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This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.
A China trade lobby group says that China may consider raising temporary tearriffs to twenty five percent on imported cars with large engines. Joining us now for some discussion of this is Linda lu Bloomberg China Cars Reporter. So, Linda, you say in your story that we had two hundred and fifty thousand cars with engines more than two and
a half liters imported into China twenty twenty three. I'm curious whether most of those come from the US and Europe And sounds like a big number, quarter of a million, is it.
Yeah, it's interesting looking at this right now, we're trying to figure out from the custom stata which automakers will be impacted. But if you compare that to the number of electric vehicles that China exports, it's actually still smaller. China exported one point five million evs last year, with about six hundred and thirty eight thousand going to Europe and North America. Like with the US, which already had a high tariff, last year, they only received about fifty two thousand evs from China.
So I'm imagining names like BMW, Audi, Mercedes, Benz and then from the US side, Cadillac some of the luxury models. Would that be a safe assumption.
Yes, that's right. China now is such a big automaking country, they more than capable of essentially filling audio demand for cars domestically. But obviously there's some luxury models that are not made in China, and like you said, those brands would be the usual suspects when you're looking at imported cars into China.
So this came from an interview from Leopin who is the chief expert of China Automotive Technology and Research Center. It was in the Global Times newspaper, and I think I'm not sure whether or not we would have picked up on it so much except for the China Chamber of Commerce to the EU talked about this and said that there would be implications, what would have to happen next for this to become policy.
Yeah, we also were looking at the Global Times interview yesterday and not sure how much of an indication this is that China may eventually move to raise the tariffs. We're all really waiting to see whether an official director will come from one of China's government agencies, such as the Ministry of Commerce or Customs, where they will officially announce the raising of the tariffs.
It feels like we're in a new phase of a trade war, wouldn't you say, when it comes to vehicles, particularly evs that are maybe exported from China to other markets, and now we're looking at possible punitive tariffs, temporary though they may be, that would target European and American manufactured luxury cars.
Yes, I completely agree. And actually since the EU launching the anti subsidy investigation into Chinese evs, we've seen a whole series of tips for tat between China and the EU and obviously the US and January does ye China announced in anti dumping investigation into Brandy, which we think maybe a response to the EU investigation, and then with the US essentially quadrupling the imput tariffs for Chinese evs. Then in recent weeks we also saw China announcing another
investigation into chemicals are being dumped from the EU. So there's a whole series of moves that I would say is really just developing this trade war.
Behind the scenes here, Linda, how much is this affecting the status of some of the jvs in China that involves so many foreign companies, you know, pairing up with local companies.
I would say with these tariffs, it's probably not going to have such a big impact on the jvs because a lot of their sales in China come from locally manufactured vehicles, and there the trenders in the Chinese market these days. The jvs such as General Motors, are the one with Ford, as well as the European joint ventures.
They're all essentially suffering a hit to their sales because of China's fast transitioned to evs, and that's something they don't have strong offerings in and they're trying very hard to catch up.
Linda, do you have a sense of what this may mean for Tesla, an American company with a factory in Shanghai making vehicles not only for the domestic market, but for exportation as well.
Yeah, things could be dicey for Tesla because, as Elon Musk himself has said, the Shanghai factory is one of Tesla's most efficient and they turned out about half of Tesla's global deliveries last year. And so if the EU were to levy tariffs on Chinese made EV's going into the block, that could be a hit to Tesla. As for the US North American markets, I think Tesla's local
factories there supply that market. But obviously with Chaye tensines getting worse, it's not going to be good for any business that's trying to do business over the world.
And just because we're talking about two and a half leaders here on cars and these are larger engine cars, so are a lot of the jvs and local domestic manufacturers that produce these types of cars as well.
Yes, I would say they produce a whole range of cars, you know, from very few efficient smaller vehicles to really beg gas guzzlers.
So they would presumably benefit if some of the foreign models are closed out a bit by much higher costs. So that's something that we can watch, you know, in terms of investing Linda, thank you for joining us on the program. Linda lu Bloomberg China Cars Reporter, looking more closely at the potential here of extra tariffs on importing large cars.
The world's most sophisticated chip making machines in Taiwan can be remotely disabled in the event China invades the island. This is a Bloomberg exclusive. We are told the remote shut off applies to a line of extreme ultraviolet machines made by ASML, and those machines are used by Taiwan Semiconductor Manufacturing Company or TSMC. Here's Bloomberg's Tom McKenzie from London.
