The Biden administration has increased tariffs on $18 billion worth of Chinese goods, escalating already tense trade relations between Washington and Beijing. Haining Zha, Vice President and Director, Asset Allocation at TD Asset Management, discusses the potential implications for the economy and markets.
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* [MUSIC PLAYING]
* We are starting today's show talking about China. And investors in the Shanghai Index have seen it rise almost 10% in the last three months. But news that US President Joe Biden is slapping new and very high tariffs on Chinese imports, including electric vehicles, chips, and solar panels, is somewhat disconcerting. Here to give us his thoughts on this and so much more is Haining Zha, Vice President and Director of Asset Allocation at TD Asset Management. It is lovely to have you here.
* Thanks for having me.
* Let's just start off with we want to go dig deep into your overall outlook on China and what you're seeing right now, but let's just start about this first move, a significant move from the US administration. I know some of the tariffs are going to be as high as 100% on electric vehicles. What do you make of what's happened?
* Well, it's certainly very damaging to the trade relationship. But, you know, it's not a surprise. Everybody sees coming. And the reason why is that the cost disparity between the US and Chinese product is just way too much. Take EV, for example. The Chinese manufacturer, BYD. Their EV is actually 15% cheaper than the similar model from Tesla and somewhere between 30% to 40% cheaper than other European and US car manufacturers.
* And that number is actually understated a little bit. So if you look at the EV cars sold in China, the average cost is about $20,000 US, but the average cost in the US is about $50,000. And recently, the Chinese EV domestic sales, domestic price, is actually dipping below 15,000. So as you can imagine, even if you slap on a 100% tariff, it might still be cost competitive and even with more functionalities.
* Another example is solar panel. For example, on a per watt basis, the Chinese solar panel is 60% cheaper than the US. So the Chinese product is around $0.15 per watt, and the US is about $0.40 per watt. So again, if you double-- based on 100% tariff and basically double that, it is still going to be very price competitive.
* And by the way, in the just newly announced plan, the Biden's tariff on solar, the PV cells are only 50%. And in terms of impact, I think the impact on the EV is probably minimal because everybody knows that. Everybody is expecting that. So the EV export to the US is actually minimal.
* In the solar space, that's where actually it can make a little bit of a splash, because last year, the solar panel imports increased by about 80%. And among them, about 85% is coming from Chinese manufacturer operating from Southeast Asian nations.
* It's incredible. I mean, just when you rhyme off everything, the manufacturing prowess that China has in terms of what it can do, it's moved so far, so fast, and so much further than what's happened in the United states, which is why we have these situations. Can I maybe get you to maybe back it up a little bit and tell us, when you look at China right now in terms of, you know, exports obviously will be-- this is going to impact exports. And you could see similar moves, I expect, from other countries as well. Real estate and employment, just how do you look at China right now in terms of how strong it is?
* Right. Actually, even before this tariff, the Chinese export has already having a little bit of weakness. For example, in March, the year over year export number is actually down 7.5%, although that number is probably a little bit understated, because last year in 2023, coming out of COVID, we have particularly very high base.
* So gradually coming out of that high base effect in April, if you look at the recent number, it is actually started growing again, 1.5% year over year. After smoothing out all of the seasonal effects, just looking at the year to date on a cumulative basis, it is growing at 2.2%. So it is OK, but it's not a super strong number.
* But looking forward, we are expecting the export to improve a little bit. The key thing, the key trend we noticed that is global manufacturing is coming out of a two-year destocking cycle, and now it seems that destocking cycle seems to be coming to an end and go into restocking. That's why recently, global PMI actually bounced back above 50. And this bodes very well for the export business.
* Interesting. When you think about-- I'm going to mention some things. You tell me maybe if it's a headwind or a tailwind for China. But real estate, that is something that has been a headwind. Does it continue to be that way?
* We see it continue to be a headwind. Just to give you one example, real estate investment year to date down 10%. So if you think about real estate plus its downstream impact probably add up to 20% of GDP. So you have 2% drag on the GDP right there. So on absolute level of activity, definitely, things are not good.
