CAN THE BELT AND ROAD INITIATIVE SAVE THE WORLD? · (pps) Latest forecast Revision (pps) World GDP...

© Copyright Allianz

Mahamoud Islam, Senior EconomistLudovic SUBRAN, Chief Economist

October 16, Monaco

CAN THE BELT AND ROAD INITIATIVE SAVE THE WORLD?


01REAPING THE WHIRLWIND THE CHINESE WAY


GLOBAL GROWTH: ADJUSTING TO THE US STORM World GDP growth to be resilient in 2018 and 2019, despite US sources ofinstability including mid-term elections and erratic policy-making:

1. The eye of the cyclone: US fiscal, monetary and trade policies create a highpressure economy in the US while absorbing global liquidities

2. The stable vortex: China, the Eurozone and Japan can absorb the negativeshocks of liquidity and (trade) uncertainty, albeit registering slower growth

3. The unstable vortex: Emerging markets from (1) those combiningstructural vulnerabilities and mistakes (Argentina and Turkey) to (2)tightrope walkers (South Africa, Brazil and Russia). Among resilient ones,some are (3) on the watch list (India, Indonesia, Philippines, Hungary,Romania) and the (4) others will stay safe in a “trade game” environment(emerging Asia & Europe countries with current account surpluses)

Macro assumptions: Brent oil prices at 72 USD/bbl in 2018 and 69 USD/bbl in2019. EUR/USD at 1.14 at the end of 2018, emerging currencies to continuesliding by 5-10% on average in H2 18, stabilizing in H1 19

Inflation and interest rates: The peak of inflation is behind us in advancedeconomies but rising price pressures in the emerging markets post currencydepreciation. We expect US 10Y interest rate to be at 3.0% at the end of 2018 and3.4% at the end of 2019

Real GDP growth, %

3

2019Latest

forecastRevision

(pps)Latest

forecastRevision

(pps)

World GDP growth 2.6 3.2 3.2 -0.1 3.1 =

United States 1.6 2.2 2.9 = 2.5 0.1

Latin America -0.9 1.2 1.2 -0.8 2.1 -0.3Brazil -3.5 1.0 1.3 -0.6 2.5 =

United Kingdom 1.8 1.7 1.4 = 1.3 =

Eurozone members 1.7 2.5 2.1 = 1.8 -0.1Germany 2.2 2.5 2.1 -0.1 1.9 =France 1.1 2.3 1.5 -0.3 1.9 -0.1Italy 1.0 1.6 1.2 = 0.8 =Spain 3.3 3.1 2.7 = 2.4 =

Russia -0.2 1.5 1.6 -0.2 1.5 -0.3Turkey 3.2 7.4 3.3 -0.4 0.4 -2.6

Asia 5.0 5.2 5.1 = 5.0 0.1China 6.7 6.9 6.6 = 6.3 =Japan 1.0 1.7 1.0 -0.2 1.0 =India 7.1 6.7 7.6 0.3 7.3 =Middle East 4.3 1.3 2.5 0.1 2.7 0.2Saudi Arabia 1.7 -0.7 2.1 0.4 2.5 0.5

Africa 1.3 3.1 3.1 -0.6 3.3 -0.5South Africa 0.6 1.3 0.7 -1.3 1.3 -1.2

* Weights in global GDP at market price, 2017

NB: The revisions refer to the changes in our forecasts since the last quarterFiscal year for India

2016 2017 2018


Global monetary basis has significantly decelerated in Q2 18. Historically, it has a pretty close link with economic activity

The monetary tightening in the US is weighing on the weakest emerging markets which are forced to increase key interest rates. This in turn raises borrowing costs for the private sector in these countries

SYPHONING OF THE GLOBAL LIQUIDITY

4

Variation in world monetary base(USD bn, M0 + reserves)

Key interest rates by region, %

Sources: IHS Euler HermesSources: IHS Euler Hermes

Emerging market debt is at risk in case of higher domestic rates; and domestic rates are sensitive to US government bond yields

Impulse response of domestic rates to US rates shock

Sources : IMF, Euler Hermes

Cumulative impulse response of long-term domestic rates 12 months after a +100bps shock on 10YR US bond yields

1.8

1.3

0.9 0.8 0.8 0.70.7

0.6 0.60.5 0.5 0.5

0.3

0.10

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Turk

ey

Braz

il

Pola

nd

Indo

nesi

a

Thai

land

Sout

h Af

rica

EM m

edia

n

Chi

le

Mex

ico

Sout

h Ko

rea

Indi

a

Mal

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a

Chi

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Rus

sia

© Copyright Allianz 5

GLOBAL TRADE: SOFTENING

Global trade of goods and services

Global trade is expected to decelerate, yet to remainresilient, to +3.8% in volume in 2018 and to +3.6% in2019

