Outlook on the Chinese Economy - HSBC...is unlikely to increase further, indicating that the...
Transcript of Outlook on the Chinese Economy - HSBC...is unlikely to increase further, indicating that the...
Outlook on the Chinese Economy
LI Xunlei
October, 2015
1. Chinese Economic Development and Outlook
2. Timetable for Economic Reform in China
3. How Can Economic Transformation Be Achieved in
China?
4. Analysis of Recent Market Volatility
Summary
2
Today, the Chinese economy is characterized by “3 transitions”, i.e. slowing economic growth,
“growing pain” caused by economic restructuring and challenges in terms of digesting the
previous fiscal stimulus. The aging population and a dwindling working population in China forced
economic growth to slow down; the massive industrialization drive a few years ago is still troubling
the Chinese economy with overcapacity and excessive leverage; after the demographic dividend
disappeared marking the imminent end of the Late Industrialization period, there’s still a long way
to go for China to complete restructuring its economy.
3 Source: WIND, Haitong Securities Research
China’s economy is undergoing “3 critical transitions”
The “3 transitions”
facing the Chinese
economy
“Changing gear” in economic growth
Digestion of the impact of the previous
fiscal stimulus package
Economic restructuring
The Chinese Economy Comes to A Turning Point
China’s economic growth continued to slow down for 7 years since 2007, and the GDP growth has
slipped from the peak of 14% to ~7%. Retrospectively, China had seen 2 continuous economic
slowdowns in the past, i.e. 1984-90 and 1992-99 that lasted 7 and 8 years, respectively. The 3rd
economic slowdown, as we’re experiencing today, has thus far lasted for roughly the same length
of time. As for the trough in growth rate, China’s economic growth bottomed at 3.8% in 1990 during
the 1st slowdown, and at 7.6% in 1999 during the 2nd decline. In 2014, GDP growth dropped to a
similar level (i.e. 7.3%), but it’s still hard to tell when economic growth will bottom out in China.
4 Source: WIND, Haitong Securities Research
0
2
4
6
8
10
12
14
16
18
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
中国GDP实际增速
7年下滑 8年下滑 7年下滑
Annual GDP growth in China (%)
An End to the Economic Slowdown Still Not in Sight
Actual GDP growth rate in China
7Y slowdown 7Y slowdown 8Y slowdown
5 Source: WIND, Haitong Securities Research
-30
-20
-10
0
10
20
30
40
50
60
70
94 96 98 00 02 04 06 08 10 12 14
商品房销量增速 汽车产量增速
-5
0
5
10
15
20
25
30
35
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
钢材产量增速 水泥增速
Commercial property and auto sales growth (%) Steel and cement production growth (%)
Industrial Production: Demand Declines across Downstream
Sectors as China Enters the Late Industrialization Phase
Property sales
growth
Auto sales growth Steel output
growth Cement output growth
Among the factors contributing to the slowing economic growth, demand in all downstream
segments led by real estate and automotive declined across the board. Property sales, in particular,
posted negative growth for the second time, resulting in continuously shrinking industrial growth in
businesses such as steel and cement. A decline in the growth of all industrial commodities
indicates that the Chinese economy has entered the Late Industrialization phase.
6 Source: WIND, Haitong Securities Research
Breakdown of urban and rural consumer spending per capita in 2013 (%)
0
10
20
30
40
50
城镇居民人均消费支出结构 农村居民人均消费支出结构
食品 衣着 家庭设备用品 居住 医疗保健 交通通信 教育文化娱乐 其他
传统消费 传统消费 新兴消费 新兴消费
Food Clothing Household appliances
& goods
Living Healthcare Transport &
communication
Education &
entertainment Other
Traditional
consumption New consumer
products
Traditional
consumption
New consumer
products
Structure of urban consumer spending per capita Structure of rural consumer spending per capita
Consumption: Traditional Consumption Lost Ground
giving rise to New Consumer Spending Patterns
With the arrival of Late Industrialization Phase, traditional consumer goods (i.e. food, clothing and household equipment and services) only account for a dwindling proportion of the total consumer spending of Chinese people, while the proportion of new consumer items (transport and communication, education and entertainment and healthcare), representing the current trends towards innovation and an aging population, has continued to increase. Food accounts for ~1/3 of total consumer spending in China. In 2013, urban Chinese consumers spent 34% of their total spending on new consumer products, higher than that of non-food consumer goods; in rural areas, new consumer goods take up 29% of the total spending, which is also close to that of non-food traditional consumer goods.
7 Source: WIND, Haitong Securities Research
Chinese exports as a percentage of total global exports
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
16
18
20
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
全球出口总额(万亿美元) 中国出口总额(万亿美元) 中国出口占全球之比(%,右轴)Global exports (US$ trn) Chinese exports (US$ trn) Chinese exports as % of global
total (right)
Foreign Trade: Limited Room for Further Export Growth
China currently accounts for over 12% of total global exports. Therefore, its share of global exports
is unlikely to increase further, indicating that the devaluation of Chinese yuan will only boost
Chinese exports to a rather limited extent. Since its entry into the WTO in 2002 until 2014, there’s
been a 6.2-fold increase in Chinese exports, and its share of global exports rose from 5% to 12.4%,
or 1/8. As a result, the room for further growth is relatively limited, and the overall global economic
downturn places extra pressure on Chinese exporters.