Essentially, this is a kill switch that would be applied to these ASML machines, these extreme ultraviolet lithography machines that process and produce, and they are essential to production of the most sophisticated chips that TSMC, that makes the biggest foundries over in Taiwan is dependent on. And TSMC's the biggest buyer of these euvs that are made and produced by SML.
That is Bloomberg's Tom McKenzie. Now we are also told that American officials have privately expressed concern to both companies about what happens if Chinese aggression escalates into an attack on Taiwan. TSMC is responsible for producing the vast majority of the world's most advanced semiconductors ran well.
Joining us now for some discussion of this is Peter Elstrom, Bloomberg Executive editor for Asia Technology. Peter, thank you for joining us. The two companies say they can disable these machines, and I suppose we have to take them at their word on this, but it will make people nervous, and it also raises the question of how much of this is priced in, And we saw trading in a stock didn't do all that much. But at least at the moment, there are no signs of invasion, so presumably there would
be time. But are you hearing from people that they see a need to discount this further?
Yeah, So this is to be clear that companies are not talking publicly about these capabilities, and the relationship is Taiwan Semiconductor makes the world's most advanced chips largely in Taiwan, and ASML supplies the most advanced equipment for making those chips. So what sources have been telling us is that there have been concerns about what happens if China gets more aggressive around Taiwan, if there's even an escalation into an attack on the island. Again, the story does not go
into the prospects for that. We think that that obviously that is something that the companies are not involved and wouldn't know anything about. But ASML has been approached by the Dutch government about the possibility of what would happen then, and ASML has told those government officials that they are
able to disable these machines remotely if something like that happens. Essentially, this is a remote kill switch so that they could stop these machines from producing advanced chips if something happens around Taiwan. More broadly, they'd be able to do that
sort of thing. Also in addition to that, so it's an extra level of caution and security that I think the government in the Netherlands in the US would see as a sign of reassurance of these advanced chip making machines won't fall into long Peter.
We stated that in our story. But what I was getting at is this discounted. I mean, are you hearing from people that that this is a serious concern or that no, it's not so much a serious concern.
Well, that's sort of the question is sort of predicated on how likely is it that China actually takes some military action against Taiwan. I think the companies are not privy to the discussions at the most advanced levels of the US government or the Dutch government for that matter, So the companies are preparing for these kinds of contingencies not really knowing what the chances are that something like
this would happen. Obviously, the tensions between the US and China have been escalating over the past few years, and there have been concerns about this. China continues to claim that Taiwan is a breakaway province and that eventually there should be some reunification of the two locations, and the US government has pushed back on that assertion.
Peter, I remember a while back our colleagues in Washington, d C. At Bloomberg News reported that the Bide administration was looking at ways to potentially destroy this equipment should there be an invasion of Taiwan on the part of mainland China. And I think it's important to point out that under current export controls that China cannot access this very advanced technology that is produced by TSMC.
Yeah, that's exactly right. Yeah, the US government's beginning with Donald Trump's first administration and then the Biden administration, have been tightening the restrictions on China's ability to get both chips and then the machines that actually make those chips. You're referring to a type of machine that ASML makes
called extreme ultraviolet machines or UV machines. Those machines are used to make the most advanced semiconductors out there, including the chips that go into iPhones, the chips that Nvidia uses for AI training. China has never been able to buy those kinds of machines. Those have been prohibited, but more recently there have been tighter restrictions on others of chips and other kinds of machines that China and Chinese companies have been able to buy. So, yeah, that's an
increasingly tightened restrictions. What we've seen in reaction to that is that China's investing a large amount of money into its own chip industry. It's trying to build up some of these domestic capabilities, and Smick, the leading maker in China of semiconductors, has made quite a bit of progress, as we saw last year with a chip that was found in Huawei smartphone. They've been able to reach seven nanimeter production, which is not at the cutting edge, but it's quite close.
So one of the areas that we've covered here in this discussion this morning is is whether or not China could get its hands on this equipment. And we were talking about how there's a kill switch to it, and that's fine. What I think is even bigger really is is how much does this then disrupt TSMC and all the automated systems of the world and all the high
tech companies that use these chips. I mean, this is what I was getting at by asking about how much is priced in about the impact on the entire semiconductor sector.
