Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Daybreak Aisia 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.
Joining us now is Wendy Kutler, vice president at the Asia Society Policy Institute and a former acting Deputy US Trade Representative. MS Keller. Thank you very much for joining us. So, Jannet Yellen's trip really didn't produce any specific agreements to lower tensions on trade and investment, but it does seem the mood is a little better. Is that just smoking mirrors or is it real?
No?
I think that's a correct assessment. There's clearly more engagement China at senior levels but also at the staff levels at the Treasury Department and other economic agencies. So that's positive. But as your other story indicated, there are serious concerns on the horizon, particularly the over capacity in China's manufacturing industries, which are grave concern not only to the US, but to other countries including Europe, South Africa, Brazil and others around the world.
Yeah, definitely, the EU is moving closer. It would seem to imposing additional tariffs on Chinese evs. I don't know the way you can call it dumping necessarily, that used to be the term we applied in the old days when it came to these types of trade tensions. But I'm curious as to whether or not you think Beijing is marking a little time here until the dust settles with respect to the presidential election. What do you think?
Well, I think that is a concern because Secretary Yellen announced kind of a new intensive engagements on balanced economy looking at the supply and demand factors, and given past experience with China, this could serve as an excuse by China just to delay, delay, delay, keep talking, don't take
any actions. So I hope when she returns and reports on progress made and what she's heard in Beijing to the President that serious consideration will be taken in terms of how the US should respond to potential export surges by China in products like electric vehicles and batteries and clean energy.
Well, the EV sector is really an interesting playing field to look at because China has actually innovated there and it has worked very hard to get a lead in the industry. But yes, it is selling vehicles very cheaply in particularly in Europe, and it is helped by subsidies in government aid. There's not really much doubt. I suppose in some ways both sides are right and both sides are wrong, and it depends on how you actually see globalization as to how you figure out who's right here.
Well, I look at it more like fair trade and unfair trade. And unfair trade to me is based on subsidies, financial assistance, low cost loans, incentives for battery procurement from local companies. All of this has been used by China to propel their electric vehicle sector. So no doubt they're competitive now, but their competitiveness is based on a lot of government money spent over a series of years to propel them on the global stage.
It's interesting because after Yellen made her remarks later in the day, we heard from the Vice Finance Minister Leol Minh. He was saying that China is going to rely on market forces to remove any excess in terms of capacity. Now, whether that suggests that Beijing is willing to stomach stomach what could be bankruptcy and some kind of consolidation as a remedy to this situation. Do you think that's likely?
Or is Beijing going to dig in a little bit, given everything that it's dealing with in terms of economic sluggishness right now, and try to prop up companies for as long as it can.
Well, they have an important decision to make. I think they heard Secretary Yellen's message very clearly, and so now they need to decide whether they continue and just export NonStop or take a pause and implement some policies not only to restrain domestic production but also to promote domestic demand. And the domestic demand part of the equation is just an area and not really addressed by their economic policies.
Ms Keller. We on purpose ran those two stories TSMC getting eleven point six billion dollars in grants and loans from the United States right next to the ev story. You know, if you're on the Chinese side and you see that, I mean, isn't that industrial policy, isn't that subsidy?
Well it is, but our policies are in response to China's policies, and let's keep in mind, five to ten to twenty billion dollars is nowhere in the ballpark of the hundreds of billions of dollars that China has put into this industry to promote it and to make it a global competitor.
I want to change gears because Prime Minister of fum Yo Kishida is going to be in the US first date to visit this week, and obviously one topic is going to be Nippon Steele's attempt to buy US Deal. Kishida will be addressing a joint session of Congress on Thursday, and the following day US Deal shareholders are set to vote on this fourteen billion dollar takeover. Do you think it's right for the US to object to this based on grounds of Well, I don't know whether national security
even enters into it. Certainly it feels a little protectionistic, does it not.
Well, first, I don't think this issue is going to come up during the summit. I think that given all of the issues that the US and Japan are cooperating on, the Nipon steel issue is really minor in the larger landscape.
Well, I want to ask you a question. This kind of laced with you know, all kinds of hyperbole. I suppose the US China tussle at the moment is like playing marbles compared to what the AI tussle might be is sort of compared to like Russian roulette.
Is that true?
I mean, are we going into a very very difficult environment.
