Tencent Slides Amid AI Capex Concerns — The China Show — 8/13/2026

[00:00:00] Speaker 1: It's 9 a.m. in Shanghai Shenzhen and here in Hong Kong. You're watching The China Show. I'm David Ingles with Yvonne Mann. We are counting down to the open markets in greater China today. Let's get your top stories. Stocks across the Asia-Pacific rising on a subdued U.S. inflation report easing concerns here about imminent Fed rate hikes. The S&P 500 is within striking distance of a fresh record. But U.S. [00:00:23] Speaker 2: listed Chinese shares slip. We'll be watching Tencent at Hong Kong after 80 hours fell with market skeptical that its big boost in A.I. spending can't help it catch up with rivals. Also ahead the PBOC [00:00:35] Speaker 1: stepping up reverse repo usage planning mid-month operations for the very first time. And China mourns Zhu Rongji the former premier who overhauled the economy has died at age 97. [00:00:53] Speaker 2: So we cleared out two certain things here overnight. Right. When it comes to not just the Tencent earnings which we'll talk about. But that U.S. inflation print was pretty bang in line with estimates pretty modest at best. So I think that really kind of clear the pathway for stocks for gold to do quite well here today. But Tencent I think you know we were we've been waiting for this A.I. capex [00:01:21] Speaker 1: spend. Well they gave it. And investors not quite liking it. No it was quite a quite a big jump from the previous year. They also went negative and free cash flow which we'll get into in a moment. But yes I think that market reaction to Tencent was I guess in some ways unsurprising given how markets have been reacting to big cap expense of late. So we'll obviously track how that drags into the benchmark today. We're looking at a big drop of course in the 80 hours overnight. In fact let's have a look at how that's fairing. Right. So everything excluding Chinese oriented equities and securities are actually doing well. Although I should mention the some of the earnings in the after hour session in the U.S. are somewhat pulling down the index on the Nasdaq. But all that is also to say the S&P did gain. And then you did get also a very strong rally in the semis when you look at the Philly Semiconductor Index which really outperformed in the overnight session. Also I guess that goes into the next board that's coming up on your screens. There's a really really bullish tailwind coming through on hardware place because of what took place overnight. So you have Taiwan. You have Korea which is now I believe back in a technical bull market up 20 percent of that. Singapore is coming online. And of course Japan also the feeling the tailwinds there of the CapEx story. One and a half percent to the upside. OK. We talked about Tencent how we did overnight. We're also looking at some changes to MSCI China with the likes of Pony AI. One of the many stocks that were shifted out. You have a lot more shifted back in as well. We'll we'll get to that iteration in a moment here. Two point four percent as we were pointing out. You're going against the grain of risk assets overnight. Tencent five and a half percent overnight. And if the futures are coming up on your screen should show still slightly to the upside. Last we checked. There we go. Four tenths of one percent. A50 of course more indicative of onshore trading. One seven on the 10 year year. We have a bond auction bond sales here in Hong Kong. I should mention that to six seventy five on the exchange rate today. All right. [00:03:21] Speaker 2: Things are pretty positive right now. Let's break down. Of course the Tencent second quarter results and bring in our China correspondent Min Min Lo with you know what stood out to you beyond just that CapEx spend. Yeah. [00:03:31] Min Min Lo: The CapEx spend I think has been the main thing that investors are watching out for. Right. And in fact some analysts are reducing the price target because of the higher higher investments. They spent so much that we are seeing the first negative cash flow since 2021. They're spending more than they're taking in from operational income. And that's even with very strong revenue double digit growth 11 percent which was better than estimates. And it's coming from the bread and butter business like the gaming business ad revenue that's up by 14 I think and 22 percent respectively. And it's thanks to AI that allowed clients to better target their users. But again when it comes to AI investments the company didn't give us a multi-year guideline unlike Alibaba which has pledged 50 billion dollars in three years. They did say they're going to double investments in AI products this year and any additional investment is going to be tied to returns on their existing investments. Yeah. And if they can't use up the [00:04:27] Speaker 1: capacity they sent there's also always the worst case option of renting some of the assets out. That's right. That was a bit of a [00:04:33] Min Min Lo: controversial statement because according to our Bloomberg intelligence analyst Robert Lee. He's saying that that really doesn't show you confidence that they are you know sure about their AI strategy. But you cut it another way. You could see it as a form of reassurance to investors that this cap expanding is coming with very limited downside right because yes if they over invested and they have excess capacity they can just rent it out. The company that say that they are going to prioritize that AI infrastructure for themselves for their long term product development. So they might sacrifice a bit of that short term gain because they can immediately make a quick buck by renting it renting out compute. But first of all their products are still lagging behind right especially when you talk about the foundational model. When you and it's now rebranded as high three just launched recently but it's still a very very small model if you compare it to the frontier models like Kimi K3 or Alibaba Quinn. So the company says it's going to invest in a state of the art model high four which will be released later this year. Some of its other applications have been doing quite well like work buddy that's an a desktop AI agent. It just launched in March but already has zoomed to the top of the most used products out there outperforming its competitors. So that creates a positive feedback loop because it is powered by their hunyuan model. They're also testing their AI agent for WeChat as well. That's in a prototype phase. So yeah still in that process of trying to make WeChat and AI first app. But again longer term the profitability and the payoff in that investment is going to be key to [00:06:05] Speaker 1: watch. Yeah I think a work buddy they said is achieving rapid user growth. Did they give any clear timeline on the return on [00:06:11] Min Min Lo: investment on AI. They did not give a very clear timeline on that. They have kept it a little bit vague and they just mentioned that AI investments is going to future AI investments is going to be tied to current returns. Yeah. So again I think it's still pretty impressive. This is one of the few companies that can spend so much and still have you know that double digit growth in revenue to give that cash flow buffer. Right. So I mean it's the sort of clout and cash reserves that the pure play names like people will not be able to compete with. So that is its competitive mode right now. All right. Min Min thank you. [00:06:52] Speaker 2: Our China correspondent Min Min Lo there. And it's not just Tencent right. We got a busy busy earnings day here when it comes to Hong Kong and China. You take a look at when it comes to Seagate Acid Holdings. Seagate Hudge. You have some of the semiconductors that are reporting as well. The big ones. So Hohong, Semi, Higod IT Tech, JD Health, JD Logistics, JD.com, Lenovo. That's a big one here as well. And of course SMIC. So Dave you've been kind of crunching the numbers. You've been looking at really what we need to be [00:07:18] Speaker 1: looking out for in this earnings season in particular. Yeah. So I think today we're looking at north of 350 billion in terms of combined market cap. And of course the benchmark we're using there is the broader benchmark here in Hong Kong. Of course there are others that are also reporting on tour. But I guess just to give you an indication of course of basically share portfolio. Right. So I think we talked about your really, really big ones. And a lot of these names actually reporting today have been featured substantially into the story in China. Right. You know, Lenovo has had a following that earnings that first quarters with Lenovo. Right. It was a massive world beating rally that followed there. So this one's going to be interesting later today. We're also looking at SMIC, of course, as far as fabs are concerned. Right. Now in as far as the market reaction that is being priced in the options market. And as you can see, what this shows you is the or is it coming out as orange? It is. Right. OK. The orange bar indicates the implied mood post earnings that it's plus minus that 10 percent. So Lenovo is poised to see a substantial move. And the average compared to what you're seeing in yellow here, which is the average over past results. I think that's over the last year or so. So almost double what we've seen, including the last one we saw back in post first quarter. JD.com also reporting, as we were pointing out, MTR is also seeing perhaps the opposite side of that. About 4 percent, two and a half percent is implied. Now speaking of these two companies, Lenovo and MTR, stay tuned for our conversation with both their executives. Tomorrow, the CFO of Lenovo will be joining us and also the CEO of the MTR Corporation on the back of those earnings that are set to report later on today. Right. We are going into the open just over 20 minutes away. 50 futures are called higher. Tencent is very much in focus, should be indicated lower. We'll get to that in a moment. This is the China Show. Okay. Before we get into the weeds of this, should we call it tameflation story? No. Just to mention, Tencent is also something that we're tracking in about nine minutes time. We should be getting the pre-markets in that. And we are indicated lower on that. We're 20 bucks, Hong Kong dollars a pop there, to the downside. Now, speaking of, so low inflation is not really helping some of the growth and momentum stocks, growth related to the internet platforms here in Hong Kong. But we did get a soft inflation number, at least not a terribly negative surprise as far as that was concerned. Right. So what rates markets did was they paired back a little bit in terms of the hike expectations for September. We went from nearly a coin toss odds to about a third, 30 to 40 percent probability of a interest rate hike next month. So not completely off the table, but somewhat off the table for now. Yeah. Let's talk more and bring in Tracy Chen from Brandy [00:10:20] Speaker 2: Wine. She's been, of course, tracking all this portfolio manager there. Tracy. Yeah, it's interesting, right? We've trimmed off some of the rate hike bets, but we complete we haven't really completely