us-china trade: risks and opportunities for investors...for institutional and professional investors...

US-China Trade: Risks and Opportunities for Investors

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Andy RothmanMATTHEWS ASIA

For institutional and professional investors use only. Do not give, show or quote to any other person. Not to be used with retail investors. Do not duplicate or reproduce.© 2019 Matthews International Capital Management, LLC PT700 3

U.S.-China Trade: Risks and Opportunities for Investors

Andy Rothman, Matthews Asia

Investments involve risk. Past performance is no guarantee of future results. Investing in international andemerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation.

For Institutional and Professional Investors Only. Please read the Disclosure Statement at the end of thisdocument.


China Drives Global Growth China accounts for about one-third of global economic growth, more than the combined share from the U.S., Europe & Japan

Source: International Monetary Fund

CONTRIBUTION TO GLOBAL GROWTH (PERCENTAGE POINTS)

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China European Union Japan United States Rest of World World


Hong Kong In Turmoil


A Long History of Protests to Exercise Political Voice

Source: “City of Protest: A Recent History of Dissent in Hong Kong: Penguin Specials”

2004:Protests calling for Chief Executive’s Resignation

2003:Protests against Anti-Subversion legislation

2005:Anti-WTO protests

2011:Protests against “Moral & National Education” curriculum

2014:“Umbrella Movement” for political reform

2016:“Fishball Riot” over local culture/heritage & political reform

2019:Protests against extradition bill and political reforms


What Are They Thinking?

Source: express.co.uk


0.8%

19.0%

76.2%

-8.6%

China Is Not Export-Led, So a Trade War Is Not Leverage

All data is for 2018. Source: CEIC

DOMESTIC CONSUMPTION = 76.2 % OF CHINA’S GDP GROWTH

U.S. TOOK 19% OF TOTAL CHINESE EXPORTS LAST YEAR

NET EXPORTS = 0.8% OF CHINA’S GDP

NET EXPORTS = -8.6% OF CHINA’S GDP GROWTH


China’s Tariffs Have Come Down Under WTOTariff Rate of Manufactured Goods, Most Favored Nation, Weighted Mean

Source: World Bank

0%

5%

10%

15%

20%

25%

30%

35%

40%

1988 1995 2002 2009 2016

China European Union United States


Many American Firms are Winning in ChinaGrowth rate of U.S. goods exports to its 10 biggest markets, since China joined the WTO in 2001

Source: CEIC; data for period 2001 to 2018

Growth Rate

During this period, U.S. importsfrom China rose 428%

31%

63%

83%

93%

118%

129%

149%

150%

155%

162%

166%

526%

Japan

United Kingdom

Canada

Germany

Total U.S. Exports ex…

Toal U.S. Exports

Brazil

Netherlands

Korea

Mexico

Hong Kong

China


IPR Problem in Context China’s Royalty Payments to the U.S. rose By more than 19x from 1999 to 2017 Only 13% of U.S. firms say weak IPR protection a “serious hindrance” to business Only 0.4% of U.S. firms said ending forced tech transfer should be top trade talks objective

Sources: CEIC, Matthews Asia, World Intellectual Property Organization, American Chamber of Commerce in Shanghai

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

China's payments for the use of U.S. Intellectual Property China's GDP

Year 1999=1


IMF: RMB in 2018 “was broadly in line with the medium-term fundamentals and desirable policies. . . not overvalued nor undervalued.”

Sources: Bloomberg, CFETS

Note: Changes in other currency exchange rates year-to-date throughAug 20, 2019; CFETS RMB index through Aug 16, 2019

Note: Changes in currency exchange rates year-to-datethrough December 31, 2018.

