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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. There has been no shortage of volatility recently for Chinese tech shares. In the last session, as an example, the Hangsang Tech Index was down three point eight percent, and that's after climbing one point seven percent in the Monday session. And that gain came after losses last Thursday and Friday, when
the Tech index was down three point four percent each day. Now, to be fair, despite the recent turbulence, the Hangsang Tech Index is still up more than twenty three percent so far this year. That said, there are some analysts saying any further selloff could undermine the narrative that Chinese markets have become an alternative investment ground. Let's take a closer look now with Bloomberg opinion columnist Shuley Ren Shuley, does this really come down in terms of the enthusiasm for
Chinese tech? Is it all about the deep seek moment?
I think so. I mean, like, it's true that the hands and tacking decks has corrected quite a bit, but I think a lot of it is just a portfolio flows right. There is a little bit of a zero sum game between the US star market and Chinese and
European stock markets. As the US market seems to have a bottom out for the short term, like a lot of hot money will be pulling out of the hands and tacking decks because they have made quite a bit of money and it's good to take profit, and then they will perhaps go back to the US star market.
On Monday, ten Cent unveiled and upgraded AI reasoning model, and this only adds to the enthusiasm for AI related companies in China and what they're doing. Is this going to continue for a while longer or is there a concern that is developing that maybe things have come too far too fast.
I think it's both. Like people think that AI theme in China is not just like a three month thing, right It has been only just not not even three months in China. It will continue on, but the rally has been quite fast, so you will see some people taking profit. But one thing I would like to point out is that what you're seeing is every week we see like Chinese companies big and small coming out with
the new AI models, large language and applications. And also there are like you know, hardware companies like BYD and they Shellby. They're also coming out with like new car models and technologies that while the investors. So I think as long as there is a continuous pace of a product innovation, people will still be interested.
Jotsai, the chairman of Ali Baba, was saying yesterday, I believe that he's starting to see the beginning of a bubble in the buildout of AI data centers in China. That's got to be a concern, I would imagine, and maybe that contributed to some of the weakness that we had in the equity market yesterday.
Yes, it's possible, but I will argue that I mean the US there could be some the start of a bubble in data centers as well, right Like I mean, at this point globally, we know AI is a technological leap and it's quite amazing, but how to make money off of and how to really mass market to consumers and get them to spend on AI products, it's still a question globally.
So if we can use AI as a metaphor for some of the gains that we have seen in automation, in mechanized handling of certain processes, and in robotics as well. Is there a risk for the overall economy in China, particularly if you start to consider Chinese workers, Yes.
There is. There's no question that the AI and the robotics they're talking about human like robots right will be taking away a lot of jobs, especially in the manufacturing sector. We have already seen that, like China is no doubt the world's biggest factory, but even the manufacturing sector, the number of employees has been shrinking because automation is already happening. So there is this concern. But what the government is trying to do is to say, Okay, China's services sector
is still underdeveloped. What China is doing is that it's producing too many goods but not enough services, and it's trying to push people to become small business owners. For instance, they can open little restaurants, little like I don't know, pat shops and then perhaps become like uber drivers, you know, or like they can take franchises and the open little milk shops, et cetera. Like they're trying to push these people into the services sector.
Does the government need to reconsider how it's educating the younger generations?
I think so, because what we are seeing the last few years, and I think it's a glob trend, is that the young people going into universities and they're taking out certain majors. By the time they graduate, their majors are no longer hot. Like in twenty twenty, like a lot of people did the management and the finance, and then when they graduated they realized, oh, you know, it's
actually engineering these days that are hot. So the government does need to, you know, give people a sense of the long term plan of the economy rather than you know, abruptly changing policies.
I'm curious to get your take because we've been talking so much about tariffs here in the States and the trade tension between Washington and Beijing. What is your sense of where we are going and how this is going to impact the economy in China.
I think the sentiment is not good, but the Chinese like. The sense that I got is that the Chinese have pretty much given up and they have decided that the tariffs are coming and it is what it is. And of course it affects certain sectors of the economy. For instance,
like the biggest Chinese exports into US smartphones, Apple, etcetera. Right, but the second biggest would be apparels and houseware, and that does affect the very small businesses in the East and the south coast of China, and there's just nothing the government can do about this.
Surely, you and I have talked in the past about the impact of the export controls that were put in place under the Biden administration, particularly as semiconductors were concerned. You could make the argument that the deep Seek moment was tied to the controls on semiconductor technology insofar as China being forced to innovate its way around them. And I'm wondering what your senses on that trajectory. Are we going to see continued advancement and innovation in China.