Sources: IHS, Datastream, Allianz Research

3.6% 3.8%2.8% 2.1%

4.8% 3.8% 3.6%2.8% 2.1%

-10.2%

-1.6%

9.4%7.2%

6.3%

-15%

-10%

-5%

0%

5%

10%

15%

13 14 15 16 17 18f 19f

Volume Price Value

Protectionist threats represent ~ USD 651 bn (3.8% of globalimports), in addition to tariffs on ~ USD 463 bn alreadyimplemented

Source: Allianz Research

Three scenarios to consider (two years cumulated effects)

Trade games

•Secluded tensions, and resolved within two years; •Protectionism remains bearable•Negligible impact on global trade

Trade Feud

•Global trade slows down (-2pp)•US growth cut by -0.5pp•Europe growth cut by -0.6pp•China growth cut by -0.3pp

Trade war

•Global trade contracts (-6pp)•US growth cut by -1.7pp •Europe growth cut by -1.9pp•China growth cut by -1pp only on the back of stabilizing policies


Manufacturing PMI and Consumer confidence

Activity: Investment growth continues to slow, retail sales show resilience

Stock markets (100= 01/2010)

CHINA #1: SLOWING MOMENTUM

Stock market: Investors confidence has beenweak since 2014-2015 market turmoil and itis getting weaker

Retail and investment

Confidence: Both manufacturing PMI and consumerconfidence weaken

5

10

15

20

2014 2015 2016 2017 2018

Nominal Retail sales (y/y)

Nominal Investment in Fixed Assets in Urban areas(YTD, y/y)

100

105

110

115

120

125

48

49

50

51

52

53

2015 2016 2017 2018

Manufacturing PMI (3mma, left)

Consumer Confidence (3mma, right)

0

50

100

150

200

250

10 11 12 13 14 15 16 17 18

China - Shanghai

Japan

Korea, Republic of(South Korea)

Sources: IHS, Allianz Research


CHINA #2: STIMULUS TAP OPEN Monetary policy indicators

Gear #1: targeted easing Gear #2: expansionary fiscal policy


Stimulus – key announcements

EOP 2017 2018f 2019f

Policy rate 4.35 4.35 4.35

Reserve Requirement Ratio* 16.5 14.0 13.0

M2 (y/y) 8.2 9.0 9.0

RMB per USD 6.5 6.8 6.9

8

10

12

14

16

18

20

2012 2014 2016 2018

Claims on private sector (y/y)Tax cut of RMB65bn to encourage corporates to spend on R&DTax cut

Issuance of RMB1.35tn of special bonds for local governments to boost infrastructure projects

Support to local governments

Launch of state financing guarantee fund with a target of RMB140bn of loans to SME and micro-firms each year

Support to SMEs



CHINA #3: SHORT-TERM RELIEF, LONG TERM SIDEEFFECTSNon Financial Corporate debt (% GDP)

Long-term side effects #1: Re-leveraging is a problem whendebt is already high.

Long-term side effect #2: Less effective counter-cyclicalpolicies and low return on investment.

Credit Intensity and ICOR166.4

160.3

164.1

120

130

140

150

160

170

2012 2013 2014 2015 2016 2017 2018

3

4

6

1

3

4

0

1

2

3

4

5

6

7

2003-07 2010-13 2014-17

ICOR

Credit Intensity



Opening to trade help China’s to grow at a fast pace

CHINA #4: THE POWER OF OPENING UP

Next step is to open the market financially to bring capital in andcreate optimal capital allocation

Exports growth and GDP growth (average 2002-17) Financial openness (Chinn-Ito Index)

Australia

France

China

India

Chile

Canada

Indonesia

Germany

Italy

Mexico

Russia

Singapore

South AfricaTaiwan

United States

Turkey

Brazil

Thailand

0

1

2

3

4

5

6

7

8

9

10

0 2 4 6 8 10 12 14

Rea

l GD

P gr

owth

Exports growth (2002-2017)Sources: IHS, Allianz Research Sources: Cesifo, Allianz Research

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

70 75 80 85 90 95 00 05 10 15

France Turkey China Japan

Financial Openess


In 2015, a miscommunication on a new currency settingmechanism led to panic: USD1.3tn left the country in 2015-2016

CHINA #5: FINANCIAL LIBERALIZATION: GRADUALISM IS KEY

5 recommendations to make it happen

Capital flows (USD bn, 4 quarters cumulated) 5 recommendations for successful capital account liberalization

Strong financial institutions (FI) and transparency

Improvement in financial literacy

Healthy and modern financing system will be pivotal

Gradualism and cautiousness; but no “stop-go” policies

Sequencing of reforms (domestic financial system then opening up)

-800

-600

-400

-200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018


: 02BELT AND ROAD: THE ONLY (MULTILATERAL) GAME IN TOWN?