Look, environment has been difficult for a long time, and we shouldn't fool ourselves that just with these engagement and trips by cabinet officers and senior leadership between the two countries that the tensions are going to go away. All that said, we need to remain engaged with China, and so I think Secretary Yellen's trip was very important, not only to send important messages and convey concerns to China,
but also define areas where we can cooperate. And with respect to artificial intelligence, I believe that there are aspects of AI where not only we should cooperate, but we need to cooperate to mitigate the potential risks of AI.
MIS and Mss Cutler very quickly in terms of the TikTok, whether or not we get a bill here through Congress that would force di vestiture away from the Chinese parent bike dance. What's your view on that.
My view is that this is a very complicated issue, but I think the US is on solid ground to want to restrict the activities of TikTok, you know, if not just for reciprocal reasons. If you look at the ability of our comparable companies to operate in China, there's no opportunity for them to operate. So I think it's very hypocritical for China to complain about what we're doing on TikTok when they don't let our big tech companies operate in their countries.
Many thanks, Wendy Cutler, or vice president at the Asia Society Policy Institute. With us, we'll please to say that Joshua Crab, head of Asia Pacific Equities at Robiko, is with us here, live in our studios, so Joshua, pretty interesting time here. We do have the US inflation data this week that might color trading a little bit and might also color whether we get two or three cuts this year, and some are even saying, with US economy
this strong, we may not get any rate cuts. First, before we get to some individual picks and regions and sectors and such, how do you feel generally about risk assets.
At the moment.
Well, I think it depends on which risk assets we're talking about. I think if we, you know, look at the US market, for example, it's a very narrow market led by small number of stocks we all know, very very high valuations and very very high expectations.
That's at one end of the spectrum.
Bring it back to Asia, I think you have you know, a number of markets here that have quite good long term or medium term sort of growth prospects in Vietnam, in Indonesia, in the Philippines, et cetera. And then you have places like China which maybe don't have as strong a long term growth but have very very cheap valuations. So I think risk assets are actually quite dispersed at the moment.
When you look at China. One of the things that we're going to be paying very close attention to this week is the PPI CPI data midweek is in a period of stagnant deflation to the degree that we should really be worried about the economy and putting more money to work in markets, whether it's the real estate market or the equity market.
Yeah, So, I mean, I think I think that sort of it depends with you on look backward or forward. I think looking backwards, that's absolutely the case. Clearly we've seen we've seen that environment. But it's always a question of where we're you know, looking forward, what that sort of changes. So we have very very low expectations on growth, we have very low expectations on things like inflation, et
cetera at this point in time. But if we look forward, I think, you know, and this is interesting to us. It's like, you know, for example, you know, companies had been missing quite a lot of being missing earnings, but the expectations can get so low that even in a weak environment, they start to beat. And you already have sort of quite low valuations that sort of sit with that.
So I guess from my perspective.
The question is here is okay, so maybe maybe we don't have a great growth environment. A lot of those negatives are now in the price, So how do we make money in that market? And you know, I think this is where it's interesting mireseing some some of the is now starting to beat. Now they're not beating because things are wonderful. They're beating because the expectations have got
that low. But also the valuations are low. You're seeing increase things like buybacks, diffidends, privatizations, and that to us is sort of when you start to see a bottomy out of a market. Now for US, that really is stock specific for now, so you really need to dive into the stock.
Level, Joshua, despite what you said at the top, but we have actually seen quite a broadening out in the US market, and you know, we only have to debate that now. But if you look at Asia markets like Korea or Japan, are we seeing the same sort of activity with a broadening or has it really just solidly been that way in Asia.
It's a little bit different depending on the market. I think Japan and Career are interesting ones to sort of use as a showcase because I think they've been a bit different. There's a different driver of that, and in Japan that's been going on for some time around you know, restructuring, reorganization, more shareholder friendly policies, and we've started to see that eken.
A little bit in Korea as well.
So if we bring that back to Japan, I think you have had a number of stocks which are sort of caught up in that sort of AI sort of aura that have done very, very well, you've had a number of the very large cap companies which is often correlated with that, that have done very well as well. But outside of that, over a sort of longer period, we've seen, you know, some of the things like the financials do well.
We've seen the industrials, and I think that's been the standout sector because they're the ones where we are seeing those unwine year cross shareholdings, that rationalization of business, and the increase in things like buybacks.
So I hear what you're saying when you're talking about having to really drill down into specific names. But if we can talk about industry groups. You just mentioned the financials there maybe some of the industrial names. What are the areas that you want to avoid in China industries specifically, sorry in.
