Further Opening Up and Reform of China s Capital Market Haizhou Huang January 7, 2016
China economy and capital market: Finding new normal 1
Macro: We expect China GDP to grow 6.9% in 2015 and 6.8% in 2016 CICC economists forecast Macro Forecast (%) 2013A 2014A 2015E 2016E GDP QoQ (NBS, SAAR) GDP YoY % 9 Real GDP 7.7 7.3 6.9 6.8 Nominal GDP 10.1 8.2 6.6 7.0 8 CPI 2.6 2.0 1.5 1.3 7.3 7.3 7.3 7.3 PPI -1.9-1.9-4.8-1.3 7.0 7.0 6.9 6.9 6.9 6.8 6.8 6.9 7 IP 9.5 8.3 6.2 6.4 Nominal Retail Sales 13.1 11.9 10.6 10.9 6 Nominal urban FAI 19.7 15.0 10.0 10.1 Customs Exports 7.8 6.0-2.6 1.3 6.8 7.7 8.0 6.6 6.2 7.6 7.2 6.6 6 7.3 7.2 7 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014: 7.3% 2015E: 6.9% 2016E: 6.8% 5 Customs Imports 7.3 0.7-14.7 0.2 USD/CNY 6.1 6.2 6.5 6.5 Source: Wind, CICC Research 2
Financing cost is still high 14.00 Non-financial listcos ROE vs. Financial institution RMB weighted average lending rate 13.00 12.00 12.0 12.9 12.7 12.4 12.2 12.7 12.3 11.00 11.4 10.00 9.00 8.00 7.00 6.00 9.0 6.2 10.2 9.9 9.4 7.0 5.7 5.7 5.7 5.9 6.0 6.0 6.1 6.3 7.1 7.4 7.8 7.8 9.2 8.0 9.7 7.6 9.3 9.2 7.2 7.1 8.8 9.5 9.6 9.6 7.2 7.1 7.2 7.1 8.4 9.4 9.3 7.4 7.3 7.3 8.6 6.9 6.8 6.5 8.1 7.3 6.5 6.0 5.00 4.00 Financial institution RMB weighted average lending rate Non-financial listcos ROE Source: Wind, CICC Research 3
Financial condition is still too restrictive for growth recovery. 14.0 % Real lending rate at multi-year high 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Real interest rate: lending rate - CPI CPI YoY Lending rate Source: Wind, CICC Research 4
Investment contracted 60 50 40 30 20 10 0 % FAI YTD YoY Source: CEIC, CICC Research 5
Diverging trends of real rates across sectors % p.a. 14 real interest rate for consumers 12 real interest rate for home buyers 10 real interest rate for producers 8 6 4 2 0-2 -4 4/2011 10/2011 4/2012 10/2012 4/2013 10/2013 4/2014 10/2014 4/2015 10/2015 real interest rate for consumers = benchmark 1 year saving rate - CPI inflation real interest rate for producers = benchmark 1 year lending rate - PPI inflation real interest rate for home buyers = benchmark mortgage rate - 70 city average housing price inflation Source: CEIC, CICC Research 6
A stronger RMB suppressed exports 50 40 30 20 10 0-10 % 2010=100 140 Delivery Value for Export YoY (LHS) 130 REER (RHS) 120 110 100 90-20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 80 Source: CEIC, CICC Research 7
Government bond yield dropped 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 % 1-year government bond yield 10-year governmeng bond yield Source: CEIC, CICC Research 8
Corporations leverage rising faster in recent years Debt/GDP broader public sector Household Non-financial corporations % 200 150 (Debt-deposits)/GDP broad public sector Household Non-financial corporations % 100 50 100 0 50-50 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 2007 2008 2009 2010 2011 2012 2013 2014 2015-100 Source: CEIC, CICC Research 9
Corporate bond yields fell 7 6.5 6 5.5 5 4.5 4 3.5 3 % 3-year AAA MTN yield 5-year AAA MTN yield Source: CEIC, CICC Research 10
But liquidity to gradually ease internally Wealth management products yields have been falling (%) Wealth management products' expected yields (1 year) 6.30 10.00 Bill-discount rate gradually down Bill Direct Discount Rate (Monthly): 6M: Pearl River Delta 6.10 9.00 5.90 5.70 5.50 5.30 5.10 4.90 8.00 7.00 6.00 5.00 4.00 4.70 3.00 4.50 2.00 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Source: Bloomberg, Wind, CICC Research 11
Liquidity in equity markets: margin financing: global comparison 10% US Taiwan Japan A-share (as of total mkt cap) A-share (as of free float) (Margin financing balance / total mkt cap) 9% 8.7% 8% 7% 6% 5% 5.1% 5.4% 4% 3% 2% 1% 0% 2.6% 2.6% 2.0% 1.0% 0.5% Source: Wind, CEIC, CICC Research 12
Liquidity in equity markets: market turnover rose from previous trough ADTV (Rmb bn) ADTV/Free float (RHS) Average 2,500 9% 8% 2,000 7% 1,500 6% 5% 1,000 4% 3% 500 2% 1% 0 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 0% Source: Wind, CICC Research 13
Liquidity in equity markets: margin financing balance once declined sharply Daily change of margin financing balance Margin financing balance Rmb bn 50 Change in margin financing balance SHCOMP (RHS) 5,500 Rmb bn 2,500 Margin financing balance SHCOMP (RHS) 5,500 0 5,000 4,500 2,000 5,000 4,500-50 4,000 1,500 4,000 3,500 3,500-100 3,000 1,000 3,000-150 2,500 500 2,500 2,000 2,000-200 1,500 0 1,500 Source: Wind, CICC Research 14
A-shares sector valuation: many sectors are above historical average (PE valuation) 90.0 80.0 MAX MIN CUR AVG 70.0 60.0 50.0 40.0 30.0 20.0 10.0 6 11 12 12 14 15 15 16 16 19 20 21 22 27 27 28 29 29 32 32 32 33 35 38 39 40 43 44 44 47 57 - Source: Wind, Go-goal, CICC Research 15
H-shares: most sectors valuation are below historical average 12m fwd P/E (X) Current 10-yr average 50 10-yr high 40 30 20 10 0 10-yr low Insurance Div. Financials Banks Transportation Real Estate Cons. Disc. Utilities Capital Goods MSCI China Telcos Health Care Materials Cons. Stap. Energy I.T. Source: Bloomberg, Fact set, CICC Research 16
Rethinking of long-term issues: Further Opening up and reform of capital market 17
