ICTF 20180424 FINAL...State-Owned Enterprises Bigger, stronger, redder More big SOE mergers...
Transcript of ICTF 20180424 FINAL...State-Owned Enterprises Bigger, stronger, redder More big SOE mergers...
Ken DewoskinDeloitte Chinese Services GroupICTF's Global Credit Professionals SymposiumApril 24, 2018
China:Credit where credit is due . . .
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2018, a year in which . . .
Chinese leaders have committed to driving ahead with the Belt and Road investments
Chinese leaders have committed to significantly deleveraging the domestic economy
Chinese leaders have committed to opening up markets, especially financial services to foreign investment
Chinese leaders have chartered a course toward more centralized control and more Party involvement in State-owned, domestic private, and foreign invested enterprises
There are signs the economy may be at a turning point
Globally winds of change are impacting attitudes toward trade and investment
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Major themes
MainlandMarket Regions
MainlandAs a Whole
NeighborhoodSphere of Influence
Global Economy, ODI, MNCs,
1 The Party, the Plans, and the Prospects
2 As the World Turns: External Environment
3 2018 Q1 Trends: A turning point?
4 Credit and Credit Scoring, with Chinese Characteristics
5 Looking ahead
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October Outcomes: The New Standing Committee of the CPC Politburo
The CPC’s seven most powerful leaders, typically including the successor to the current leader . . . .
But recent constitutional change eliminating term limits changes the succession prospects
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Xi declared a “New Era”– what does it mean?
“Xi Jinping Thought” written into Party Constitution. 3.5 hour Work Report outlines “new era” in all areas of political, economic, and global policy
China is now so successful and wealthy, the Deng doctrine of “bide and hide” is unnecessary
Xi reiterates that Party will now pursue growth quality, not quantity
Party leadership hints that growth target might be amended after 2021
No apparent factional balance in newly-elected Politburo and Standing Committee. Members recognizable as Xi allies and advisors, some with strong growth track records
No apparent successor has been identified, which in the past has been typical of second term NPCs
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Party Congress Work Report – Party Building
OVERSIGHT“We will intensify political inspection to identify problems and ensure that deterrence works”
Stepped up political inspections and oversight
PENETRATION“Strengthen grass-roots level Party organizations”
Party cells to become more alert and proactive
OBEDIENCE“The primary task of Party building is to ensure the whole Party obeys the Central Committee”
Increased Party meetings, ideological oversight, and influence over public discourse
The party leads everything, everywhere – Xi Jinping, Oct 18The party leads everything, everywhere – Xi Jinping, Oct 18
Source: People.cn
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The Work Report Outline: . . . planning advances, markets retreat
State-Owned Enterprises
Bigger, stronger, redder More big SOE mergers Stepped-up efforts to
boost profitability Re-draw the boundaries
of the “commanding heights” to incorporate new industries
State-Owned Enterprises
Bigger, stronger, redder More big SOE mergers Stepped-up efforts to
boost profitability Re-draw the boundaries
of the “commanding heights” to incorporate new industries
Innovation
Huge state-led investments into quantum computing, AI, semiconductors, robotics, green
Planned innovation via pilot programs, demonstrations projects and innovation clusters.
Innovation
Huge state-led investments into quantum computing, AI, semiconductors, robotics, green
Planned innovation via pilot programs, demonstrations projects and innovation clusters.
Supply-Side Structural Reform
Written into CCP Charter Dominant future
economic “re-form” framework
“Attack” on industrial overcapacity
Upstream M&A: fix price volatility in commodities
Supply-Side Structural Reform
Written into CCP Charter Dominant future
economic “re-form” framework
“Attack” on industrial overcapacity
Upstream M&A: fix price volatility in commodities
Macro-Economic Policy
Across the board risk containment (i.e. monetary policy, housing, etc.)
Carefully guarded capital account
Tighter local gov’t fiscal constraints
Macro-Economic Policy
Across the board risk containment (i.e. monetary policy, housing, etc.)