4
6
8
10
12
14
16
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
中国潜在经济增速(%,蔡昉,2015)
中国潜在经济增速(%,郭豫媚等,2015)
中国GDP增速(%)
Projections of China’s potential GDP growth (%)
8 Source: WIND, Haitong Securities Research
China’s potential economic growth (%, CAI Fang, 2015)
China’s potential economic growth (%, GUO Yumei et al. 2015)
China’s GDP growth (%)
Potential Growth to Slow Down But Stay above 6.5%
in the Next 5 Years
Assuming that China will follow a similar trajectory of economic growth as Germany, Japan and
South Korea, China’s economic growth will then decelerate at a certain point in the future.
According to projections made by economists LIU Shijin et al., CAI Fang and GUO Yumei et al.,
China’s GDP growth will likely slow down in the next 5 years and remain above 6.5%, which is also
the minimum requirement to meet the target of “doubling 2010’s GDP by 2020” set by the 18th CPC
National Congress.
1. Chinese Economic Development and Outlook
2. Timetable for Economic Reform in China
3. How Can Economic Transformation Be Achieved in
China?
4. Analysis of Recent Market Volatility
Summary
9
10 Source: WIND, Haitong Securities Research
SOE reforms implemented on 3 levels
本轮国企改革
监管层面
经营层面
产权层面
分类监管
分层监管
混合所有制
现代企业制度
Latest
SOE
reforms
Regulation
Property
ownership
Business
operation
Category-based
regulation
Multilevel
regulation
Mixed ownership
Modern enterprise
system
Why Are the Current SOE Reforms Different?
The ongoing SOE reforms are launched against a general background of the “New Normal” of the Chinese economy. As the reforms entered the “deep water” area, 3 long-term solutions have been proposed: (1) regulatory reforms – focusing on category-based multilevel regulation, the bottom line is that, while ensuring leadership by the party, SOEs will be divided into non-profit, special-purpose and competition-oriented enterprises for which different reform approaches will be adopted, and relevant regulation will be conducted on all 3 levels, i.e. State-owned Assets Supervision and Administration Commission (SASAC), state capital management companies and for-profit SOEs; (2) property ownership – the bottom line is to prevent any losses of state-owned assets, and the mixed ownership reform will be prioritized as the central issue, where securitization and state-owned assets, introduction of strategic investors and private investors, and employee stock ownership and stock incentive schemes will be implemented as the key measures; (3) business operation – SOEs need to improve their business performance, scale up operations and consolidate their competitiveness by establishing a modern enterprise system.
On 13 September, the CPC Central Committee and the State Council distributed the Guiding Opinions to Deepen State-Owned Enterprise Reforms and set forth the 5 fundamental principles for SOE reforms. Objectives of the reforms are to achieve decisive results in key areas and key operations concerning the SOE reforms by 2020, and establish a state-owned asset management system, a modern enterprise system and market-oriented management mechanisms catering to China’s basic economic system and the socialist market economy, thereby further rationalizing the structure of state-owned assets in China. Specific targets include: by 2020, the corporate reform of SOEs will be preliminarily completed; the state-owned asset regulation system will be further developed; the efficiency of state-owned capital allocation will be significantly improved; and “party leadership building” will be fully strengthened among SOEs.
11 Source: WIND, Haitong Securities Research
Fundamental principles and specific objectives for SOE reforms
基本原则
•必须坚持和完善基本经济制度
•坚持社会主义市场经济改革方向
•坚持增强活力和强化监管相结合
•坚持党对国有企业的领导
•坚持积极稳妥统筹推进
改革目标(2020年)
•国有企业公司制改革基本完成
•国有资产监管制度更加成熟
•国有资本配置效率显著提高
•企业党的建设全面加强
Fundamental principles Objectives (by 2020)
• Must adhere to and keep developing the basic
economic system
• Uphold socialist market economic reforms as
the general direction
• Combine efforts to revitalize the economy and
regulation
• Ensure the party’s leadership over SOEs
• Active, steady and centralized reform
promotion
• Corporate reform of SOEs will be preliminarily
completed
• State-owned asset regulation system will be
further developed
• State capital allocation will be significantly
more efficient
• Party leadership building will be fully
strengthened among SOEs
Guiding Opinions Issued for SOE Reform with Well-Defined
Principles and Objectives
It is expressly stated in the Reform Decision of the 3rd plenary session that SOE reforms will be conducted and managed based on re-categorization of the SOEs. The Guiding Opinions divide SOEs into commercial and non-profit enterprises, of which the latter category is further divided into 2 sub-categories, i.e. SOEs within fully competitive industries and sectors, and SOEs within important industries and key sectors related to national security and the economic lifeline of the country, which are designated to undertake key special projects. We considers the differentiation between commercial and non-profit SOEs to be a highlight of the Guiding Opinions, as it allows reforms of the 2 types of SOEs to be implemented following different directions. In particular, state capital may be reduced to the level of general shareholders, rather than controlling shareholders, in the case of commercial SOEs specializing in competitive businesses.
