conference on global economic issues · r007: interbank market average 7-day rates of all financial...
TRANSCRIPT
CONFERENCE ON GLOBAL ECONOMIC ISSUES
Session 2
China
China in mid 1990s Economy dominated by state owned firms State owned firms inefficient Capital, labor, and access to world markets misallocated
What changed? “Grasp the Large, Let Go of the Small” (1998‐2005) State owned firms better managed Better allocation of labor Capital misallocation unchanged Access to world markets, foreign investment and inputs
World Bank Doing Business Indicators (2013)
Starting a Business: 151 Congo: 152 Haiti: 140 Construction Permits: 181 Getting Electricity: 114 Access to Credit: 70 Protection of Investors: 100 Paying Taxes: 122
"Long March" for Licenses
"Small" City (2 million people) in Southern China
Actively look for quality prospects Initial discussion to learn about investor Feasibility Analysis Identify land and other needed services Approval by Vice‐Mayor Sign agreement
What is the Chinese System? Formal Institutions are like the Congo Strong Informal Institutions
Local governments will help you get anything done Local governments are entrepreneurial; willing to experiment “Free entry into special deals”
Costs of System of Special Deals Some firms do not have special deals Small local firms; firms in other cities
No protection of property rights for firms without special deals Resource misallocation
Depends on discretion of local officials Why do local officials do this?
What has changed? Financial liberalization (“off‐balance sheet fiscal policy”) Anti‐corruption campaign Trade war
Recent Chinese Growth Dynamics
Maurice ObstfeldUniversity of California, Berkeley; Peterson Institute; NBER; and CEPR
Clausen Center Conference on Global Economic IssuesUC Berkeley
November 16, 2019
China’s growth smoother post-Xi, but declining
0
2
4
6
8
10
12
14
16
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
GDP growth rate GDP per capita growth rate
Tiananmen Asian crisis GFC Xi accession
Several trends lowering growth (complex reality)
• Rebalancing toward consumption and services.• Demographics.• Less potential to move labor out of the countryside.• Convergence in general (Pritchett-Summers).• A growth model that has become unsustainable, counterproductive:
o E.g., Keyu Jin, “China’s Steroids Model of Growth,” in L. A. V. Catão and M. Obstfeld, eds., Meeting Globalization’s Challenges, Princeton U Press, 2019.
• Xi has disproportionately favored low-productivity state enterprise over private sector in his bid to strengthen Party (i.e., his) control:o E.g., Nicholas Lardy, The State Strikes Back: The End of Economic Reform in
China? Peterson Institute for International Economics, 2019.
Profitability of firms by ownership class
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Returns on total assets, percent
Central SOEs Local SOEs Industrial private enterprises
Source: CEIC and IMF staff estimates
Debt-to-equity ratios for SOEs and private enterprises (percent)
0
50
100
150
200
250
2012 2013 2014 2015 2016 2017Central SOEs Local SOEs Industrial SOEs Private industrial enterprises
Flow of loans to nonfinancial firms, 2010-2016
Source: Nicholas Lardy, https://www.piie.com/system/files/documents/lardy2019-11-06ppt.pdf
Shorter-term growth obstacles are also in play• Anti-corruption campaign freezes risk-taking, initiative – though it’s been a key tool
of Xi’s consolidation of power.
• Credit clampdown – disproportionately hurting private firms.
• Anti-pollution drive.
• Trump’s trade war.
o The direct effects on China’s growth are likely pretty small (e.g., Lardy’s recent blog).
o Which is not to deny a substantial global impact – 0.8% by 2020 as per IMF.
o In particular, big regional effect – with implications for China itself.
Recent headwinds: WEO growth revisions
5
5.2
5.4
5.6
5.8
6
6.2
6.4
2019 2020 2021 2022 2023 2024
4/19 projections 10/19 projections
Authorities have slowed domestic credit growth
5
10
15
20
25
30
35
1/1/
2007
7/1/
2007
1/1/
2008
7/1/
2008
1/1/
2009
7/1/
2009
1/1/
2010
7/1/
2010
1/1/
2011
7/1/
2011
1/1/
2012
7/1/
2012
1/1/
2013
7/1/
2013
1/1/
2014
7/1/
2014
1/1/
2015
7/1/
2015
1/1/
2016
7/1/
2016
1/1/
2017
7/1/
2017
1/1/
2018
7/1/
2018
1/1/
2019
7/1/
2019
Source: Year-on-year growth rates from CEIC
Manufacturing PMI (Caixin) relatively resilient
IMF growth revisions for EMD Asia
5.8
5.9
6
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
2017 2018 2019 2020 2021 2022 2023 2024
Oct. 2017
Oct. 2018
Oct. 2019
Prospects for the trade war
• Short term “phase one” deal possible by year’s end.• Whether there is further progress will depend on nature of US
objectives.o Limited goal of reducing bilateral deficit?o Broader objective of changing Chinese system?o Even broader objective of resisting China’s geopolitical and economic
ambitions.