written off the possibility of a rate hike for September or even later on this year. How do you interpret this U.S. inflation print? Do you think we can rest a bit easy now or the debate still has not been [00:10:41] Speaker 4: resolved? Yeah, I think today's inflation number is just as people expected. It is like both the headline and core inflation. So to me, it's almost like a non event, right? Initially, the market reacted sharply. Treasury rallied and equity rallied. But at the market close, most of the move already faded. So that shows you the market real concern is not inflation. Most of the trend is not inflation. But the trend is not inflation. So I would characterize that the Fed should feel some kind of relief. But that's not the real story behind the trade resell off and the Fed is still behind the curve on tackling inflation and to reach their inflation target. So I think this will not make them more likely to hike. So I think this will not make them more likely to hike. So I think this will not make them more likely to hike. So I think it's really hard for the Fed to hike in September because it's so close to midterm. But at the same time, you hope that they should have hiked in July, right? Because the inflation is still elevated. Yeah. Yeah. The benefit certainly of hindsight. I mean, when you look at absolute yields, say on the 10 year, I mean, they've certainly crept up over the last few months. I mean, did market just tighten policy [00:12:11] Speaker 1: for the Fed. And I guess related to that question is, you know, we had an auction as well in the Treasury markets a few hours ago. Did that give you any better insight into how the market actually feels about the inflation story? [00:12:20] Speaker 4: Yeah, I think if you look at the positioning on the CTA positioning, it's people are underweight duration right now. So it doesn't take a lot for people to cover their underweight. So I think in the near term, the near term Treasury can have a bit of a rally. But I don't think that will last long. And so so hence, I think the auction should go well because of the simple fact that people are so underweight. And I think they they will price less probability of hike. So you can see two year can rally more than 30 year. You will see curve steepening in the near term. Either bear steepening or or bull steepening. But there should be some kind of a steepening to gradually price price out of the September hike. [00:13:15] Speaker 2: Okay. How are you looking at Jackson Hole and what Governor Warsh is going to say? Because I mean, it was a pretty rocky start for his first FOMC meeting in terms of the messaging around inflation. You know, what what does he need to do in order to fine tune that message now, you think? [00:13:33] Speaker 4: Yeah, I think he will be trying to be as vague as possible because he he he focused on less communication and let that the Fed follow the market rather than the other way around. So I think we'll be closely watch the two year because the two year is the markets doing the Fed's job. Bond vigilante is doing the Fed's job. So so so I don't think there will be a lot of take away out of the Jackson Hole. But I could be wrong. And I can't imagine he will say anything new there. [00:14:07] Speaker 1: Tracy. Yeah, that is wishful thinking already. If he does, in fact, give us a little bit more. But Tracy, just before we talk about obviously the rising rate environment also in the Asia Pacific, JGB and China, I would just want to get your thoughts on, you know, we've talked a lot about AI. There's been a widening of credit spreads with all this fundraising that's going on from Mag seven and some of their peers in the industry. I wonder, do you think the market has now figured out what credit scores to attach to those securities? What do you think is going on there with the widening of spreads? [00:14:44] Speaker 4: I think there's just too much supply and there is a skepticism on the AI trade. But if you look at the global AI arms race between China and U.S., it's quite it's quite daunting to see which one will slow down. So I think the hyperscalers in the U.S., they are forced to just keep building out the infrastructure because the demand for compute is still very huge. And if you look at Corvives, the earnings report, it shows that they have so many backlogs. So at the same time, I do think the credit market will have to absorb a lot of supply. And that is why I think the credit spread will continue to widen from here, especially the IG part. And for investors, we have to pick bonds, right? I think I think that's not all data center credit are created equal. You can see them trade differently. It's the investors concern about which one will survive, which one will be going default going forward. So I think I think JP Morgan estimated there will be $5 trillion of capex spending from hyperscalers. So the entire AI build out from now to 2030. And most of the spending will fall on IG credit and private credit. And high yield and securitize a tiny part of that $5 trillion. So that's a lot of demand for capital. And that is exactly why I think the cost of capital will go up. You can view this as a fiscal stimulus from AI company. So we are going from government fiscal stimulus to private sector fiscal stimulus. And it's the same to us. Credit spread will widen from here. Just a matter of supply. [00:16:41] Speaker 1: Which I guess is a good problem or something good that you know, if you're a financial official, you'd rather they spend it than than you do. What does it mean then for DM rates moving forward then? [00:16:56] Speaker 4: Yeah, I think I have been witnessing this regime change pre-COVID versus post-COVID. So pre-COVID we have so many savings and then you don't have enough investment. So the cost of capital is so low. We have ZERB or actually negative real yield. But post-COVID we have massive government spending and there's a wealth transfer from government sector to private sector. Household has been locking very low mortgage rate and corporate they have been refinancing their debt to get very low cost of capital. So right now we are very constructive on both household and corporate and less or I can say negative on the sovereign sovereign, especially DM sovereign because the fiscal picture is just very ugly. So I would say we are more constructive on credit rather than the DM sovereigns. I think yield will stay high for longer if not going higher for longer. And inflation will also be elevated. Because there are just too much fiscal spending. Yeah. What does that mean for the dollar? I mean, we've seen that correlation between rates and the dollar kind of break down. Does it stay divorced for a while? What does it mean for dollar? Yeah, I think the breakdown of the correlation between dollar and rates is mostly driven by fiscal concern because foreign investors, they will look at the U.S. fiscal. They are concerned. So I think the dollar is the most difficult question. It has a lot of drivers, the U.S. exceptionalism, the AI capex, and then you have this geopolitical conflict. And then you have this relative central bank policy because right now we see a discrepancy among all the central banks. Some central banks, they are, they are, they are, they are pausing like Australia, but BOJ, they are lagging behind the curve and U.S. is a little bit lagging behind the curve. And then BOE probably will buy some more time because their economy is so weak. So at the same time, I would say it's really hard to see the dollar. I think in the near term, dollar can be a little weaker against the Asian currency because Asian currency, they have, they are so cheap, right, Korean won, Japanese, yeah, and CNY. So they have room to rally from here, especially if China wants to internationalize their currency. But U.S. dollar can be stronger than euro and then weaker against the LATAM currency. [00:19:47] Speaker 1: So it's a mixed picture. Yeah. It's the, I guess as a final question, is the cleanest trade on rates than China with a stronger currency, stable, stronger currency, and you really don't have an inflation problem. [00:20:06] Speaker 4: Yeah. CGP has been a true safe haven for the past four or five years. Ever since COVID, as the economy slowed down, property market is going through, to this, this, this recovery. So, so I think that's why the massive demand has been relatively weak. That's why CGP has been doing so well. But China is, you know, like the so-called K-shaped economy. They are focusing on tech, technology, self-sufficiency and AI build out. So I think it's not just one, one single lens. You can look at China. You have to look at both, the new economy versus the old economy. But the new economy hasn't been able to offset the old economy yet at this juncture. [00:20:55] Speaker 1: Patience is, is a virtue. I think someone's told us that sometime back. Tracy, thank you so much for that. Tracy Chen, the portfolio manager at Brandywine Global. We're going into the session today, what, seven minutes away. We're looking at 10 cent, down about 3%, more than double volumes in the auction right now in the pre-markets. We're up, down 3.3%. Plenty more ahead. It's a massive earnings day across mainland China today. This is Bloomberg. [00:21:34] Speaker 2: All right, your agenda for Greater China today. We're watching that overnight reverse repo, right? So they, there was announcement that they were going to start conducting it mid month. And so obviously we're hearing a little bit more about them using this sort of tool. So certainly we'll get more indications on what implications that might have on the bond market and the like. There is this bond revival that we're watching very closely as well. Tencent, of course, front and center. We have plenty of earnings on tap as we had a big list up there like Lenovo, SMIC, MTR, or just a few. We're still waiting for some credit data out of China and, of course, that bond sale in Hong Kong today. Yeah, we have that, of course, very much on tap today. [00:22:18] Speaker 1: Really amidst this, let's call it this window of stability across rates markets. As we go into the thick of the Thursday session, we are called lower as you can see across the benchmarks. A lot of that might have to do with the fact that you have one of the biggest heaviest weighted stocks down about 3% in the form of 10 cents. So that's something, of course, we're tracking today. Not to just also mention there are other earnings to tell you about. So Galaxy, for example, plus, of course, the the approach to all these upcoming ones coming through. There's an anthropic, by the way, just line crossing through here, said to be in talks to buy AI startup to cart. Six billion is the price that is being talked about there. The opening bell, three minutes away. This is The China Show. Welcome back. You're watching The China Show. We're cutting down the open of markets. I apologize. I have a very croaky voice today battling with a cold here right now. [00:23:13] Speaker 2: But I'm going to power through for the next two hours or so. She's fine. I'm fine. That's why I'm at work here today. Just think of like, you know, Phoebe