Fears are growing that China’s economy is tethering on the verge of deflation after yet another slate of underwhelming economic data July 17 provided more evidence that the stall in growth momentum may turn out more severe without more meaningful policy intervention.
China is facing a demographic problem and needs to boost its productivity for growth, said David Mann, chief economist for Asia-Pacific, Middle East and Africa at the Mastercard Economics Institute.
“You need to see the productivity side pickup exactly because of the demographic challenge,” he told CNBC’s “Squawk Box Asia” on Monday.
“If you go back 10, 20 years in China, you had so much of growth coming purely from just more people showing up each year — that labor contribution rather than capital or productivity.”
“Now, you need the productivity,” he said, underlining Beijing has to make sure “capital is channeled” in a way that boosts productivity.
China ended its Covid-19 controls in December and the initial economic rebound has lost steam. The 6.3% economic growth in the second quarter marked a 0.8% pace of growth from the first quarter, slower than the 2.2% quarter-on-quarter pace recorded in the first three months of the year.
“The extra challenge China has though — unlike say even somewhere that has a smaller population — is about numbers,” said Mann.
“When you look at a population of around 1.4 billion people, even if the working age group is shrinking, there’s just not enough people out there to be able to practically make that happen.”
As a result, it’s crucial for Beijing to encourage private sector growth to ease the productivity pressures, he added.
Mann explained a key for the economy would be “how strong we see growth in the private sector — to be able to bring in those innovations and introduce them in a way that does keep growth a bit stronger, without needing to resort, for example, residential real estate investment, which is not as productive.”
China is expected to release its inflation data Wednesday, which will give further clues on the country’s recovery trajectory. Lackluster consumer demand led to no change in prices in June.
Domestic travel has been a bright spot in the recovery. Urban residents more than doubled their tourism spending in the first half of the year from a year ago to 1.98 trillion yuan ($280 billion), according to the Ministry of Culture and Tourism.
There has been a recovery, “it’s just that people — per person — are spending less,” said Mann.
“With the travel recovery domestically in China, we’ve seen volumes of people around key holidays up and matching and exceeding even 2019 levels,” he noted. “But the per person spending has not been,” leading to a slightly “more tame recovery” in consumer spending.
Dinesh Kumar Khara, chairman of the bank, says in many other countries, inflation is attributed to supply-side constraints, but that’s not the case in India.
Australia has urged China to abolish all remaining trade restrictions after Beijing lifted tariffs on its barley imports, pointing to signs of a normalization in bilateral ties.
“We want all of the impediments removed that currently affect our trading relationship with China,” Trade Minister Don Farrell told CNBC Monday.
We think with some goodwill on both sides, that we can completely stabilize this relationship.
Don Farrell
Australian trade minister
“We always saw the barley application and the suspension of the barley application before the [World Trade Organisation] as a template for dealing with the wine issue,” he said. “So I think now’s the opportunity to have some further talks with the Chinese government.”
A decision on wine tariffs is “not very far away,” according to Farrell. “And of course, we’re extremely confident that the 220% tariffs that were applied to Australian wine will be removed.”
In April, Australia agreed to “temporarily suspend” its World Trade Organization complaint against China for its 2020 decision to impose 80.5% duties on Australian barley trade that was once worth about 1.5 billion Australian dollars ($988.1 million).
It paved the way for Beijing to expediate its review of the tariff decision.
Last Friday, the Chinese Commerce Ministry announced it was dropping all anti-dumping and countervailing duties on Australian barley starting Saturday — more than three years after they were imposed. The ministry cited “changes in the Chinese market” but did not further explain.
Bottles of wine imported from Australia are displayed for sale at a supermarket in Nantong Free Trade Zone on November 27, 2020 in Nantong, Jiangsu Province of China.
Vcg | Visual China Group | Getty Images
On Monday, Farrell said a “range of factors” were at play, with Chinese beer consumers and barley importers “very strongly in favor” of reintroducing Australian barley.
The move underscored thawing tensions between Australia and China, following the first meeting between China’s President Xi Jinping and Australian Prime Minister Anthony Albanese on the sidelines of the Group of 20 leaders’ summit in Bali in November.
Since then, Australia’s foreign minister Penny Wong and trade minister Farrell have made multiple visits to Beijing and have had direct meetings with their direct counterparts.
Relations between the two countries deteriorated in 2020 under the leadership of former prime minister Scott Morrison, after Australia supported a call for an international inquiry into China’s handling of the coronavirus pandemic, which was first reported in the Chinese city of Wuhan.
“I think our whole strategy throughout this process has been to de-escalate the issues, to try and resolve the issues between us and China through dialogue rather than disputation,” Farrell said. “And we think with some goodwill on both sides, that we can completely stabilize this relationship.”
China’s trade curbs forced Australian farmers and producers to find new markets for their produce as the Australian government sought to diversify its trading relationship with free trade agreements with India and the United Kingdom. Farrell said he is hopeful of a trade deal with the European Union “soon.”
Piyush Gupta, CEO of the Singapore bank, discusses Fitch Ratings’ decision to downgrade the United States’ long-term foreign currency issuer default rating to AA+ from AAA.
A Chinese and US national flag hang on a fence at an international school in Beijing on December 6, 2018. (Photo by Fred DUFOUR / AFP) (Photo by FRED DUFOUR/AFP via Getty Images)
Fred Dufour | Afp | Getty Images
Businesses see geopolitical tensions as the biggest threat to the global economy right now, according to the latest survey by Oxford Economics.
The finding “confirms” that perceptions of economic risks have shifted significantly for businesses, said Jamie Thompson, head of macro scenarios and author of the survey.
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“Geopolitical tensions are now the main focus of concern, both in the near term and the medium term,” he noted.
Around 36% of businesses polled view geopolitical tensions as top risks currently — such as those related to issues over Taiwan, South Korea, and Russia-NATO.
In contrast, a similar survey in April found that nearly half the respondents viewed either a marked tightening in credit supply or a full-blown financial crisis as the top risk in the near term.
The latest third quarter 2023 Global Risk Survey covered 127 businesses from July 6-27 this year.
The findings come amid fraught relations between Washington and Beijing, as bilateral ties hit their lowest in years. Tensions escalated after the U.S. shot down a suspected Chinese surveillance balloon which flew over American air space.
Regarding Taiwan, China has insisted the issue was an internal affair and warned the U.S. it’s a red line that must not be crossed. Beijing considers the democratically self-ruled island part of its territory.
Last week, the Biden administration announced a weapons aid package to Taiwan that’s worth up to $345 million, according to Reuters. The move is seen as likely to anger China.
Meanwhile, Russia’s invasion of Ukraine has strained the Kremlin’s relations with the North Atlantic Treaty Organization. NATO’s expansion has long been a point of contention for Russian President Vladimir Putin, who claims Kyiv’s accession would pose a threat to Moscow’s national security.