China or Japan in China, Okay.
So the way I would sort of from an industry perspective, I think that you know, things like the export market, for example, has been and think things like export and real estate has been a big driver of the economy for decades. Right, And if we sort of look forward about what needs to happen in China, as we need to see more focus on the consumer, right, we need to see more focus on sort of what's happening internally.
We need to see more focus on moving to higher value add in the manufacturing sector.
So that's that for US is where you need to look.
Now you have to be careful because you know the rest of the market knows this as well. So some of these stocks are trading at two higher premiums relative. But we think that is the area where what needs to change in China for it to go back onto a better growth trajectory than what we've seen.
Well, it needs to get you know, the discount sort of set aside by investors. For one thing, you have a discount on South Korea, which you've had long standing in place, and China now as well. For instance, this year, you know some of the market we talked about the Nike and also the Taiaks in Taiwan up eight and a half to nine to ten percent year to date, similar to what we've seen from the S and P five hundred. The cost be actually lower, the cost be
down one point seven percent US dollar terms. So is Korea one that can can be different for the rest of this year?
I think it can.
And this is where things like the election are really going to matter. You know, you talked about, you know, the career discount, and there are a number of reasons for that, but one of the ones that I think is most relevant and can have the biggest impact in the short term is shareholder policies, right, And it's a bit like Japan. You know, we haven't seen a lot of dividends, you don't see a lot of buyerbacks, you
don't see a lot of these type of activities. But a bit like Japan, there is a bit of a mindset change happening. We've talked about this for decad for the best part of a decade, but I think there are a number of you know, impacts happening at the same time here. Right, you've got the pension schemes locally not putting money and needing to take money out. Now you've got a stock exchange which is quite focused on
bringing up the valuations of these companies. And then I think you've also got a you know, sort of a national element. Like the Japanese have done this, we can do this as well. So I think there are a number of these influencers coming at the same time. So if the election stays, if the current party stays in power. This continues to be a push. I think then you find the management teams that actually are really going to
affect change. And yes, I think there can be some great opportunities to make money, but probably more alpha than I would say look at the individual market, because some companies won't.
All right, Yeah, some good tips there, Joshua, thanks very much for coming into our studios with us live here, Joshua crabhead of Asia Pacific Equities at Robiko, lad Savov, Bloomberg Tech editor with us in our studios here in Hong Kong. It's nice to have you back in here. So this is a big deal. You got three plants by TSMC, and we just mentioned that whopping sixty five billion dollars in total investments, the US helping out with
some subsidies I suppose. And this is also a very high tech plant that we're talking about here, this third fabrication site, because they will have next generation two nanometer process technology. When is that likely to come to fruition.
Well, it's an interesting question, and one way to look at it is also to the specific challenges that TSMC has in building its chip making facilities in the US. It isn't Taiwan, which is where TSMC has built up its lead as the world's leading ship maker. It is in Japan where TSMC just inaugurated its new plant ahead of time. Because Japanese construction is largely uncontested around the world.
The Japanese very proud of how quickly they build their fab TSMC, for its part, its first facility has been delayed, has been subject to delays. Part of it is TSMC has said this, it's the lack of qualified labor. It's also running to issues with labor unions. In the United States. It isn't as smooth sailing as it has been in Taiwan and Japan, So some of this is I mean, it's a very optimistic, very positive outlook at the moment, with both the nation and the company putting their best
foot forward, putting a lot of money into it. But it is going to depend on the smooth operation of construction and development as we go along.
Yeah, definitely, And I think it's a big concerned that there is a delay here in a presidential election year where the administration would probably like to see a little bit more in the way of progress. Is there anything that you think the administration can do to improve the timeline here or is this outside the control of the White House.
Well, I think the measures of the White House has taken so far significant more than significance. I mean, when you compare it to the rest of the world. I mentioned Japan, they're putting in much smaller sums of money. When you look at the US, they're kind of uncontested in the amount of money that they can in both in grants and in loans to these companies. It's six point seven billion dollars in grants to TSMC. That's part of what's enticed TSMC to step up into its investments.
