conference on global economic issues · r007: interbank market average 7-day rates of all financial...

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

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)

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70

90

110

130

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170

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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

AEH1119U-1000629-1/22

FOR INSTITUTIONAL INVESTORS USE ONLY - PROPRIETARY AND CONFIDENTIAL

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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} It appears we are mid-to-late cycle, similar to 2005-2007 and 1996-1997} Q4 2018 looks like an anomaly


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?

AEH1119U-1000629-3/22

} 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

4FOR INSTITUTIONAL INVESTORS USE ONLY - PROPRIETARY AND CONFIDENTIAL

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)

AEH1119U-1000629-4/22

1 BlackRock geopolitical risk dashboard


Rising risks of US-China competition, Gulf tension, and European fragmentation

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FOR INSTITUTIONAL INVESTORS USE ONLY - PROPRIETARY AND CONFIDENTIAL 6AEH1119U-1000629-6/22

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


…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

AEH1119U-1000629-7/22

Negative feedback loop between China and global demand can intensify in 2020

2 Exports likely to be a bigger dragger next year


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


-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


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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12

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

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60

80

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120

Jan-

15

Apr-

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Jul-1

5

Oct

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Jan-

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Apr-

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Jul-1

6

Oct

-16

Jan-

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Apr-

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Jul-1

7

Oct

-17

Jan-

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Apr-

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Jul-1

8

Oct

-18

Jan-

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Apr-

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Jul-1

9

# m

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g in

key

sec

tion

s

Big Data & Technology Environmental Protection Supply Side Reform

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30

35

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

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Apr-

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Jul-1

6

Oct

-16

Jan-

17

Apr-

17

Jul-1

7

Oct

-17

Jan-

18

Apr-

18

Jul-1

8

Oct

-18

Jan-

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Apr-

19

Jul-1

9

# m

enti

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g in

key

sec

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s

Financial Delveraging SOE Reform Tax Cut

2 Policy trends through NLP

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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



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



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

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BlackRock’s Long-Term Capital Markets Assumption Disclosures

This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in U.S. dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies.

References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice.

The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns.

Risk Disclosures


This material is provided for informational or educational purposes in People’s Republic of China ("PRC", for such purposes, excluding Hong Kong, Macau and Taiwan) only and does not constitute a solicitation of any securities or BlackRock funds or any financial services in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful.

Investment involves risk. Past performance is not necessarily a guide to future performance. The value of investments and the income from them can fluctuate and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate. Levels and basis of taxation may change from time to time.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2019 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass.

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