THE BELT AND ROAD INITIATIVE: BRAND, CONNECT AND FINANCE

12

Source: National Sources, Euler Hermes

Five goals, two routes (land and maritime routes) and six economic corridors (land corridors) Goals Description

Cultural Exchange Improving people connection and promoting cultural exchange

Financial integration Enhancing monetary policy coordination and financial cooperation

Trade and investment Facilitating cross-border investment

Policy coordination Planning and supporting large-scale development projects

Facilities connectivity Building facilities to connect BRI countries/regions

§ Brand. It is a communication tool which aims at improving China’s brand equity and soft power specifically through cultural exchanges § Connect. It aims at connecting all the BRI members with better infrastructure § Finance. It is tool that should facilitate cross border investment, improve financial cooperation and promote RMB internationalization.


THE BELT AND ROAD INITIATIVE: MEGA-DEAL FOR MEGAREGION

How big is the BRI? In % of the global economy

The project gathers 80+ countries across Asia, Europe, Africaand recently from Latin America.


Capital of major financier represent c.USD250bn. This issupplemented by major policy banks. China development bank(USD900bn) and China Exim Bank (USD200bn) in particularcombined promise total USD1.1tn.

Sources: IHS Global Insight. Allianz Research

Major financiers (capital in USD bn)

54,5

100 100

Silk Road Fund AIIB New Development Bank

68%

46%41%

36%

29%

Population Savings Global Trade GDP Private consumption


Top exports destinations of China in BRI members(exports gains, USD bn)

China-BRI trade will boost global trade flows by+158bn in 2018 and +117bn in 2019.

Sources: IHS, Datastream, Allianz Research Sources: Wind, Euler Hermes

Top BRI exporters to China (exports gains, USD bn)

BRI: USD117BN TO MAKE IN 2019

South Korea, Malaysia and Vietnam to be themain winners

Merchandise trade gains impact in USD bn (China – BRI trade)

South Korea, Vietnam and India will be the maindestinations for Chinese corporates

10

7

7

4

4

4

4

3

3

3

7

5

5

3

3

3

3

2

2

2

0 5 10 15 20

South Korea

Viet Nam

India

Singapore

Russian Federation

Malaysia

Thailand

Indonesia

Philippines

United Arab Emirates

2018

2019

81 61

76

56

0

20

40

60

80

100

120

140

160

180

2018 2019

Export from China

Import from China21

7

6

5

5

4

4

3

3

2

16

5

5

4

4

3

3

3

2

2

0 10 20 30 40

South Korea

Malaysia

Viet Nam

Thailand

Russian Federation

Singapore

Saudi Arabia

Indonesia

South Africa

Philippines

2018

2019


Bangladesh

Cambodia

India

Indonesia

Malaysia

Lao

Philippines

Myanmar

TajikistanThailand

Vietnam

Russia

Turkey

South Africa

Mongolia

Pakistan

Sri Lanka

Iran

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

-40% -20% 0% 20% 40% 60% 80% 100% 120%

Chi

na's

Net

OD

I gro

wth

China's imports growth

Strategic partners: for sales and Influence

15

CHINA: FIVE OBORTUNITIES TO TAKE (1)China’s net outward direct investment and import growth

average (2014-2016, selected markets)

OBORtunity #1: Business internationalization with adevelopment of China’s manufacturing supply chain, strongerties with strategic markets

OBORtunity #2: Cut in overcapacity as BRI members becomesthe main destination for china’s steel and coal


Exports to BRI: Share in China’s total of iron and steel and coal exports

60%

42%

62%

49%

66%

53%

0%

10%

20%

30%

40%

50%

60%

70%

Iron and Steel Coal

2010 2013 2017Producing hubs: new manufacturing and commodity suppliers



International Payment with RMB (global market share)

OBORtunity #3: Economic upgrading as BRIprovides new clients for high tech products

Sources: IHS, Datastream, Allianz Research Sources: Wind, Euler Hermes

Nominal investment completed in construction, growth in 2017

CHINA: FIVE OBORTUNITIES TO TAKE (2)

OBORtunity #5: Regional rebalancing asthe Western regions catch up in terms ofinfrastructure

