d1 1400-1430_20150519 20150519 ubs china macro policy short_andrew sheng

Chinas Macro Policy and Global Implications

Andrew Sheng Distinguished Fellow, Fung Global Institute UBS Global Family Office Summit Asia, Hong Kong 19 May 2015

Global Growth Uncertainties Addressing the New Normal

Section 1

3

Advanced Countries Rebound, led by US, supported by decline in oil prices

Source: IMF. 2015. World Economic Outlook April 2015, Uneven Growth: Short- and Long-term Factors.

GDP Growth Forecasts

4

Euro area regaining growth with Ukraine and Grexit risks



5

Risks of Secular Stagnation Growth in Real GDP and Volume of Imports, (Percent)

Source: IMF. 2015. World Economic Outlook April 2015, Uneven Growth: Short- and Long-term Factors. Source: IMF staff calculations.

6

China Slowing to around 6% by 2016


7

China Slows, World Slows

Source: Hazel Sheffield. 2015. How Chinas slowing GDP growth could drag down the global economy. The Independent.

Percentage change

8

India will overtake China growth rate, but EME growth will remain resilient



9

Risks in Debt overhang and Fast growth in EME debt

Source: BIS. 2015. Highlights of Global Financing Flows.

Global Bank Credit Aggregates, by Borrower Region At constant end-Q3 2014 exchange rates

10

Most EME debt increase from corporates

Source: IMF. 2015. Global Financial Stability Report April 2015. Navigating Monetary Policy Challenges and Managing Risks.

Change in Private Sector and Government Indebtedness between 2007 and 2014 (As a share of GDP; percentage points)

Sources: Bank for International Settlements; Morgan Stanley; national authorities; IMF, World Economic Outlook database; and IMF staff calculations. Note: Data for Malaysia are from Bank Negara Malaysia, and the change in debt is between 2008 and 2014.

Chinas Impact on the World Global Slowdown, Rising dollar adds volatility

Section 2

12

1% Slowdown in Chinas Growth Impacts World Trade

Source: Hazel Sheffield. 2015. How Chinas slowing GDP growth could drag down the global economy. The Independent.

If Chinese industry production slows 1%, commodity prices are hit (per cent)

If Chinese industry production slows 1%, trading partners take the hit (per cent)

13

Chinas Economy Rebalancing Towards Higher Value-Added Exports

Source: China Bureau of National Statistics, Haver Analytics.

China % Total Exports, 12mma (%)

Source: Henry H. Mcvey. David R. Mcnellis, Frances B. Lim, Rebecca J. Ramsey, Jaime Villa & Aidan T. Corcoran. 2015. Chinas Rebalancing Effort: Will It Be Enough? KKR Global Institute.

14

Currency Devaluations in the Region

Source: Bloomberg. Source: Henry H. Mcvey. David R. Mcnellis, Frances B. Lim, Rebecca J. Ramsey, Jaime Villa & Aidan T. Corcoran. 2015. Chinas Rebalancing Effort: Will It Be Enough? KKR Global Institute.

Chinas New Normal Addressing Comprehensive Structural Reform

Section 3

China: Xis New Normal

Source: Xi Jinping. 2014, November 9.

Assume main engines of growth

Reduce urban-rural gap

Raise household incomes through better wages

Spread wealth inclusively

Knowledge-based

Services

Consumer Needs

Household Incomes

Fruits of Development

Rural Areas

Urban Areas

1. Recognize new contradictions & risks

2. Adapt flexibly key to reform success

3. 4 key directions: Medium-economic

growth Focus on efficient and

quality growth model Utilize better existing

resources Develop new growth

drivers through innovation

16

One Belt One Road Initiative () AIIB part of package

17

57 countries among founding members of the China-led Asian Infrastructure Investment Bank (AIIB)

AIIB is a critical element of Chinas one belt, one road strategy, which encompasses two initiatives: the overland Silk Road Economic Belt, connecting China to Europe, and the 21st Century Maritime Silk Road, linking China to Southeast Asia, the Middle East, and Europe

This initiative could cost up to $232 billion, of which $100 billion will come from AIIB

Programs will cover 4.4 billion people in more than 65 countries, with annual trade of participant nations growing to $2.5 trillion within a decade

Chinas New Silk Roads

18 Source: The Transport Politic, 2010. Asias High Speed Rail.

19

China Increasing Global Export Market Share

Source: UNCTAD. Source: Kyu-Chul Jung. 2015. Changes in the Export Competitiveness of China, Japan, and Korea.