Well, KSMC still is largely dependent on its base of production in Taiwan. That's where it makes the vast majority of its chips, and it certainly its most advanced chips. But you have seen the company begin to diversify geographically at the urging of governments around the world, including the US government. It's building a chip fabrication plant here in Japan,
it's building another one in the United States. It may also build something in Europe at some point, So that does, I think to your point, that does create additional expenses because they need more plants in more different areas to kind of have the geographic diversity that would minimize the risks of anything happen to their Taiwan production plants. But make no mistake, what they have right now in Taiwan has not been replaced yet and probably won't be replaced
for many, many years. The company's strategy for a long time was to make everything in Taiwan because they have their best equipment there, their most advanced equipment. They also have their best engineers. They can share knowledge about how to run the production lines, the whole production process that allows them to reach high yield so that they get
a high percentage of their chips that are workable. At the end of that, when you start to do that in three different countries for four different countries, gets much more complicated. That's one of the strategic challenges for TSMC right now.
Absolutely the impact could be you know, it just could be enormous. Peter, thanks so much for joining us. Peter Elstrom, Bloomberg Executive editor for Asia Technology. Six FED officials spoke in Unison today about keeping interest rates higher for longer. Governor Christopher Waller wants to see three to five months of good inflation data before considering cutting rates. In the meantime, Atlanta as Rafae Albostik said, the FED is actively re
thinking it's view on the neutral rate. Here's Bloomberg's Michael McKee.
Fed officials are speaking with one voice now that they don't think they're going to be cutting rates anytime soon. There's a slight disagreement about how many they might get in this year, if any at all, but they all seem resigned to the fact that this is going to be a long process and that the US is going to be the outlier. The ECB can go ahead first, maybe the Bank of England, but the FED is going to sit tight for several.
Months Bloomberg's Michael McKee. In the meantime, ECB President Christine Legard is forecasting June rate cut for Europe if the price path holds. Joining us now. In our studios in Hong Kong is Carl Tannenbaum, chief economist at Northern Trust. Carl the implications of the economy and also the markets holding up pretty well with interest rates steady here at a pretty high level. Seems to be that the neutral rate has moved higher. Your thoughts on that and where we're.
Heading, Well, first, good morning, Brian. It is not a surprise to me that the Fed formed a bucket brigade to pour cold water on the market's assumption that easing would come more approximately. This is the second round that we've had with over optimism from investors this year, and I think they want to make sure that their intentions
are not misunderstood. In addition, the American economy has continued to sustain momentum far beyond expectation, leading some to think that the amount of restraint that is required to achieve the inflation target is higher. That's the science behind the neutral rate, And so again it looks to us as well as the markets, like it will be late this year at the earliest before we get that first easing from the Fed.
And between now and then more dollar strength. And I would imagine Carl and the conversations that you're having there in the Apac region, there are some people that are a little annoyed with that fact.
There's little doubt. While it's been good for me, I was actually able to afford breakfast in Singapore for the first time and a number of visits. The fact is is that there are central banks in emerging markets who have settled inflation, they have growth struggling, and who would like to ease interest rates to help those conditions. But to do so would risk appreciating the currency and making
the things they import more expensive. So there are central banks around the world that are very much fed dependent.
So, Carl I was interested to hear you say that you felt as though the markets were overextended to a certain degree. And that's not what I want to ask you about. I want to ask you about the economy, because you get this feeling that some people still hold out that a recession could happen sometime later this year or early next year. In other words, there's a lot of uncertainty. How strong is the economy and how durable and sustainable is it in your view?
Well, looking backwards, American economic growth has exceeded expectation for seven quarters in a row, and not by a little, and the tracking here in the second quarter also looks very positive. I think the common over the thing that people have overlooked is the consumer strength. I know that the markets got a little excited that our unemployment rate has gone up to three point nine percent, but for most of my career that would have been an amazing level.
And real wages are growing, giving the kind of spending power that sustains economic activity. Consumers have turned out their debts, so of corporations, and so monetary policy hasn't bitten as much, hence the need to keep rates higher for longer.
Carl, I'm curious, how are you making sense of the inversion of the yield curve as persistent as it has been.
One of the things I've pointed out to our clients at Northern Trust is that an inverted yield curve is consistent with a soft landing as well as a recession. And if you take a look at the history of the yield curve as a recession indicator, it's quite mixed. There have been times we've had inversions without a recession, and at times the curve has inverted and we haven't
seen a downturn for almost two years afterwards. So I think it's important to look at other indicators as a compliment to that one gauge.