Buffay. Well, it's about to say, right? [00:23:35] Speaker 1: It's a good mix between Phoebe Buffay, Michael Bolton and a little bit of Harrison Ford. Oh, really? Yeah. Wow. That's a that's a good combination. A lot of a lot of. Way to sell it. Yeah. I'm not sure if I did. Yeah. No. So there's two things that we were a little bit more clear about. [00:23:53] Speaker 2: Sure. Whether it is about U.S. inflation, it seems like there's not as much urgency for the Fed to hike in September. And that certainly is helping the likes of Korea, for example, now back into some sort of bull market. Yes. After this chips are getting a bit more momentum. And then Tencent. Right. Finally, we get some A.I. CapEx spend. But it's interesting the market reaction that we've seen. Yeah. [00:24:13] Speaker 1: They've been waiting for more details and more tangible plans. Yeah. And the number really from Tencent. And they made it all about A.I. Yeah. During the earnings call. 170 percent, I think, was the jump. Yeah. If I'm not mistaken, on CapEx spend. And then markets went the opposite way. So open and mainland here. Just a note, too. Right. The China index is actually moving up. And I think that really is goes to show what Yvonne just talked about. The revival of the hardware trade just about across the board. The China has been very tied to what's been happening in the Philly Semiconductor Index. What's happening in Korea. That's one to watch. Now, just to mention that, too. So you have bottom of your screens. CX empties up 3 percent. Flip the page. We're going to see what Hong Kong is doing. And shortly after that, you'll see what Tencent is doing. The reason that is relevant today is given the price action today. CX empty up 10 cent down. We now just could have at this point in time China's biggest company changing hands from Tencent to CX empty just in terms of market cap. Right. So Tencent coming up on your screens. There's been a lot of changes as far as price targets on the street are concerned. We've unpacked the earnings for you. A lot of attention on the cap expense. Tencent should be down about 3.6 percent. Volumes are also picking up quite substantially in the opening minutes. Four, four, four, four right now on Tencent. Right. We'll table this very, very quickly just to also mention before we forget it. There have been some changes to MSCI China. There's been a whole list of deletions and a whole list of additions to the index as well, just to see what the market reaction is. So we talked about the A.I. story and we do have the infusion of a lot more A.I. representation in the benchmarks themselves with the likes of Jerpu in stock is reacting six and a half percent to the upside and some of the additions there. We had the deletions as well, please. Very quickly, so our viewers can get an idea of what they're what's coming out. You have China. You have some of the solar companies and also HSI and Pony are also being removed from the benchmark there. But yes, this is something that will obviously track as people try it. Of course, we reconfigure their portfolios alongside changes to the benchmarks. Yeah. In terms of what the street is saying about Tencent. Right. [00:26:23] Speaker 2: The sell side for the most part was in fact looking at that A.I. capex spend with a little bit more of a negative lens. Right. You have the likes of Goldman, Morgan Stanley actually lowering their price targets there for the stock because of these higher A.I. investments. Right. So 670 now for Goldman is their price target 550 for Morgan Stanley City, though, actually raising their price target for the stock here and really revising that operating profit growth estimates as well. That's going to be pretty interesting to get Alicia Yap to talk us through all this right now. She joins us, of course, Citigroup Global Markets Asia MD and head of Pan-Asia Internet Research. Most of the market took that A.I. capex spend negatively. How do you look at it? Well, it is understandable. [00:27:06] Speaker 5: Given it is a really big amount. It's a big jump right this quarter. I think my initial reaction is that, oh, they're actually able to spend because previously I think they've been talking about they wanted to spend. It's just that they couldn't spend it right on the right time. Right. But now I think finally they're able to procure. I think the delivery of either the memory chips or some of the GPU from the domestic side is probably prompting the capex number and also the prepayment. Right. To secure some of the procurements. It's also results in the outflow for the cash flow this quarter. Yeah. It's likely not a one off capex spend. You were on earnings call. What is your indication of how much more they are likely to spend over the next few quarters then. So we we raise our capex assumption post this quarter. Previously, we were way too conservative given. We haven't seen anything that coming in right the past few quarters. So we are now for 2026. Even for the next two quarters, we are raising it to 60 65 billion coming out from the 53 billion this quarter. Okay. So our this year full year we are at 200 billion. And then next two year we are also above 200 billion. So that means the next three years we are actually total about 600 billion. [00:28:28] Speaker 2: Wow. Okay. Is it concerning that they're basically turning free cash flow negative at a time when that pathway to monetization on these investments is still maybe not as clear or do you see it a bit differently. [00:28:41] Speaker 5: This is only one quarter. But if you look at the operating profit that they're able to generate. Right. So it's actually over 300 billion. Right. Full year on the full year basis. So sometimes it's just a one quarter impact because they have to prepay. Right. So for example, if you wanted to sign certain contract and your customer asks you to prepay, you have to prepay to secure. Right. So I actually think it's just a timing of some of the outflow. But on the full year basis, their core business is still generating decent operating cash flow. So no need to raise money. They have some existing debt. We obviously don't know what they're thinking about it. But if they want, they can tap into the debt market and all that. And then they also have the investment portfolio. Right. That they can also sell down if they really need it. Yeah. Okay. And does it look like they do need it or is this it just seems a mismatch in cash flows and liquidity. It's just a timing. Yeah. I think it's a timing. And then I think management did mention on the call last night is that some of these costs is fixed costs fixed costs that is more upfront loaded. So they shouldn't be we shouldn't be expecting them the same amount the same magnitude forever. Right. So that seems to be implying on the management message yesterday. [00:29:56] Speaker 2: In terms of the AI product lineup for Tencent, obviously there's been a lot of talk about WorkBuddy being very popular. What do you make of the whole lineup, whether it's the LLMs, the coding assistance and the like? I mean, do you see them stacking up pretty competitively with the likes of Baba or ByteDance now? [00:30:13] Speaker 5: Mm-hmm. If you look at they did highlight three key area. One is their Hun Yuan model. Right. So now it's a Hun Yuan 3. They are working on the Hun Yuan 4. It's not the Soda yet. I don't think Hun Yuan 4 will be the Soda. They don't expect Hun Yuan 4 will be the Soda. But they will continue to work on it. One day they're going to reach Soda. OK. And then the next thing is what body which is the productivity agent which is already generating some revenue even though it is small because it's not for everyone. OK. It's for enterprise for prosumer in the individual professional. But that actually is already quite effective. OK. And they will continue to work on and fine tune and potentially getting more user onboarding the work buddy. And then the third one is a consumer AI which is the way the AI agents inside WeChat which in the future you and me could actually easily maybe just using a voice and say tap into and then they can function some tasks for us. OK. So these I think they did also mention into the future. The show way is not going to use a lot of the inferencing because first I think obviously the in device inferencing could be coming along over time. But then in the meantime the real and which is the model that specifically designed to fit the show way AI agent is a very very small model. And then all the inferencing costs is actually will be very small compared to the other LLM that we are looking at. And we're coming [00:31:44] Speaker 1: to level always very quickly now on on shares of 10 cent. Is it is it clear to you and it could be a longer term story but is it clear to you that there will be fresh and new revenue streams coming through because of all the investments that that's or is it you know are people going to be spending more time. When does their scale start to show up basically the AI story. [00:32:04] Speaker 5: What body is already a new revenue stream that they don't have before. This is actually able to charge based on the token. And then I think the show way the consumer AI to be honest I don't think there is a clear roadmap in terms of the actual new monetization. But over time I think when because like everybody's are using we check every day. So it's going to be enhanced the existing monetization which is either the gaming the advertising right or the payment mechanism like the transaction. So those will be the additions of the existing business. And then you know they talk about into the future if they have the access compute power. They're thinking about also the renting GPU business right which you will through their cloud business. OK. And then the model as a service. Once they are let's say who and for becomes good enough strong enough model. They could also strengthen their model as a service platform which they could also generate revenue from there. OK. Tencent is just the beginning of this whole China tech earnings season. I mean let's talk about the others. [00:33:09] Speaker 2: What are you watching out for the most for the rest of it. What do you think investors need to look out for the most this time. OK. Next week obviously we [00:33:16] Speaker 5: have Baba. Yeah. And then we have Baidu. Both of them will also show you know the compute powers like in terms of the our cloud revenue growth. Baba we in our preview we we raise our you know cloud revenue estimate to 45 percent. So they are accelerating from 38 percent last quarter. So hopefully they're going to achieve that. And then for Baidu last quarter they already achieved like 80 percent like 79 percent on the AI cloud infra revenue. So this quarter we model 62 is like the salary partly because you know last quarter is a little high. Yeah. And then after that then we have me trying hasn't announced the reporting date. But May 20 is also another name that a lot of clients actually paying attention to these days. Why partly because I think you know they bounce back really you know well on to the from the low in end of June probably because of the earnings revisions is very