12 Source: WIND, Haitong Securities Research
Category-based SOE reforms and performance appraisal
竞争行业和领域的商业类国有企业
•改革方式:实行公司制股份制改革,股权多元化,着力推进整体上市
•考核方式:重点考核经营业绩指标、国有资产保值增值指标和市场竞争力
国家安全、国民经济命脉的重要行业和关键领域、承担重大专项任务的商业
类国有企业
•改革方式:保持国有资本控股地位,支持非国有资本参股,积极实行股权多元化
•考核方式:考核经营业绩指标、国有资产保值增值的同时,加强对服务国家战略、保障国家安全和国民经济运行、发展前瞻性战略性产业及完成特殊任务的考核
公益类国有企业
•改革方式:可以采取国有独资形式,具备条件的可以推行投资主体多元化,鼓励非国有企业参与经营
•考核方式:重点考核成本控制、产品服务质量、运营效率和保障能力,考核中引入社会评价
Commercial SOEs within
competitive industries and
sectors
SOEs within key industries and sectors related to national
security and national economy, designated to undertake key
special projects
Non-profit SOEs
• Reform approach: Equity
diversification through
corporate reforms of SOEs,
focusing on holistic listing of
the SOEs
• Appraisal: Performance
appraisal mainly focuses on
business performance
metrics, performance in terms
of preserving and increasing
the value of state assets, and
enterprise competitiveness
• Reform approach: Non-state-owned
capital is encouraged to invest in the
equity of the SOEs for equity
diversification, while ensuring the
status of state-owned capital as
controlling shareholders
• Appraisal: In addition to business
performance metrics and state asset
value preservation and appreciation,
the SOEs’ performance in terms of
facilitating national strategies,
safeguarding state security and
national economic development,
fostering potential strategic
industries, and fulfilling special tasks
• Reform approach: The SOEs may
be wholly state owned, and where
possible, investor diversification
may be implemented, encouraging
non-state-owned investors to
participate in SOE management
• Appraisal: Performance appraisal
mainly focuses on cost control,
product and service quality,
operational efficiency and
supporting capabilities, and public
assessment should be incorporated
into the appraisal framework
Category-Based Regulation: SOE Category Simplification
and Holistic Listing of SOEs
It is expressly stated in the Guiding Opinions that the authorization-based management system for state-owned capital
should be reformed focusing on capital management, and state capital investment and operation companies will be
restructured and established, indicating that SASAC has taken “capital management” as the clear direction for SOE reform.
Such a shift ensures the “leadership of the party” as well as separating the government from enterprises to increase the
operational autonomy of SOEs. We expect that SOEs will be regulated based on 3 levels, whereby SASAC will play a purely
regulatory role in supervising state capital operators, who will also have limited exposure to business decision-making of
invested SOEs – instead, they will exercise their decision-making authority through the boards of shareholders, thereby
allowing the boards of directors and the management of commercial SOEs greater power in business decision-making.
13 Source: WIND, Haitong Securities Research
Some provinces and municipalities introduced reform policies for competitive SOEs
Province/
municipality Related policies
Beijing By 2020, state capital should account for more than 60% of the total capital of urban public service and
special-purpose SOEs
Shanghai State capital will exit from some SOEs specializing in highly market-oriented and competitive businesses in
an open, transparent and orderly fashion, through the introduction of a state capital movement platform
Tianjin In the case of competition-oriented SOEs, reforms will be gradually implemented to ensure a greater number
of outside directors than inside directors, and efforts will be made to introduce the CFO assignment system
Chongqing All suitable SOEs and assets will be listed, and more than 80% of the state-owned capital of competition-
oriented SOEs will be securitized
Zhejiang
No lower limit is set for state-owned equity in competition-oriented SOEs; manager recruitment of
competition-oriented SOEs will be gradually opened up; the professional manager system will be adopted for
competition-oriented SOEs on grade-2 or below; wholly state-owned provincial enterprises specializing in
competitive businesses will set up the outside director system, and their boards of supervisors and
supervision mechanisms will be further improved
Jiangxi Efforts will be made to push forward the restructuring and listing of SOEs, especially competition-oriented
SOEs
Multilevel Regulation: Shifting away From Enterprise
Regulation toward Capital Management
The Temasek model of Singapore merits particular attention. In the 1970s, Singapore had a large number of government-reliant state-owned enterprises, and Temasek was established to separate the government from the SOEs and to enhance their operating efficiency. As of March 2015, the average yearly return received by Temasek investors was 16%. Instead of directly participating in managing the invested SOEs, Temasek takes part in decision-making through voting in shareholders’ meetings. In addition, it is proposed in the Guiding Opinions that 30% of the proceeds of state-owned capital investments will be turned over to public finance by 2020 – since SOEs enjoy preferential treatment of the state, the increase in SOE revenue turnover will fill the gap in social insurance, and a greater portion of SOE profits will be used to improve people’s livelihood.