RMB CFETS Basket

Chinese Renminbi

2018 JANUARY 1 THROUGH Aug 20 , 2019

0.0%

-13.5%

-1.7%

2.2%

-4.3%

-5.7%

-2.0%

-16.2%

-5.3%

-1.7%

4.4%

-1.0%

-6.8%

-0.2%

3.0%

-7.7%

0.0%

-1.6%

3.3%

-2.6%

-1.3%

2.2%

Mexican Peso

S African Rand

Malayian Ringgit

Japanese Yen

S Korean Won

Indonesian Rupiah

Singapore Dollar

Russian Ruble

US Dollar Index


We Shouldn’t Start a Trade War Based on the Mistaken Belief We Face an Economically Weak OpponentLarry Kudlow: “The Chinese economy is crumbling.” - August 6, 2019President Trump: “China has had the worst year they’ve had in 27 years.” - August 20, 2019

Sources: CEIC, Federal Reserve Bank of St. Louis

REAL RETAIL SALES DURING THE FIRST SEVEN MONTHS OF THE YEAR, YOY

REAL GROWTH RATE OF PER CAPITA DISPOSABLE INCOME

120% 16.6%

China U.S

Over the last 10 years6.6%

1.4%

China U.S.

6.5%2.6%

China U.S.

1H19

(2008 – 2018)


Very Modest Credit Stimulus in Response to Trump Tensions

Augmented TSF outstanding = total social financing (TSF) outstanding - equity financing + muni bond outstandingSources: CEIC, Matthews Asia estimates

Enough to boost sentiment without adding much to China’s debt burden

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Jul-16 Jan-18 Jul-19Augmented TSF outstanding Nominal GDP

YoY


Source: CEIC, Matthews Asia

YoY

Beijing Hasn’t Abandoned its Financial Sector De-Risking CampaignBut the worst impact of the crackdown on off-balance sheet credit has passed

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-16 Sep-16 Jun-17 Feb-18 Nov-18 Jul-19

RMB loans outstanding Shadow loans outstanding


Beijing Also Refrained From an Infrastructure Stimulus

YoY

Source: CEIC

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

May-15 Mar-16 Dec-16 Nov-17 Sep-18 Jul-19

Infrastructure investment


Source: CEIC

Fixed Asset Investment by Private Firms Has Yet to RecoverPrivate sector confidence still dampened by U.S.-China tensions

YTD, YoY

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-11 Jun-12 Nov-13 Apr-15 Sep-16 Feb-18 Jul-19

FAI FAI by SOEs FAI by private firms


YOY

Source: CEIC, NBS

Household Consumption Rose 7.8% in 2Q19 vs. 7.3 in 1Q19Includes a wider range of services compared to retail sales; services now 49.4% of household consumption

0%

2%

4%

6%

8%

10%

12%

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

Per capita consumption expenditure


A Consumer-Driven Economy . . .

Primary industry refers to agriculture, forestry, animal husbandry and fishery and services in support of these industriesSecondary industry refers to mining and quarrying, manufacturing, production and supply of electricity, water and gas, and construction Tertiary industry refers to all other economic activities not included in the primary or secondary industries, including real estate, finance, wholesale and retail, transportation and other service industries

SHARE OF GDP BY PRODUCTION APPROACH

Services & consumption bigger than manufacturing & construction for the eighth consecutive year in 2019

Source: CEIC

0%

10%

20%

30%

40%

50%

60%

1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 1H19

Primary industry Secondary industry Tertiary industry


Source: CEIC

Millions

0

50

100

150

200

250

300

350

400

450

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

State-controlled urban employment Private urban employment

. . . Driven by Entrepreneurs 86% of urban employment now in small, privately-owned, entrepreneurial companies Economic freedom has led to greatly expanded personal freedom


Source: CEIC, Federal Reserve Bank of St. Louis, NBS, OECD

Strong Income Growth Drives the World’s Best Consumption StoryAverage real income growth over the last decade of 8.2% in China vs. 1.6% in the U.S.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Averagefrom 09 to

18US China


Migrant Worker Income Consistently Up 6%+ AnnuallyAverage Monthly Income About US$600

Rmb per capita, YTD YoY

Source: CEIC

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

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 monthly income of migrant workers Growth rate (RHS)


Government Deposits

*FI=Financial InstitutionsSources: CEIC, World Bank

Italy

US$ TN

Brazil

Deposits on Non-Financial Enterprises

Household Deposits

Depositsof Non-Banking FI*

India Russia

A Sustainable Story: High Savings Rate (and a Liquid Banking System)Household savings more than combined GDP of Brazil, India, Russia and Italy

0 5000 10000 15000 20000 25000 30000

GDP

China's Bank Depositsin 2018 Household Deposits Deposits of Non-Financial

EnterprisesGovernmentDeposits

Brazil India Italy


Source: CEIC

RETAIL SALES IN CHINA AND THE U.S. (US$ BN)

The World’s Best Consumer Story Chinese retail sales = 91% of U.S. retail sales in USD terms in 2018; up from 36% a decade ago Real retail sales rose 6.9% YoY in China last year, vs. 2.4% in the U.S.