Carefully guarded capital account
Tighter local gov’t fiscal constraints
13-5SSSRBRI
MIC2025Socialist Core ValuesTwo Studies, One BecomeThree Necessaries Four ComprehensivesFour Confidences Four Consciousnesses Four Greats Five-in-One Constructions
Plans&
CampaignsSource: Economist, MOFCOM, Xinhua Net
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The China Dream Achieving Rejuvenation Is the Dream of the
Chinese People – November 29, 2012 Hard Work Makes Dreams Come True – April
28, 2013 Realize Youthful Dreams – May 4, 2013 The Chinese Dream Will Benefit Not Only the
People of China, But Also of Other Countries –May 2013
Right Time to Innovate and Make Dreams Come True – October 21, 2013
The Rejuvenation of the Chinese Nation Is a Dream Shared by All Chinese – June 6, 2014
The Dream: major theme continues . . .
“The Party exercises overall leadership over all areas of endeavor in every part of the country.”
– Xi Jinping, Oct 18, 2017
Source: China Daily, Xinhua Net, Xi Jinping: The Governance of China
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Two hats for Xi Jinping– one voice?
President Xi’s VisionOpen borders, open markets Environmental leadership Win-Win global agreements Peaceful and constructive rise Opening themes reiterated at the 2018 Boao conference by Xi
General Secretary Xi’s Vision Never forget national humiliation Politics in command Top-Level industrial planning Caged markets Digital walled garden Secure borders via “loyal” military
Xi has given several major speeches, his 3 hour, 30,000 word work report at 19th NPC, a much briefer, more global viewpoint at APEC meetings in Hanoi, and most recently a keynote at China’s Boao Forum.
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Major themes
MainlandMarket Regions
MainlandAs a Whole
NeighborhoodSphere of Influence
Global Economy, ODI, MNCs,
1 The Party, the Plans, and the Prospects
2 As the World Turns: External Environment
3 2018 Q1 Trends: A turning point?
4 Credit and Credit Scoring, with Chinese Characteristics
5 Looking ahead
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The US-China Relationship and beyond
Tariff Tweets
IP issues and 301
China ODI down trends
Clipping the wings of the biggest outbound investors
CFIUS and FIRMMA
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Probing the meaning of the Tariff confrontation
China’s imports of US fruit (US$ M and %)
Source: China customs, J Capital
Escalating tariff threats interspersed with responsive and sometime conciliatory rhetoric appear to be impacting investor sentiment and moving markets but so far not being implemented at scale or even laid out in useful detail
5 Key Questions
1.What is the probability of broad implementation?
2.What is the probability of escalation?
3.Who has the greatest leverage?
4.Where are the pain points?5.How does this relate to
broad trade and investment challenges?