14 Source: WIND, Haitong Securities Research
Management architecture of Temasek
任命
新加坡
总统淡马锡控股
董事会
常务委员会
审核委员会
领导力发展和
薪酬委员会
淡马锡控股
经理层
投资标的公司1的股东大会
董事会和
管理层
投资标的公司2的股东大会
董事会和
管理层
投资标的公司
3的股东大会
董事会和
管理层
。。。董事会和
管理层
新加坡
财政部
任命
Standing
Committee
President
of
Singapore
Ministry of
Finance
Temasek’s
Board of
Directors
Audit
Committee
Leadership
Development and
Compensation
Committee
Management of
Temasek
Holdings
Board of
Shareholders
Invested company 1
Board of
Shareholders
Invested company 2
Board of
Shareholders
Invested company 3
Board &
Management
Board &
Management
Board &
Management
Board &
Management
Appointment Appointment
Multilevel Regulation: Temasek Model Is Worth Studying
As the solution to inherent issues associated with the “domination by a single shareholder”, the mixed ownership reform
seeks to transform SOEs’ operating mechanisms by introducing non-state-owned investors to projects conforming to the
state’s industry development policies and conducive to industry upgrade, especially in businesses such as oil, natural gas,
electricity, railroad, telecommunication, resource development and public utility. Currently, most listed SOEs are still
controlled by the government, with a relatively low degree of mixed ownership. According to China’s Ministry of Finance,
among enterprises controlled or owned by state capital, 80% of the equity is held by the state; and the figure increases further
to over 90% if wholly state-owned enterprises are factored in. Due to inefficient enterprise management resulting from the
“domination of a single shareholder”, nearly 40% SOEs are operating at a loss. In 2014, the average ROE of Chinese SOEs was
merely 5%, and that of local SOEs was even lower at 3.5%.
15 Source: WIND, Haitong Securities Research
SOEs are inefficiently managed, and 40% of them are loss-making Average SOE ROE continued to decline (%)
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
2005 2006 2007 2008 2010 2011 2012
全国国有企业:户数:亏损企业 全国国有企业:户数:盈利企业
2
3
4
5
6
7
8
2000 2002 2004 2006 2008 2010 2012 2014
全国国企ROE 地方国企ROEChinese SOEs: number of SOEs:
loss-making SOEs
Chinese SOEs: number of SOEs:
profit-making SOEs ROE of Chinese SOEs
ROE of local SOEs
Pushing forward Mixed Ownership Reform
Specific measures of the mixed ownership reform include: introduction of strategic investors,
pushing forward SOE restructuring and listing, employee stock ownership schemes, attracting equity
funds as shareholders, and introducing private capital to public projects. Securitization of state-
owned capital will be an important means of implementing the reform. At the local level, a number of
provinces have set out clear targets for asset securitization (50%+) in their SOE reform programs. As
the leader in private economy development, Zhejiang aims to “securitize ~75% of state-owned
assets” in 3-5 years, and Hunan and Chongqing set an even more ambitious target (state asset
securitization rate of 80%).
16 Source: WIND, Haitong Securities Research
State capital securitization targets (%) set by some Chinese provinces and municipalities
Increasing the State Capital Securitization Rate
0
10
20
30
40
50
60
70
80
90
湖南
(2020)
重庆(3-5
年)
浙江(3-5
年)
江西
(2020)
河南
(2020)
北京
(2020)
甘肃
(2020)
黑龙江
(2020)
湖北
(2020)
天津
(2017)
Hunan
(2020)
Chongqing
(3-5Y)
Zhejiang
(3-5Y)
Jiangxi
(2020)
Henan
(2020)
Beijing
(2020)
Gansu
(2020)
Heilongjiang
(2020)
Hubei
(2020)
Tianjin
(2020)
The ultimate goal of SOE reforms is to enhance the management efficiency of SOEs. To this end, it is
imperative to establish a modern enterprise system. Both the Politburo and SASAC issued several relevant
policies since the introduction of the “4 reform” pilots in last July. It is explicitly stated in the Guiding
Opinions that a modern enterprise system will be established focusing on the joint-stock corporate reform,
corporate governance structure, leadership management, salary distribution, internal personnel
employment, etc.
17 Source: WIND, Haitong Securities Research
Category-based SOE reform and performance appraisal
公司制股份制改革:大力推动国有企业改制上市,创造条件实现集团公司整体上市。允许将部分国有资本转化为优先股,在少数特定领域探索建立国家特殊管理股制度。
法人治理结构:切实落实和维护董事会职权,法无授权任何政府部门和机构不得干预;加强董事会内部的制衡约束,国有独资、全资公司的董事会和监事会均应有职工代表。
企业领导人员分类分层管理:根据不同企业类别和层级,实行选任制、委任制、聘任制等不同选人用人制度,董事会按照市场化方式选聘和管理职业经理人,且增加市场化选聘比例。
薪酬分配制度改革:对领导人员实行与选任方式相匹配、与企业功能性质相适应、与经营业绩相挂钩的差异化薪酬分配办法。
内部用人制度:建立分级分类的企业员工公开招聘制度,企业各类管理人员能上能下、员工能进能出。
Developing the Modern Enterprise System to Improve
SOE Operating Efficiency
Joint-stock corporate reform: Actively pushing forward SOE restructuring and listing, and facilitating holistic listing of group
companies. Some state-owned capital will be allowed to be transferred to preferred shares, and explorations will be made to
introduce the special state share administration system in certain sectors
Corporate governance structure: Effectively implementing and protecting the power of board of directors, and no
government department may interfere with such power without proper legislative authorization; balances and checks
within the board of directors should strengthened, and staff representatives should be included in the boards of directors
and supervisors of wholly state-owned enterprises and enterprises solely founded by the state.
