China in 2019:Pursuing a middle-income growth model

March 2019

0

50

100

150

200

250

0

5

10

15

20

25

30

35

40

45

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Valu

e of 1

% N

omin

al GD

P Gr

owth

, PPP

USD

Shar

e of G

loba

l Rea

l GDP

Gro

wth,

%

China Has Been a Major Contributor to Global Growth

China's share of world real GDP growth, %

Value of China's 1% nominal GDP growth, PPP USD bn

China

Malaysia

South Korea

-10

-5

0

5

10

15

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Real

GDP

Grow

th

Per capita income (PPP basis), USD

China Has High Real GDP but Low Per Capita Income

Natural slowdown, bigger global contribution

2

Source: VanEck; Bloomberg. GDP: gross domestic product. PPP basis: Adjusted based on purchasing power parity, which accounts for differences in price levels. *Although not shown, china accounted for 100% of Global Real GDP in 2009.

We believe China’s economy is bound to slow as it matures and relies more on consumption – similar to what happened with regional peers

China’s contribution to global growth will still remain significant, in our opinion

*

3

Source: VanEck, Bloomberg LP (left). The Economic Complexity Index (ECI) is a holistic measure of the productive capabilities of large economic systems, usually cities, regions, or countries. In particular, the ECI looks to explain the knowledge accumulated in a population and that is expressed in the economic activities present in a city, country, or region. To achieve this goal, the ECI defines the knowledge available in a location, as the average knowledge of the activities present in it, and the knowledge of an activity as the average knowledge of the places where that economic activity is conducted.

Innovation, economic complexity ahead of peers

We believe China’s innovation record is impressive

Economic complexity is significantly above the peer group

Brazil

ChinaFranceIsrael

Mexico

Turkey

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

7 8 9 10 11 12

Econ

omic

Com

plex

ity In

dex

Per Capita GDP, PPP basis (ln)

China Has a Diverse and Sophisticated Economy

4

Source: Bloomberg LP. GDP: Gross Domestic Product.*Consumption refers to activities that directly provide utility to people, and investment refers to the accumulation of capital goods

Secular transformation to consumption-based economy

Rising middle class drives secular transformation to consumption-base economy – higher incomes are associated with a higher share of services in GDP

The share of GDP driven by investment is slipping below 30% and services account for nearly 60% of fixed investments

2023F

2020F

40

42

44

46

48

50

52

54

56

58

0 5,000 10,000 15,000 20,000 25,000

Serv

ices S

hare

in N

omin

al GD

P, %

PPP-Based Per Capita GDP ($)

As Income Rises, so Does Services Share

0

10

20

30

40

50

60

70

80

90

100

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Cont

ribut

ion

to G

DP G

rowt

h (%

)

China’s Growth Increasingly Driven by Consumption*

Consumption Investments

China Services Share of Nominal GDP vs China Per Capital Income, Quarterly Observations

From March 2005 - September 2018

5

Source: Bloomberg LP (left); Unassuming Economist (right). M2 is a calculation of the money supply that includes cash and checking deposits, savings deposits, money market securities, mutual funds and other time deposits.

Transformation has costs – widening macro imbalances

China accumulated multiple macroeconomic imbalances while getting richer

China’s leverage – including corporates – is among the highest in the world

So is M2/GDP ratio

0

50

100

150

200

250

300

Dec

-04

Jul-0

5Fe

b-06

Sep-

06Ap

r-07

Nov

-07

Jun-

08Ja

n-09

Aug-

09M

ar-1

0O

ct-1

0M

ay-1

1D

ec-1

1Ju

l-12

Feb-

13Se

p-13

Apr-1

4N

ov-1

4Ju

n-15

Jan-

16Au

g-16

Mar

-17

Oct

-17

Debt

to G

DP (%

)

Past Growth Was Fueled by Additional Debt

China total debt/GDP China corporate debt/GDP

0

20

40

60

80

100

120

140

160

180

ARG

ENTI

NA

BRAZ

ILIN

DO

NES

IAM

EXIC

OTU

RKE

YR

USS

IAC

OLO

MBI

APH

ILIP

PIN

ESSO

UTH

AFR

ICA

HU

NG

ARY

POLA

ND

ISR

AEL

CH

ILE

CAN

ADA

UN

ITED

STA

TES

CZE

CH

REP

UBL

ICEU

RO

ZON

EAU

STR

ALIA

MAL

AYSI

ASW

ITZE

RLA

ND

THAI

LAN

DSO

UTH

KO

REA

JAPA

NC

HIN

A

M2 M

oney

Sup

ply t

o GD

P (%

)

The Supply of Money is Still High

6

Source: VanEck Research, Bloomberg LP. PPI: Producer Price Index.

