00:00Joining us here on set is Xiaojiazhi, Chief China Economist at Credit Agricole,
00:04and Huishan, Chief China Economist at Goldman Sachs.
00:08Let's play a header or tails.
00:11Why don't we start with you, Huishan, your initial reaction to the numbers?
00:15I think the industrial production beating expectations
00:20are consistent with exports beating expectations earlier this month.
00:24So the whole set of data seems to suggest that China's economy
00:29is still very much driven by exports and industrial production.
00:32If you think about the year to date, industrial production is 6% handle,
00:36GDP probably 5% handle.
00:39That means that the domestic demand is still on the softer side,
00:43whereas external demand and production and manufacturing competitiveness,
00:46that story continues.
00:48Xiaojia, I want to ask your take.
00:50How long can these numbers stay, I guess you could say, resilient?
00:53And how do you expect things to change in terms of where tariff reductions
00:56could stay in place or be lower further or even higher?
00:59I mean, what's your projections now?
01:00Yeah, I think with the latest slash of the U.S. and China tariffs,
01:06definitely there could be continued kind of relative strength driven by exports.
01:12We have seen some of the high-frequency data coming from shipping
01:18shows that there have been a very sharp rebound in terms of the Canadian booking
01:23as well as the freight prices to the U.S. routes.
01:27So this will continue to have this front-running tariffs coming to play,
01:33which would in turn have lending support to the production side of the story.
01:39But if we look at retail sales, it was a miss.
01:42Of course, last year we had quite a steep rise in terms of basic fat,
01:48but consumption continue, you know, grow at a slower pace compared to production.
01:55I think that definitely continue to require more of the policies to support,
02:01especially in the consumption side.
02:03Right. I think that's a question for both of you.
02:05Let me start with you this time.
02:07Any visibility, though, in terms of consumption over the next three months?
02:11I think if we look at some of the data, I would say consumption has remained.
02:17We don't have not really see a very significant shift in the consumption style so far.
02:24If we look at the latest Labor Day consumption data seems to be still holding up OK.
02:29And if we look at the employment, it has actually had a slight drop to 5.1%.
02:35But going forward, after this initial front-loading of shipment of exports,
02:41how much this would have an impact on employment
02:44and how this will continue to have an impact on the consumer sentiment,
02:49I'm not very optimistic so that we have to see a little bit more policy easing coming through
02:56in order to stabilize such kind of domestic demand and expectations
03:02and they feel more comfortable to consume.
03:05You don't feel like we're going to get more stimulus, though, right?
03:09We are getting the implementation of those easing announced in March,
03:14which is less exciting as we saw the news,
03:16and then there's just the implementation of the trading program and so on and so forth.
03:20We think there's incrementally toward the end of the year, especially when we get to Q4,
03:25last year's high base is going to make a young year growth very challenging,
03:29and that's the possibility where fiscal expansion could accelerate somewhat.
03:34So in terms of our forecast, we are expecting the full year policy easing slightly higher than what we predicted
03:41after the two sessions in March.
03:43Right. And currently, like what's your current forecast right now for the economy this year?
03:47GDP growth, 4.6%.
03:494.6%. And you guys just recently upgraded, right?
03:51Yes.
03:52Upside or downside risks is that number currently?
03:54I think currently we look quite balanced.
03:57When I put down this 4.6% GDP growth,
04:00I had this assumption of the U.S. tariff would remain at a level of 50 or higher.
04:06Clearly, April, the, you know, the T4 tariff hikes was unlikely to be sustainable,
04:13and I think it will fall back.
04:15But if we look at the tariff plays and if we look at how complex this U.S. and China trade deal could become,
04:22then tariffs are currently at around 40%.
04:27I think there could be some of the, you know, is unlikely to be very smooth and easy negotiations between the two.
04:37Upside or downside risk? Because you guys have also changed your forecast.
04:40Yeah, we went a round trip, right?
04:43A lot of your peers have, too.
04:45Yeah, started the year around a four and a half, and now we're back four and a half.
04:48And in the middle when the tariff rate was sky high, we did cut GDP forecast.
04:53I mean, it's from a domestic point of view, there could be some downside risk precisely because if tariff rates are lower,
05:02then there's less urgency to ease.
05:04So there's room for, you know, property sector performing not as stable as we would have hoped.
05:10But externally, we'll see what happens with tariffs.
05:15What the past month has shown us is Chinese manufacturing competitiveness and export resilience.
05:21So in that regard, in our forecast, we are pennsyllating Chinese exports to the U.S.
05:27will drop by a quarter to 30% because, indeed, we do have a 30% tariff added on top of what we had at the start of the year.
05:37So I think there's quite a few moving parts, but around four and a half seems to be the right place right now.
05:42Your inflation forecasts of Huishan and Goldman are below market consensus.
05:46Can you tell us why?
05:47I think inflation is where China is in a very unique place.
05:53Usually when people think about, for example, higher growth, that should correlate with a higher inflation.
06:00Yeah.
06:01That's true to some degree in China.
06:03But at the same time, when you have a gross pressure and the dynamic in China could push the government to produce more to get to that GDP target, which is more supply than demand, which is more deflationary.
06:16So you have two lines of story happening at the same time.
06:20Even if you have innovation like AI, that's deflationary in many industries.
06:25So whether you have a good story of innovation or hitting GDP target because of policy pushing or whether you have a bad story where growth naturally slows more than expected, I think inflation is just going to be very challenging in China.
06:40That's why we have a below consensus forecast on the inflation.
06:43You know, the lack of inflation so far, is that necessarily a bad thing?
06:46What's your view on that?
06:47I would say, I mean, when it comes to this kind of U.S. and China tariffs and you could continue to impose more of the deflationary pressures.
07:03So on one hand, I think it underpins the expectations of what you have.
07:10But on the other hand, if we look at how people would decide to spend and whether people, the companies would decide to put on more investment, whether there is urgency.
07:22And if we look at the debt levels, I would say this continued disinflationary pressures is probably not what the Chinese policymakers really want.
07:34And that would help China, because if we look at the real GDP.
07:38OK, so around 5 percent target.
07:41But if we look at the negative GDP deflators, nominal GDP is only 4 percent.
07:48If we look at wage growth is only 2 to 3 percent.
07:51And that would have an impact on corporate earnings growth as well.
07:55So with this, you know, outright negative ratings in CPI and the PPI, it's very hard to conclude that it would be actually positive for the Chinese economy.
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