Category-based multilevel SOE leadership management: Election, appointment, recruitment, etc. systems will be adopted for
SOEs based on their category and level. The board of directors adopts a market-oriented approach to professional manager
election/appointment and management, and more managers will be hired through market-based recruitment.
Salary distribution reform: Differential salary distribution measures matching the corresponding manager selection methods and
functions of the SOEs and tied with work performance will be implemented among managers of SOEs
Internal personnel employment: Open, category-based and multilevel SOE staff recruitment systems will be established to
enable the demotion/promotion of relevant management personnel, and the recruitment and dismissal of SOE employees.
During the 3rd session of the 12th National People’s Congress held on 12 March 2015, PBoC Governor, ZHOU Xiaochuan,
talked about the timetable for interest rate liberalization in China: the deposit interest rate cap will likely be lifted in 2015. In
fact, ZHOU elaborated on measures to step up interest rate liberalization in the Reform Decision Guidebook released at the
end of November 2013, where the short-term, short-to-medium-term and medium-to-long-term objectives for interest rate
liberalization were specified. In addition, he stated during the National People’s Congress and the Political Consultative
Conference in 2015 and the 6th China-US Strategic Dialogue in July 2014 that China “should be able to complete interest
liberalization in 2 years”. And YI Gang, PBoC’s Deputy Governor, was also quoted saying that “relevant conditions have
become increasingly ripe for interest rate liberalization”.
18 Source: WIND, Haitong Securities Research
ZHOU Xiaochuan’s remarks on interest liberalization
Time Occasion Event
Nov. 2013 Reform Decision Guidebook
Near-term objectives: Relevant efforts will be focused on the market-based self-discipline
mechanism for interest rate pricing and independent pricing by financial institutions; ensuring
effective lending base rate offering as the basis for credit product pricing; facilitating interbank
deposit certificate issuance and trading, and increasing the applicability of market-based pricing
to debt products of financial institutions.
Short/medium-term objectives: Fostering a fully-developed market-based interest rate system,
and developing the central bank interest rate regulation framework and the interest transmission
mechanism.
Mid-term objectives: Interest rates will be fully liberalized, and the market-oriented macro-level
interest rate regulation mechanism will be further developed.
Mar. 2014 NPC and the Political
Consultative Conference
The cap on deposit interest rate will be lifted, which should also be the final step toward interest
rate liberalization. Since restrictions on many other interest rates have been lifted, deposit
interest rates will also be opened up. I personally believe that this will be realized in 1-2 years.
Jul. 2014 6th China-US Strategic Dialogue The goal is still to complete interest rate liberalization within 2 years, but the time for interest rate
liberalization is also dictated by external factors, and the PBoC has its own timetable.
Mar. 2015 3rd Session of the 12th NPC Lifting the deposit rate cap is highly likely in 2015.
Market-Oriented Interest Rate Reform: Deposit-Interest
to be Fully Opened up within 2015
Inclusion of Renminbi into the SDR basket of currencies has major strategic implications for RMB
internationalization. First, it means that the RMB has become a global currency and an official currency
used by IMF’s member states, which will raise its position among currencies worldwide. Second, inclusion
of the RMB into the SDR will boost global demand for Chinese yuan and therefore improve its functions as
an international currency in terms of international payment settlement, financial transactions and official
reserves. Lastly, given China’s ~US$ 4trn foreign exchange reserves, we will be able to cut reserves once
the RMB becomes a reserve currency, and the resultant saving of funds can be used for development
purposes. Here, the SDR is discussed within the general framework of RMB internationalization. Viewed
from a higher level, RMB internationalization, freely floating exchange rates, interest rate liberalization and
RMB convertibility under capital accounts are 4 separate measures with a common goal, each serving as a
necessary and sufficient condition for the others.
19 Source: WIND, Haitong Securities Research
The “4 in 1” reform incorporates separate but closely connected components
RMB
internationalization
RMB convertibility under
capital accounts
Freely floating exchange
rates
Interest rate liberalization
SDR, RMB Internationalization and Capital
Account Liberalization
The RMB capital account reform was significantly expedited in 2015. During the IMF annual conference in April,
Governor ZHOU Xiaochuan disclosed that “China plans to make the RMB freer to use”; in the RMB
Internationalization Report (2015) released in June, the PBoC pointed out that “we are not far away from RMB
convertibility under capital accounts”. Relevant policies have also been rolled out: bond repurchase was opened
up for some overseas financial institutions; Mainland-HK fund mutual recognition was launched; and QDII2 and
Shenzhen-HK Stock Connect are both on the horizon. Looking back at the capital reform history in China, relevant
reforms have been steadily pushed forward despite temporary delays and drawbacks.