Price deflation reignited debt concerns

Even though the producer price index (PPI) is driven mostly by commodity prices…

…it pushes nominal GDP lower, worsening China’s debt/GDP ratio

-60

-40

-20

0

20

40

60

80

-8

-6

-4

-2

0

2

4

6

8

10

Dec-1

1Ma

y-12

Oct-1

2Ma

r-13

Aug-

13Ja

n-14

Jun-

14No

v-14

Apr-1

5Se

p-15

Feb-

16Ju

l-16

Dec-1

6Ma

y-17

Oct-1

7Ma

r-18

Aug-

18

Bren

t cru

de p

rice c

hang

e (%

annu

al ch

ange

)

PPI (

% an

nual

chan

ge)

PPI and Oil Prices are Highly Correlated

PPI, %yoy Brent, %yoy

-10

-5

0

5

10

15

20

25

30

Mar-0

1Ja

n-02

Nov-0

2Se

p-03

Jul-0

4Ma

y-05

Mar-0

6Ja

n-07

Nov-0

7Se

p-08

Jul-0

9Ma

y-10

Mar-1

1Ja

n-12

Nov-1

2Se

p-13

Jul-1

4Ma

y-15

Mar-1

6Ja

n-17

Nov-1

7Se

p-18

% (a

nnua

l cha

nge)

Decreasing Prices Have Pushed Down Nominal GDP

Nominal GDP, %yoy PPI, %yoy

7

Source: VanEck Research, Bloomberg LP. Debt service coverage ratio is the ratio of cash available to debt servicing for interest, principal and lease payments.

Price deflation has implications for corporates

Lower PPI and nominal GDP growth may eat into corporate profits…

…which can be problematic as debt servicing ratios remain high

-8

-6

-4

-2

0

2

4

6

8

10

-10

-5

0

5

10

15

20

25

30

35

Dec-1

1Ma

y-12

Oct-1

2Ma

r-13

Aug-

13Ja

n-14

Jun-

14No

v-14

Apr-1

5Se

p-15

Feb-

16Ju

l-16

Dec-1

6Ma

y-17

Oct-1

7Ma

r-18

Aug-

18

PPI (

% an

nual

chan

ge)

Indu

stria

l pro

fits (

% an

nual

chan

ge)

Declining Prices Reflected in Corporate Profits

Industrial profits, %yoy PPI, %yoy

US, 14.7

Mexico, 5.1

South Africa, 8.9

Turkey, 27.7

0

5

10

15

20

25

30

Mar-0

5No

v-05

Jul-0

6Ma

r-07

Nov-0

7Ju

l-08

Mar-0

9No

v-09

Jul-1

0Ma

r-11

Nov-1

1Ju

l-12

Mar-1

3No

v-13

Jul-1

4Ma

r-15

Nov-1

5Ju

l-16

Mar-1

7No

v-17

Jul-1

8

Debt

serv

ice co

vera

ge ra

tio (%

)

Private Debt Service Coverage Ratio is Elevated

China, 19.3

Dealing with imbalances is painful

8

China has begun to address some of the most pressing issues – high leverage and shadow financing

However, the deleveraging drive hit the private sector and smaller companies the hardest in our opinion, while State Owned Enterprise (“SOE”) borrowing costs remained almost untouched

0

50

100

150

200

250

300

350

400

2015 2016 2017 2018 2019

Spre

ad (b

ps)

