Outlook on the Chinese Economy - HSBC...is unlikely to increase further, indicating that the devaluation of Chinese yuan will only boost Chinese exports to a rather limited extent.

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.


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


-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.


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.


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 (%)


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.




China?


Summary

9


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.


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.


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.


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.


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%.


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%).


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.


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”.


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.


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.


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.


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.


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




China?


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.


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.


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.


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




China?


Summary

29


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.


YTD turnover rates by market (annualized, %)

Highly Speculative Markets

32


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.


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


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


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


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


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


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


USA:

1942-68

USA:

1982-00

Japan:

1950-61

Japan:

1967-89

Taiwan:

1985-90

HK:

1984-97


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

Outlook on the Chinese Economy - HSBC...is unlikely to increase further, indicating that the devaluation of Chinese yuan will only boost Chinese exports to a rather limited extent.

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