While businesses continue to see high inflation as a “significant near-term risk,” they appear more confident that the problem will eventually moderate, noted the survey.
“Respondents’ expectation for world consumer price inflation stands at 3.7% in 2024, 0.2ppts below our latest baseline forecast,” said Thompson.
“Expected inflation over the medium term has fallen significantly, unwinding the rises seen over the past two years,” he added.
The survey also highlighted easing concerns over banking system related risks.But the issues remain elevated.
Around 30% of respondents still view either a marked tightening in credit supply or a full-blown financial crisis as among the top risks for the near term in the latest survey.
Some investors, such as Kevin O’Leary, have predicted the ongoing cycle of U.S. Federal Reserve rate hikes could lead to more regional U.S. bank failures.
Geopolitical risks continue to factor prominently for businesses as a major concern for the next five years. Over 60% of those polled see it as a “very significant risk” to the world economy.
“As reported last quarter, more than three-fifths of respondents view geopolitical risks as a very significant risk to the global economy over the medium term,” said Thompson.
“An intensification of geopolitical tensions could potentially trigger significant deglobalization of trade and the financial system,” he added.
Deglobalization is the third most cited risk in the latest survey, viewed as “a very significant risk” by 23% of respondents.
Around 25% view early policy rate cuts as among the top upside risks. On China, businesses see “less chance of a China-driven upturn.”
China’s reopening as the top global upside has almost halved over the past three months, down 10% in the latest survey compared with 19% in April.
“Continued weakness in the [Chinese] real estate sector is weighing on investment, foreign demand remains weak, and rising and elevated youth unemployment, at 20.8% in May 2023, indicates labor market weakness,” the IMF said in a report.
The Bank of Japan has pushed back on speculation its recent policy adjustment marked the start of a tightening cycle.
Deputy Governor Shinichi Ichida on Wednesday reiterated the central bank’s flexible threshold for tolerance on long-term bond yields is merely a necessary modification to sustain its ultra-easy monetary policy position.
On Friday, the BOJ unexpectedly loosened its yield curve control, a move some market watchers said mark the start of the end of the Japanese central bank’s ultra-easy monetary policy position. The so-called YCC is a policy tool used to target longer term interest rates.
Needless to say, we do not have an exit from monetary easing in mind.
Shinichi Ichida
Deputy governor, Bank of Japan
“The Bank’s decision to conduct yield curve control with greater flexibility aims at patiently continuing with monetary easing while nimbly responding to both upside and downside risks under extremely high uncertainties for economic activity and prices at home and abroad,” Ichida said in prepared comments for a public address in Chiba prefecture.
“Needless to say, we do not have an exit from monetary easing in mind,” he added.
Speculation about such an exit emerged after the BOJ’s surprise decision to offer to “flexibly” purchase 10-year Japanese government bonds at 1% yield through fixed-rate operations. The central bank, however, stuck to its existing plan to allow yields to fluctuate in the range of around plus and minus 0.5 percentage points from its 0% target level.
On Wednesday, Japan’s 10-year bond yield hit yet another fresh nine-year high at about 0.63% after the BOJ left its purchase offer amounts unchanged from last month in its fixed-rate operations.
The BOJ’s yield curve control is part of its ultra-easy monetary policy, which also includes keeping short-term interest rates at -0.1%. It is aimed at reflating growth in the world’s third-largest economy and sustainably achieve its 2% inflation target after years of deflation.
On Wednesday, Ichida said there is “still a long way to go” before Japan’s central bank would even consider raising short-term interest rates from its current -0.1% to 0%.
Every policy has its positive effects, but it also always comes with costs. There is no free lunch for any policy.
Shinichi Ichida
Deputy governor, Bank of Japan
Ichida said the BOJ needs to maintain ultra-easy monetary policy and keep interest rates lowto “carefully nurture” nascent signs of change seen in firms’ wage- and price-setting behavior.
He added it was difficult to change the cautious attitudes “so deeply entrenched” among firms even after Japan’s economy achieved a situation where it was no longer in deflation.
The central bank has been under pressure to tighten its monetary policy since inflation has consistently exceeded its 2% target for 15 straight months, while wages are finally starting to increase after years of stagnation.
This position pits the BOJ squarely against the global wave of tightening monetary policy in the last 12 months, as inflation spiked following the resumption of economic activity as the world emerged from the pandemic.
“Every policy has its positive effects, but it also always comes with costs. There is no free lunch for any policy,” Ichida said. “When inflation expectations rise, not only the easing effects but also the side effects strengthen. It is necessary to strike an optimum balance between the two.”
Customers dine at Izakaya restaurants in the Ameyoko shopping street on July 27, 2023 in Tokyo, Japan. Japan’s core consumer price index climbed by 3.3% in June, outpacing the US figure for the first time in eight years.
Riad Salameh’s tenure as governor of Lebanon’s central bank on Monday came to an end after 30 years, with many sharply critical of the legacy he now leaves behind.
“The loss of savings for several generations of Lebanese” is all part of Salameh’s legacy, Nasser Saidi, a former vice governor of the Banque du Liban, told CNBC’s Dan Murphy on Monday.
Lebanon has failed to find an official successor to Salameh, who has been governor of the central bank since 1993 and has worked under 12 prime ministers and recurring political instability.
Wassim Mansouri, the deputy governor will take on the role of governor on an interim basis, he told reporters on Monday. Salameh told CNBC on Monday he hopes his “successor will be successful.”
Lebanon has failed to find an official successor to Salameh, who has been governor of central bank since 1993 and has worked under 12 prime ministers and recurring political instability.
Wassim Mansouri, the deputy governor of the central bank, told reporters that he will take the role on an interim basis.
Lebanon’s Rafik Hariri first became prime minister in 1992 and tapped Salameh to rebuild the country’s post-war economy and banking sector. Under his stewardship, however, Lebanon descended into an economic crisis of epic proportions.
Foreign reserves have dipped below $10 billion, the currency has depreciated by almost 100% in value against the dollar and Salameh himself has been blamed for the collapse of Lebanon’s financial system, which has estimated losses of an eyewatering $70 billion.
In 2022, the World Bank blamed the country’s political elite for a “Ponzi Finance” scheme, saying the depression was “deliberate in the making over the past 30 years.”
An anti-government Lebanese activist displays Lebanese bills during a protest outside the country’s central bank against the continuing downward spiral of the Lebanese pound against the dollar and Riad Salameh’s arrest, under investigation by five European countries.
Even members of the current government have suggested it was time for change at the central bank. In June, Lebanon’s Economy and Trade Minister Amin Salam told CNBC that Salameh had been Lebanon’s central bank head for “way too long.”