clear. But I'm actually will be cautious. I think the expectations is going building very high into the 3Q guidance as well. [00:34:17] Speaker 2: OK. Any indication that those price wars are something I think of a pass now. Are you starting to see more signs of that. [00:34:26] Speaker 1: You mean the money pricing war in the E. Yeah. E-commerce. Well the corby. Yeah. Oh the e-commerce. Yeah. Like how does that. Yeah. How does you know how do these businesses actually. Oh advertising and all these things. Yeah. [00:34:37] Speaker 5: Yeah. So the food delivery pricing wars is behind us. OK. That's why you see the earnings recovery for Baba on the commerce side for Meituan and even for JD which is tonight. And then on the commerce unfortunately the big pictures the macros remain quite weak. So that will still wait on you know the GMV and the CMR growth for Baba for example. Yeah. And then the the cloud pricing war I think Tencent talked about yesterday. It seems like they are also able to raise prices. So it's not like you know really that everyone's is driving down the prices is indeed you know they can using the higher input costs to actually raise their cloud product costs. I mean cloud product prices. OK. We've been talking to our guests this week about this. It seems to be a [00:35:28] Speaker 2: sea change of how people are looking at China big tech now. Before it was all I'm just going to put everything on JuPoo Minimax all these people to your place. And now there seems to be more of this rotation going back into the Max seven I guess of China. How should I be looking at these pure plays now. Just given the volatility we've seen. And the valuations still have we have we [00:35:48] Speaker 5: trimmed enough on valuations too. Yeah. So I think it's good that people able to rotate back and see the values for the China big tech. Right. Because you know the entire month of June it was like since I'm really really really They forgot about them. Yeah. We forgot about them. And then finally July we see some rebound and people started to think oh yeah I know fundamental does you know matters right. At the end of the day the valuation fundamental does matter. But I think the pure play will still be you know a place in the portfolio allocation. It's just I think people have to take into consideration it will be a very volatile if they actually have a higher proportions of their portfolio in those pure play. And plus pure plays is just keep moving because we still need more time for them to let you know show and demonstrate they can indeed deliver versus the big tab. We know that they've been around for a long time. They've been too many cycles. For example like you know with the 10 cent they were a bit late but now they're catching up. Right. And all that. So we do see you know the return should be coming in especially for the long term investor [00:36:55] Speaker 1: to have the patient. Alicia always a pleasure. Thank you so much for taking the time to come in. Alicia up there. We covered everything of course including gd.com which reports today. Managing director then head of Pan Asia internet research at Citigroup Global Markets Asia. Right. Just to mention since we were just talking about that. Right. The chip story across mainland China. Chinex is rallying quite decently. 1.7. And of course some of the hardware plays like Hua Hong SMIC. And these are the three of course that are reporting today. So keep an eye on this. And when you look at the other parts of the equity market across the Asia Pacific on the CapEx store and the hardware story on servers. And this is of course the iteration we're getting across markets in Taiwan at this point in time. We're up 1.3 percent on the benchmark here. Lots more ahead. This is Bloomberg. [00:37:59] Speaker 2: Well PBOC is set to conduct a mid month overnight reverse repurchase agreements for the first time. So really expanding the use of this new liquidity tool that was introduced back in June. Let's bring in our market supporter Anthony Stevens on the significance of this and what the implications could be. So this is like a bit of a plumbing exercise. [00:38:16] Speaker 6: Right. They want to move towards a more modern framework in guiding rates. So they had the benchmark rates before. Now they want a multiple kind of benchmark way to guide rates. This is on the backdrop of them looking to not be just a liquidity injection engine. So the last three days they have not injected any money into the system. Yeah. Judging that liquidity was ample. This is not a liquidity problem that China faces with deflation. It's a growth problem. Right. So now you get a chance to treat the PBOC like the Fed. There's more kind of modern way of signaling banks in terms of using the repo. The second thing is they want to avoid this relentless disruption from one off events. So one of the reasons this calendar is so interesting is tax season is coming up in China for corporates and people. And then there's a huge short term kind of demand for cash that always stresses the bank system. And if you see how the short term rates have been trading you also see at month and quarter and year and these big spikes in rates. Right. The PBOC wants to tell people look there's a there's a fixed amount of money available. It's available regularly. You know get your planning in order. Use it properly. And as a result we can guide rates more effectively in a narrow band because these activities are done more regularly. regularly. Now that's a very positive signal for China's fixed income market because China's fixed income market has been growing and been growing pretty steadily. Rates are low. It's true. But Chinese fixed income has outperformed and the size of that market borders this kind of sophistication. So on the financial side of China is a very positive. This is a positive indication. Yeah. It improves the transmission of monetary policy and certainly makes it more modern because of the complexity of the economy right now. [00:40:03] Speaker 1: There was a notion when this first came out. And so they've made the announcement yesterday. But it's not like this is new. Right. They've flagged this very early on. [00:40:10] Speaker 6: They flagged it in June. Right. Yes. The PBOC comments around that big conference in June that this kind of modernization push is coming. They were open to feedback from the banks how they can improve. So this is actually quite a nice consultation process with the banking system. And they want the complexity as you said of the economy is growing so fast. And the monetary size of China is growing so fast. They cannot no longer use blunt tools. Right. The sophistication gap with the U.S. is starting to close. And this is very nice for me to observe that WASH is similarly focused on improving the plumbing of the Fed. So in terms of the complexity of the banking systems in both U.S. and China the monetary policies in both countries are trying to improve the efficiency of monetary policy transmission. Fantastic. Anthony. Great stuff. [00:40:58] Speaker 1: Anthony Stephens there. Bloomberg's markets reporter on. Yeah. The just focus on the short ends at this point in time. Lots more ahead here on the China show. CSI 300 to the upside. Seven tenths of one percent. MCI China. Of course a lot of changes coming through as far as the internal piping on the benchmark itself. We're lagging on the Hang Seng. Hang Seng tech though is seeking a little bit of a lift. A closer look underneath the hood coming up next. This is Bloomberg. Former Chinese premier Zhu Rongji has died aged 97. Zhu was a key architect of China's economic rise who pushed through some really landmark state sector reforms and really helped pave the way for the economy's entry into the WTO in the early 2000s. For more perspective. Let's bring in Steven Engel, a chief North Asia correspondent here with us to talk us through this. [00:42:00] Speaker 7: It's not an overstatement to say that he was really key in driving a lot of the major reforms here. Yeah. Which is interesting too given that he was one of the few premiers that only really served for one term from about 1998 to 2003. But it was a pivotal five years. And his past before that really set him up for that pivotal role which saw as well the rise of China into the World Trade Organization which he was very critical in negotiating with all the parties including Pascal Lamy who has who's at the time the head of the WTO praised him for his pragmatism and also you know complete command of the issues at hand. Now this is a guy that rose up the ranks as vice premier in charge of national economic policy. He was also the party chief in Shanghai which helped build Shanghai and attract foreign businesses into Shanghai. He was on the standing committee of the all powerful politburo. He was also the central bank governor. He was also the central bank governor the PBOC governor. Some of these were simultaneous as well. So he had a real outsized role in crafting the reform agenda which some have criticized as well because he dismantled you know unwieldy large bloated indebted state owned enterprises laying off 40 to 50 million people including where I lived up in the northeast of China in Shenyang in 1990 and 91 is when a lot of these this pain hit the economy. But it was necessary and some would say that he was the right person for the time. Right. He also essentially set up the asset management companies that bought all the bad debt from the banks recapitalize the banks ahead of their very high profile listings with cleaner balance sheets that have now become some of the world's biggest banks. So he had an absolute critical role in reform and the battle on corruption and also attracting foreign direct investment. He was a fluent English speaker. Some say he had a great sense of humor which also helped along with Jiang Zemin who was the president at the time. The two of them were quite large characters. [00:44:11] Speaker 2: You said he was pivotal at that time of what China needed. Right. Right. Was a free market sort of stance reforms that you mentioned about SOEs. How does that align or not align with what China looks today under Xi Jinping. [00:44:26] Speaker 7: I think it's a very valid question and one that's going to be debated for quite some time. How would Zhu Rongji fit you know as his role back then. How would he fit in this administration a third consecutive term under Xi Jinping. Which some would say focuses more on ideology and a larger role of state owned enterprises a larger role of the state. Zhu Rongji really pioneered the push for private enterprise to rise. Which has led to what we've seen over the last couple of decades. The rise of Alibaba Tencent and more recently BYD even Huawei which has state connections but is considered a private company. It's very interesting what kind of voice he would have under Xi Jinping. It's about loyalty. Zhu Rongji encourage cadres all up and down the party party to speak out. So it might run afoul of some of the more ideological policies of Xi Jinping. And as he has pivoted away from those market reforms some would say. [00:45:34] Speaker 1: Steve. Thank you so much for the