• Deep conflicts over technology (Huawei, for example) could lead to further frictions, while also disrupting even more US-Europe relations.• My guess: we are in for a long-term struggle.
Two other regime challenges: Swine fever
250000
300000
350000
400000
450000
500000De
c-11
Aug-
12
Apr-
13
Dec-
13
Aug-
14
Apr-
15
Dec-
15
Aug-
16
Apr-
17
Dec-
17
Aug-
18
Apr-
19
Pig herd (thousands)
50
70
90
110
130
150
170
190
210
Jan-
05Ja
n-06
Jan-
07Ja
n-08
Jan-
09Ja
n-10
Jan-
11Ja
n-12
Jan-
13Ja
n-14
Jan-
15Ja
n-16
Jan-
17Ja
n-18
Jan-
19
Pork price (index)
Two other regime challenges: Hong Kong
China Macro Views
Jeff ShenCo-CIO Active Equity
Co-Head Systematic Active Equity
Oct 2019
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Global backdrop China macro and policy outlook Investing in China
Dovish central banks extend the long cycle but
geopolitical risks loom large
Policy easing ramps up to offset external headwinds.
Structural reforms are required to reassert growth
Domestic markets are opening up. Data/evidence based
Investment approach is key for China.
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Table of Contents
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} It appears we are mid-to-late cycle, similar to 2005-2007 and 1996-1997} Q4 2018 looks like an anomaly
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Source: BlackRock, as of September 30, 2019. For illustrative purposes only. The market similarity measure is based on our proprietary signal that draws multi-dimensional comparisons between different periods. A darker gradient signifies more similarity with the target period and lighter signifies less similarity.
1 Where are we in the cycle?
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} Sellside strategists have become markedly more dovish recently, as compared with the start of the year.
} Similarly, sentiment for fiscal policy is also turning more supportive in many DM countries
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Source: BlackRock, as of September 30, 2019. The above chart is based on our proprietary signal which measures fiscal policy sentiment across developed market countries. For illustrative purposes only.
Developed Market (DM) Fiscal Sentiment
Source: BlackRock, as of September 30, 2019. The above chart is based on our proprietary signal which measures monetary policy sentiment from sell side strategists, across countries. For illustrative purposes only.
Monetary Policy Sentiment, YTD Change
-1.5-1.0
-0.50.00.51.01.52.02.53.03.5
Jan-15
Jun-15
Nov-15
Apr-16
Sep-16
Feb-17
Jul-1
7
Dec-17
May-18
Oct-18
Mar-19
Aug-19
Z-sc
ore
AUS CAN EMU JPN UKI USA
AUSBRA
CAN
CHN
EMUIDO
IND
JPN
KOR
MEX
ML
PO
USA
SA
-3
-2
-1
0
1
2
3
-3 -2 -1 0 1 2 3 4
Oct
-201
9
Jan-2019
Standard Deviation From Historical Mean
Easier Monetary
Policy
1 Monetary and Fiscal policy with Natural Language Processing (NLP)
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1 BlackRock geopolitical risk dashboard
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Rising risks of US-China competition, Gulf tension, and European fragmentation
AEH1119U-1000629-5/22
Global backdrop China macro and policy outlook Investing in China
Dovish central banks extend the long cycle but
geopolitical risks loom large
Policy easing ramps up to offset external headwinds.
Structural reforms are required to reassert growth
Domestic markets are opening up. Data/evidence based
Investment approach is key for China.