Saidi, meanwhile, said Salameh — who faces international arrest warrants and allegations of fraud — is to blame for the country’s economic collapse.
“He is directly responsible, in my view, for conducting monetary and exchange rate policy that has led to the collapse that we have seen. He actually conducted a Ponzi scheme, whereby he was trying to protect a highly overvalued Lebanese pound, by increased borrowing particularly from the banks, the banks, brought in deposits from Lebanese expatriates around the world,” Saidi said.
Despite these many accusations, Salameh left his post on Monday to a crowd of cheering supporters, demonstrating the deep divisions in Lebanese political society and a loyalty to leadership which has been in power since the end of the country’s civil war.
“Lebanon was ruled by a class that diminished and undermined impunity, so it is normal to see Riad Salameh leaving office without any authority questioning him or holding him accountable,” Laury Haytayan, the leader of opposition party Taqaddom, told CNBC on Monday.
Salameh, who faces two international arrest warrants and allegations of fraud, told CNBC on Monday: “It is untrue to hold me directly and solely responsible” for the collapse of Lebanon’s economy.
“The exchange policies are determined by the government and [the Banque Du Liban] applies them in every government that was elected since 1993, their target was exchange stability,” he said, referring to Lebanon’s central bank.
Salameh also pointed to the “waste and losses in the electricity sector,” subsidies, political instability and the “cost of the Syrian refugees,” as contributing factors to Lebanon’s economic decline.
To rebuild Lebanon’s post-war economy, which largely relies on remittances, Salameh offered high interest rates, attracting deposits from the vast Lebanese diaspora, which stands at almost 14 million.
In 2016, Salameh launched a financial engineering operation which combined Lebanon’s local currency and U.S. dollar deposits, attracting foreign reserves in an attempt to prop up the economy.
High interest rates on U.S. dollar deposits helped bail out Lebanon’s ailing banks, which eventually dug into the country’s own reserves, according to the World Bank.
Salameh was also the architect of Lebanon’s dollar peg, which the country still uses today, yet now the economy runs mostly on a black market system with varying rates, and is largely dollarized due to the massive devaluation of the Lira.
Lebanon’s Central Bank Governor Riad Salameh gives an interview with AFP at his office in the capital Beirut on December 20, 2021.
Joseph Eid | Afp | Getty Images
Henri Chaoul, a former advisor to Lebanon’s finance minister and to Lebanon’s negotiations with the International Monetary Fund, told CNBC that Salameh is “substantially” to blame for the country’s economic collapse.
“He had the power and the obligation to say no to two major policy pillars of the last decades: the currency peg and the monetization of the debt. And he failed at both, leading to the catastrophic collapse of the financial sector. Apart of course of all the alleged fraud and aggravated money laundering activities that he is under investigation for.”
Salameh oversaw Lebanon’s debt monetization plan, which allowed the central bank to provide financing for the government. Moody’s warned in 2019 that this could undermine the country’s currency peg and its ability to pay off debts.
Lebanon’s negotiations with the IMF have since stalled after the government failed to implement reforms required to unlock aid. The country has been without consensus on a new president, against the IMF’s demands, since October of last year.
“I think the IMF is the only choice for Lebanon,” Saidi told CNBC.
“Simply because politicians don’t have the courage and don’t have the competence and there’s too much corruption going on. They don’t want reforms because they view the reforms as not serving their own interests, the only way to move forward is to bring in the IMF that will impose conditions” Saidi added.
HSBC’s net profit more than doubled to $18.1 billion in the six months ended June, a sharp spike compared to the $9 billion in the same period a year before.
The bank’s profit before tax rose 147% year-on-year to $21.7 billion, up from $8.78 billion in the first half of 2022.
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This figure included a $2.1 billion reversal of an impairment relating to the planned sale of its retail banking operations in France, as well as a provisional gain of $1.5 billion on the acquisition of Silicon Valley Bank UK.
In light of the strong results, HSBC’s board approved a second interim dividend of $0.10 per share, and announced a further share buyback of up to $2 billion, which “we expect to commence shortly and complete within three months.”
An HSBC Holdings bank branch in Hong Kong on May 24, 2022. A Hong Kong-based trade platform launched by HSBC Holdings three years ago with much fanfare has shut down after failing to build a commercially viable business.
Bertha Wang | Bloomberg | Getty Images
Asked when the bank’s dividend might return to pre-pandemic levels, CEO Noel Quinn told CNBC’s “Capital Connection” that “if all goes to plan this year, we should be above our pre-pandemic dividend level.”
HSBC paid out a total dividend of $0.51 in 2018, and $0.30 in 2019.
For 2022, the bank has already declared two interim dividends of $0.10 each, bringing the total amount of dividends paid to $0.20. Quinn said that “our final interim dividend at the end of the year, will be the balance to get us to a 50% payout ratio.”
In March, the U.K. arm of HSBC — Europe’s largest bank by assets — bought SVB U.K. for £1 ($1.21), in a deal that excludes the assets and liabilities of SVB U.K.’s parent company.
Revenue increased by 50% year-on-year to $36.9 billion in the first half, which HSBC said was driven by higher net interest income across all its global businesses due to interest rate rises.
My job is to diversify the revenue. And I believe we’re starting to show evidence of that and we will continue to invest for diversification of revenue.
Noel Quinn
CEO of HSBC Holdings
Net interest income for the first half stood at $18.3 billion, 36% higher year-on-year, while net interest margin came in 46 basis points higher at 1.70%.
The strong performance was due to strong revenue growth across all business lines and all product areas, the CEO said. “Certainly, there’s an element of interest rates in there. But there’s also good growth in our fee income and trading income.”
For the second quarter alone, HSBC beat analysts’ expectations to report an 89% jump in pre-tax profit in the second quarter.
Pre-tax profit for the quarter ended in June was $8.77 billion, beating expectations of $7.96 billion.
Net profit was $6.64 billion, beating the $6.35 billion expected in analysts’ estimates compiled by the bank, jumping 27% compared to the same period a year before.
Total revenue for the second quarter came in at $16.71 billion, 38% higher than the $12.1 billion seen in the same period a year ago.
HSBC’s Hong Kong-listed shares rose 1.23% after the announcement.
Here are other highlights of the bank’s financial report card:
Net interest income came in at $9.3 billion in the second quarter, compared to $6.9 billion in the same period a year ago.
Net interest margin, a measure of lending profitability, rose 43 basis points year on year to 1.72% in the second quarter of 2023.
Moving forward, HSBC has also raised a key performance target, forecasting a near term return on tangible equity of 12%, compared to its previous target of 9.9%.
In fact, Quinn said that in the next two years, HSBC is expecting a “mid-teens” return on tangible equity, adding that “this is a broad-based delivery of profit and return.”
He sees future growth for HSBC coming from corporate banking, as well as international wealth and international retail banking for the affluent.