context and of course. [00:45:38] Speaker 7: Known to be a straight shooter. Straight shooter. Yeah. Very much right. Yeah. [00:45:42] Speaker 1: Our chief North Asia correspondent. This is really why we dedicate really a chunk of our time to really discuss and unpack what is now a very complex and very large economy. Because of a lot of the reforms of course put in place decades back to Ronji of course passed away at the age of 97. We're going into the second hour of the China show. So the Hang Seng tech index a glance at the benchmark. Hang Seng is now a flat was open slightly to the downside right now. I think Tencent was very much in focus. It's come off lows. It's coming up on your screens. We were down as much as three over 3 percent. We're now down to about two and a half points for 49. We've had some changes of course in the street in terms of price targets. You know a lot of the attention went to that massive CapEx number 170 plus from the year. First time it's negative free cash flow since 2021 which was a timing issue according to city. But you know markets were like OK you've spent a lot of money. [00:47:03] Speaker 2: And if this continues you know we'll need to see returns on the money. Yes. I mean investors were waiting for that catch up story for Tencent for some time now. We finally got it. Right. We're talking about doubling AI CapExpend. But maybe it's coming at a time when the market is really questioning all this investments going on as well. And whether you know when are you really going to see those returns when it comes to those investments. So it's interesting what Alicia said too. Right. He said look at the end of the day maybe some of this is just very front loaded. Right. That maybe this is a one time thing. All these contracts that need to be signed and all that. But they still see maybe a little bit more of that visibility here when it comes to that sort of monetization. Especially when they said you know the earnings call was really dominated by all things AI and their product line up there too. Yeah. So they bumped up city bumped up their projections on the business. [00:47:48] Speaker 1: They've also bumped up their expectations on the CapEx spend. I think she Alicia was admitted that they she she too was surprised with the number because they there was very little indication that Tencent was ready to open up its wallet. And then they did. And I think the point of debate here I think which probably in a moment we'll get into is is how do we interpret the comment coming through from management that if they did if they do find themselves in a situation where they overspent. Then they could rent it out. Right. OK. What medicine. Right. Not too long ago. And that caused a lot of jitters in the markets. Yeah. Well I guess which goes to show why markets are still a bit uneasy. They're still trying to figure out what it means in the meantime though. So while we are making our minds up on that what seems to be working looking at the price action overnight was this right yet. You had the S&P close higher. You had to inflation not a problem for now. No strong indication that will propel the Fed you know the Fed to raise interest rates next month. I think pricing went from about coin toss odds to about thirty five forty percent probability. So a little bit less but still on the table. The socks index actually outperformed massively overnight and it really played out in as far as some of these benchmarks are concerned on your screens. Now the Kospi index if you're curious where that is. So we've actually carved it out separately because we are now back in a bull market on the Kospi index. We're up twenty percent from the lows. Yeah. Like I don't know. Like I think we've spent tons of time talking about the Kospi index. I'm actually struggling to find more superlatives for the market that has really water this drive. But yes here we here we are again. It's the old winners seem to be the current winner still. [00:49:27] Speaker 2: I think what we saw with the U.S. hyperscalers and the fact that they are still willing to spend a lot on AI. That really is bringing back a lot of enthusiasm back into Korea in some ways. Right. Let's let's bring it back to Tencent though. [00:49:39] Speaker 1: Why not. Because certainly with the breakdown earnings of B.I. Yeah. Let's Rob Lee's here to talk us through of course his take on the earnings. He's our senior analyst at Bloomberg Intelligence. So we're all yours. So what caught your eye. Sure. [00:49:51] Speaker 8: OK. To give a balance for you. I think Tencent, ByteDance and Alibar will ultimately ultimately if I can get my words out emerge as winners in this sector. However, we've got no real visibility on where the payback on their significant investment. So that is one thing the market is obviously concerned about. As you mentioned in your prelude, their free cash has gone negative to the tune of about two billion in the context of a, you know, Goliath of a business with substantial cash generation, et cetera. This is of no fundamental consequence. So they are in the investment phase. They continued or they are effectively doubling down and sharpening their focus on that. But there will be no bottom line return this year. And based on where we stand, it's unlikely to see it next year. I think also the issue and the reason that the ADRs in the states were down quite heavily last night. And also if you look at the process as a proxy in South Africa, I think the messaging, let's just say, was suboptimal, because if I was presenting a new strategy, you want a very clear message. Now, I'm not saying Alibaba gets it right all the time, but they are, you know, you will be in no doubt what Alibaba is gunning for. They're gunning for leadership of the sector. They're driving high rates of growth within the cloud business. It was a fairly mixed message from Tencent last night. And as you mentioned again in your prelude, the fact that they said, well, actually, you know, on a worst case scenario, we could deploy these assets externally to clients and make more money that way. I mean, it's not, it's a bit of a mixed message and it doesn't indicate supreme confidence in your vision, really. It highlights the inherent risks, which I think are fair. So, again, to be fair to management, they're giving a balanced view, but the market doesn't like uncertainty. And I think that's why the ADR, et cetera, was down. So we're unlikely to get a payback, you know, within the next 18 months or so. But Tencent remains better positioned than most of the subscale peers to do that in the long run. [00:51:46] Speaker 2: And some have said, right, despite factoring in this significant investment into AI, they were still able to deliver some double digit earnings growth. Right. [00:51:54] Speaker 8: And especially in the core business. What were some of the positives to you? Yeah, the core business is doing really well. And the numbers were in line. I think the expectations were a bit beaten down going into the print. And also, as you're aware in the local context, Tencent's actually been, you know, a fairly significant underperformer year to date. I think it's lost around 170 billion in market gap. Again, I don't think that has any long term consequence. But the domestic video games was actually above expectations. That's performing very strongly. The margins there are very good. The international games business was a little bit weaker, but we did anticipate that. The fintech business, which includes the cloud business as well as coming through. And I should say first or lastly, the ads business was growing well over 20 percent top line, which again for a business of the scale and size is really something. So there is no concern whatsoever on the core business, but they're in the investment phase with no immediate prospect of a payback. And that's depressing margins. Well, OK, let me rephrase. It's not depressing margins. It's a headwind. It's a margin headwind. So if we didn't have the A.I. Spend, we would have seen a decent margin improvement last night and I didn't come through, but it is depressing free cash flow. So what do you think they should do next? But maybe not the same question. What do you think they will do next? OK, well, as China's largest listed tech company, they have a dual responsibilities, if you like. They've got responsibility to the state at a time where China's A.I. Plus strategy is looking to drive the proliferation of the technology across the nation, you know, for the benefit of all. So I think, you know, they're in a fantastic position to do that. And clearly that is beginning to work with the hope that that will help rebalance the economy to high tech and ultimately drive economic productivity. So that's a real positive for the nation as a whole. But ultimately Tencent and the other private sector companies are subsidizing that at the moment, which again, maybe from a moralistic list list or leave that. But, you know, they have responsibility for. But then the shareholders are not going to benefit from a financial return at this point. I'd also say less so Tencent, but obviously companies like Moonshot are clearly moving towards more complex advanced models and narrowing the performance gap with the states, as we've seen. So China is making fantastic progress in terms of technological progress, but the profit really isn't there at the moment. And I don't think it will be there for the next 18 months or so, at least. [00:54:28] Speaker 1: Well, they they played a long game. Rob Lee has a fantastic piece separate to what we just discussed, of course, and the AI strategies between the pragmatic approach in the in China and, of course, the very frontier cutting edge that we're seeing in the U.S. And really, if you had to pick one who wins out. Right. As far as that's concerned. Rob Lee. Fantastic. Senior analyst there at Bloomberg Intelligence. Right. A look at global equity markets year to date and to where we are right now as we move into mid mid August. So we've done well 14 percent on MSCI all countries. So that includes world, including EM. And as you can see, chip plays have done and led the rally here with the Sox index up 75. Europe has done decently well. And as you can see, China's continued to lag year to date on where we are right now. So does the global bull run continue? Joining us here on set is Jeff Lee, global equity CIO at E-Fund Hong Kong. Good morning and very nice to see you. [00:55:21] Speaker 9: Thank you. Great to be here. Does that trend continue, you think? I think so. The most important macro backdrop for the next few years related to what our guests just talked about, the AI spending boom. We're talking about in aggregate a trillion dollar incremental AI spending in the coming years. We're talking about a huge scale corporate sector leveraging up their balance sheet. And that will give a huge boost to global economy. And that's we already see that impact on earnings this year. We see huge upgrade revising up of global earnings of the sector across all sectors, specifically tech sector. The economy is doing really well. I think this will continue. So that gives you a really nice backdrop