1 2 3
Table of Contents
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5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
China real GDP growth
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…alternative data confirms the slow down
Sources: Wind, IMF forecast, August 2019
Trade tension weighs on China’s growth…
2 Risks in Chinese economy skewed to downside
% yoyActivity through satellite images vs. official PMI
45
47
49
51
53
55
57
59
61
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Satellite image derived China Manufacturing China Official PMI
Source: SpaceKnow, BlackRock, as of 28 February 2019, for illustrative purposes only
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Negative feedback loop between China and global demand can intensify in 2020
2 Exports likely to be a bigger dragger next year
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Source: Wind, as of August 2019
12mma yoy %
-20%
-10%
0%
10%
20%
30%
40%
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
Jan-
18
Jul-1
8
Jan-
19
Jul-1
9
China's exports
US EU ASEAN
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H12019
Share of Chinese exports by destination
US EU Japan ASEAN Other Asia RoW
… and export reliance on G3 countries still amount to 40%
Source: Wind, BlackRock calculation, as of August 2019
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2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jan-16
Mar-16
May-16
Jul-16
Sep-1
6
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-1
7
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-1
8
Nov-18
Jan-19
Mar-19
May-19
Jul-19
7d SLF rate 7d Reverse Repo DR007 R007
Market rates (%) versus policy interest rate corridor
2 Monetary easing aims primarily to reduce corporate funding cost
Source: Wind, BlackRock as of August 14, 2019.
Monetary tightening
Monetary easing
Standing Lending Facility (SLF): the rates at which PBoC provides liquidity to financial institutions
R007: interbank market average 7-day rates of all financial institutions with all sorts of pledged securities
DR007: interbank market average 7-day rates of banks with treasuries as pledged securities
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… with a front-loaded timeline and more room to expand
Source: CEIC, JP Morgan Research, BlackRock, April 2019
Augmented fiscal deficit to expand by more than 1.5% of GDP in 2019…
2 Fiscal stimulus becomes more visible in Q2 2019 and onwards
Source: PBoC, Ministry of Finance, August 2019
10FOR INSTITUTIONAL INVESTORS USE ONLY - PROPRIETARY AND CONFIDENTIAL
-2
0
2
4
6
8
10
12
14
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018F
2019F
% o
f GD
P
Others*Policy bank net bond issuanceNet land salesLocal govt borrowingsSpecial local govt bondGeneral deficit + budget stability fund
0
1,000
2,000
3,000
4,000
2017 2018 2019
Net insurance of local government special bonds, in Rmb bn
Q1 Q2 Q3 Q4
2019 local govt bond quota will be used up by 2019 Q3. Additional quota likely to be added for Q4
AEH1119U-1000629-10/22
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Source: Bloomberg, Wind Info, CICC Research, as of August 2019
CNY fixing came stronger than forecasts, indicating aversion to a sharp depreciation
Source: Wind; BlackRock, as of August 2019
USDCNY has deviated from the anchor of interest rate differentials
2 FX policy: geopolitical considerations overwhelms fundamentals
6.00
6.20
6.40
6.60
6.80
7.00
7.200.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19
China-US 10Y Treasury Yield Diff (lhs) USDCNY (inverse, rhs)
CNY appreciates
CNY depreciates
AEH1119U-1000629-11/22
Source: BlackRock, 31 December 2017
New words showing up on the 19th NPC
The 19th
Communist Party
Congress
Supply side reform
Environmental protection
One Belt One RoadDeleverage
SOE reform
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2 Text mining long term policy
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• Environmental protection and Big Data/Technology remain key focus
• Tax Cut continued to receive more coverage, while SOE reform plunged with Deleveraging and Land Reform
Source: BlackRock, as of 31 Jul 2019. Key sections refer to top 7 sections from the People Daily’s News website, For illustrative purposes only.
Key policy focus Newly emerged policy focus
0
20
40
60
80
100
120
Jan-
15
Apr-
15
Jul-1
5
Oct
-15
Jan-
16
Apr-
16
Jul-1
6
Oct
-16
Jan-
17
Apr-
17
Jul-1
7
Oct
-17
Jan-
18
Apr-
18
Jul-1
8
Oct
-18
Jan-
19
Apr-
19
Jul-1
9
# m
enti
onin
g in
key
sec
tion
s
Big Data & Technology Environmental Protection Supply Side Reform
0
5
10
15
20
25
30
35
Jan-
15
Apr-
15
Jul-1
5
Oct
-15
Jan-
16
Apr-
16
Jul-1
6
Oct
-16
Jan-
17
Apr-
17
Jul-1
7
Oct
-17
Jan-
18
Apr-
18
Jul-1
8
Oct
-18
Jan-
19
Apr-
19
Jul-1
9
# m
enti
onin
g in
key
sec
tion
s
Financial Delveraging SOE Reform Tax Cut
2 Policy trends through NLP
AEH1119U-1000629-13/22
Global backdrop China macro and policy outlook Investing in China
Dovish central banks extend the long cycle but
geopolitical risks loom large
Policy easing ramps up to offset external headwinds.