Deleveraging Has Raised Borrowing Costs for Non-SOEs

Central SOEs Local SOEs Non-SOEs

-40

-30

-20

-10

0

10

20

30

-20

0

20

40

60

80

100

120

Apr-1

0Se

p-10

Feb-

11Ju

l-11

Dec-1

1Ma

y-12

Oct-1

2Ma

r-13

Aug-

13Ja

n-14

Jun-

14No

v-14

Apr-1

5Se

p-15

Feb-

16Ju

l-16

Dec-1

6Ma

y-17

Oct-1

7Ma

r-18

Aug-

18

New

CNY

Loan

s, %

Cha

nge y

oy

Shad

ow F

inan

cing,

% C

hang

e yoy

China Lending: New Loans Up, Shadow Financing Down

Shadow Financing, %yoy New CNY Loans, 12m rolling sum, %yoy

Source: VanEck, Bloomberg LP (left); UBS (right). SOE: State-Owned Enterprise. Shadow financing generally refers to financial intermediaries which facilitate the creation of credit across the financial system but whose members are not subject to regulatory oversight

↓ tightening

↑ loosening

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Feb-14 Feb-15 Feb-16 Feb-17 Feb-18

Requ

ired

Rese

rve R

atio

China’s Policy Moves are not Having the Same Impact as in the Past

Some traditional policy tools look less effective

9

Source: Bloomberg. RRR: required reserve ratio.

The transmission mechanism is not working properly, as past policy moves (2018 RRR cuts) failed to ease China’s financial conditions as they had in the past

Notwithstanding, the “drip stimulus” approach is still in place

March 2016: Cut 0.5%

April 2018: Cut 1%

October 2018: Cut 1%

January 2019: Cut 1%

September 2015: Cut 0.5%October 2015: Cut 0.5%

April 2015: Cut 1%

February 2015: Cut 0.5%July 2018: Cut 0.5%

Fiscal stance remains stimulative

10

Source: Bloomberg.

Authorities are relying more on policy support through fiscal channels, in our view

China’s budget deficit was at historic wide in 2018…

…albeit not as wide as it was in the U.S. after the global financial crisis

-12

-10

-8

-6

-4

-2

0

2

4

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fisc

al Ba

lance

as %

of G

DP

China Fiscal Balance, % GDP

China Fiscal Balance, % GDP U.S. Fiscal Balance, % GDP

Downward revisions to GDP growth forecasts appear to have bottomed out

We believe drip stimulus is kicking in

China growth forecasts becoming less pessimistic

11

Source: VanEck; Bloomberg LP.

99.75

100

100.25

100.5

100.75

101

101.25

J.P. M

orga

n Fo

reca

st R

evisi

on In

dex

Downward Growth Revisions Have Slowed

Services look fine and manufacturing may be turning

12

Source: Bloomberg. Purchasing Manager Index: is an indicator of economic health of a sector.

We believe China’s manufacturing investments are rebounding

Services look steady and new orders are rebounding

0

5

10

15

20

25

Dec-1

2Ap

r-13

Aug-

13De

c-13

Apr-1

4Au

g-14

Dec-1

4Ap

r-15

Aug-

15De

c-15

Apr-1

6Au

g-16

Dec-1

6Ap

r-17

Aug-

17De

c-17

Apr-1

8Au

g-18

Dec-1

8

Year

ove

r Yea

r Gro

wth

% (3

-mon

th av

erag

e)

Investment in Manufacturing Shows Rebound

49

50

51

52

53

54

55

56

Feb-

16Ap

r-16

Jun-

16Au

g-16

Oct-1

6De

c-16

Feb-

17Ap

r-17

Jun-

17Au

g-17

Oct-1

7De

c-17

Feb-

18Ap

r-18

Jun-

18Au

g-18

Oct-1

8De

c-18

Feb-

19

Inde

x Valu

e

China Purchasing Managers Index

China's Official Services PMI China New Orders PMI

13

Left chart: Source: BofA Merrill Lynch Global Research, CEIC.Right chart: Source: BofA Merrill Lynch Global Research estimates, CEIC, Wind, PBoC. Other financial assets include stock, bond, insurance, trust and peer to peer investments.

