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EMTA Special Seminar on China (Singapore) - May 24

Tuesday, May 24, 2016

Sponsored by
 icbc standard bank

Raffles Hotel
1 Beach Road

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
David Fernandez (Barclays)
Tim Condon (ING Bank)
Roland Mieth (PIMCO)
Rajeev DeMello (Schroders) 

5:00 p.m. Cocktail Reception 

Additional support provided by Barclays and MarketAxess. 

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

EMTA Panel in Singapore Expect Less Turbulent 2H in China

EMTA held a Special Seminar focusing on the Chinese economy in Singapore on Tuesday, May 24, 2016. ICBC Standard sponsored the event, which drew a crowd of approximately 100 market participants. Additional support for the event was provided by Barclays and MarketAxess.

Speakers predicted a quieter market in the rest of 2016 for Chinese assets, as Beijing worked to avoid a repeat of August 2015 and January 2016 market turbulence, especially in the run up to its party congress next year.

Moderator Jinny Yan (ICBC Standard), in opening remarks, reviewed the much-discussed May 9, People’s Daily article--and its subsequent analysis in The Economist magazine--in which an “authoritative person” questioned the use of easy credit to promote Chinese growth, and argued that policy changes were needed to avoid a future financial crisis. Yan noted that the story illustrated the current battle between reformists in Beijing, led by President Xi Jinping, and proponents of the status quo, represented by Prime Minister Li Kiqiang.

“It’s really hard to read the document and not think that the reformers have the upper hand,” opined Tim Condon of ING, who discussed market speculation and who had actually authored the article. Roland Mieth (PIMCO) noted that his firm did, in fact, see it as a political criticism of the Prime Minister by the President’s camp, and believed that political infighting would continue until the next party congress when each side would try to assume dominance. He was unsure which side would ultimately win out, while venturing that some sort of accommodation could be negotiated.

In a discussion of Chinese debt levels, David Fernandez (Barclays) stressed that Beijing wanted to avoid repeats of the episodes such as 8/11, and thus would avoid dramatic moves, but “whether deleveraging is forced upon them is another matter…if it happened, it would be the result of a policy mistake, the unintended consequence of perhaps a regulatory move.” Rajeev De Mello (Schroders) lamented that, “countries by themselves don’t reform; it will be difficult for China to reform gradually. There is a policy put; all will be done to keep growth up until the next party congress.”

Investor speakers agreed that another policy-error related sell-off could provide buying opportunities. However, in the view of De Mello, “no one wants one…the CNY crisis had an impact on all risk assets—that volatility was too much, even if it presented opportunities.” Mieth added that investors feared “radical uncertainty” and that the events such as 8/11 “make it hard for firms like us to make decisions based on fundamentals.” He anticipated that there would be “pockets of volatility” going forward. Underscoring the assumption that Beijing’s focus was to avoid any shock waves, panelists agreed that China would meet its official growth target (an indicator that many investors treat with skepticism).

Yan explored the theme of yuan depreciation. Mieth’s base case was that the CNY would be depreciated in a gradual, controlled manner in accordance with the desire for stability. He saw the CNY as potentially weakening by 5% based on a number of factors, including Chinese demand for offshore assets.

Fernandez announced his forecast of the CNY at 7/USD, similar to his call made at EMTA’s Singapore Forum in October 2015. He explained the weaker CNY would primarily result from US rate hikes causing the dollar to strengthen (“7 is not really aggressive when you see how other currencies are expected to depreciate versus the dollar”). Condon didn’t expect any movement in the CNY in 2016, also similar to his October 2015 EMTA Forum prediction. Condon cited both the country’s massive reserves and, in his estimation, a G-20 accord not to depreciate currencies, which he believed China had accepted. He added that, “outward capital flows have fallen to a manageable pace; any sudden movement on the currency will trigger greater outflows and get the G-20 on China’s case, and who needs that?!” De Mello’s view was in the middle, forecasting 6.75 CNY per dollar, acknowledging that, “I’m not a super dollar bull.”

Yan asked for thoughts on the gradual opening of the Chinese onshore market to foreign investors. De Mello deemed current spreads on Chinese onshore corporates to be insufficient to reflect risk, “although top-rated SOEs might be fine.” Mieth anticipated continued gradual moves to open up the market, “but the ultimate test is whether Chinese debt will be added to fixed income indices.” He cautioned that India’s government had thus far failed to get Indian debt added to global indices despite an active official campaign, and that “there is a history of market expectations running ahead of reality [with regards to] China; that has been a pattern.” He suggested that sell-side firms might be more confident on Chinese debt inclusion in industry indices than investors. De Mello responded that even speculation of index inclusion would promote greater confidence in Chinese debt by institutional investors, and ventured that the process “won’t take too long.”

Finally, Yan asked speakers for any advice they would offer Chinese officials. Fernandez and De Mello urged that Beijing scrap its official growth targets. Mieth recommended a speedier “removal of the put on some corporates.” Condon, on the other hand, stated “I have nothing to advise them; they have an unparalleled record of delivering good growth.” Yan herself believed that Chinese officials could learn more by listening to the market, while equally recommending that investors read the country’s news in Chinese rather than waiting for stale translations.

EMTA has held events in Singapore since 2006. Its annual Singapore Forum, which features a broader discussion of Asian investment themes, will be held on October 21, 2016 and will be sponsored by ING Commercial Bank.