for global macro and the fiscal fiscal spending of global governments are not going to drag. Probably will add a bit more oil to the economy. So we'll worry about too strong economy growth in the future, probably. [00:56:33] Speaker 2: Good problem to have. Yeah, good problem to have. So you still think tech AI is going to be leading this market for the rest of [00:56:39] Speaker 9: the year or that's right position after this pullback we've seen. I think I consider the pullback healthy because it was between March and May. We have a huge rally with the socks. We see we see the performance. Other for other sectors were not relatively quiet. They lacked. And what we saw was all the capital globally were chasing the investment that the stocks in this sector in tech sector alone. And that's probably will not continue. That probably won't won't repeat. Now we have a divergence of opinion about the you know. We talk about AI's ROI. We talk about sustainability of the company's balance sheet. So from here people will have divergence opinion about tech sector. As a result these capital would chase these the tech rally will start to allocate into the rest of the market. Market way to find value relative you know underperform sector with still solid fundamental but reasonable valuation. So I expect broadening continue broadening of the market from here. Tech might still take the leadership role. But the market the rest of them it will not be [00:57:56] Speaker 1: extreme as what we saw in the last few months. You know people are trying to attach what degree of confidence they can on earnings. Right. So I think when you look at it from the CapEx perspective of the spenders that's earnings to everybody else with the exception of to the hyperscalers for example. Right. And so I guess my question for you is you know when people worry about return of investment is that simply a worry that is limited to the hyperscalers. In other words can I trust then the earnings that is coming through across this part of this part of the world in terms of that spend continuing to boost earnings of suppliers. Absolutely. So OK let's talk about what people really are worried about when they talk about ROI. Sure. The whole value chain start with you know [00:58:32] Speaker 9: the the big the model companies the AI model companies spend a lot of money and you know build capacity and then that trans that become hyperscalers the cloud providers revenue. And then the end users use those services you know use the model to do stuff. So you are talking about model hyperscaler and end users from model perspective they make very we all know that they make very high growth margin. So they have decent ROI. That's why they will not stop investing. We see this. That's why we see them you know continue spend more money because they see positive ROI. From last year last couple of weeks hyperscalers earnings. We know they also make decent ROI. You know they can get their money back their investment back a current rental rate in a few years time. You know two three years they get the return back. So they have decent ROI. So all the burden come on the end user side from the end user side. To us. Yes. Corporates. OK. So earnings. So earnings. So for out of all the scenarios codings have proven itself as high ROI activities. That's why coding become the largest revenue driver for AI companies. But what's not proven is scenarios outside of applications outside of coding. We need to find a second scenario as big as coding as profitable as high ROI as coding to make people not worried. Now people are concerned about this. And what we see is corporates are cutting their spending on AI a little bit. In the past. It's the users. In the past it's token maximizing. Now they do token rationalizing. Sure. So so the we we see people we see corporates use more and more AI. But it's so much harder to prove AI can increase that revenue or cut cost. [01:00:47] Speaker 2: That ROI calculation is becoming much more murkier. OK. That's interesting. So what's this next phase of the AI trade look like to you then. Right. We've had this violent repricing of semiconductors the picks and shovels trade. What are you thinking is the next phase looking like to you. If you're saying the application side is actually slower than expected. It's actually not too slow. The ROI people are still everybody. [01:01:11] Speaker 9: Nobody want to miss the opportunity to use AI to increase their productivity. So I don't think they spend less. The corporate are spending less. But it's people the market is questioning them spending this money. Do you have ROI for this spending. The next phase for for for for for AI I think it will be the same as before. If you those questions you know the ROI question we were asking if you if you recall for the last few years AI trade has been on for a few for three years at three four years from day one. This is the question was the ROI. Every single year the market will come back to our ROI question once or twice and the market have it the sector have a decent pullback. But these questions could never get answered on day one is you know way and see situation. Every year we question the ROI then some development in the sector happened. That is the concern a little bit. This year it was coding you know that then you know coding was a proven scenario. So no problem. Our I solved now coding become relatively you know later phase. Then what's the next scenario. People worry about that again. So you have valuation pullback. But what you have is a huge multi year you know probably the largest sector trend. We see in our career. Yeah. Since the Internet or. Yeah. Yeah. So. So when you have a cheaper sector with you know on stock unbroken trend. At least without those questions answered even without those questions answered. These are still you know decent risk reward situation now. OK. So they will continue. So we'll wait and see the next scenario. But meanwhile those companies that you know we saw the rally yesterday from from the socks. These companies still reporting great earnings and these earnings continue with you know valuation kept at bay. That's a that's a more sustainable scenario. [01:03:09] Speaker 1: And I think that's the conundrum people face. Right. Because if you strip out the E.I. layer and just look at the company itself and the ratios and everything else. That looks to be the most decent by an easiest by. But you also have all these frontiers and you know these breakthroughs at the very edge which could date some of those things. So I guess what I want to focus on is apart from A.I. and July was a very good reminder to not put your eggs in one basket. What are we ignoring. What are we ignoring and what is the counterweight then to A.I. [01:03:40] Speaker 9: The what are we ignoring is what sectors do you. Yes. The. So when we when when the tech sector was the only sector was up massively. Right. All the all the other sector lacked. But there are good stuff in there to have great companies in there. And they they compound you know 10 15 percent a year. But all of a sudden compared to tech they're not attractive enough. So we're talking about I think we're talking about a capital allocation phenomenon. We're chasing tech now that gradually looking at other sectors the laggard for example a few a few examples for example the global health care. health care. It was it was a ignored sector for a while. But if you're positive we talk about you know the next scenario for A.I. It is probably most likely A.I. for science. A.I. for biotech. And if A.I. drive a productivity growth in health care. Well we're going to see a massive upcycle again in this sector. So when a sector lag lagged and about to have an upcycle as potentially a great opportunity. Also you know quality as a factor. Right. We in the past we were talking about you know company with great mode. It's a very long runway. Those companies get ignored for the last two years. We see constantly derating earnings become multiple derating from 40 50 times to 20 times. Now they haven't changed that much. Some of them might get disrupted by A.I. But we see sustained you know a few of them are attractive by now. [01:05:21] Speaker 1: Jeff thank you so much for that. That was Jeff Lee there global equity CIA fund Hong Kong. Right. So don't ignore quality as a factor. Health care financials are also making a comeback just in terms of carving out mind space. Lots more head. This is the China show. [01:05:51] Speaker ?: A.I. [01:05:56] Speaker 1: Welcome back. So this underground market is reportedly emerging in China for insider tips on who could be next to fall in the Chinese president Xi Jinping's anti-corruption crackdown. Let's bring in our senior agent government correspondent Rebecca Wilkins joins us now to talk us through this. And what do we know about this emerging markets that people are discussing right now. [01:06:17] Speaker 10: Rebecca. Yeah it's a fascinating government day that really underscores some of the anxiety that we're seeing around this invasive anti-corruption purge that President Xi Jinping has stepped up in the last couple of years in particular. The latest findings come from a report by a magazine printed by Xi Hua and essentially looks at the emergence of the small social media groups that are purportedly pervading the panels of information of secretive information about for example that countries that might be about to be probed or investigations that may perhaps be in the works. And for a very small fee you can join these groups. For something more like sort of $60 or so you can join a group that's even more purportedly even more secretive with higher levels of information. Now the report itself points out that some of this is just entirely fabricated. It's really just about trying to raise money from people who are who are joining these groups. But there is some sort of legitimate areas of concern for authorities particularly where we've seen for example leaks of personnel information. And so there is clearly an anxiety. And the fact even that we've seen so far or see why related publication kind of put for this for I think underscores some of that anxiety they have authorities have to sort of try and clamp down on this. But of course there are sort of use and demand for this sort of information. Think about the sort of upwards of 900,000 cadres that were probed last year. Nearly 200 of them right by central government as a more senior officials. Plus of course when officials are probed there is also typically an investigation that's linked to a variety of companies that may be also linked to that official as well. [01:08:04] Speaker 2: Okay. So obviously there's some questions about how legitimate some of these things are. But what what what clues does it give us right when it comes to the qualities that the president will reward or really who he's going to select in his next cohort. I know there's a big one coming up next year. [01:08:23] Speaker 10: Yeah. This is this is a really interesting question. And to your point that even just throwing this forward a bit when we have this sort of problem that comes up in October will be