I think what China is doing is it's looking inward. Like we have seen news reports that China is considering even like installing its own export controls so that Chinese companies are not flooding cheap goods into the rest of the world, because the government does recognize that it's a bit of a shock to the rest of the globe. Right, So, like what we are hearing recently is that the goods that are meant to be exported, they're trying to get them consumed at home, and that's why we see a
lot of that. That's in part why we see a lot of the so called training programs. If you have a car that's like three year old, you can trade in and then get some subsidy and get a brand new car. They're trying to basically consume the access capacity and the goods at home.
Are you seeing signs that domestic demand is improving?
I think so, like the last couple of months, especially since the beginning of Deep. I mean when we entered twenty twenty five, everybody was pretty pessimistic, right, and suddenly Deep seek about and that the government is now talking the right things. They're not necessarily doing that much like if you look at the fiscal stimulus, it's bigger, but it's not that big, right, But they are saying the right things and people feel a little bit well, a
lot of it is just sentiment. People feel a little bitter safer in this economic environment, and that you do see the sentiment improving.
We'll leave it there. Surely it's always a pleasure. Thank you so much. Bloomberg Opinion columnist Shuly Wren joining from Hong Kong here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm dek Krisner. So we had a bit of churn in the US equity market through most of the session on Tuesday, a little bit of assessment of risk associated with the trade war. I
think that's a fair way of describing it. Chief among those risk stagflation and with it the rising odds of recession. Now for a look at the price action as Bill Campbell, he is Global bond portfolio manager at Double Line. Bill joining from Los Angeles. Thanks for making time to chat with us. How do you evaluate the economy right now? Bill vis a vi the threat of a lot more tariffs on the way.
Well, thanks for having me, Doug. The way we're looking at things in the near term is until we remove this cloud of uncertainty, markets and the economic outlook is it's going to be challenged at best. I think the place where we invest in our most active across the
bond markets. They're telling you that there is a lot of concern not only with the upcoming April second date, but what we haven't had clarity on and what there still is a lot of confusion about, is April second going to be the final date where we get a framework for what the tariffs in the tariff package and the goals will look like, or do we have this risk of continued layering that potentially sectoral tariffs targeting the auto sector, pharmaceuticals and other industries may then follow a
reciprocal tariff package. And until we get those answers, the uncertainty is likely to keep risk assets at least it's going to be a headwind to risk assets moving higher. And you know, from our outlook, what we're trying to
do is get a little bit more defensive. But we're finding some more interesting plays in the bond market and also in markets in the US treasury market, specifically the frunt end of the US Treasury curve, and interestingly enough, a couple of international plays, with some focus on Europe.
Do you see the risk of stagflation as being significant right now.
Well, that depends on what you mean by stagflation if you are talking, you know, about a recession. I think we're still uh, you know, looking at the odds of recession, still about a third, but those probabilities have come up over the past month, you know, maybe almost doubled from where you know, our initial expectations were when the Trump
administration initially came into office. So I think that the the questions that we need to answer to, you know, get you know, the question that we need to answer about stagflation really are how long are tariff's going to be in place, how high are the tariff rates going to be? And is there a risk that as I mentioned before, there's going to be layering now that if we don't have layering and we turn out to have a one and done type tariff package on April seconds.
I think the scenario that Jay Powell articulated in the you know, in its press conference, you know, at the last fo MC meeting, you know, that that is plausible. They you know, the Fed seas inflation on a core on for the PCE core to you know, remain pretty sticky, tick up to two point eight percent before ticking down to two percent, So inflation would be a one year
issue before prices start to normalize. But the risk to that outlook is the layering risk and the more that we have additional tariffs placed on for any reason, whether it's trying to bring manufacturing back to the US or like we saw today with the Venezuela tariffs, trying to achieve geopolitical outcomes using tariffs. All of that weighs on the economic outlook, both for persistently higher inflation and you know,
downside risks to growth. And we again with that outlook, I think right now our positioning, one of the things we're trying to do is, you know, take more of a barbelled position, where we're layering a little bit more into the front end of the treasury curve, where we think that you know, with j. Powell's current rhetoric, he's kind of capped how much yields on the front end of the treasury curve could back up, given the fact that he's willing to look through the potential for higher
inflation rates in the near term. But if there is a growth accident, if too many tariffs do cause a growth accident, we think that then there's plenty of room for those treasury bonds to rally, creating a decent convexity profile.
