, maybe some cooler heads.
Well indeed, and I think there that goes to the heart of this. There's a lot of nuance in the analysis of the competition here. So there's a number of different things at play, and of course the distribution element for discovery is key. But how this addresses or changes the competitive landscape in the different sectors of the economy in which these companies operate, I think is key. It's a it's not kind of a one size fits all competition argument. There's lots of nuance and there's lots of
kind of detail in there. And indeed, the quick response that we saw from some of these politicians speaks to that idea that you raise that perhaps maybe we haven't gone through the detail. Let's just take a step back, let's analyze really what this could do to the competitive landscape before reaching a conclusion whether this is anti competitive or not.
I think that's very interesting also because Dick Durbin, i think, is trying to move forward the legislation on the Senate side to foster competition among credit card networks. To Bryan's point, right now, right that is pretty much controlled by Visa and MasterCard.
Yeah, it's a very good point.
Yeah, absolutely, Yeah, And you know, there there's a long term these are things that will have long term impact on this sector. So we shouldn't jump too quick conclusions. We should really look at the detail and examine just how this will impact the sector and how this will play out, because ultimately, consumers need to feel that they would benefit from this long term, that that they need, they need that kind of sense of comfort for this deal to get done.
I guess the response in the marketplace, and you know, you have investors really running through the numbers, and it does. It does inform a little master guard down three and a half percent, Visa down as well, Discover up. So obviously, you know, it looks like it's almost like a Knight in shining armor coming to the rescue. A Discover gained twelve point six percent and for Capital one, well little changed. So what do you read into some of these stock price movements, Adam Well, I.
Think some of those moves are bigger than others. Right, So the Discovery twelve thirteen percent or so moves is pretty clear. We probably don't need to say that much about that. But the you know, some of the Visa one you mentioned that there's small moves really that they're not they're not. They don't appear to me to suggest that this is an investor base that has decided that this is definitely a net negative for MasterCard in any
meaningful way. So I think you should just pause for thoughts slightly and just understand what these stocks do over the coming days earning it's all been decided in the most recent trait.
Hi, Adam, thanks so much. Adam, Hey, Bloomberg Finance.
Editor with US Live.
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 listen and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.