“We’re investing in areas that will drive growth beyond the interest rate regime there exists today. My job is to diversify the revenue. And I believe we’re starting to show evidence of that and we will continue to invest for diversification of revenue.”
Correction: This story has been updated to reflect that net interest margin rose 43 basis points in the second quarter of 2023. An earlier version misstated the year.
India is poised to become the world’s second-largest economy by 2075, according to Goldman Sachs.
Darren Robb | The Image Bank | Getty Images
India’s strong growth prospects and recent stock market boom has piqued investor interest, drawing attention and increasing exposure to a once ignored market.
“India’s growth story is greater than the average … Whatever the world is grappling with, it’s business as usual for India,” said Feroze Azeez, deputy CEO of Anand Rathi Wealth.
Major economies were hit by higher inflation during the Covid-19 pandemic, but India’s inflation was already elevated. The country’s inflation rate stood at 7.59% in January 2020, while that of other large economies like the United Kingdom and Japan were low, at 1.8% and 0.8% respectively in the same month.
Azeez said high inflation is a situation that India is used to and it has “always traveled the path of higher inflation and higher interest rates.”
In June, India’s inflation rate was 4.81%, which remains within the Reserve Bank of India’s tolerance band of 2% to 6%. The central bank has left interest rates unchanged at 6.5% since April.
“All the macro variables are stacking and we are in the growth cycle … There is a paradigm shift and flight of capital from Indian households savings to equity to contribute to the India growth story,” Azeez told CNBC’s “Squawk Box Asia” last week.
The International Monetary Fund recently raised its 2023 growth forecast for India, citing stronger growth in the fourth-quarter last year, powered by domestic investment.
Both the Sensex and Nifty hit all-time highs in July and analysts are confident the indexes will bring positive returns for years to come.
“Many people have said in the past that India is the place to invest in, but they have been disappointed because [the momentum] will start and it’ll suddenly die out,” said Soumya Rajan, CEO and founder of Mumbai-based Waterfield Advisors.
But recently there has been a “confluence of positive flows” from both domestic retail and foreign institutional investors due to an “amazing allocation towards equity investments,” Peeyush Mittal, portfolio manager at Matthews Asia, told CNBC.
More companies are also adopting a “China plus one” strategy and setting up manufacturing operations in India, boosting the country’s long-term outlook, Nilesh Shah, managing director at Kotak Mahindra Asset Management said.
“There is a combination of positive sentiments, higher flows, and backing from the fundamentals which is causing the Indian market to move higher … Overall investments in India are on revival mode,” said Shah.
“So whichever way one looks at the economic numbers, India appears as an oasis in the global desert,” he added.
Although India’s monsoon season and general elections in 2024 could create volatility in the coming months, analysts remain optimistic and recommended four sectors.
India’s financial industry has done well recently, Rajan said, adding the sector is the biggest contributor to the country’s capital markets.
“The corporate balance on banks is the best it’s ever been,” Waterfield’s Rajan said. “We’ve had an outstanding run in what we’ve seen in the last few years and a lot will continue to happen in this space.”
Earlier this month, IDFC First Bank said its board had approved its merger with IDFC Ltd., which the company estimated would increase standalone book value by 4.9% compared with its financials as of March 31.
This came days after India’s largest private lender HDFC Bank completed its $40 billion mega merger with Housing Development Finance Corporation, making it the world’s fourth largest bank by market cap.
Analysts said Indian banks also remained insulated from the Adani crisis. In February, short seller firm Hindenburg accusedthe conglomerate of decades of stock manipulation and accounting fraud.
“The fact that they weren’t caught on the wrong side of that entire trade was, was good. So clearly, their underwriting standards are looking much better,” she highlighted.
Matthews’ Mittal said India’s HDFC Bank and ICICI Bank are good buys and are set to continue taking market share from public sector banks. Shares of HDFC Bank have gained 1.4% so far this year, while ICICI Bank has jumped 11%.
Although Rajan was optimistic, she remains neutral on banks as the sector “had a really good run, so the exponential upside is not huge, but will be fair.”
Mittal also noted there are “decent” opportunities in non-banking financial names such as Bajaj Finance and Mahindra Finance.
Bajaj Finance has gained 11% since the start of 2023, while Mahindra Finance surged by 26% during the same time.
Rajan and Mittal are both optimistic on fast-moving consumer goods and mentioned Nestle India as a sector pick. The sector was “beaten down quite a bit” during the pandemic, but has shown strong recovery and positive growth in the short term, Rajan said.
Shares of Nestle India have climbed more than 15% since the beginning of the year, and both analyats expect they could continue to run further.
According to the World Bank, about 68% of India’s population is of working age (15 to 64 years old), a positive demographic dynamic for consumer spending.
“It’s as simple as consuming biscuits. If you extrapolate your biscuit consumption across a population of 1.4 billion, it’s still quite a lot,” Rajan said.
Shoppers purchase groceries at the upscale LuLu Hypermarket located in the Lulu International Shopping Mall in Kerala, India, on May 25, 2022.
Global companies are moving their manufacturing lines to India as more of them begin to see it as Asia’s alternative to China.
The country would hence highly prioritize ramping up its manufacturing capacity so it has the adequate infrastructure in place to be a leader in global supply chains, Kotak’s Shah pointed out.
“The China plus one trend means that a lot of global outsourcing is shifting, and we believe Indian manufacturing companies will be able to participate in global supply chains. The sector will do well in the next couple of years,” said Shah said.
An engineer works on a component at the Godrej Aerospace manufacturing plant, in Mumbai on July 10, 2023.
Punit Paranjpe | Afp | Getty Images
However, Rajan pointed out that India has a lot of catching up to do if it wants to match China’s manufacturing prowess.
Even though companies say that they are adopting a “China plus one” strategy, “that plus one has not necessarily been India, it could be other South Asian and Southeast Asian countries,” as the country is still grappling with shortfalls in its infrastructure, she said.
“The big play is of course around infrastructure and capital goods,” she added. “Whether it’s auto components or heavy engineering, these companies are expected to do well.”
If investors were to bet on which sector in India will continue remaining strong in the next three to five years, pharmaceuticals will be a good pick, according to Shah.
“The world is aging and needs cheaper competitive medicine, and Indian companies fit well,” Shah said. “When the world is looking for competitive healthcare, Indians through their doctors, medicines, treatment or cost of delivery, will be able to do better.”
However, Matthew Asia’s Mittal said that instead of buying into pharmaceutical companies, upstream companies such as Syngene will be a good investment opportunity. Although such companies do not directly sell pharmaceutical products, they are involved in the research, development and manufacturing of them.
Investor sentiment in China remains weak as the country continues to miss growth expectations, and there are clearly industries and companies in India that have benefited from that, Rajan said.