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The IP frictions and regulatory evolution
China’s Tech imperatives
CFIUS– recent decisions
FIRMMA– extending the reach
National regulators go global
Other channels
Perhaps more complex and critical than trade imbalances, issues of innovation, IP transfer, and IP theft are helping fuel a sharpening of regulator activity and reach
U.S. hits ZTE with ‘denial of export privileges’ for violating sanctions settlement 4/16/2018The U.S. Department of Commerce Monday imposed a denial of export privileges against ZTE and a related company for seven years for failing to comply with settlement terms in an earlier sanctions case. Source: www.fcpablog.com
China delays Qualcomm, Toshiba deal reviewsApr. 15, 2018 7:50 AM ET|By: Yoel Minkoff, SA News Editor
China is slowing reviews of multibillion-dollar takeover deals as U.S.-China trade tensions escalate, WSJ reports
Source: https://seekingalpha.com/news/3345669-china-delays-qualcomm-toshiba-deal-reviews
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China’s outbound investment: Plays and Players
Chinese Commerce Minister Zhong Shan said on Sunday that China will continue to restrict irrational outbound investmentReuters, 3/1//2018
• Several of the largest Chinese outbound investors--real estate companies, insurance companies, and conglomerates-- have had their wings clipped, chairman changed, and assets sold off or transferred
• Focus is on critical investments, aligned with MIC2025, BRI, and China’s technology and resource acquisition priorities
• Steady growth in Chinese company presence in global financial markets, with equity listings and bond sales
Source: Ministry of Commerce, Bloomberg, Deloitte analysis
2018 new deals in the making down 90% yoy
Source: MOFCOM, China Daily
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China’s broader geo-eco-political outbound thrust
• Bilateral trade agreements in the wake of WTO accession
• Alternate regional trade pacts: RCEP
• Bilateral investment deals• Alternate institutions:
AIIB, CIP, CNY/CNH, Commodity trading boards, Equity markets
• Belt and Road Initiative (BRI)
Domestic Market Access
Production Base
Financial Resources
China’s Geo-Economic Levers
Largest goods producer Largest infrastructure builder Largest commodity consumer Largest financier Largest FOREX holdings
Source: The Conference Board China Center for Economics and Business, Deloitte analysis
China’s Geo-Economic Projects
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What is the Belt and Road Initiative?
Map source: Grisons Peak
A platform for China to try to soak up acute overcapacity and support growth for distressed State industry
Encompasses increased connectivity via rail, road, and energy infrastructure as well as increased seaborne engagement via new ports in the South China Sea and Indian Ocean
The publicly proclaimed notion is that OBOR is about driving newfound China-ASEAN-Central Asia-Middle East (and beyond) trade connectivity, cooperation, and integration –and associated growthSource: The Conference Board China Center for Economics and Business
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Major themes
MainlandMarket Regions
MainlandAs a Whole
NeighborhoodSphere of Influence
Global Economy, ODI, MNCs,
1 The Party, the Plans, and the Prospects
2 As the World Turns: External Environment
3 2018 Q1 Trends: A turning point?
4 Credit and Credit Scoring, with Chinese Characteristics
5 Looking ahead
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Rate of leverage growth decreasing but debt growth continues
Growth in 2016 and 2017 remained largely debt fueled.
In 2017 Q1-Q3, it took 0.3 units of credit to create one unit of GDP. In comparison, the average credit/growth ratio during 2011-15 was 0.28.
At the current status quo, credit intensity, the total debt-to-GDP ratio, will increase from 259% in 2016 to 317% in 2022.*
*Assumptions for calculation: (1) the credit intensity ratio in the coning 5 years remains unchanged from the 2016-17 period; and (2) the government debt-to-GDP and foreign-debt-to-GDP ratios remain unchanged
0.22
0.40
0.34
0.260.29 0.29
0.260.28
0.310.30
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0.0
0.1
0.2
0.3
0.4
0.5 Local government debt replacement (LHS)TSF increase (LHS)Nominal GDP growth,ytd (RHS)M2 growth, ytd (RHS)
Source: NBS, PBoC CEIC, The Conference BoardNotes: local government debt when replaced by bonds is not included in TSF, so the replacement amount is added back to TSF for 2015, 2016 and 2017 Q3.
Credit Intensity Ratio Growth, percent
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Originally primarily driven by mortgage borrowing, now durable goods buying, consumption credit, and unspecified investment credit
0
1000
2000
3000
4000
5000
6000
7000
0%
5%
10%
15%
20%
25%
12/20
08
12/20
09
12/20
10
12/20
11
12/20
12
12/20
13
12/20
14
12/20
15
12/20
16
9/20
17
New bank loan to households: short-term (RHS)
New bank loan to households: long-term (RHS)
New bank loan to housholds over householddisposable income ratio (LHS)
Sources: NBS, CEIC, The Conference Board
Loan to Income Ratio, % RMB, billion Lending to households increased
RMB 6.3 trillion in 2016, a 64% YOY increase. The newly-added loans were equivalent to 19% of household disposable income in the year (blue line) From 2017 Q1-Q3, the ratio of new
bank lending to households over disposable income increased to 21% The outstanding household debt
over annual household disposable income ratio reached 88% in 2016, up from 74% in 2015. If this ratio continues to rise at the same rate as in 2017 Q1-Q3, by the end of 2019, it will be higher than the pre-crisis peak in the US in 2007 at 130%.