* But the question we ask ourselves is, incrementally, does the real estate getting better? The answer to that is we haven't seen enough evidence. For example, when we look at the high frequency real estate sales, we see a bit of improvement in recent weeks. But again, we think it's probably due to seasonal after China coming out of the Chinese Labor Day holiday. If you look at on a year-to-date cumulative basis, the new home sales is still down 40% year over year, secondary existing home down 20% year over year.
* And another evidence we see is, for the real estate market to bottom, we really need to see the inventory clear out. But at the moment, if we look at inventory, it is sitting at somewhere near 25 months. So historically, the last 10-year average is around 15. So we still have quite a bit of inventory to digest.
* And another observation we had is on the secondary market, the increase in transaction volume typically is coupled with large price cuts. This tells us the market is still trying to find a bottom in terms of price level.
* Fascinating. I've only got a couple of minutes left. I'm going to ask you. I'm going to make an assumption here that when you've got real estate issues, that's going to affect domestic demand and how people feel rich or not, whether they're spending. But when you just back up, and as I mentioned at the top, we saw the Shanghai Index up 10% over the next three months, what do you anticipate? What kind of performance can we maybe look at? Or what are you what are you thinking about over the next, let's say, year?
* Right. I think for the last little while, there are a range of factors that drive that 10% performance. For example, on the fundamental front, as I mentioned, the global PMI moved up above 50, same for the Chinese PMI. And on the news front, at the end of April, they had the Politburo meeting. And in that meeting, it signaled a more of a dovish bias, signaling more monetary easing room, which is a good thing, although the pace of that easing might not be up to people's expectation.
* And also, in July, you will have the Third Plenum, which is another catalyst. And then, on the fund flow perspective, the global investors are very pessimistic about Chinese equity. And the valuation has been so cheap. And since that, we are going to a bit of a stabilization phase. Now, the hedge fund money going back to its space, and then the price move up. And then for the long only emerging market portfolio manager, for the fear that they are lagging behind the benchmark, they also pair their China underweight.
* So that's all valid, but looking forward, what we're focused on is, does this rally have legs? Is it going to be a more sustainable rally? And because of the drag that we mentioned from real estate, we don't think we have seen enough to be confident.
* Haining, it is always great to talk to you. Thanks so much for coming in.
* Thanks for having me.
[MUSIC PLAYING]
* We are starting today's show talking about China. And investors in the Shanghai Index have seen it rise almost 10% in the last three months. But news that US President Joe Biden is slapping new and very high tariffs on Chinese imports, including electric vehicles, chips, and solar panels, is somewhat disconcerting. Here to give us his thoughts on this and so much more is Haining Zha, Vice President and Director of Asset Allocation at TD Asset Management. It is lovely to have you here.
* Thanks for having me.
* Let's just start off with we want to go dig deep into your overall outlook on China and what you're seeing right now, but let's just start about this first move, a significant move from the US administration. I know some of the tariffs are going to be as high as 100% on electric vehicles. What do you make of what's happened?
* Well, it's certainly very damaging to the trade relationship. But, you know, it's not a surprise. Everybody sees coming. And the reason why is that the cost disparity between the US and Chinese product is just way too much. Take EV, for example. The Chinese manufacturer, BYD. Their EV is actually 15% cheaper than the similar model from Tesla and somewhere between 30% to 40% cheaper than other European and US car manufacturers.
* And that number is actually understated a little bit. So if you look at the EV cars sold in China, the average cost is about $20,000 US, but the average cost in the US is about $50,000. And recently, the Chinese EV domestic sales, domestic price, is actually dipping below 15,000. So as you can imagine, even if you slap on a 100% tariff, it might still be cost competitive and even with more functionalities.
* Another example is solar panel. For example, on a per watt basis, the Chinese solar panel is 60% cheaper than the US. So the Chinese product is around $0.15 per watt, and the US is about $0.40 per watt. So again, if you double-- based on 100% tariff and basically double that, it is still going to be very price competitive.
* And by the way, in the just newly announced plan, the Biden's tariff on solar, the PV cells are only 50%. And in terms of impact, I think the impact on the EV is probably minimal because everybody knows that. Everybody is expecting that. So the EV export to the US is actually minimal.