There's also this fear, perhaps that the consumer is weakening a little and particularly at the lower end. And you need only look at a stock like Visa, which is actually down over the past three months. It's not up. I mean people think, oh, every stock is up in the United States, this is the everything, Raley, It is not really the case. Some consumer even Meta is actually a little bit lower over the past three months. I'm wondering how healthy is the consumer really.
Over And I think you've hit on something that's very important, and that is you can look at things in aggregate, but the details matter. The incomes. Let's say the lowest forty percent of income groups in the United States, they've exhausted their pandemic savings, and while they're still working, they're spending a little bit faster than they should. And we've seen an accumulation of consumer debt that's back to levels
that we saw prior to the pandemic. Associated with that, we've seen some debt delinquencies, which also suggests that maybe some belt tightening is on the horizon. One reason why I would anticipate consumer spending in America to taper off to a much lower rate of growth as we move through twenty twenty four.
One of the things that we've been focusing on a lot on this program. Is the divergence between kind of what the markets may be signaling and the soft landing that you've been kind of outlying there. Do you think that there is a risk that markets need to recalibrate, that maybe there is on the equity side, at least a little too much enthusiasm.
I wouldn't think so. Again, the economic outlook is very solid. The earnings outlook has been very, very good in certain sectors that have been leading our markets as well as others. There's a lot of optimism about what the next generation of machine learning and artificial intelligence might bring. That's really
been the big driver. The other question that I get a lot is we do have an election coming up, and people are concerned about how that might affect markets, but the history shows that that impact is relatively small.
Both gentlemen running seem to want to spend a lot. Is that something like debts and deficits don't matter at the moment, but does that come into the picture sometime soon.
Well, it's frightening. Neither one of them is serious about fiscal policy. One would probably like to reduce taxes further and claim that that pays for itself. The other would like to continue spending but characterize it as an investment
whose returns would also leave the budget net neutral. And I hear that said, and then I look at the national debt of thirty four trillion that's likely to triple over the next twenty years if policy isn't changed, And well, I'm looking around for somewhere else to live, just in case the worst happens in the USA may maybe here in Hong Kong.
Who knows one of the candidates too, seems to be implying that maybe the FED shouldn't be an independent body. How do you feel about that?
Yeah, that story came out I think a few weeks ago. Let me reassure our listeners. Structurally, from a legal perspective, it would be very difficult for an administration to have undue power over the FED absent a congressional change reopening the Federal Reserve Act itself, which I find highly unlikely. In the structure within the FED where I used to work is one that feels it's independence is really critical to economic and market performance, and they will safeguard that to their last breath.
You know, I'm curious to get back at some of these uncertainties that persist, and my ultimate question to you will be what's an outlier? But let me just lay some groundwork here. First, I was interested to hear Morgan Stanley's Mike Wilson on Surveillance, excellent program. I always like to catch that before I go to sleep at night. And you know, he was a long standing bear. He's raised his targets, but he still sounds pretty bearish, pretty downbeat in many ways. So he says, look, we just
don't know, We can't know. And anybody who says they know, you know, they're fooling themselves. Is it really that, Alista? What really keeps you awake at night? What are you most concerned about as a risk for the economy?
If I were to try and untangle that statement, that's one that a lot of us have. First, the markets have performed very well, multiples are at the up end of their acceptable ranges, of volatility has been low, and yet we're concerned. And I suppose the way you square that circle, Brian, is that there are a lot of
potential tail risks. We have high levels of geopolitical uncertainty, two wars going on, and other both economic and political conflicts likely, and I think that that leads some to suspect that the risk premium resident in markets right now is not sufficient to cover if one of those tail events becomes a reality.
Maybe a third war and let's call it a trade war between the US and China. What type of impact do you think that may have? And we've already seen a lot in terms of export controls and the threats of tariffs, new tariffs being imposed. Where is this going.
Well, war is probably an extreme term given the kinetic activity that we have, but the trade frictions between China and the United States continue to escalate. It actually as one of the few policy areas where Republicans and Democrats are in unison, so unlikely to see much of a change there. The challenge there is that that could be inflationary for everyone. It could narrow the path to development for smaller economies and for entrepo economies like Hong Kong Singapore.
In this region, that friction is not helpful either to financial or commercial activity.
Carl, thanks so much for joining us, for being here in Hong Kong and taking out the time to come into our studios. Later off, Mike, I can recommend some areas in Hong Kong if you're really seriously thinking about joining us here. I know you said that partially tongue in cheek, but it's great to have you with us on the program. Carl Tenenbaum, Chief Economist at Northern Trust.
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.