China’s high tech exports to BRI (% of total high tech exports)

22%

27%

15%

17%

19%

21%

23%

25%

27%

29%

01 03 05 07 09 11 13 15 17

High tech manufactures: electronic and electrical (% total high tech exports)

Start of the BRI

>20%>15%>10%>0%<0%

1.59

2.12

0,0

0,5

1,0

1,5

2,0

2,5

3,0

12 13 14 15 16 17

International Payment with RMB (Global Market Share)

OBORtunity #4: RMB internationalization as BRImembers start to trade and borrow in RMB terms

Start of the BRI


Capital #1: China investment in BRI countries has increased by USD410bn from2014 to June 2018, compared to USD261bn over 2009-2013

BRI MEMBERS: THREE CHANNELS OF IMPACTS (1)

Demand #2: the Chinese consumer wagon

China’s overseas investment and construction contracts (USD bn) in BRI members

39

28

28

24

23

0 10 20 30 40 50

Pakistan

Malaysia

Singapore

Indonesia

Russia

Top 5 receivers (USD bn, 2014-2018*)

261

410

0

50

100

150

200

250

300

350

400

450

2009-2013 2014-2018*

Investment in BRI countries (USD, bn)

* end in June 2018Sources: China investment tracker, AIE and HF

China’s consumption vs the United States (USD bn)

Sources: IHS Global Insight, Allianz Research

0

5000

10000

15000

20000

25000

30000

35000

10 15 20 25 30 35 40

China

United States


BRI MEMBERS: THREE CHANNELS OF IMPACTS (2)Infrastructure investment needs by sector (USD bn, by 2040)

Competitiveness #3: Improved infrastructures are expected to boost competitiveness of BRI markets through lower costs oftransactions.

Sources: IHS, Datastream, Allianz Research

0

5000

10000

15000

20000

25000

Total Energy Water Telecom Transport

Asia (exclude China)

Europe

Africa

Examples of Belt and Road project

Djibouti-Ethiopia Railway Line, Ethiopiaand DjiboutiMombasa-Nairobi Railway, KenyaAddis Ababa Light Rail, EthiopiaJakarta-Bandung railway (Indonesia)Kuantan Port (Malaysia)Bangkok-Chiang Mai Railway (Thailand)Dawei Port (Myanmar)Gwadar (Pakistan)Gujarat Rural Roads (MMGSY) Project (India)Natural Gas Infrastructure and Efficiency Improvement Project (Bangladesh)

Africa

South Asia

ASEAN

Examples of BRI related projects


NOT A WALK IN THE PARK: 3 CHALLENGES

8-Nov-18File name | department | author

19

• China cannot finance BRI alone (with total debt estimated at 260% GDP) Therefore, Private capital will be needed

• Financial viability of BRI: some countries are already heavily indebted (Mongolia, Sri Lanka, e.g.).

Financial Sustainability

8582

69 67 6764

0

10

20

30

40

50

60

70

80

90

Mongolia Sri Lanka Maldives Montenegro Pakistan Laos

Government debt (% GDP, 2017)

Source: IMF WEO, IMF article 4


NOT A WALK IN THE PARK: CHALLENGES

8-Nov-18 20

• There is no common legal regime shared among BRI countries

• Consequently, businesses have often failed to comply with local regulatory frameworks

Legal and Regulatory Risks

BRI: a regulatory puzzle


PRC Law (China)

Continental Civil Law (Russia)

Common Law

(Malaysia, Singapore)

Islamic Law (Saudi Arabia)

EU regulatory framework


NOT A WALK IN THE PARK: CHALLENGES

8-Nov-18File name | department | author

21

• the BRI is unfolding amid strong political tensions and spans an area with territories in conflict (e.g. Afghanistan, Myanmar etc.)

Geopolitical and Social Risks

Cross-border area with significant Kurdish

communities

Turkey

EgyptSaudi Arabia

Yemen

Afghanistan

Pakistan

IranIraqSyriaLebanon

Turkmenistan


The Example of the Middle East

Conflict pressure points:• Kurdish areas, including Turkey• Saudi vs. Iran, incl. Straits of Hormuz• Yemen: Sunni v. Shia• Qatar vs. Saudi Arabia, UAE, Bahrain, Egypt

(blockade)• Israel: impact of Jerusalem recognition by the US• Lebanon: political uncertainties• Iran: impact of US withdrawal from JCPOA• Turkey: US sanctions

Israel


THANK YOU!

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CAN THE BELT AND ROAD INITIATIVE SAVE THE WORLD? · (pps) Latest forecast Revision (pps) World GDP...

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