* In the solar space, that's where actually it can make a little bit of a splash, because last year, the solar panel imports increased by about 80%. And among them, about 85% is coming from Chinese manufacturer operating from Southeast Asian nations.
* It's incredible. I mean, just when you rhyme off everything, the manufacturing prowess that China has in terms of what it can do, it's moved so far, so fast, and so much further than what's happened in the United states, which is why we have these situations. Can I maybe get you to maybe back it up a little bit and tell us, when you look at China right now in terms of, you know, exports obviously will be-- this is going to impact exports. And you could see similar moves, I expect, from other countries as well. Real estate and employment, just how do you look at China right now in terms of how strong it is?
* Right. Actually, even before this tariff, the Chinese export has already having a little bit of weakness. For example, in March, the year over year export number is actually down 7.5%, although that number is probably a little bit understated, because last year in 2023, coming out of COVID, we have particularly very high base.
* So gradually coming out of that high base effect in April, if you look at the recent number, it is actually started growing again, 1.5% year over year. After smoothing out all of the seasonal effects, just looking at the year to date on a cumulative basis, it is growing at 2.2%. So it is OK, but it's not a super strong number.
* But looking forward, we are expecting the export to improve a little bit. The key thing, the key trend we noticed that is global manufacturing is coming out of a two-year destocking cycle, and now it seems that destocking cycle seems to be coming to an end and go into restocking. That's why recently, global PMI actually bounced back above 50. And this bodes very well for the export business.
* Interesting. When you think about-- I'm going to mention some things. You tell me maybe if it's a headwind or a tailwind for China. But real estate, that is something that has been a headwind. Does it continue to be that way?
* We see it continue to be a headwind. Just to give you one example, real estate investment year to date down 10%. So if you think about real estate plus its downstream impact probably add up to 20% of GDP. So you have 2% drag on the GDP right there. So on absolute level of activity, definitely, things are not good.
* But the question we ask ourselves is, incrementally, does the real estate getting better? The answer to that is we haven't seen enough evidence. For example, when we look at the high frequency real estate sales, we see a bit of improvement in recent weeks. But again, we think it's probably due to seasonal after China coming out of the Chinese Labor Day holiday. If you look at on a year-to-date cumulative basis, the new home sales is still down 40% year over year, secondary existing home down 20% year over year.
* And another evidence we see is, for the real estate market to bottom, we really need to see the inventory clear out. But at the moment, if we look at inventory, it is sitting at somewhere near 25 months. So historically, the last 10-year average is around 15. So we still have quite a bit of inventory to digest.
* And another observation we had is on the secondary market, the increase in transaction volume typically is coupled with large price cuts. This tells us the market is still trying to find a bottom in terms of price level.
* Fascinating. I've only got a couple of minutes left. I'm going to ask you. I'm going to make an assumption here that when you've got real estate issues, that's going to affect domestic demand and how people feel rich or not, whether they're spending. But when you just back up, and as I mentioned at the top, we saw the Shanghai Index up 10% over the next three months, what do you anticipate? What kind of performance can we maybe look at? Or what are you what are you thinking about over the next, let's say, year?
* Right. I think for the last little while, there are a range of factors that drive that 10% performance. For example, on the fundamental front, as I mentioned, the global PMI moved up above 50, same for the Chinese PMI. And on the news front, at the end of April, they had the Politburo meeting. And in that meeting, it signaled a more of a dovish bias, signaling more monetary easing room, which is a good thing, although the pace of that easing might not be up to people's expectation.
* And also, in July, you will have the Third Plenum, which is another catalyst. And then, on the fund flow perspective, the global investors are very pessimistic about Chinese equity. And the valuation has been so cheap. And since that, we are going to a bit of a stabilization phase. Now, the hedge fund money going back to its space, and then the price move up. And then for the long only emerging market portfolio manager, for the fear that they are lagging behind the benchmark, they also pair their China underweight.
* So that's all valid, but looking forward, what we're focused on is, does this rally have legs? Is it going to be a more sustainable rally? And because of the drag that we mentioned from real estate, we don't think we have seen enough to be confident.
* Haining, it is always great to talk to you. Thanks so much for coming in.
* Thanks for having me.
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