looking really keenly to see precisely which officials will be removed or confirmation of that as well as to try and divine what it is that that Xi Jinping is trying to to identify and officials like keeping around. We know that from the very very very outset of Xi Jinping coming into power. He always sort of promised to tackle corruption of the so-called flies and tigers both the low level and the senior officials. So it certainly continues to be a really key part of his regime particularly perhaps this president defies more terms that we may see from presidency. Rebecca thank you so much. [01:09:19] Speaker 5: And we're going to talk to you about the government and economy correspondent. We have lots of our head. This is Bloomberg. My initial reaction is that oh they're actually able to spend because previously I think they've been talking about they wanted to spend. It's just that they couldn't spend it right on the right time. Right. But now I think finally they're able to procure. I think the delivery of you know either the memory chips or some of the GPU from the domestic side is probably prompting the CapEx number and also the prepayment right to secure some of the procurements. It's also you know results in the outflow for the cash flow this this quarter. Previously we were way too conservative given we haven't seen anything that coming in by the past few quarter. So we are now for 2026 even for the next two quarters we are raising it to 60 65 billion coming out from the 53 billion this quarter. Okay. So our this year full year we are at 200 billion. And then next two year we are also above 200 billion. So that means the next three years we are actually total about 600 billion. [01:10:41] Speaker 1: So we are now at the top who joined us in the last hour of course around the Tencent store and certainly that focus of conversation which is the CapEx number quite a big one. 170 plus percent was the increase there. In fact she as you perhaps saw there they were not expecting there was no indication that Tencent was ready to open its wallet. They did. There was a mismatch maybe of liquidity and cash flow as you had a negative cash flow number coming through there for the first time in a quarterly basis going back to 2021. But yes I mean it's certainly the number that markets are focused on currently. There's a ton of volume coming through in Tencent three and a half percent of the downsides. We have again tested a low end of today's range. Now I think what's interesting too is what BI and Rob Lee had to say about this right. So Tencent obviously has sort of like a twofold if you think about it twofold in terms of priorities in terms of the corporate and what this means of course for the broader AI rollout in China. And Rob Lee had this fantastic report out on the latter. So he's comparing the path that China and the and the US and those what they're taking. And what he says is this pragmatic AI strategy that will in terms of China's case low cost not exactly the very very frontier will still merits vast amounts of CapEx and CapEx spend in that separate path. But also when you look at the US for example and some of the more close source path that they're taking as well there and what that really means as far as the this rivalry is concerned. Now speaking of that B of A securities on the China side estimates by 2030. Well let's put it globally then we go to the China side in a moment here. The China side related CapEx could hit more than 1.7 trillion dollars. Now from that pool China's own capital expenditure could have 327 billion also by the end of 2030. That's accounting for about a fifth of global spend and that is expected to boost copper prices which are by the way already at a record. 14,000 and the metal is already up 43% since 2021 and B of A sees global copper foil shipments growing at 17% on CAGR basis from last year into 2030. To discuss this report is Maddy Zhao. She's here with us a co-head of China equity research author of this report and head of APAC basic materials oil and gas research. That's a very long introduction for you just to underscore really the ton of coverage that you guys. OK so you now have you guys have initiated coverage on a very specific part of the copper market. Tell us tell us what that is and tell us why. [01:13:13] Speaker 11: Yeah sure. So we initiated coverage on the copper foil which is a key materials for the PCB and also the lithium battery as well. And of course it's a downstream for copper. So copper foil is getting more and more tractions because of the growing AI CapEx and also the growing demand. Of the AI PCBs as well. So copper foil together with E glass and raisins are the three key materials for the CCL which go into PCV as well. And normally copper foil accounts for 40 percent of the cost of the CCL. We expect the copper foil global market like you said to grow at 17 percent CAGR in the next five years. And at the same time the high end AI copper foil market to grow at 36 percent CAGR in the next five years. How sensitive is the copper price or what you know to really what you see when it comes to AI investments right now. Is it pretty correlated you think right now. I think the direct use in AI for copper is probably account for about 2.5 percent of the total copper demand. So it's not that big. Of course we are expecting copper use in AI directly to grow at about 18 percent CAGR in the next five years. So probably by end of 2030 copper direct use into AI will account for about 4 percent to 5 percent of total China total global copper demand. But at the same time you also have the indirect use like for example the grid the grid spending the ESS and all this is because of the AI the use of power. So we are expecting China grid spending to grow at about 12 percent this year and at around 10 percent CAGR in the next few years as well to drive the copper demand. And then the indirect use i.e. the power sites will account for half of copper demand. And is it an undersupplied market so far copper foil specifically. Yes. So copper is under supply and copper foil extremely under supply for the high end ones because if you want to go into the high end PCB copper foil. First of all you need special machines and then a lot of the machine has already been booked out until 2028. So these machines were produced by Japan. And the key producers in China has already booked out all the machines until 2028. Secondly you need 18 to 24 months certification to go into the downstream companies to get recognized as well. So in China the high end HVLP three and four i.e. the high end PCB copper foil only two companies have the recognition so far. [01:15:52] Speaker 2: So we've seen record prices. A lot of it has to do with I think the demand picture you see but the supply picture is quite tight as well. How should I look at also trade policy because I think there's a lot hanging over what the U.S. is going to do when it comes to tariffs. [01:16:09] Speaker 11: Yes. Yes. Actually the U.S. tariff on the copper sides I would say that previously market expect we have a clear picture in by the end of June. But nothing happened. Now probably market expect it will happen in January. So that's why a lot of traders are still arbitrage the copper prices between the copper prices between the U.S. and U.S. so still shipping into U.S. as well. And one of the near term data we look at is China copper inventory. It has dropped from over 300 thousand tons to now 70 70 thousand tons. So dropped around 70 percent from the peak in January. And now it's at nearly four years low of the inventories as well. And you have the peak season of the grid spending coming. The ESS peak season coming and all these A.I. spends as well. And so that's why we are still very positive on copper. [01:17:00] Speaker 1: Is it. I mean it's easy for me to say it easy for me to see that. Why don't they just restock. Just help us understand that dynamic. There were four year lows. We've gone for 70 thousand which seems like quite a low number of inventories. Yeah. But the difficult thing is [01:17:15] Speaker 11: there is there is no supply. Right. Here today's supply has continued to miss the major producing like Chile Peru. The great has continued to the rate as well. A lot of the major copper mines from like Freeport from Jersey mining continue to delay on the recent resumption. So here today you can say the run rate of supply growth is less than 1 percent growth. So that's why there is very limited. And to be honest if you want to restart a copper mine general timing is eight years for Greenfield. So it's not that easy to resolve the problem. How should I be looking at some of these copper stocks. Right. [01:17:53] Speaker 2: I think you've been marking that the valuations have been quite cheap and really not really reflecting the fundamentals. [01:17:58] Speaker 11: Why do you think there is that disconnect. It's also head scratch. Yes. Yes. So if you look at the Chinese copper names on average is trading at 10 times historical average is 14 times global currently trading at 20 times. So if you compare to historical average or compared to global it's kind of now the biggest gap in terms of valuation. So that's why we've been pushing copper names aggressively given the attractive valuation. I would say the reason recently we already started to see copper name rebounds. But compared to global name is still underperforms to underperform the coppers. The major concern is to more macro. Uncertainty on U.S. dollars. And then probably apart from the greed other part. China demand is relatively weak. Like for example home appliance or for example autos. People are still worried about the overall macro. I think that's the key reasons. [01:18:48] Speaker 1: I see. The I want to talk about the energy market if we can because you know there's been a lot of conversation around that you know and we've had this before. That's the bottleneck on the story. There's not enough energy. But we know of course China has a lot of assets and capacity. Just what's the framework you guys are looking at as far as China's energy needs as it builds out its AI infrastructure. So I think I think power is one of the key advantage [01:19:13] Speaker 11: that China have in terms of in terms of AI. So we have a lot of the free power capacity. We have a lot of renewables. The greed is probably the most well established as well. Power tariff is 40 to 60 percent cheaper than U.S. and Europe in terms of. So the cost of power is and the availability of power is definitely one of the key advantage. But if you are wanting to look at more upstream actually we also have some upstream issues like for example oil we're about 70 percent reliant on import gas around 40 percent reliant on import as well coal because of a lot of fatal accidents. Recently we have a lot of a lot of coal supply checks and last month's coal production was down 10 percent. So there is still some issues affecting. But overall on this global competition I would say China is well established on the power sides. [01:20:09] Speaker 1: OK. We're going into earnings season. Yes. So everything from I mean you talked about energy. So you have oil and