Until yesterday, officially TSMC had only planned two plants. Now that they made the announcements, it's free plans. It's more than sixty five billion dollars. Previously it was more than forty billion dollars. So what the US is doing is it's putting in the investment directly, it's leveraging it to get your investment from the likes of TSMC and Edwin, who you cited earlier. He mentioned Samson is in the running. Samson also stepped off his investment because the way that
the US has structured its subsidies and support. Is the more you put in, the more you will get out of us. And moreover, it's worth saying they have various benchmarks that they're going to have as TSMC goes through with the development. They're not just going to unload the money in TSMC's theoretical bank account and leave them to it, which I think shows also a bit of foresight and a bit of some of the lessons learned maybe from the experience with Fox Cone in Wisconsin previously.
And Heine's also looking to get some funding. I'm curious, though, what you think this little bit of a black eye that the US doesn't have the same quality tech workers. It may just be the numbers because the US has so many demands on its well educated engineers and tech workers. But is this something that will have to change for this third fabrication site to actually, you know, make any progress.
Well, I would imagine what are.
We seeing on the US side to you know, to increase the number of these types of workers to be available.
I would imagine TSMC would very much welcome that. Let's put it in those terms. But I should also mention there is one company I don't want to mention the company necessarily, but they do their production in China and then they do specific production for military purposes for the US in Finland. And what it told me is that the cost of labor is two to three times. It makes the product two to three times more expensive to produce the same product that they do in China in Finland.
It's just simply the case that for the qualification and the cost, Asia is uncontested as far as labor force goes. So the US is dealing with an issue that most of Europe is dealing with. Likewise, so I am sure that. I mean, there are politicians, there are members of the administration who are pushing to improve things like immigration measures to encourage more people to come over. But likewise, this
is an international competition. And Japan, again I keep mentioning it, it has its own initiatives to bring its own semiconductor engineers back from places like the US so that they can support Japan's own chip making endeavors.
It's interesting that you make that point because if you look at the history of the semiconductor industry, I mean, these products were developed in the United States. Hong Kong at one point was a major place of assembly Japan as well, and then it migrated obviously to Taiwan. And now we're talking about China trying to create greater runway for advanced chips. But in terms of the companies that are going to benefit downstream, and I'm thinking about ASML
in particular. This company undoubtedly, no matter where you slice it, just by virtue of the fact that they own so much of the high end manufacturing technology, they will also be a big beneficiary in this build up, will they not?
Oh?
Absolutely? And the fun part for ASMOS don't have to do anything. The entire thing is just falling into their lab because likely, as you say, the extreme ultra violet machines which are the key to doing the most advanced of making today until somebody invents an alternative, and that's nowhere on the horizon. ASMO is the only provider of those. So the more that the likes of Japan, the US,
China too, but ASMO can't explot those to China. The more that nations INDIAU throw into that conversation as well. The more that nations, the more that companies like TSMC and Samsung or is in hot competition with each other, the more that they invest. The more that they put in, the more the likes of ASML benefit. And again I keep coming back to Japan, but it's worth mentioning there
are so many companies that are rising triple. I mean, we covered one just recently, Towa Corp. In Japan, which quintuple the share price simply because it provides compound compound moding that Heiniz and Samsung use in their advanced AI memory.
Somehow, in Japan, they're they're finding workers that you know, don't demand too much. So it is some of this nearly twelve billion dollars of funding in these round of loans and grants to TSMC, will some of that actually be there to support hiring, to pay better salaries to people in order to attract them.
That's a good question that we should ask TSMC, I would say, and let's not say that anybody's asking too much. It may very well be, I mean, given the different costs of living in various places, it may be very reasonable prices that people are looking for. And again we're not just looking for unqualified labor. A lot of this
is advanced engineering and advanced skill. And one of the secrets, so to speak of TSMC's leadership is the fact that it has people with decades and decades of experience of running these chip making factories.
No doubt about that. And I think Intel, which will obviously also participate in these grants from the US Chips Act, has said that it will, as a part of its investment, increase training so that they are looking at kind of carving out their own workforce and maybe creating a fast track. I don't know whether it's clearly not a college degree, but it's did the type of technical degree that would be required for anyone who's working in one of these fabs.
Yeah, you know, Doug, we got an extra chair here in our studios for Vlad, and I think he has designs on it. Do you think Lad you're gonna hang out with us for a while?
Always ready for him? Brian, Yeah, Yeah.
He talks to me when we're getting coffee, you know, like, hey, let's do something on the radio.
There you go, I said.
This is the Bloomberg Daybreak Asia podcast, bringing to 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.