She emphasized that even if China’s economy rebounds more robustly in the next nine to 12 months, investors will remain interested in India.Rajan noted that investors can also include exposure to both economies in their portfolios.
Furthermore, Rajan noted domestic investors play a pivotal role in India’s stock market and that is “really what has kept markets more elevated.”
“It’s not as if our companies are necessarily looking for foreign markets or exports to survive or thrive.”
Rashtrapati Bhavan, the official residence of the President of India, in New Delhi.
Kriangkrai Thitimakorn | Moment | Getty Images
China’s growth slowdown is set to hurt global commodity demand, but India could make up for some of that shortfall, according to ANZ.
India’s economic growth is likely to outpace China’s, with the South Asian nation set to become the third-largest economy by the end of this decade, the bank predicted.
That means India’s demand for commodities will likely surge, and it could cover more than half of China’s demand shortfall especially in the energy sector, the bank said in a recent report.
“India’s demand for commodities is slated to grow rapidly, supported by favorable demographics, urbanization, the expansion of manufacturing and exports and the build-up of infrastructure,” ANZ analysts wrote.
India has overtaken China to become the most populous country, and according to ANZ’s data, its rate of urbanization is expected to rise to 40% by 2030 from current levels of 35% — stoking demand for industrial metals and energy commodities which are often associated with a rise in demand for infrastructure and manufacturing.
India will scale up its efforts to decarbonize by 2030, but those efforts may be frustrated by the nation’s rapidly growing energy needs…
India’s annual demand for major commodities — like oil, coal, gas, copper, aluminum and steel — is expected to rise collectively by more than 5% from now till 2030, the bank estimated.
In comparison, China’s demand for these same commodities will slow to between 1% to 3%, accompanying a projected GDP slowdown to 3.5% growth by the end of this decade. China’s second-quarter GDP expanded 6.3% year-on-year, falling below market expectations for 7.3% growth.
The pick-up in India’s demand will be most prominent for oil and coal, in line with the country’s heavy oil import dependency at more than 80%, ANZ predicted.
“India will scale up its efforts to decarbonize by 2030, but those efforts may be frustrated by the nation’s rapidly growing energy needs, a significant share of which may still have to be met by fossil fuels,” the analysts wrote.
India’s petroleum product consumption for 2024 is estimated to rise almost 5% from current levels to 233,805 thousand metric tonnes, India’s Petroleum Planning and Analysis Cell projects.
According to ANZ’s counterfactual scenario, even if China’s growth is not slowing, India is estimated to make up for 60% of China’s slack in coal demand in 2030, and 66% for oil.
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The Indian government’s increasing emphasis on infrastructure development, energy transition and capex could also mean demand for steel and iron will pick up for the country.
“Metals and bulks may see a strong rise in demand,” the report said.
“For aluminum and steel, India’s pick-up of demand left unrealized in China may not be very substantial, simply because the scale of consumption of these items in the latter is very large,” ANZ highlighted.
China consumes more than 50% of global industrial metals and steel production.
While China will continue to retain its status as a behemoth in the commodity markets, India can still be a “significant influencer,” says ANZ.
Indonesian President Joko Widodo makes a speech during the Association of Southeast Asian Nations (ASEAN) Foreign Minister’s Meeting in Jakarta, Indonesia on July 14, 2023.
Murat Gok | Anadolu Agency | Getty Images
A new regional cross-border payment system recently implemented by Southeast Asian nations could deepen financial integration among participants, bringing the ASEAN bloc closer to its goal of economic cohesion.
The program, which allows residents to pay for goods and services in local currencies using a QR code, is now active in Indonesia, Malaysia, Thailand and Singapore. The Philippines is expected to join soon.
That’s according to each country’s respective central bank.
The move comes after the five Southeast Asian countries signed an official agreement late last year. At the recent ASEAN summit in May, leaders also reiterated their commitment to the project, pledging to work on a road map to expand regional payment links to all ten ASEAN members.
The scheme is aimed at supporting and facilitating cross-border trade settlements, investment, remittance and other economic activities with the goal of implementing an inclusive financial ecosystem around Southeast Asia.
Analysts say retail industries will particularly benefit amid an expected rise in consumer spending, which could in turn strengthen tourism.
Regional connectivity is considered crucial to reduce the region’s reliance on external currencies like the U.S. dollar for cross-border transactions, particularly among businesses. The greenback’s strength in recent years has resulted in weaker ASEAN currencies, which hurts those economies since the majority of the bloc’s members are net energy and food importers.
“The system will forgo the U.S. dollar or the Chinese renminbi as intermediary,” said Nico Han, a Southeast Asia analyst at Diplomat Risk Intelligence, the consulting and analysis division of current affairs magazine The Diplomat.
A unified cross-border digital payment system will “foster a sense of regionalism and ASEAN-centrality in managing international affairs,” he added. “This move becomes even more crucial in light of escalating tensions among major global powers.”
How it works
By connecting QR code payment systems, funds can be sent from one digital wallet to another.
These digital wallets effectively act as bank accounts but they can also be linked to accounts with formal financial institutions.
For instance, Malaysian tourists in Singapore can make a payment with Malaysian ringgit funds in their Malaysian digital wallet when making a transaction. Or, a Malaysian worker in Singapore can send Singapore dollar funds in a Singaporean digital wallet to a recipient’s wallet in Malaysia.
Fees and exchange rates will be determined by mutual agreement between the central banks themselves.
For now, a region-wide system like this doesn’t exist in other parts of the world but down the road, the Bank of International Settlements, based in Switzerland, hopes to connect retail payment systems across the world using QR codes and mobile phone numbers.
“The ASEAN central banks’ effort is innovative and novel,” said Satoru Yamadera, advisor at the Asian Development Bank’s Economic Research and Development Impact Department.
“In other regions like Europe, retail payment connection via credit and debit cards is more popular while China is well-known for advanced QR code payment, but they are not connected like the ASEAN QR codes,” he continued.
Economic benefits
QR payments don’t impose fees on cardholders and merchants. They also boast of better conversion rates than those set by private payment processors like Visa or American Express.
Micro enterprises as well as small- and medium-sized businesses, or SMBs will emerge as winners from regional payment connectivity, experts say. According to the Asian Development Bank, such companies account for over 90% of businesses in Southeast Asia.
“SMBs can avoid the expenses associated with maintaining a physical point-of-sale system or paying interchange fees to card companies,” explained Han from Diplomat Risk Intelligence.
Marginalized individuals from low-income backgrounds also stand to benefit. As the payment system works via digital wallets and doesn’t require a traditional bank account, it can be used by the unbanked population.
“The system has the potential to improve financial literacy and wellbeing for the underbanked population,” Han noted.
ASEAN’s new system will also enable merchants and consumers to build a robust payment history, and provide valuable data for credit scoring, said Nicholas Lee, lead Asia tech analyst at Global Counsel, a public policy advisory firm.