Important policy buffer: household balance sheets

0

50

100

150

200

250

300

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

RMB

trillio

n

Balance Sheets Have Grown Steadily

Asset Liability Net asset

We believe household balance sheets are currently in good shape

However, property comprises a large portion of household assets and consumer confidence shows strong correlation with housing sector

A sustained drawdown in housing prices could have an outsized impact on consumer confidence and spending

95

100

105

110

115

120

125

Jan-

11Ma

y-11

Sep-

11Ja

n-12

May-1

2Se

p-12

Jan-

13Ma

y-13

Sep-

13Ja

n-14

May-1

4Se

p-14

Jan-

15Ma

y-15

Sep-

15Ja

n-16

May-1

6Se

p-16

Jan-

17Ma

y-17

Sep-

17Ja

n-18

May-1

8Se

p-18

Inde

x Valu

e (Ja

nuar

y 201

1 = 10

0)

Consumer Confidence and Housing Prices are Closely Linked

Second-hand houses price index Consumer confidence index

Geopolitical considerations to grow in importance

14

Sources: Bloomberg as of 1/25/2019. Past performance is not indicative of future results.

Trade dispute with the U.S. is affecting trade flows and confidence

We believe geopolitical issues will not disappear any time soon as U.S. demands strike at the heart of China’s growth/social model

Some supply chains may shift out of China

China establishing alternative geopolitical networks/structures

-30

-20

-10

0

10

20

30

40

50

60

Jan-

00Ju

n-00

Nov-0

0Ap

r-01

Sep-

01Fe

b-02

Jul-0

2De

c-02

May-0

3Oc

t-03

Mar-0

4Au

g-04

Jan-

05Ju

n-05

Nov-0

5Ap

r-06

Sep-

06Fe

b-07

Jul-0

7De

c-07

May-0

8Oc

t-08

Mar-0

9Au

g-09

Jan-

10Ju

n-10

Nov-1

0Ap

r-11

Sep-

11Fe

b-12

Jul-1

2De

c-12

May-1

3Oc

t-13

Mar-1

4Au

g-14

Jan-

15Ju

n-15

Nov-1

5Ap

r-16

Sep-

16Fe

b-17

Jul-1

7De

c-17

May-1

8Oc

t-18

Expo

rts 3m

ma %

yoy

U.S.-China Trade: Exports to China

US exports to China (US Census Bureau), 3mma %yoy China imports from US (Customs General Administration PRC), 3mma %yoy

U.S. currency demands may create problems down the road

15

Sources: Bloomberg. Real effective exchange rate is an index that describes the strength of a currency relative to a basket of currencies of a country’s trading partners, taking into account differences in price levels in each country. Current account: the current account consists of the balance of trade, net primary income or factor income and net cash transfers, that have taken place over a given period of time. Past performance is not indicative of future results. Index performance is not representative of fund performance. See disclaimers at the end of this presentations.

The U.S.’ “CNY stability” demand is in contradiction with fundamentals (slower growth, smaller current account surpluses)

Renminbi appreciated a lot relative to regional peers and other reserve currencies in the past several years

0

2

4

6

8

10

12

Mar-0

0Fe

b-01

Jan-

02De

c-02

Nov-0

3Oc

t-04

Sep-

05Au

g-06

Jul-0

7Ju

n-08

May-0

9Ap

r-10

Mar-1

1Fe

b-12

Jan-

13De

c-13

Nov-1

4Oc

t-15

Sep-

16Au

g-17

Jul-1

8

Curre

nt A

ccou

nt B

alanc

e (%

of G

DP)

Past Current Account Surpluses Have Disappeared

60

70

80

90

100

110

120

130

140

150

160

Real

Effe

ctive

Exc

hang

e Rat

e (3/3

1/200

5 = 1

00)

CNY Levels Contracted with Fundamentals

JPY EUR USD GBP CNY

Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) may offer investments products that invest in the asset classes and country included in this presentation.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

Disclosure

16

China in 2019:�Pursuing a middle-income �growth model Natural slowdown, bigger global contributionInnovation, economic complexity ahead of peersSecular transformation to consumption-based economyTransformation has costs – widening macro imbalancesPrice deflation reignited debt concernsPrice deflation has implications for corporatesDealing with imbalances is painfulSome traditional policy tools look less effectiveFiscal stance remains stimulativeChina growth forecasts becoming less pessimisticServices look fine and manufacturing may be turningImportant policy buffer: household balance sheetsGeopolitical considerations to grow in importanceU.S. currency demands may create problems down the roadDisclosure