Structural reforms are required to reassert growth
Domestic markets are opening up. Data/evidence based
Investment approach is key for China.
1 2 3
Table of Contents
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Source: Bloomberg, as of end of November 2018
China A-shares provide diversification to global equity investors
Source: MSCI, as of April 2019
MSCI index inclusion to add more than US$100bn
3 Global index inclusion of China onshore equities
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Stock market rallied with little leverage increase Number of investor online posts normalized
Forward PE of China A Low Relative to History Northbound flows recovered, cumulative vs daily (RHS)
Source: BlackRock, Bloomberg, as of 30 Sep 2019; BEst figures quoted. It not possible to invest directly in an index
Source: BlackRock, Wind, CSDC, as of 31 October 2019. It is not possible to invest directly into an index. Source: BlackRock, average daily measure, as of Jul 31 2019
Source: BlackRock, Hong Kong Stock Exchange, as of Jun 30 2019
(14 .0)
(9. 0)
(4. 0)
1.0
6.0
11.0
16.0
21.0
500
600
700
800
900
1,000
Jan-
18
Feb-
18
Mar
-18
Apr-1
8
May
-18
Jun-
18
Jul-1
8
Aug-
18
Sep-
18
Oct-1
8
Nov-
18
Dec-
18
Jan-
19
Feb-
19
Mar
-19
Apr-1
9
May
-19
Jun-
19
CN
Y bn
-
30,000
60,000
90,000
120,000
150,000
Sep-
14
Dec-
14
Mar
-15
Jun-
15
Sep-
15
Dec-
15
Mar
-16
Jun-
16
Sep-
16
Dec-
16
Mar
-17
Jun-
17
Sep-
17
Dec-
17
Mar
-18
Jun-
18
Sep-
18
Dec-
18
Mar
-19
Jun-
19
Average # daily retail investor posts
16
0
5
10
15
20
25
30
Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
MSCI Emerging Markets Index MSCI China Index MSCI China A Onshore Index
0
500
1,000
1,500
2,000
2,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
Jan-
18
Jul-1
8
Jan-
19
Jul-1
9
CSI300 Index Balance of margin financing (RHS)
3 China A Share Market Valuation and Sentiment
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0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
Foreign holdings China onshore equity/bond
Foreign holdings % total MV of equity/bond Foreign holdings of onshore equities % Equity MV
Foreign holdings of onshore bonds % Bond MV
3 Foreign investors’ presence in China is small and keeps rising
Foreign investors keep buying Chinese onshore assets even in adverse market environment
Source: PBoC, Wind, as of June 2019
CIBM Direct starts
Stock connect starts
Bond connect starts
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Source: Hang Seng indexes, Wind, as of August 2019
A-H share premium widens on external geo-political risks and domestic policy supports
3 Chinese Equity Market Structure
80.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
160.0
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
A-H share price premium%
Foreign Investors, 3%
Domestic Retail &
Unclassified Investors,
52%
State & Restricted
Shares, 30%
Domestic Institutions, 5%
National Team, 10%
Source: Blackrock, Wind, Hong Kong Exchange, SZSH ex, as of 31 December 2018
China A Equity Market Ownership Structure
AEH1119U-1000629-18/22
Source: Kantar Media CIC, BlackRock, as of 31 December 2018The companies mentioned above are stated for illustrative purposes only and not meant to be a recommendation to buy or sell any security.
AE0418U-466427-1470479FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
3 Data as the new precious commodity
AEH1119U-1000629-19/22FOR INSTITUTIONAL INVESTORS USE ONLY - PROPRIETARY AND CONFIDENTIAL19
Global backdrop China macro and policy outlook Investing in China
Dovish central banks extend the long cycle but
geopolitical risks loom large
Policy easing ramps up to offset external headwinds.
Structural reforms are required to reassert growth
Domestic markets are opening up. Data/evidence based
Investment approach is key for China.
1 2 3
Table of Contents
FOR INSTITUTIONAL INVESTORS USE ONLY - PROPRIETARY AND CONFIDENTIAL 20AEH1119U-1000629-20/22
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