“That’s particularly advantageous for unbanked and underbanked segments of the population, who traditionally lack access to such credit assessment data.”
Moreover, “increased non-cash transactions would allow policymakers to capture transaction data and trade flow more effectively, assuming these data are accessible,” said Lee.
“This, in turn, could lead to better economic forecasting and policymaking.”
Currency pressure ahead
While strengthening payment connectivity within the region has the potential to reduce payment friction and accelerate digital transition, it could inadvertently put pressure on certain currencies, particularly the Singapore dollar.
“The potential scenario of the [Singapore dollar] emerging as a de facto reserve currency within the region poses a challenge that ASEAN states will need to confront,” said Lee.
“With the [Singapore dollar’s] strength and stability, both international and regional businesses may opt to hold more of their working capital in [Singapore dollars], relying on the new payment network for efficient currency conversion,” he explained.
If that happens, it could weaken the purchasing power of other currencies in the region and result in higher imported inflation if central banks don’t intervene.
In such a scenario, authorities may feel the need to impose capital restrictions in order to protect their respective currencies, which could undermine the very purpose of establishing a regional payment network.
Regulations pose another challenge.
Central banks will have to address security and fraud issues, plus undertake the task of educating the public to embrace the new payment system, said Han.
“These factors can collectively contribute to a time-consuming process,” he warned.
This kind of coordinated action will require strong political will from regional leaders and it remains to be seen if ASEAN members can come together to successfully implement such an ambitious venture.
Police officers block off an area around a damaged office block of the Moscow International Business Center (Moskva City) following a reported drone attack in Moscow on July 30, 2023.
Alexander Nemenov | Afp | Getty Images
Ukrainian drones attacked Moscow early on Sunday, injuring one, damaging buildings and suspending flights at Vnukovo airport, TASS news agency said, citing officials.
Russia’s Defence Ministry said a Ukrainian drone was destroyed in the air over the Odintsovo district and two others crashed in Moscow, according to TASS.
One person was injured as a result of a blast in a building, TASS said, citing emergency services. The airport was closed for arrivals and departures, the agency said.
Mayor Sergei Sobyanin said earlier the facades of two office buildings had been slightly damaged but that there were no casualties, TASS reported.
The Ukraine government did not immediately respond to a request for comment.
Russia said on Monday it would retaliate harshly against Ukraine after two drones damaged buildings in Moscow, with one strike close to the building where the military holds briefings on what Russia calls its “special military operation” in Ukraine.
Ukrainian Deputy Prime Minister Mykhailo Fedorov said at the time there would be more drone strikes.
Viewing cryptocurrency as “digital gold” may be a mistake.
State Street Global Advisors’ George Milling-Stanley, whose firm runs the world’s largest gold exchange-traded fund, believes cryptocurrency is no substitute for the real thing due its vulnerability to big losses.
“Volatility does not back up any claims for crypto to be a long-term strategic asset as a competitor to gold,” the firm’s chief gold strategist told CNBC’s “ETF Edge” earlier this week.
Milling-Stanley’s firm is behind SPDR Gold Shares, the world’s largest physically backed gold ETF. It has a total asset value of more than $57 billion as of last week, according to the company’s website. The ETF is up 7% year to date as of Friday’s market close.
Milling-Stanley believes gold’s 6,000-year history as a monetary asset serves as a significant sample basis to understand the benefits of investing in gold.
“Gold is a hedge against inflation. Gold’s a hedge against potential weakness in the equity market. Gold’s a hedge against potential weakness in the dollar,” he noted. “To me, historically, the promise of gold for investors has … overtime [helped] to enhance the returns of a properly balanced portfolio.”
The precious metal is having trouble this year staying above the $2,000 an ounce mark. But Milling-Stanley believes the economic backdrop bodes well for gold — recession or not.
“It’s pretty clear that we’re liable to be in a period of slow growth. … Historically, gold has always done well during periods of slower growth,” Milling-Stanley said.
Milling-Stanley also believes the relaxation of Covid-19 restrictions in China should spark more demand for gold. It’s known as the world’s largest consumer of gold jewelry behind India, according to the World Gold Council.
“It’s not just China and India. It’s Vietnam, it’s Indonesia, it’s Thailand and Korea. It’s a whole raft of Asian countries that are really the main drivers of gold jewelry demand,” Milling-Stanley said.
Gold settled at $1,960.47 an ounce Friday. The commodity is up more than 7% so far this year.
North Korean leader Kim Jong Un featured at the Seoul Railway Station in Seoul on May 31, 2023.
Jung Yeon-je | Afp | Getty Images
North Korean leader Kim Jong Un met with the Chinese delegation who visited Pyongyang to celebrate the 70th anniversary of the end of the Korean War and vowed to develop the two countries’ relations to a “new high,” the North’s state media said on Saturday.
Kim hosted a reception for the Chinese officials led by Communist Party Politburo member Li Hongzhong on Friday. The Chinese delegation was the first since the Covid-19 pandemic.
“Reaffirmed at the talk was the stand of the parties and governments of the two countries to cope with the complicated international situation on their own initiative and steadily develop the friendship and comradely cooperation onto a new high stage,” the North’s KCNA news agency said.
The central bank loosened its yield curve control — or YCC — in an unexpected move with wide-ranging ramifications. It sent the yen whipsawing against the dollar, while Japanese stocks and government bond prices slid.
Elsewhere, the Stoxx 600 in Europe opened lower and government bond yields in the region jumped. On Thursday, ahead of the Bank of Japan statement, reports that the central bank was going to discuss its yield curve control policy also contributed to a lower close on the S&P 500 and the Nasdaq, according to some strategists.
“We didn’t expect this kind of tweak this time,” Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC’s “Capital Connection.”
The Bank of Japan has been dovish for years, but its move to introduce flexibility into its until-now strict yield curve control has left economists wondering whether a more substantial change is on the horizon.
The yield curve control is a long-term policy that sees the central bank target an interest rate, and then buy and sell bonds as necessary to achieve that target. It currently targets a 0% yield on the 10-year government bond with the aim of stimulating the Japanese economy, which has struggled for many years with disinflation.
In its policy statement, the BOJ said it will continue to allow 10-year Japanese government bond yields to fluctuate within the range of 0.5 percentage point either side of its 0% target — but it will offer to purchase 10-year JGBs at 1% through fixed-rate operations. This effectively expands its tolerance by a further 50 basis points.
“While maintaining the tolerance band for the 10-year JGB yield target at +/-0.50ppt, the BoJ will allow more fluctuation in yields beyond the band,” economists from Capital Economics said.
“Their aim is to enhance the sustainability of the current easing framework in a forward-looking manner. Highlighting ‘extremely high uncertainties’ in the inflation outlook, the BoJ argues that strictly capping yields will hamper bond market functioning and increase market volatility when upside risks materialize.”