20 Source: WIND, Haitong Securities Research
The history of capital account convertibility reforms in China
1993年 十四届三中全会
首次提出要“逐步使人民币成为可兑换的货币”
1996年 经常项
目完全可兑换实现
97年亚洲金
融危机,进程被搁置
2003年 十六届三中
全正式重新提出“逐步实现资本项目可兑换”的目标
2002年引入QFII
制度
2006年引入QDII
制度
2003~2008年:
• FDI和ODI很大
程度上实现了人民币可自由兑换
• 对贸易融资以及与贸易相关的对非居民债权采用注册制
2009年
启动跨境人民币贸易结算业务试点
2008年全球
金融危机,进程被延缓
2010年
• 将资本项目可兑换目标写入十二五规划
• 境外机构进入境内银行间债市
2011年开展RQFII
制度
2013年
• 十八届三中全会宣布将寻找机会推进“人民币资本账户可自由兑换的进程”
• 上海自贸区成立
2014年
沪港通成功开展
2015年
• 债券回购交易向已获准进入银行间债券市场的境外人民币清算行和境外参加行开放
• 两地基金互认启动
Reforms were put
on hold due to the
Asian financial
crisis in 1997
Delays in the reforms
due to the global
financial downturn in
2008
“Making RMB a convertible
currency” was proposed for
the first time in the 3rd Plenary
Session of the 14th NPC in
1993
The target of “capital
account convertibility”
was officially re-proposed
in the 3rd Plenary Session of
the 16th NPC in 2003
Cross-border RMB
trade settlement
pilots launched in
2009
RQFII
launched in
2011
Shanghai-HK
Stock Connect
launched in 2014
Current accounts
became fully
convertible in
1996
QFII
introduced in
2002
QDII introduced
in 2006
2003-08:
• FDI and ODI
made RMB
significantly more
convertible
• Registration-
based
administration
adopted for trade
financing and
trade-related non-
resident claims
2010:
• Capital account
convertibility was
included in the
12th Five-Year
Plan
• Foreign
organizations
were allowed to
enter China’s
interbank bond
market
2013:
• Announcement of
the 3rd Plenary
Session of the
18th NPC to seek
opportunities to
promote “free
conversion of
RMB capital
accounts”
• Shanghai Free-
Trade Zone
established
2015:
• Opening of bond
repo to offshore
RMB clearing
banks and
participating
banks qualified for
interbank bond
investment
• Mainland-HK
fund mutual
recognition
launched
Progressive Opening of RMB Capital Accounts
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
0
100
200
300
400
500
600
700
800
900
1,000
Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15
QFII投资额度(亿美元,左轴)
QDII投资额度(亿美元,左轴)
RQFII投资额度(亿元,右轴)
0
10
20
30
40
50
60
70
80
90
100
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2007 2008 2009 2010 2011 2012 2013
QFII总资产(亿元,左轴)
QFII证券资产占总资产比例(%,右轴)
(1) Credit facilities – commercial credit is already fully convertible in China according to relevant IMF
assessment reports. (2) Direct investment – China has opened up outbound direct investment (ODI), but
direct investments in China by overseas investors and clearing transactions are still subject to government
approval. Capital, money and derivative markets – conversion of RMB is mainly realized through QFII, QDII
and RQFII, where the investment quotas have been consistently increased. As of 29 June 2015, the
investment quota for QFII reached US$ 75.5bn, QDII quota was close to US$ 90bn and RQFII quota was
RMB 390.9bn, marking a 216-fold, 9-fold and 37-fold increase, respectively.
21 Source: WIND, Haitong Securities Research
Investment quotas for QFII, QDII and RQFII Total assets of QFII and securities held by QFII as a
percentage of total assets
Capital Account Convertibility Enhanced Rapidly and
Can Be Further Improved
Total assets of QFII (RMB 100mn, left)
Securities held by QFII as % of total assets (right)
RQFII investment quota (RMB 100mn, right)
QFII investment quota (US$ 100mn, left)
QDII investment quota (US$ 100mn, left)
Based on Mundell’s “ternary paradox” theory, the PBoC had to choose 2 of the 3 options, i.e. free
movement of capital, fixed exchange rate and independent monetary policy. The PBoC recently cut interest
rates and reduced the deposit reserve ratio requirement (RRR). In our opinion, the RRR cut came as a
surprise. The aim is to make it clear to the market that the PBoC gives greater emphasis to an independent
monetary policy, and hence the previous reform of the exchange rate formation mechanism. In the past,
China exercised control over capital flow. This, coupled with relatively fixed exchange rates, dictated that
Chinese interest rates followed the trends in the US. However, the latest exchange rate reform made the
exchange rate of RMB more flexible. In addition, capital movement control has been tightened up, and it is
theoretically viable to pursue a totally independent monetary policy at the same time.
22 Source: WIND, Haitong Securities Research
Alternative monetary policies available to China under the Mundell Triangle
Interest
rates
pegged to
the US
Independent
interest
rate
policy
Fixed
exchange
rate
Capital
flow
Managed
floating
exchange
rate
Capital
flow
management
Exchange Rate Deregulation & Independent
Interest Rate Policy
1. Chinese Economic Development and Outlook
2. Timetable for Economic Reform in China
3. How Can Economic Transformation Be Achieved in
China?
