A Giant Producer, & An Emerging Giant Consumer/Investor China s Role in Global Trade and Investment Hong Liang Chief Economist, Head of Research October, 2016
I China: A global manufacturing power house, yet a new comer to global investment 1. China s share of global GDP has increased significantly following more than 3 decades of fast economic growth. 2. Its total trade has surpassed the US, and it has become a formidable global manufacturing power house. 3. Its domestic capital markets have also moved up the ranks globally. 4. Yet, global asset allocation to China and China s overseas investment remain very low. II China s annual net savings is multiple times of that of the US, and more than those combined by the G3 It will continue to drive down real investment returns both inside China and globally. III China s rising leverage reflects underlying inefficiencies in financial system and forced savings, rather than solvency risks Therefore, policies that can reduce those forced savings and improve financial sector inefficiencies will help stabilize growth, inflation, and leverage ratio.
I. China: A global manufacturing power house, yet a new comer to global investment 3
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 China s share of global GDP has increased significantly following more than 3 decades of fast economic growth (% of World GDP, US$) 40% Euro area China Japan United States (% of World GDP, PPP) 25% Euro area China Japan United States 35% 30% 25% 2015 24% 20% 15% 2014 17% 16% 20% 12% 15% 16% 15% 10% 10% 5% 6% 5% 4% 0% 0% Source: World bank, CICC Research 4
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Its total trade has surpassed the US (% of World Export) 16% China United States Germany Japan 14% 12% 10% 8% 2015 14% 9% 8% (% of World Import) 20% United States China Germany Japan 18% 16% 14% 12% 10% 2015 14% 10% 6% 4% 4% 8% 6% 4% 6% 4% 2% 2% 0% 0% Source: World bank, CICC Research 5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 It has become a formidable global manufacturing power house (% of World Manufacturing, value added) 30% Germany China Japan United States 25% 2014 25% 20% 15% 17% 10% 5% 7% 7% 0% Source: World bank, CICC Research 6
Its domestic capital markets have also moved up the ranks globally Domestic market capitalization (2015, TOP 10) Debt securities outstanding (2015, TOP 10) United States China Japan United Kingdom Euronext Hong Kong, China India Germany Canada United States Japan China United Kingdom France Germany Italy Netherlands Canada Switerzland (US$ bn) Australia (US$ bn) - 5,000 10,000 15,000 20,000 25,000 30,000-5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Source: WFE, BIS, CICC Research 7
Yet, global asset allocation to China remains very low 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 44% 12% 7% 15% 22% GDP share 35% 3% 9% 23% 30% EPFR global funds' allocation 24% 3% 8% 15% 51% MSCI World index weight Others China Japan Euro US Currency composition of global FX reserves (As of 1Q2016) USD 63.6% EUR 20.4% GBP 4.8% JPY 4.1% Others 6.1% RMB 1.1% Weight in SDR Basket USD 41.7% EUR 30.9% GBP 8.1% RMB 10.9% JPY 8.3% Euro include UK, France, Germany and Italy. As of July 2016, 299 foreign institutions have been granted with QFII licenses, and the total quota is US$81.38 billion, of which ABU Dhabi Investment Authority got US$2.5 billion, Kuwait Investment Authority got US$1.5 billion, and Qatar Holding LLC got US$1 billion. Source: EPFR, Bloomberg, CEIC, IMF, CICC Research 8
China s overseas assets are relatively low 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Overseas assets as % of GDP China United States Japan 190.9% 130.1% 56.6% Source: IMF, CICC Research 9
II. China s annual net savings is still multiple times of that of the US, and more than those combined by the G3 10
China s annual net savings is still multiple times of that of the US. $bn 4000 Adjusted net savings, excluding particular emission damage (current $US) 3500 3000 China United States Japan 2500 2000 1500 1000 500 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: CEIC, IMF, CICC Research 11
and more than those combined from the G3 US=100 800 Adjusted net savings, relative to the US 700 600 500 400 China Japan UK, France, Germany, Italy 300 200 100 0 1982 1987 1992 1997 2002 2007 2012 Source: CEIC, IMF, CICC Research 12
III. China s rising leverage reflects underlying inefficiencies in financial system and forced savings, rather than solvency risks 13
China s debt: not a solvency issue, but much room for efficiency improvement Debt/GDP Deposit/GDP % 260 240 220 200 180 160 140 120 100 1997 1998 2000 2001 2003 2005 2006 2008 2009 2011 2013 2014 2016 80 Source: CEIC, CICC Research Note: Debt = Total social finance (excluding equity) + Government Bond; Deposits = M2 M0 14
Corporate s leverage rose while the public sector s savings went up Debt/GDP % 200 (Debt-deposits)/GDP % 150 Government Government Household Non-financial corporations 150 Household Non-financial corporations 100 50 100 0 50-50 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-100 Source: CEIC, CICC Research 15
Government agency & org deposits kept rising 48 % Household deposits/m2 Non-financial corporate despits/m2 % 16 46 Government agency & org depostis/m2, right scale 44 42 15 40 38 14 36 34 32 13 30 28 2011 2012 2013 2014 2015 2016 12 Source: CEIC, CICC Research 16
Government agency & org deposits kept rising 25 Rmb trillion Social security fund + housing fund 20 Government agency & organization deposits 15 10 5 0 Source: CEIC, CICC Research 17
Corporate tax burden has been increasing over time Rmb trillion 12 Social security fund + housing fund % 16 % of pre-tax income 60 10 As % of GDP, right scale 14 50 8 12 10 40 6 8 30 Overall tax burden for corporate sector 4 2 6 4 2 20 10 Overall tax burden for household sector (include social security contributions) 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: CEIC, CICC Research 18
Short term: corporate sector s cash position has improved The cash flow position has strengthened for industrial enterprise since 2014 and for listed companies 80 % NBS industrial enterprise 45 % All listed non-financial companies 78 40 76 35 74 72 70 68 (cash+short term investment*)/total liability 30 25 20 cash & cash equivalents*/total revenue 66 15 64 10 * cash + short term investment = reported current assets - account receivable - inventory * cash & cash equivalents = cash + bank deposits & certificate of deposits for corporate Source: CEIC, Wind, CICC Research 19
Long term: 470 % Japan's non-financial sector debt/gdp (govt., non-financial corporates and household) 630 % Japan's total debt/gdp (govt., non-financial corporates, household & financial inst.) 460 620 450 610 440 600 430 420 410 400 390 590 580 570 560 550 540 380 530 Source: Haver, CICC Research 20
Thank you! 21
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