From a market perspective, investors — many of whom were not expecting this move — were left wondering whether this is a mere technical adjustment, or the start of a more significant tightening cycle. Central banks tighten monetary policy when inflation is high, as demonstrated by the U.S. Federal Reserve’s and European Central Bank’s rate hikes over the past year.
“Fighting inflation was not the official reason for the policy tweak, as that would surely imply stronger tightening moves, but the Bank recognised obstinately elevated inflationary pressure by revising up its forecast,” Duncan Wrigley, chief China+ economist at Pantheon Macroeconomics, said in a note.
The BOJ said core consumer inflation, excluding fresh food, will reach 2.5% in the fiscal year to March, up from a previous estimate of 1.8%. It added that there are upside risks to the forecast, meaning inflation could increase more than expected.
Kazuo Ueda, governor of the Bank of Japan (BOJ).
Bloomberg | Bloomberg | Getty Images
Speaking at a news conference after the announcement, BOJ Governor Kazuo Ueda played down the move to loosen its yield curve control. When asked if the central bank had shifted from dovish to neutral, he said: “That’s not the case. By making YCC more flexible, we enhanced the sustainability of our policy. So, this was a step to heighten the chance of sustainably achieving our price target,” according to a Reuters translation.
MUFG said that Friday’s “flexibility” tweak shows the central bank is not yet ready to end this policy measure.
“Governor Ueda described today’s move as enhancing the sustainability of monetary easing rather than tightening. It sends a signal that the BoJ is not yet ready to tighten monetary policy through raising interest rates,” the bank’s analysts said in a note.
Capital Economics’ economists highlighted the importance of inflation figures looking ahead. “The longer inflation stays above target, the larger the chances that the Bank of Japan will have to follow up today’s tweak to Yield Curve Control with a genuine tightening of monetary policy,” they wrote.
But the timing here is crucial, according to Michael Metcalfe of State Street Global Markets.
“If inflation has indeed returned to Japan, which we believe it has, the BoJ will find itself needing to raise rates just as hopes for interest rate cuts rise elsewhere. This should be a medium-term positive for the JPY [Japanese yen], which remains deeply undervalued,” Metcalfe said in a note.
The effectiveness of the BOJ’s yield curve control has been questioned, with some experts arguing that it distorts the natural functioning of the markets.
“Yield curve control is a dangerous policy which needs to be retired as soon as possible,” Kit Juckes, strategist at Societe Generale, said Friday in a note to clients.
“And by anchoring JGB (Japanese government bond) yields at a time when other major central banks have been raising rates, it has been a major factor in the yen reaching its lowest level, in real terms, since the 1970s. So, the BoJ wants to very carefully dismantle YCC, and the yen will rally as slowly as they do so.”
Pantheon Macroeconomics’ Wrigley agreed that the central bank is looking to move away from YCC, describing Friday’s move as “opportunistic.”
“Markets have been relatively calm and the Bank seized the opportunity to catch most investors by surprise, given the consensus for no policy change at today’s meeting,” he wrote.
“The markets are likely to test the BoJ’s resolve, as it probably will seek to engineer a gradual shift away from its [yield curve control] policy over the next year or so, while leaving the short-term rate target unchanged, as it still believes that Japan needs supportive monetary policy.”
The Japanese yen strengthened and 10-year JGB yield rose after the Bank of Japan said it would allow “greater flexibility” in its target range for 10-year Japanese government bond yields.
Yields for 10-year Japanese government bonds stood at 0.551% on the news, the level since September 2014. The yen was trading at 138.64 against the dollar at 12:35p.m. Hong Kong and Singapore time.
After a two day policy meeting, Japan’s central bank adjusted its stance on its yield curve control policy, saying that it will continue to allow 10-year government bond yields to fluctuate in the range of around plus and minus 0.5%.
The BOJ also offered to buy 10-year JGBs at 1% every business day through fixed-rate operations, unless no bids are submitted. The move effectively expands its tolerance by another 50 basis points.
Earlier, currency markets were testing the waters after Nikkei reported the BOJ will let long-term interest rates rise beyond its cap of 0.5% “by a certain degree” at its monetary policy meeting today.
Under its yield curve control policy, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero.
With inflation having exceeded the BOJ’s 2% target, concerns are rising that Japan’s relatively low interest rates have made the yen less attractive and vulnerable to selling.
Central banks around the world have raised rates aggressively to rein in on inflation, but Japan has continued to maintain an ultra-loose monetary policy and kept rates low.
On Friday, the Tokyo’s core consumer price index, which excludes volatile fresh food but includes fuel costs, rose 3.0% in July from a year ago. That’s slightly more than the 2.9% expected in a Reuters consensus poll.
The consumer price index rose 3% from a year ago in June — the lowest level since March 2021. But Powell said the Fed would need to “hold policy at a restrictive level for some time” and be prepared to raise rates further, given that core inflation is still above 3% — higher than its 2% annual target.
“You keep squeezing the toothpaste tube, you keep rolling it up, you keep raising rates, and you know things are going to break, you just don’t know when and where,” O’Leary, who runs his own early stage venture capital firm, O’Leary Ventures, told CNBC’s “Street Signs Asia” early Thursday after the Fed’s latest rate hike announcement.
“I am just predicting — and I am very cautious on this — it will break down in the regional banks, which supports 60% of the economy,” he said, adding that the rapid rise in the cost of capital is “killing them on their real estate loans.”
“You keep squeezing the toothpaste tube, you keep rolling it up, you keep raising rates, and you know things are going to break, you just don’t know when and where,” Kevin O’Leary said.
“Terminal rate, where the Fed stops, could be 6.25, could be 6.50,” O’Leary said. “So you’ve really got to think about this if you think about the long term and the short-term effect.”
That’s higher than the Fed’s median end-2023 forecast for its funds rate, which stands at 5.6% as of the June meeting. It is also higher than the most hawkish prediction of 6.1%, according to the Fed’s latest summary of economic projections issued in June.
“We’ve started to see the cracks, the Titanic has not [sunk],” O’Leary said.
Disclosure: CNBC owns the exclusive off-network cable rights to “Shark Tank.”
Singapore’s United Overseas Bank is expecting “some upside” in interest income in the next quarter, after the U.S. Federal Reserve announced a fresh rate hike overnight.
UOB’s core net profit jumped 35% to 1.5 billion Singapore dollars ($1.13 billion) in the second quarter from a year ago. Its net interest income for the quarter grew 31% from a year ago — boosted by robust net interest margin that expanded 50 basis points to 2.13% on higher interest rates, the Singapore-based lender said in a statement released early Thursday.
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Net interest margin, a measure of lending profitability for banks, is the difference between interest earned and interest paid.