So I'm curious as to how you wait consumer confidence in everything that we're describing right now or everything that you've kind of laid out. Today the Conference Board published its index. We saw a fourth straight monthly decline. It kind of mirrors echoes perhaps what we had recently from the University of Michigan, those data indicating that consumer sentiment fell to something that was greater than a two year low.
I believe is there in your work a strong correlation between how consumers are feeling that sentiment reading and how they go about their spending.
Well, yes, when we're looking at the you know, the the confidence numbers, both from the University of Michigan and also the Conference Board today, they're showing clearly that you know, the consumer in the US, uh, you know, is becoming more cautious at the margin.
Uh.
You know, we also are watching credit card delinquencies and you know, at the lower end of the income bracket, we're starting to see some you know, there have been stresses you know on the consumer there as well. Not only is it you know, concerns that inflation will remain higher and higher prices you know, are denting consumer confidence. But you know, with the with the tariff risk, what we're seeing is the potential for more margin squeeze across
many sectors. And when margins get squeezed and companies need to start managing the bottom line, that puts jobs at risk, and that further can crimp both consumer spending and consumer confidence. I think the Trump administration is clearly making the bet that with all of the upcoming government layoffs, they're anticipating that there's going to be a handoff of those jobs
from the government sector to the private sector. And this is where one of the risks that we've been highlighting about the Trump administration and all of the changes that they're putting in place so quickly is there's a high level of execution risk, and this is an example of that that they're hoping that the private sector is going to be able to take a lot of the government jobs that are going to be shed over the coming quarters.
But with increased prices, potentially tighter margins, and the subdued outlook for near term growth, as was highlighted, you know, most notably by the Fed marking down twenty five growth expectations, there's an execution risk that the private sector may not be able to handle that.
So tonight in the States, we are learning that GOP congressional leaders are close to agreeing on a plan to pass an extension of those twenty seventeen tax cuts, and this plan we were told would also increase the debt ceiling. What are the fiscal ramifications of this and how do you think the market will treat it well?
So there's fiscal ramifications and there's also a liquidity ramification that you know, I'd like to highlight.
At the end of this.
First of all, I think the extension of the tax cuts is needed for you know, the current economic environment of a cooling consumer or a more consumer that's growing ever more stretched. Our concern and double line has been that, you know, the outlook or our fiscal deficit currently standing you know around seven percent deficit to GDP is really
on an unsustainable path. The more that we're unable to correct the deficit in the near term, if we do have a growth slowdown, all the automatic stabilizers such as unemployment insurance are just going to automatically, uh, you know, increase the demands on the government to basically print money or sell treasury more treasury bonds into the market. Uh need to pay for those expenditures. And what that's going to do is put upward pressure on back end yields.
So what I had highlighted earlier that we like to you know, right now we're uh, we're waiting more heavily in our portfolios the front end of the treasury curve. What we're doing that at the expense of is we're underweighting the back end of the treasury curve, you know, due to these increased fiscal risks. Now on the liquidity side, when the debt ceiling gets extended, perversely, there is a
tightening of market liquidity in the background. So when we started into the excessive deficit procedures, the Treasury started drawing down their cash account that they keep at the FED called the Treasury General Account, in order to pay for all of their bills instead of issuing new debt. But what that does is it puts money into the banking system.
When the debt.
Ceiling is passed, then the Treasury can issue new Treasury bonds and they refill that bank account sitting at the FED, the Treasury General Account. But what that does is it pulls money out of the banking system, or liquidity out
of the banking system. So if this bill does pass, what initially may look like a good headline, you could have some tightening effects in the market and be another headwind for overall all risk assets and it's something that we should keep it close eye on in the coming months.
Bill. Before I let you go, you were talking there about the FED today. Governor Adriana Kougeler was offering some support for this idea that the FED would keep rate steady for some time given rising inflation expectations and this uptick that we have seen in goods inflation. Very quickly, give me your outlook for FED rate cuts this year. How many are you forecasting?
Well, that's a great question. I think for now.
One to two potentially this year, because we think that there is the potential that growth could slow a little bit more than maybe other.
Market participants are expecting, but that.
Would come at the end of the year, because we do think that near term April second will cause a temporary spike in inflation.
But we have to see, as you pointed.
Out, what is that growth and inflation profile after we get through whatever these Trump tariff policies will be both the April twid and the potential for sectoral tariffs and additional tariffs afterwards.
Bill will leave it there, Thank you so much. A great conversation with Bill Campbell. He is Global bond portfolio manager at Double Line joining us from Los Angeles 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 Chrisner, and this is Bloomberg