China Story: Reform and Opening-up In 1978,the third Plenary Session of the 11 th CPC Central Committee launched China s historic reform and opening-up. Later, the 14 th CPC National Congress and the third Plenary Session of 14 th CPC Central Committee confirmed that the Chinese economy should be marked-based and opened-up. Solid improvements in opening-up since China s WTO entry in 2001 have substantially boosted system reforms. According to Mr. DENG Xiaoping, China should open up both internally and externally in accordance with laws of socioeconomic development, and reform is in essence internal opening-up. 4,000 (US$ bn) China's Foreign Trade 3,500 1978~2000, introducing foreign capital and expertise into China After 2000, going abroad 3,000 2,500 2,000 1,500 1,000 500-1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source:CEIC, CICC Research 18 18
Benefits from reform and opening-up China s growing importance in global trade China s foreign exchange reserves expanded rapidly 12.0% Foreign trade as % of world Export Import (US$ bn) 4,000 Foreign Reserve 3,821 3,500 10.0% 3,000 8.0% 2,500 6.0% 2,000 4.0% 1,500 1,000 2.0% 500 166 0.0% - 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source:Haver Analytics,CICC Research Source:Haver Analytics,CICC Research 19 19
Where is China now? (per capita GDP relative to US) China(12.7) Korea(48.9) Malaysia(20.2) Japan(72.6) UK(74.2) Brazil(21.9) US=100 160 140 120 100 80 60 40 20 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: CEIC, CICC Research 0 20
China in a four-dimensional glance Large economy: space to grow and gravity model Developing country: long way to catch up via industrialization and urbanization Transition economy with strong government: effectively implement policies under strong leaders Over insurance? 21
Deposits vs Debt held by households, corporate, and the government (as end of June 2015) Deposits and Debts by sectors (as of June 2015) Households Deposits Debts Rmb 53.7 trn 79% of GDP Rmb 25.1 trn 37% of GDP Non-financial corporations Deposits Debts Rmb 42.2 trn 62% of GDP Total Rmb 98.5 trn 144% of GDP Excluding debt of local govt Rmb 84.9 trn 124% of GDP Government Deposits Debts RMB Deposits held by government entities T-bond & Local govt bond Rmb 20.2 trn 30% of GDP Rmb 11.3 trn 17% of GDP RMB Fiscal Deposits Policy financial bond Rmb 4.1 trn 6% of GDP Rmb 10.6 trn 16% of GDP Subtotal Local govt debt Rmb 24.3 trn 36% of GDP Rmb 13.6 trn* 20% of GDP Foreign Exchange Reserves USD 3.7 trn (Rmb 22.9 trn) 34% of GDP Total (including FX reserves) Total (including debt of local govt) Rmb 47.2 trn 70% of GDP Rmb 35.5 trn 52% of GDP * The RMB 13.6 trn total outstanding local government debt is under review after the preliminary release of the updated local government debt audit in September 2015. We await for further details of contingent debt breakdown for an updated estimate of local government debt Source: CEIC, Wind, Official Audit Office, China Railway Corp., CICC Research Note: The percentage to GDP ratios are divided by four consecutive quarters GDP from 3Q12~2Q13. 22
New economy sectors outperformed in recent years 1,000 900 New economy - old economy (RHS) A-share new economy index A-share old economy index 600 500 800 700 400 600 300 500 200 400 100 300 200 0 100 (100) 0 (200) Source:Fact set,bloomberg,cicc Research 23
Debt ratio: a tale of two enterprises 63 62 61 60 59 58 57 56 55 54 % Debt ratio of SOEs Debt ratio of non-soes Source: CEIC, CICC Research 24
Economic reforms after the third plenum Two main directions of reform Market playing a decisive role in the allocation of resources Economic development benefiting all people to a greater extent and in a more equitable manner Areas of reform SOE reform Change in the government s role Fiscal and tax system: reforming the tax system, stabilizing the tax burden, making budget more transparent Land system reform and integrated urban-rural development A new round of opening-up Easing of the family planning policy Financial reforms on top of the agenda! 25
Path to financial reform Market system Allowing the establishment of privately-owned small/mid-sized banks Registration-based IPO reform, tightened bond market regulation, increasing the proportion of direct financing Developing inclusive finance Money rates More market-based exchange rate regime; accelerating interest rate liberalization Promoting two-way opening-up of capital markets Accelerating the process towards achieving RMB capital account convertibility Reducing FX reserves holding; increasing RMB bond issuance; 2% + 2% Implications on JGB; USD; etc. Financial regulation Improving regulatory coordination mechanism; establishing a deposit insurance system; introducing a market-oriented exit mechanism for financial institutions 26
Fast Forward: Global economic growth contributors Emerging Asian economies to contribute close to 55% to global growth in next 10 years US and EU to contribute less than 20% Two economies with double digit growth contributions Contribution to World economic growth by region between 2013-2023 Source: IMF, BBVA 27
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