4. Analysis of Recent Market Volatility
Summary
23
Germany, Japan and South Korea all experienced a drop in national industrialization rate in their struggle
to escape the middle income trap. Today, China has come to the Late Industrialization stage. According to
the growth theory, transformation of the economic growth model is an inevitable outcome after growth
driven by demographic dividend comes to an end. In other words, new growth drivers must be developed
for the Chinese economy. We think our hope will mainly come from 3 factors: human capital represented by
China’s ample supplies of university graduates and engineers, the US model driven by innovation, and
reforms promoted by President XI Jinping.
24 Source: WIND, Haitong Securities Research
Transformation of China’s growth model
Economic
growth
Demographic
dividend
Past Future
Investment
Foreign trade
Human capital
Innovation
Reform
Solution: Growth Model Transformation –
Finding New Growth Drivers for China’s Future
The increasing popularity of higher education has been significantly improving the quality of labor force in
China. Nearly 7 million students graduate from Chinese universities every year, as opposed to 1 million 10
years ago. From the perspective of non-agriculture employment, ~5 million new jobs will be created every
year in the future, meaning that almost all the new jobs will be taken by university graduates. Therefore, it
is imperative for us to develop a new economic growth model matching the characteristics of human
capital supply in China.
25 Source: WIND, Haitong Securities Research
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
80 85 90 95 00 05 10
每年高等教育毕业生数量
每年高中毕业生人数
0
500
1,000
1,500
2,000
2,500
3,000
92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
新增大学生毕业数
新增非农就业人数
No. of Chinese university and
high school graduates by year
No. of new university graduates and
new non-agricultural jobs (10,000)
No. of higher education graduates
No. of high school graduates No. of university graduates
No. of new non-agricultural jobs
Growth of Human Capital Resulting from
Increased University Enrollment
Why future enterprises will be nurtured on the capital market? An important reason is that return on capital
will be trending down over the long term given China’s ageing population. Therefore, there must be a shift
away from expensive bank financing toward direct financing at a lower cost. Due to the large number of
bank outlets and employees, bank loans are inherently cost ineffective. By contrast, the information
sharing feature of direct financing enables enterprises to make substantial savings of financing cost,
making it especially suitable at a time of low return on capital.
Changes in financing structure
26 Source: Haitong Securities Research
High interest
rates
Bank
financing
Capital
market
High financing cost
due to the large
number of employees
and business outlets
Low financing cost
due to information
sharing
Growth driven by
demographic
dividend
Population ageing Low interest
rates
From Bank Financing to the Capital Market
Declining return on capital will lead to a shift in the financing system from banks to the capital market, and
the resultant rise in labor cost will damage the competitiveness of Chinese industries against an increase
in demand for services. As a result, the focus of China’s economic structure will move from industries
toward services. For traditional industries, there are only 3 solutions: (1) internationalization – seeking new
demand overseas through the “One Belt and One Road” platform; (2) entering the high-end manufacturing
market by building their competitiveness; (3) establishing themselves as industry leaders through M&A.
Changes in China’s economic structure
Banks Industry
Services Capital
market
High interest
rates
Low interest
rates
Going abroad
through “One Belt
and One Road”
Entering high-end
manufacturing
with improved
competitiveness
Becoming
industry leaders
through M&A
Source: WIND, Haitong Securities Research
Rise of the Service Industry amid Industrial Transformation
27
The 4th Plenary Session decided that the establishment of a legal system featuring equal rights,
equal opportunities and fair rules will be expedited to safeguard the personal rights, property rights
and fundamental political rights of Chinese citizens. We think this means that more equity
assurance policies will be introduced after the meeting to ensure fair play in market competition,
fair trading of elements and fair income distribution.
28 Source: WIND, Haitong Securities Research
Outlook for reforms after the 4th Plenary Session
Speed is of
paramount
importance
Equality
as the top
priority
Equal
opportunities
Fair play in competition
Fair trading of elements
Fair income distribution
Equal rights
Fair rules
Reforms to Ensure Equity of Policies
1. Chinese Economic Development and Outlook
2. Timetable for Economic Reform in China
3. How Can Economic Transformation Be Achieved in
China?
4. Analysis of Recent Market Volatility
Summary
29
Source: WIND, Haitong Securities Research
The total market cap of A shares now stands at RMB 43.1trn, the negotiable market cap totals
RMB 34.9trn, and the free float market cap totals RMB 17.1trn, of which 46% is held by
individual investors.
Breakdown of free float market cap held by A share investors
General corporate entities
Funds
Insurance & social insurance
PE
Brokerages
Other Large SOEs
Individual investors
Internal Cause: Investor Structural Imbalance
30
A shares have maintained a stable transaction distribution since 2007: individual investors
account for 85%, institutional investors account for 12%, and corporate entities for 3%.
Source: Statistical Yearbook of the Shanghai Stock Exchange, WIND, Haitong Securities Research
Distribution of A share transactions
Natural-person investors General corporate entities Professional organizations
Stock Markets Dominated by Individual Investors
31
The turnover rate among A share investors is far higher than investors in other stock markets.
The turnover rate in China’s GEM is 10x, whereas that of Nasdaq is only 2.5x.
