Under the Banyan Tree - Top takeaways from HSBC's China Conference

0:00Hello and welcome to Under the Mania Tree. I'm Harold Venerable, head of Asian Equity Strategy back in Hong Kong, a little an hour ago. It's Wednesday evening when we record this and many of us have spent the last two days in Shenzhen at the 2026 HSBC China conference. We had panels, meetings and a lot of clients at the Global Investment Research and LIST cafe. Fred actually isn't able to join me today, he's actually still here in Shenzhen, but I'm happy to welcome Asia-Managing Editor Jiggly to the podcast. Jiggly is also spent the last couple of days in Shenzhen and has helped me put a note together on a key takeaway from the conference. That's what today's podcast is all about, so let's get to it from HGBC Global Investment Research you're listening to Under the Mania Tree. Jake, welcome to the podcast.

1:00Thanks for having me, Harold. Long time listener, first time caller. Yeah, that's right, this is your inaugural session at Under the Mania Tree. Jake and I actually travel together on our way back, just back here into Hong Kong. And actually it's quite nice, I mean you have a China travel card as well, right? I mean it could not be easier with the snazzy China travel card, it's such an improvement from, you know. It's basically going like you go and go into the subway, so you cross the border so quickly, I believe it all works on the Chinese side on face recognition as well. So if you even if you forget your passport and your travel card, you can still get in and out because it will recognize you. That's right, and then on the Hong Kong side as we just witnessed, you don't even have to get out the car, you do it all. And then, which is also maybe interesting before we talk about the conference, you go over a bridge because we went through Shenzhen Bay, there's of course different areas where you can get into Hong Kong. And that's not far away where the, not that we're travelers is being erected. And we actually saw some building projects here in the distance, right? We saw a lot of building.

2:01It's coming up fast, there's a lot of building. And there was a whole building that looked like some university, research units or something like that. Parking lots I saw were being constructed. So, yeah, so that's that's happening as well because we spoke about this under the bayonetry not long ago last week, even though not mistaken. So just maybe let me cast a little bit of a picture for the listener at a conference here. It's basically in a hotel and they have a large ballroom and in the ballroom, there are big presentations where there's hundreds of people sit and normally big issues are being discussed. The central bank is there or maybe some minister or some academics talking about what's the direction of China and what are going to do with interest rate policies and these sort of things. And then next to it, there are, is a smaller cafe as I mentioned earlier on, where they are stable, all the analysts there and we have conversations with clients who just want to talk about say, Asian equities or India, China or whatever they are interested in. And that's where I spent most of my time because I had a whole bunch of meetings in the analyst cafe. I didn't join the panels in the ballroom, but you were there, right?

3:02Yeah, you actually had to go and do some work. I had the easier job of actually sitting in on the panels and they were as always fascinating. But I mean, the tone started off right from the very beginning. This idea that deflation is still hovering over China, but the good news and the first speaker and many others said, look, China's starting to come out of deflation. And that's important because if you come out of deflation, then you get consumption starting to go up and you've written lots about this hair on the back. No, absolutely. And I think you can imagine what this would take place because if I think that a TV is cheaper next week, well, I'm going to not buy now because I want to buy next week. I think it's going to be cheaper next month, so I'm going to wait a usually delayed consumption. But if you think the price to go up is the reverse, of course, you say let's buy now. Otherwise, next month, it will be more expensive. So this can have a real big impact. And I think we need some more policy stimulus to get there done probably. That's what the economist got excited about. What they heard was, look, if we're coming out of deflation, that means probably more supportive

4:03policies. We're already supportive, but the signal seems to be there might be more down the road. Yeah. But it's still saying, well, let's wait and see for it because to be honest, the consumer stocks are not rallying in China. There's not a lot of interest in that particular sector because growth is still very, very weak. You can imagine if you're a consumer company, but your prices come down and people don't want to buy it, then your sales are not really good. So yeah. So the profit growth in that particular sector still remains a problem. There are some interesting companies that can benefit from, this is an interesting story. Actually, I heard from the consumer analyst. In the past, it was all about the people said, well, we can buy stuff in the stores, but I want to buy it online now. So online was winning over offline, but now in snacks is the other way around. People want to go to funky stores that look odd and have different snacks, and they want to go and pick them up themselves. So there's this trend. So there are these companies who do okay in consumer, but yeah, that's a sort of a specialized story, right? Some colleagues even took me to a lovely local Szechuan restaurant.

5:03Lovely food. The restaurant was empty. Now, I thought it was a big red flag. But what they said was, actually, that just means everybody's ordering the food to take it away. So the restaurant has got good business in the sense, but as long as it's online. Yeah. Yeah. Good food. Actually, I unfortunately was not able to join that particular. It was a lunch, right? It was a lunch in Szechuan, and it was spicy. Ah, yeah, yeah. So I just had sandwiches, so not so exciting, actually. So the deflation is a key story. Let's see how it's going to develop into next year. What other stories came out of it? Well, I don't think you can talk about China without talking about trade. China is in the headlines all the time. But one of the big messages I thought was, move beyond the headlines, and actually China is staying nimble. It's navigating the tariffs. And there's different measures of this, but they're saying trade to the US is actually holding up OK. It's down, but it's not as bad as you think it is. And look, we've got to talk about Europe. China's really exporting quite a lot there, and that's quite an interesting development. Now, so at the conference, they had the latest sort of car.