“We are hopeful that [net interest margins] will stay for the following quarter, with some upside biasness following this morning’s announcement by the Fed,” UOB chief financial officer Lee Wai Fai told CNBC’s JP Ong on “Street Signs Asia” in an exclusive interview Thursday.
Overnight on Wall Street, the Fed raised interest rates by 25 basis points, taking its benchmark borrowing costs to a target range of 5.25%-5.5% — the highest level in more than 22 years.
Financial markets had completely priced in the widely anticipated move. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.
Shares of UOB, one of Singapore’s largest lenders, rose 0.7% to a three-month high on Thursday.
The stock was broadly in line with the benchmark Straits Times Index in Singapore, and slightly below the 1% gain for the MSCI Asia ex-Japan.
“We think that loans will be repriced and that we will be able to manage our cost of funding a lot stronger mainly because of the flight to quality for the Singapore depositors,” Lee said.
Southeast Asia’s third-largest lender said its loan-related and wealth management fees eased as investor sentiments remained subdued. These declines were partly offset by an increase in card fees, the bank added.
On Thursday, UOB lowered its guidance for fee income guidance to a high single digit growth, from a double-digit growth projection at its first quarter earnings announcement.
The United Overseas Bank logo is displayed atop UOB Plaza One in the central business district on February 23, 2021 in Singapore.
Nurphoto | Nurphoto | Getty Images
The bank’s projection for low to mid single-digit loan growth remains unchanged.
It now expects credit cost to hit around 25 basis points for the rest of the year, a slight increase from the previous projection of 20 to 25 basis points.
“We are hopeful that despite a challenging first half, second half will be a lot better. And with some of the reopening of the economy, some of the trade-related activities will pick up,” Lee told CNBC.
“We are expecting to see activity coming back, especially now people got used to the high interest rate environment … so we see some of those customers coming back into the market,” he said.
UOB is the first of Singapore’s three major banks to report its quarterly earnings. Singapore’s largest lender DBS will report Aug. 3, followed by Overseas-Chinese Banking Corp. on Aug. 4.
A Samsung Galaxy Z Fold 5 smartphone, left, a Galaxy Z Flip 5 smartphone during the Galaxy Unpacked event in Seoul, South Korea, on Wednesday, July 26, 2023. Samsung introduced the fifth generation of its foldable smartphones on Wednesday, seeking to counter a sluggish market for devices and upcoming rival products from Apple Inc.
SeongJoon Cho | Bloomberg | Getty Images
Samsung Electronics posted a second-quarter profit drop Thursday as weak demand for memory chips persists.
Here are Samsung’s second-quarter results versus estimates:
Revenue: 60.01 trillionKorean won (about $47.21 billion), vs. 60.8 trillion Korean won expected by analysts, according to Refinitiv consensus estimates.
Operating profit: 0.67 trillion Korean won, vs. 0.6 trillion Korean won expected by the company.
Samsung reported sales slipped 22% from a year ago, while operating profit plunged 95%. Earlier this month, Samsung estimated second-quarter revenue to be 60 trillion Korean won and operating profit to be 600 billion Korean won.
Samsung is the world’s largest maker of dynamic random-access memory chips, which are found in consumer devices such as smartphones and computers.
“Global demand is expected to gradually recover in the second half of the year which should lead to an improvement in earnings driven by the component business,” Samsung said in its earnings report.
“However, continued macroeconomic risks could prove to be a challenge in such recovery in demand,” said the South Korean firm.
Samsung said that robust artificial intelligence demand led to more DRAM shipments than expected in the second quarter, compared with the first quarter.
“The memory business saw results improve from the previous quarter as its focus on high bandwidth memory (HBM) and DDR5 products in anticipation of robust demand for AI applications led to higher-than-guided DRAM shipments,” said Samsung.
Both DRAM and NAND flash memory chips also saw “more limited price drops” which improved second-quarter performance, compared with the first quarter, Samsung said.
“As server customers continued inventory adjustment, overall purchase demand had not yet recovered. Due to the strong demand for generative AI, however, investment from the data center sector was concentrated on AI servers,” said Samsung.
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High-performance memory chips are required to train generative AI models such as ChatGPT. Such chips enable generative AI models to remember details from past conversations and user preferences in order to generate humanlike responses.
“Looking to the second half of the year, the market is expected to gradually move toward stability considering increasing production cuts in the industry, while inventory adjustments by customers are likely to wind down,” said Samsung.
Samsung said it will focus on high-value-added products such as DDR5, LPDDR5x and HBM as it expects a recovery in demand, as well as increase investments in infrastructure, R&D and packaging technology.
Samsung said that overall mobile phone market demand declined from the first quarter due to continued macroeconomic challenges such as inflation.
The hype from the Galaxy S23 series launch in the first quarter also faded, said Samsung. Delayed market recovery also posed further challenges to second-quarter sales.
“Nevertheless, the Galaxy S23 series was able to achieve higher results than its predecessor in the first half, in terms of both volume and value,” said Samsung, adding that it plans to lift sales of the Galaxy S23 and Galaxy A series.
Global shipments of smartphones are expected to decline 3.2% in 2023 to 1.17 billion units, according to global market intelligence firm International Data Corporation. The firm lowered its forecast from February, driven by factors such as “a weaker economic outlook” and “ongoing inflation.”
Smartphone and PC manufacturers are grappling with excess inventories of memory chips after stockpiling to meet increased demand for consumer devices during the pandemic. Inflation has led to consumers cutting back on purchases of these goods, driving down prices for memory chips.
“Our conversations with channels, supply chain partners, and major OEMs all point to recovery being pushed further out and a weaker second half of the year,” said Nabila Popal, IDC’s research director.
“Consumer demand is recovering much slower than expected in all regions, including China.”
In its Thursday earnings call, Samsung told analysts that it would be making additional production cuts on certain DRAM and NAND products “to further accelerate inventory normalization.”
Samsung said it will focus on the newly launched high-end Galaxy Z Flip 5 and Galaxy Z Fold 5 series to cement its leading position in the global foldable smartphone market.
“Despite how bad the memory business is, the good thing is at least the premium part of the market is helping to drive some of their profits or at least offset some of the damage caused by the the memory side of the business,” said Bryan Ma, vice president of devices research at IDC, on CNBC’s “Squawk Box Asia” on Thursday.
But the Galaxy S23 series still drives most of Samsung’s profits in the premium smartphone space, said Ma.
“We do also have to keep in mind that foldables honestly are not a huge part of it, even if they are the premium part of the market. It’s actually more of the traditional candy bar Galaxy S23 that really drives a lot of their profits at least in the premium part,” said Ma.
Still, it gives Samsung an edge over its rival Apple. “It’s garnering mindshare. Things like a foldable phone that Apple doesn’t have yet,” said Ma.
