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EMTA Special Seminar on China (Hong Kong) - May 26

Thursday, May 26, 2016

Sponsored by
icbc standard bank

Mandarin Oriental
5 Connaught Road Central
Hong Kong 

Topics to include:
Is China out of the woods yet?
What is the outlook for the economy in the coming year?
How bad is China’s debt problem, and can the government solve it?
Can China succeed in its rebalancing and reform campaigns?
When and how should foreign investors access the China onshore market, and which asset classes?
And much more 

3:30 p.m. - Registration 

4:00 p.m. - Panel Discussion
Prospects for the Chinese Economy
Jinny Yan (ICBC Standard) – Moderator
Anthony Chan (AB)
Zhiwei Zhang (Deutsche Bank)
Tim Condon (ING Bank)
Stephen Chang (JP Morgan Asset Management)

5:00 p.m. Cocktail Reception 

Additional support provided by Deutsche Bank and MarketAxess. 

Registration fee for EMTA Members: US$50 / US$695 for non-members.

EMTA Panel in Hong Kong Examines Accepted Wisdom on Chinese Economy

The focus on the Chinese economic outlook continued at an EMTA Special Seminar held in Hong Kong on Thursday, May 26, 2016. ICBC Standard Bank again sponsored the event, which was attended by 100 market participants. Deutsche Bank and MarketAxess provided additional support.

ICBC Standard’s Jinny Yan noted that the accepted wisdom among China economists included a belief that Chinese leverage was excessive, that bad debts were cause for alarm, that the CNY had to depreciate, that the housing market was in a bubble, and that a restructuring of the economy was elusive, among other factors. Yan returned to such themes during the panel discussion, asking speakers if such “givens” were valid.

Anthony Chan (AB) immediately questioned another idée recue: the characterization of President Xi as a reformer. “When he came to power, the reform program was the most comprehensive we had seen. We thought if he could accomplish half of that, it would be great…but the things we see now are all [occurring] under his rule,” and thus, Chan pondered if the moniker of “reformer” was accurate.

Deutsche Bank’s Zhiwei Zhang agreed that it was “hard to read the true color of the leadership,” and that “very confusing signals” were being emitted. The leadership transition next year could provide investors with greater clarity. He cautioned that the regime’s reliance on credit to stimulate the economy may work for “one to two more years,” and the strategy becomes increasingly risky beyond 2017.

Tim Condon of ING discussed the controversy regarding the May 9, 2016 People’s Daily article, in which an “authoritative person” warned against over-reliance on debt to fuel the economy, and which analysts viewed as indicative of a political battle over Chinese growth policies. In Condon’s estimation, it was a “hopeful sign…that they published this debate. It is clear that there is uncertainty, but it’s encouraging that they are thinking about the right things.” Condon concluded that, as the transformation to a consumption-based economy remained the regime’s goal, it would be a “miserable time for manufacturing for a long while, but that the bailing out of Chinese firms will not continue as it has in the past.”

J.P. Morgan Asset Management’s Stephen Chang agreed that the article should be an encouraging sign for investors, while anticipating an official near-term “muddle through” approach, as Beijing’s massive resources bought Chinese leaders some time. He highlighted the improved communication to the market since the 8/11 CNY sell off.

Chan, however, expressed a less sanguine view. “I’m concerned that the political infighting signaled by the article might last the next couple of quarters.” This could stymie economic growth, as “uncertainty at the top leads to a lot of confusion in business planning.”

Despite speculation that Beijing’s progress in closing zombie factories was slowed by a concern over social unrest, panelists agreed that the Chinese labor market was running close to its full potential. “It looks like people who want a job can get one, though not necessarily a great one,” stated Zhang. The strong labor market meant that China could afford to cut its official growth target, he added.

As at EMTA’s Seminar in Singapore two days earlier, most panelists agreed that China would announce its official growth target. However, Hong Kong investor panelists were less optimistic in their assessment of growth as measured by non-official proxies, with Chang estimating 5 to 5 1/2 % growth and Chan’s forecast at “below 6%.”

Deleveraging was also a panel focus. “It is a legitimate concern, it’s high…but it’s not super high,” observed Chang, who believed that leverage would increase rather than decrease. He recommended investors focus on China’s funding costs, and whether the yuan could remain steady. One potential pitfall was greater-than-expected US rate increases, he warned.

Chan concurred that Chinese indebtedness would increase, rather than abate. “The best case is that the debt/GDP ratio stays the same at 250%; it could grow to 270%, or in a worst case scenario 300%,” he stated. Only an economic crisis would force a deleveraging, in his view.

Turning to China’s non-performing loans, Condon was adamant that the “solving such a large problem would require a variety of approaches –write-downs, securitization, debt-equity swaps–but not likely QE, which would lead to a weaker yuan.” Chang expressed his own reluctance to invest in the country’s bad assets. “There are enough legal issues to worry about in onshore Chinese corporates before they go to the default stage, such as the attempt to call bonds without call features, or change of control protection; I don’t think the international investor wants to jump into bad assets yet.”

Chan highlighted onshore corporate rating concerns, which in the minds of many investors were over-inflated. However, he noted that a few clients were nonetheless making strategic decisions to invest in RMB-denominated assets, and were doing so before index inclusion made this more widespread.

Estimates on the yuan/dollar exchange rate varied. Zhang maintained a 7.0 forecast, while Chan stood out of consensus with a 1% appreciation view.