Now many Chinese households are leveraging-up . . .
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Little progress toward deleveraging, and rating downgrades
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
U.S. Japan
China
China bank assets as a percent of world GDP
Source: IMF, FDIC, BOJ, Bloomberg, The Conference Board, Deloitte analysis
The PBoC’s Financial Stability Report 2017 noted that “the outstanding balance of off-balance sheet assets of banking institutions was an additional RMB 253.52 trillion” at the end of 2016, although asset types are unclear During and around the 19th
Party Congress, regulators have promised tough action on gray financial markets Downgrades from Moody’s
and S&P; China argued back
Less and less a closed system, we believe China had three external vulnerabilities: 1) cost of borrowing abroad; 2) support of Chinese listings in foreign markets; 3) exchange value of the RMB
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As 2018Q1 reports in . . .
After a buoyant 2017 and good start to 2018, PPI, CPI, commodity prices, construction activity are all in retreat. That is unusual for this time of year.
• Steel demand down 2% through March and production up 2%, leading to accumulating inventories and declining prices
• Retail sales increasing, but at the slowest rate since 2004
• Consumer debt increasing 23% yoy
3 Snapshots
Capital Flight
Shanghai Composite Index
Controls on capital outflows have strengthened greatly over the last three years, but high net worth families and enterprises of all size continue to show interest in diversifying assets and currency holdings
Sources: China customs, MoC, PBoC, SAFE, Wind, J Capital, Deloitte analysis
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Financialization of the Chinese economy
Heavy Process Manufacturing
Basic Goods Manufacturing
Export Sector Development
Financial and New Economy
1980 NowTech Transfer - JVs
Import Substitution –Locality Development
Export Capacity –Locality Development
Zone Value Chain Development
Asset based wealth creation
Capital Gains-based Wealth Creation
Value Added Manufacturing
Urbanization and Real Estate
1979-84 Modern Agricultural Bank and ICBC founded; BOC begins overseas expansion; PBOC becomes “new-era” central bank
1994 China Development Bank founded1999 Big Four bailout with new AMCs2009 Explosive growth of Total Social
Financing, Trusts, WMPs, Derivatives, Interbank market, Commodity markets
2016 China’s Other Financial Institutions (OFI) value reaches US$10T, +27% yoy
Sources: The Conference Board, Wittbrot “New Phonebook,” Deloitte analysis
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China’s paired currency– a unique monetary tool
China's M3 in circulation has nearly doubled in the last five (5) years to US$25 Trillion, nearly tripling in the last eight (8) years
China M3 in circulation
• Under depreciation pressure, MoF shrinks accessible CNH supply
• Demand for CNH remains & even increases• Accessible CNH increases in exchange value
to US$ because of supply-demand imbalance
Only SDR currency that is non convertibleOnly major economy with two forms of the same currencyVery limited use in international settlementLimited number of exchange centers abroad, operating with State-owned banks
China is the only major economy with a non convertible currency
Sources: Federal Reserve of St. Louis, Bloomberg, GlobalRMB estimates, Deloitte analysis
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Major themes
MainlandMarket Regions
MainlandAs a Whole
NeighborhoodSphere of Influence
Global Economy, ODI, MNCs,
1 The Party, the Plans, and the Prospects
2 As the World Turns: External Environment
3 2018 Q1 Trends: A turning point?