Global Export Market Shares of China, Japan, and Korea

20

China gaining competitiveness in key exports

Source: Calculation using raw data from UN Comtrade database.

Office appliances and automatic data-processing devices

Telecommunications and recording equipment

Source: Kyu-Chul Jung. 2015. Changes in the Export Competitiveness of China, Japan, and Korea.

21

FAI growth to Decelerate to 8% of GDP to rebalancing economy

Source: China Bureau of National Statistics, Haver Analytics.

China: Fixed Asset Investment as a % of GDP


22

Chinas Internet Companies to Gain More Market Share

Source: comScore, Morgan Stanley Research.

Top Ten Internet Properties by Global Monthly Unique Visitors, (Millions)


23

Chinas Low-Carbon Power

Source: Randall. 2015. Heres Why Apple Is Building Solar Farms in China . Bloomberg.

Power in gigawatts. "Low-carbon" includes hydro and nuclear. Source: BNEF.

24

Services Industry Overtakes Manufacturing

Source: China National Bureau of Statistics, Haver Analytics.

China GDP Composition, 2014 (% GDP)


25

Bulk of Chinas Trade Still in USD

Source: China Customs, Haver Analytics, KKR Global Macro & Asset Allocation analysis. Source: Henry H. Mcvey. David R. Mcnellis, Frances B. Lim, Rebecca J. Ramsey, Jaime Villa & Aidan T. Corcoran. 2015. Chinas Rebalancing Effort: Will It Be Enough? KKR Global Institute.

But RMB Rising as World Payment Currency

26 Source: SWIFT Watch; SWIFT. 2015. RMB breaks into the top five as a world payments currency.

Deep dive on payments currencies evolution Value of payments flows sent worldwide

Payments currencies evolution Value of payments flows sent worldwide

Index of payments currencies over 2 years Value of payments flows sent worldwide, base December 2012

More Countries with RMB Swap Lines

27 Source: RMB Roadmap. 2014. ASIFMA. http://www.asifma.org/uploadedfiles/resources/rmb%20roadmap.pdf

Five Facts on New IMS

28

FX trading markets averaged $5.3 trillion per day in April 2013, up from $3.3 trillion in April 2007. 2012 Global merchandise trade (X+M) $30 trillion (6 days FX trading) and $6.6 trillion G4 monetary base

2.US Congress torpedoing IMF quota reforms; IMF and multilateral development banks (WB, ADB etc) constrained in lending due to unwillingness to increase capital

3.Feds $333 billion dollar swap lines to only 5 central banks: UK, ECB, Japan, Canada and Switzerland)

4.PBOC $426 billion bilateral currency swaps with 26 central banks, focusing on trade facilitation

5.CDB Balance sheet of $1.3 trillion larger than IMF + World Bank together

China Risks Fiscal issues, Real Estate and Shadow Banking

Section 4

30

China A Share

Source: BBVA. 2015. China Economic Outlook, Second Quarter 2015.

China A Share, 2005-2015

Source: CEIC and BBVA Research.

31

Fiscal Financing Gap emerging in 2015

Signs of 2015 Budget facing funding headwinds

Data: Deutsche Bank, MOF, NBS, Wind Source: Zhiwei Zhang & Audrey Shi. 2015. Special Report: China - Fiscal slide worsened, policy easing cycle may start soon. Deutsche Bank Research.