Source: WIND, Haitong Securities Research
YTD turnover rates by market (annualized, %)
Highly Speculative Markets
32
Source: WIND, Haitong Securities Research
Prior to 15 June 2015, A share financing (margin trading + margin financing) / negotiable market
cap reached 7.2%, matched only by the frenzied Taiwanese stock market in 1990. The slump in
June was followed by investigations by the CSRC, and the A share leverage ratio is now lowered
to a reasonable level around 3.3%.
7.2%
10.0%
0.9%
3.0%3.3%
2.30%
0.57%
1.50%
0%
2%
4%
6%
8%
10%
12%
A股杠杆(流通市值) 台湾 日本 美国
各国市场杠杆率比较
融资额/总市值 最高值
融资额/总市值 平均值
615调整前
目前杠杆率
Before 15 June, 2015
Current leverage
ratio
Financing/total market cap Peak
Financing/total market cap Average
Stock market leverage by country
A share leverage ratio (negotiable
market cap)
Taiwan Japan USA
Internal Cause: Excessive Leveraging
33
A long-term bear market is caused by a reversal in fundamentals. The recent A share slump is
attributable to individual events and institutional factors. Similar excessive corrections have
occurred in overseas stock markets.
Source: WIND, Haitong Securities Research
Mid-term bull market corrections by stock market
A shares (2015):
Shanghai
Composite Index
A shares (2015):
CHINEXT Index
A shares (1996):
Shanghai
Composite Index
Taiwan (1988):
Weighted index
USA (1987):
S&P 500
Extreme Market Volatility
34
Source: WIND, Haitong Securities Research
Interest rate Risk
appetite Profit
Inversion of order 10Y government bond yield (%, left)
1/A-share PE – 10Y government bond yield (adjusted, %, left)
YoY growth of A-share cumulative net profit (%, right)
Market Reconstruction in 3 Steps
35
Source: WIND, Haitong Securities Research
Interest rate and RRR cuts by the PBoC on 25 August revealed the “ternary paradox” policy
orientation.
FOMC chose not to raise interest rates. RMB turnover in September dropped from US$ 25bn /
day to US$ 15.1bn / day, indicating that the devaluation pressure on RMB has significantly
subsided.
0
100
200
300
400
500
600 人民币成交金额(亿美元)RMB turnover (US$ 100mn)
Step 1: Stable Exchange Rate with Rate Cuts Confirmed
36
Source: WIND, Haitong Securities Research
Lower interest rates led to changes in the asset price comparison effect, in favor of the stock
markets. The current high dividend yield makes A shares substantially more attractive, similar to
the level in March 2014.
4.89%
3.93%
3.16%
6.00%
1.66%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
银行理财
1年期
AA企业债
1年期
货币基金利率 股息率前15
公司均值
A股整体股息
率(分红公
司)
百
主要投资品种收益率对比Yields on main investment products
1Y bank wealth
management
1Y AA corporate
bonds
Money
funds rate
Avg. valuation
of top-15
companies by
dividend yield
Overall A-share
dividend yield
(dividend-paying
companies)
A Shares Became More Attractive After the Slump
37
Source: WIND, Haitong Securities Research
Since July 2014, reforms have accelerated,
gradually bolstering investors’ risk appetite.
The most sensitive funds started to enter
the market.
After the promulgation of the top-level
national reform plan, the supporting “1+N”
is expected to follow soon. Acceleration of
reforms will help ease the pessimistic
sentiment.
Rate cut led to a
lower risk-free rate
Acceleration in
reforms raised risk
appetite
Earnings
expectations
improved steadily
Strong support Catalyst Safeguard
Under RMB 500,000
RMB 5mn – 100mn RMB 500,000 – 5mn
Over RMB 100mn
Account asset growth YoY by category
Step 2: Risk Appetite Correction
38
Source: WIND, Haitong Securities Research
With the introduction of growth stabilization measures in July 2013, GDP growth in H2 will
exceed the market consensus.
The Ministry of Finance released the Fiscal Policy Measures to Support Economic Growth
Stabilization on 8 September.
GDP: cumulative
YoY (%) Avg. GDP (E): cumulative YoY (%)
Growth Stabilization through Active Fiscal Policy to Allay
Concerns over Deflation
39
After WWII, representative stock indexes overseas increased 10-20 times due to strong
economic growth.
The “13th Five-Year Plan” due for release during the 5th Plenary Session of the 18th National
People’s Congress in October will focus on economic restructuring and emerging industries.
Implementation of relevant policies will rebuild investors’ confidence about China’s economic
transformation and innovation.
Increases in related indexes (X)
Step 3: Confidence Restoration after Successful Economic
Transformation
40 Source: WIND, Haitong Securities Research
USA:
1942-68
USA:
1982-00
Japan:
1950-61
Japan:
1967-89
Taiwan:
1985-90
HK:
1984-97
Source: WIND, Haitong Securities Research
Economic growth models worldwide are shifting toward technological innovation as the growth
driver, with the US taking the lead. The Chinese market is “genetically” suitable for internet
development, and the Chinese government has introduced industry policies to support
innovation.
Investment of Chinese venture funds
(VC + PE + Angel Investors) Number of A-share IPO Listed Companies since 2012
No. of investment projects (right)
Total investment (RMB 100mn, left)
China in the Midst of Economic Transformation
Main board
126, 31%
GEM
176, 44%
SME
102, 25%
41