$0

$1000

$2000

$3000

$4000

$5000

$6000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US China


Continued Gradual Process Toward A Market EconomyChina joined WTO in December 2001; Xi Jinping became the Party Secretary in November 2012

Share of private sector in urban employment is for year 2001, 2012 and 2017.Source: CEIC

68%

49%

15%

7%

82%

55%

67%

39%

86%

76%

91%

46%

Share of private sector inurban employment

Consumption contribution toGDP growth

Chinese retail sales (as % oftotal in U.S.)

Share of exports by domesticprivate firms

2001 2012 2018

Chinese Retail Sales(as a % of total in U.S.)


Opportunities: China is the World’s Best Consumer Story

Growth rates for the US and Japan are from 2009 to 2017Sources: World Bank, Oxford Economics

Real compound annual growth rate of consumption from 2009 to 2018

Oxford Economics estimates that the number of Chinese middle-class

consumers will exceed the entire population of the U.S. by 2026

8.3%

1.4%

1.4%

4.7%

7.1%

0.9%

2.8%

3.2%

1.8%

China

Germany

United Kingdom

Hong Kong

India

Japan

South Korea

Thailand

United States


Appendix


Risk 1: Residential Property Bubble? Tier 1 cities account for only 2% of new home sales; Tier 2 = 30%; Tier 3 = 68% (by sqm)* Over last 10 years, average annual growth of nationwide new home prices 9.3%; nominal income 9.6%

*Data as of 12/31/2018Note: Tier 1 includes Shanghai, Beijing, Guangzhou and Shenzhen

Sources: National Bureau of Statistics, Matthews Asia estimates

SHARE OF NEW HOME SALES BY SQM, 2018 NEW HOME PRICE INCREASE SINCE THE START OF 2011,As of July 2019Tier 1

2%

Tier 230%

Tier 368%

93%

50%

32%

tier 1 tier 2 tier 3


Risk 2: China’s Debt Problem The result of China’s response to the Global Financial Crisis (GFC)

Source: CEIC, Matthews Asia estimates

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10

Exports Loans outstanding Infrastructure investment

Growth Rate, YoY

Dec-10


0

1

2

3

4

5

6

197019721974197619781980198219841986198819901992199419961998200020022004200620082010201220142016

China Japan Indonesia South Korea Thailand

End of China’s One-Child PolicyPolitically important, but no change to demographic trends

Source: World Bank

Births per Woman

1980: Enforcement of China’s one-child policy


China is Aging, but Won’t be as Old, on Average, as Japan Until 2050

*ForecastsThere is no assurance any forecast or projection will be realized.

Sources: World Bank, United Nations

0%

5%

10%

15%

20%

25%

30%

35%

40%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

China Japan

17%

10%

Japan in 2015:

14%

29%

36%

China in 2050:

7%U.S. in 2050:

22%

% OF POPULATION AGE 65 AND ABOVE

* * * * * * *


Andy Rothman Investment Strategist

Andy Rothman is an Investment Strategist at Matthews Asia. He is principally responsible for developingresearch focused on China’s ongoing economic and political developments while also complementingthe broader investment team with in-depth analysis on Asia. In addition, Andy plays a key role incommunicating to clients and the media the firm’s perspectives and latest insights into China and thegreater Asia region. Prior to joining Matthews Asia in 2014, Andy spent 14 years as CLSA’s Chinamacroeconomic strategist where he conducted analysis into China and delivered his insights to theirclients. Previously, Andy spent 17 years in the U.S. Foreign Service, with a diplomatic career focused onChina, including as head of the macroeconomics and domestic policy office of the U.S. embassy inBeijing. In total, Andy has lived and worked in China for more than 20 years. he earned an M.A. in publicadministration from the Lyndon B. Johnson School of Public Affairs and a B.A. from Colgate University.He is a proficient Mandarin speaker.

Today’s Speaker


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