32

Fiscal Slide Worsened in Q1, Monetary Easing Expected

Land proceeds in government fund income

Source: Deutsche Bank, NBS, MoF, Wind Source: Zhiwei Zhang & Audrey Shi. 2015. Special Report: China - Fiscal slide worsened, policy easing cycle may start soon. Deutsche Bank Research.

33

Real Estate Investment Slowing Down

Real Estate Investment (% of GDP)

Peak Residential Construction Investment (% of GDP)

Source: Mali Chivakul, W. Raphael Lam, Xiaoguang Liu, Wojciech Maliszewski, and Alfred Schipke. 2015. Understanding Residential Real Estate in China . IMF Working Paper 1584.

Sources: CEIC; and IMF staff calculations.

Sources: CEIC; Haver Analytics; and IMF staff calculations.

34

Chinese Cities Residential Real Estate Inventory about Advanced Country levels

Source: Mali Chivakul, W. Raphael Lam, Xiaoguang Liu, Wojciech Maliszewski, and Alfred Schipke. 2015. Understanding Residential Real Estate in China . IMF Working Paper 1584.

Residential Real Estate Floor Space per Capita in Major Countries, (Sqm/per capita)

Residential Real Estate Floor Space Per Capita, (Sqm/per capita, 2013, prefectural city level)

Sources: CEIC, Individual authorities, National Bureau of Statistics (NBS), IMF staff calculations.

Sources: NBS, Fangguanju, IMF staff calculations.

Chinas Demand for Infrastructure and other Investments Still Large

Source: Andrew Sheng and Ng Chow Soon. 2015. Bringing Shadow Banking into the Light: Opportunity for Financial Reform in China. FGI report.

35

Capital Stock per Capita, 2013 Price

Source: Simon Ogus 2012.

CN 4%

China Accounts for Only 4% of Global Shadow Banking

Source: Andrew Sheng and Ng Chow Soon. 2015. Bringing Shadow Banking into the Light: Opportunity for Financial Reform in China. FGI report. Source: FSB, Global Shadow Banking Monitoring Report 2013.

Share of Assets of Non-Bank Financial Intermediaries (20 Jurisdictions and Euro Area, End-2012)

36

Chinas Shadow Banking Much Less Complex than U.S.


U.S. Shadow Banking System

Source: IMF 2014b. Global Financial Stability Report. 37

Estimated Size of Shadow Banking in China


Shadow Banking Size in China: Range of Estimates, end-2012

Note: # based on IMFs data of Chinas GDP of US$8.2 trillion in 2012. Source: Official, media and market sources. 38

NPL Ratio Estimates for Chinas Shadow Banking


Estimation of the NPL Ratio for Shadow Banking Sector, 2013

Source: CBRC data, FGI and Oliver Wyman analysis. 39

Thank you

Q&A to [email protected]

and www.andrewsheng.net

40

Slide Number 1Slide Number 2Slide Number 3Slide Number 4Slide Number 5Slide Number 6Slide Number 7Slide Number 8Slide Number 9Slide Number 10Slide Number 11Slide Number 12Slide Number 13Slide Number 14Slide Number 15China: Xis New NormalOne Belt One Road Initiative () AIIB part of packageChinas New Silk RoadsSlide Number 19Slide Number 20Slide Number 21Slide Number 22Slide Number 23Slide Number 24Slide Number 25But RMB Rising as World Payment CurrencyMore Countries with RMB Swap LinesFive Facts on New IMSSlide Number 29Slide Number 30Slide Number 31Slide Number 32Slide Number 33Slide Number 34Chinas Demand for Infrastructure and other Investments Still LargeChina Accounts for Only 4% of Global Shadow BankingChinas Shadow Banking Much Less Complex than U.S.Estimated Size of Shadow Banking in ChinaNPL Ratio Estimates for Chinas Shadow BankingSlide Number 40

d1 1400-1430_20150519 20150519 ubs china macro policy short_andrew sheng

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