you have gold as well. So what's top of mind for you as you go into the thick of your coverage next week. Yeah. So I think some of the key [01:20:22] Speaker 11: stocks that people will look at is just in mining's reporting the next few days. They already have free reports. So the profit alerts. So I think it's what the management is guiding in the new strategy especially recently there have been some deals getting to pull off on the acquisition sites. And then also probably some of the aluminum like charcoal. Hong Chao. And then the Petro China is reporting very soon as well. So these are the key names that we're watching for. All right. Coffee to you and your team. [01:20:52] Speaker 1: Here we go. As we get ready for sleepless on the sell side as we call it. All right. Maddy Zhao. Thank you so much. That's a joke. Of course. Co-head of China Equity Research. Head of APAC Basic Materials Oil and Gas Research at V of A Global Research. Right. Just ahead here in shows billions of dollars parked in Hong Kong trusts and insurance products are drawing fresh attention from Beijing. We'll examine whether China's offshore tax hunt has real teeth. This is Bloomberg. Welcome back. You're watching the China show. So as China steps up efforts to collect taxes and overseas wealth the attention is certainly turning very quickly to trust and insurance products here in Hong Kong wealth hubs of course globally. Let's bring in Shuli Renner Bloomberg opinion columnist who talks about this uncertainty over how those assets are being assessed. It's creating fresh concerns for investors. She's with us right now to [01:21:54] Speaker 12: talk us through this. Shuli. Yeah. Your column today. So even legal experts in mainland China they have raised eyebrows at some of the taxations that China is imposing. For instance China has talked about imposing taxation on insurance gains that mainland China bought in Hong Kong. Right. And they were saying like you need to give me 20 percent of your capital gains. And the legal experts in China say that you know insurance income there's no law saying that the China has the right to tax insurance income nor any law exempting it. So in practice in mainland China local authorities they don't tax insurance income. So why should offshore insurance be be treated any differently. Also there's the issue with the tax collection. Believe it or not it's the local authorities that are calculating capital gains and charging their residents with tax tax bills. And the different authorities they have different treatments. For instance the city of Shanghai it is a little bit richer and a little bit more reasonable. They say OK I'm not going to tax you until you cash out on your insurance product. But but Nanjing is poorer and they say anything that's accrued or even if it's undistributed capital gains need to be charged. So imagine you know we have a stock brokerage account. I have unrealized the gains and I still have to pay for it. So there is a lot of confusion around [01:23:19] Speaker 2: that. OK. So what is taxable. What is not. How is something calculated. What does Hong what can Hong Kong do then to kind of blunt this impact or what's [01:23:30] Speaker 12: what's coming from China now. Well one one possibility is Hong Kong making itself a better destination for global asset managers. The Hong Kong government has been talking about passing a landmark tax reform bill. Basically exempting exempting or taxation on the investment funds. Also on the bonus their employees are getting. So that is one more one major thing. But other than that there's not much Hong Kong can do to be [01:24:00] Speaker 1: honest. Did you see the industry being able to change some practices or do we just have to wait for for clarity or like how do you see things [01:24:07] Speaker 12: evolve in big picture. I think we just have to wait to see more clarity like look at Hong Kong's insurance sector has done very well. Last year new premium grew by 50 percent and it's just a very good sector. But now there are so much like ambiguity right like what kind of products are being taxed. Like for instance how about life insurance. How about health insurance. How you calculate the capital gains. These questions. Chinese government has to address them somehow surely rent. Thank you so much. Our Bloomberg opinion columnist you can [01:24:40] Speaker 1: check out her column of course on your Bloomberg terminal. And also of course you can get an insider's guide to the money and people shaking up the finance hub here in Hong Kong edition newsletter. Of course it is very topical here in the city as a global wealth hub. And of course as we were just alluding to there some of the big insurers here in the city have actually not seen the share price recover since we discussed this as we go into the think of earnings season. The likes of Prudential for example and others in the industry whip out your phones scan a QR code you see on your screens and you can get that straight into your inboxes. I have a very special chart by the way that's coming out today. Check it out. Thoughts more ahead. This is Bloomberg. This fear of losing your job from the certainly adoption and uptake of A.I. has largely been focused on office staff right programmers teachers. But the tech is actually coming for the blue or blue collar workers too. Right. They are now being recruited by A.I. firms to train the robots that may soon actually replace them. That's the topic of today's big take. Excuse me. And let's bring in our senior reporter for Asia right to talk us through. Excuse me Sarita. Fantastic piece today. So why is India actually emerging as a hub for this sort of trend that's been emerging across labor markets. So you know a large language [01:26:18] Speaker 13: of the world's models David learned from the language of the Internet such as Wikipedia. But there isn't readily available videos or data to teach the models that can make the robots work. You know so robotic makers have to find go find the recordings of the recordings because the robots are you know great on viral videos. They can dance. They can do choreographed routines. They can show off like amazing acrobatic maneuvers. But in real life they are really abysmally inefficient. So India's you know by a twist of economic progress India is the place where a lot of people millions and millions of them really work with their hands. So now there's a race to come to India to capture these workers doing all kinds of things. You know working with their hands in the warehouses in fact free is in steel cutting units in recycling units in denim factories. So that is you know that is the race here among global robotics builders to build something with this data that can make the robots work better. [01:27:46] Speaker 2: Yeah it's fascinating to see the pictures right where they basically strap on an iPhone or a phone and just start recording their hands. And I think some of the people that you even interviewed said they don't even know what they're really recording what it's for in some ways. But tell us a bit more about the companies that are actually leading this race to really gather this sort of human [01:28:05] Speaker 13: motion data and how are their approaches different. So you know this is really the newer facet of the U.S. China AI race robotics particularly embodied AI or AI that is you know connected to physical devices that and can interact with the real world. That's the next facet of the U.S. China AI race. So there are plenty of AI robotics builders in the U.S. and in China particularly that are racing to get ahead in this in this field. For instance in the U.S. everybody's heard of Tesla's Optimus. Agility Robotics. And in China you know we've just had like a very big splashy debut on the stock markets of one of the most prominent robotics makers Unitree. And there are of course others like Agibot and UBtech that have already deployed many of these robots out in the real world in factories. But of course the numbers are really really tiny so far. [01:29:13] Speaker 1: And I mean what are the obvious and perhaps not too obvious implications on you know the labor market in as far as the specific method of collecting data is concerned. [01:29:29] Speaker 13: You know perhaps what is happening now in India David is probably one of the cheapest ways to collect data get a bunch of smartphones strap it onto the foreheads of people who are actually already working. You know never mind the discomfort never mind consent and all of the other you know privacy related stuff. A lot of companies are doing this and this is one of the most popular ways of collecting data. But there are others. There is for instance tele operated data where robots are remotely controlled by humans to go out in the real world and collect data which is much more accurate to the robotics world. There are plenty of different approaches and the labor market implications of course are humongous. But you know a lot of experts say that this is at least you know five to ten years away. So it's not coming. It's not around the corner like a lot of things are happening in the labor markets in software coding for instance or or consulting or lower level financial analytics jobs. This is a little bit away. But the labor implications for a country like India where a lot of work is manual is is tremendous. Countries like India and China have to look at what this advent of human rights in a big way will mean for for their for their labor force. Particularly in a country like India where there's a huge young working population. If these manufacturing and physical work goes away then you know India has to figure out another way to employ these young people. [01:31:19] Speaker 1: Yeah that. That's a big issue. That's a big issue. Sarita. Thank you so much. Fantastic. Fantastic piece there. The big take of course for today. Please please check that out. Sarita right there. Yeah. That's on a terminal right now. That's the function to go to that specific pages. And I big take of course on your Bloomberg terminal. Right. Just very quickly Tencent. Of course it's a stock we've been tracking given of course the earnings and the CapEx focus that we've seen there. And as you can see shares have been bobbing around two and a half to three and a half percent losses here. We're at about the midpoint as we go into the latter part of the of the morning session. Some of the computing lease related names on your screens very very shortly. And on the back of that of course still a very heavy earnings stock here in Hong Kong and mainland China. SMIC, Hua Hong, JD and C.K. Hutch are coming out of course with with earnings as well over the next few hours or so. Speaking of earnings right the other two coming up with earnings MTR and Lenovo are also set to report later today. And tomorrow we'll be unpacking those earnings numbers with executives from the companies. Winston Cheng, CFO of Lenovo and the CEO of MTR Jenny Young will be joining us here in shows tomorrow. Stay tuned for those conversations coming up. That's it from us here today. We will see you all tomorrow. Have a great rest of your Thursday. This is The China Show.