6:06One of my colleagues took that, and it's literally a sort of SUV. But if you get in, one of the configurations is that the front two chairs can actually flip. So it's a sort of a kind of a living room. So with the four of you can talk, and you can eat, or you can do whatever you want to do. And yeah, that car then drives itself around. So my colleague was completely blown away with it. I actually sent her a video to my dad, and said, this you can get in there. He was in China for 40,000 euros. And he was like, hands up like, OK, I'd love to sign up for that. And this, of course, why they're so successful. Because of the intense competition that we had in China, these companies had to be super client-focused and competitive, and therefore also doing so well in export markets. Absolutely. Being sold domestically, but exported. But we also had not just hard goods, but services as well, doing quite well overseas for China. And then we had a really racking up some good numbers, even as growth, what we heard, was quite muted still at home overall.

7:08Yeah, overall growth domestically, that's a consumption story, spoke about it's still muted, but the export numbers are good services as well. But to be honest, actually, Europe is also a big service exporter into China, selling all sorts of particular specialized services and these other things. It's not that Europe is losing out here, it's just a very complex sort of balance of trade pictured that emerges here. There was also some talk about debt, right? There was some talk about debt. And here, one speaker in particular emphasized how, look, US has got a lot of debt, but so has China. But the slightly worrying sign for China is how fast it's rising. It's rising faster than the US. Faster than the US and faster than most other or a lot of other markets. And that's something we need to keep a close eye on. Because it limits the room for any extra fiscal spending. And that can really lead to problems down the road. And they pointed also to say, well, where's all this money going? And they said, look, it's going in investment, but it really needs to go in proper, productive

8:09investment. And we need to see more of that in China. Jake, let's take a quick break here. And then I'd like to come back and talk about AI because that was a big topic on the conference. And the question is, of course, is that the big productive investment? Well, Jake, if we talk about China and Chen Sen and investments, we have to talk about AI. And actually, one of the particularly interesting features at the conference were that there were startup companies. So companies that are not really looking to raise money on the stock market yet, they're just growing, with all sorts of AI ideas. So people could visit these sort of new emerging companies on the conferences, well, really, really interesting. But did you pick up anything about, must have been talking about a plenary room about AI as well? Well, firstly, no China conference is possible today without dancing robots. And we had that, and that's all powered by AI.

9:10But more seriously, that's what economists describe as the K-shaped economy. Can you explain that? Yeah, sure. So if you think of the K and it's got an arrow going up and a sort of arrow going down or a thing going up, that's AI. And for China, that's going gangbusters. It's having a great time during this. Absolutely. If I look at just the earnings growth in China from companies, overall earnings growth is about to say 12, 30% or so. But AI hardware, that's 99, 0%. But it's just a small portion of the overall market. So that's the K going up. And people seem very positive that this story is going to continue. It's chips, it's other bits of hardware, it's services around that. It's adoption as well, the adoption of these models, but companies and implementation. That's right. And on a serious point about robots, it's probably humanoid robots around the corner as well. China's leading the world and all that. So people were excited about that. And they felt that it sort of compensates for the down-shaped arrow of the K-shaped.

10:10Yeah. Well, that's the consumption story we just spoke about, right? Yeah. No, that's right. But all this must have been something you were talking about in your meetings, Harold. Yeah. In all the meetings we had, this came up. And very often more in a regional sort of context. But the tone of the investors is slightly changed a bit. From the AI is the best thing ever since sliced bread. And you have to be in Korea. That was the first story, the first half of the year. What we've seen in July is that the Korean market came off quite a lot. About say 40% at one particular point in time. And now the question is, is this really a good story? So people have reassessing this. And is there too much capacity being built? And this is not just in the US. Globally we're building about $1 trillion in data centers. But also are we making too many chips in Asia? The short answer is probably not yet. But this could become an issue but maybe not until early 2028, late 2027. But you see that people are thinking a bit about that.

11:13And then also impacts flows in the market. What we've seen is that in July, as I said, the Korean market has come down. And it's been taken out. It actually went back into the US partially. But also we've seen a rotation whereby people said, let's go into maybe other markets. Not just everything in Korea. There's a growing interest in Japan. We've talked a lot about Japan, but also China, actually. So money is coming back into China. And then the question is, where do you want to be? And this is a key shape sort of story for us in equities as well. So AI is a great story, but it's a lot more than that. It's an... Yeah, exactly. It's easy to make a real great story. But hey, are we going to make money out of it? Are we not investing too much? Who is going to make that money? And will that then be paid out in difference to me as a sheholder? And those are some of the questions that people try to ask in Asian equities, global equities and in China equities, of course, as well. Well, Jake, thanks a lot for joining us. And that's a wrap up on the 2026 China conference, as well as this particular episode of Under the Beneventry.

12:14Thanks for listening and do listen like and subscribe. You know, to drill by now, Under the Beneventry is an HVC global investment research production and our producer sitting here in the room very quiet is Graham McKay. From all of us in Hong Kong, take care. Till next week.