4 Credit and Credit Scoring, with Chinese Characteristics
5 Looking ahead
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A generation of change
During less than 40 years of reform, China has evolved from a total cash society with a single state bank to arguably the world’s most digitalized and diverse system of financial services, channels, and exchange assets
“Masses” become “consumers”
Urban pops nearing 60%
Largest CNY bill remains 100元
Currency alternatives/financialization proliferate
Consumer debt expands rapidly
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China continues to lead the way in highly integrated eco-systems built around payments
The BATs, several second tier Internet companies, property developers, logistics companies, and several other business classes are aggressively building highly networked business modelsThe intense market interest is already pointing to fragmentation, oversupply, and standard conflicts, but consolidation is underway
Maintenance/Repair
Finance
InsuranceSharing
Intermodal Integration
Operating Systems Mapping and navigation
Payments
Lifestyle
e-commerce/sales
Marketing
BAT LAND
The Future of MobilitySource: Deloitte Studies, China Daily, Xinhua Net
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Eco-system enabled FICO +++
公民得分 Social Credit Scoring System
1. “You must receive packages at the same address where you pay utilities!”
2. “Your investments should be proportionate to your online spending.”3. “In the last half year, you should donate at least 1 RMB each month.”4. “The top 20 people you contact most by phone are the most
important for Alipay. Everyone please treasure this!”5. “It’s ideal to have 3-5 credit cards.”
Sesame Credit: Path to an ideal credit scoreEC
ON
OM
ICS
ECO
NO
MIC
S +
BEH
AV
IOR
• A more comprehensive scoring system planned for every citizen, linked to national ID card, mobile phone number, and facial recognition record
• Inputs include such things as buying behavior, economic patriotism, Party agenda alignment, school achievement, on-line game time, garbage sorting, illegal activities, jay walking, etc.
• Impacts include such things as school admission, access to high speed rail, air travel and good hotels, mortgage availability, access to passports and foreign travel, access to purchase luxury goods, etc.
Source: Deloitte Studies, The Conference Board Studies
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Major themes
MainlandMarket Regions
MainlandAs a Whole
NeighborhoodSphere of Influence
Global Economy, ODI, MNCs,
1 The Party, the Plans, and the Prospects
2 As the World Turns: External Environment
3 2018 Q1 Trends: A turning point?
4 Credit and Credit Scoring, with Chinese Characteristics
5 Looking ahead
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Big Data Instead of Market Forces“Big Data will make the market smarter and make it possible to plan and predict market forces so as to allow us to finally achieve a planned economy.” – Jack Ma, statement at an economic conference, reported by the Financial Times, Sept 4, 2017
Why central planning should work in the 21st Century
Socialism with Chinese CharacteristicsDeng argued that the transition to a perfected form of socialism would require the use of capitalist activities as an interim step – market forces, controlled competition, labor market flexibility, etc. – until such time that the socialist economic model was ready to be perfected…
Guiyang International Big Data Expo 2016 is held in Guiyang International Conference and Exhibition Center in Guiyang, capital of southwest China's Guizhou Province, May 25, 2016Investors in Guiyang include Apple and Qualcomm
. . . When it failed in the 20th!
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Becoming a dominant global player in Industry 4.0
Technology guidance, subsidies, public and private R&D investment, and other resources are pouring into the basic building blocks
RoboticsDigital<> Hardware
interfaces
Big Data and Analytics
Artificial Intelligence
Industry-Internet Integration
2013 2015
23%11% VS.
R&D Production
Promotion and application
Comprehensive application
China smart manufacturing equipment market has entered a rapid growth era. Around 23 percent of surveyed companies apply automation extensively in 2015, versus 11 percent in 2013IT, IOT
connectivity
Sources: Deloitte survey and analysis
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Campaigns suggest continuation of investment-fueled super-scaling
From 0 to 800+ robotics companies in several years87,000 robots installed in China in 2016
As always, construction leads the way . . .— Over 600 high-tech incubators started since 2014— 12 or more “Big Data zones”— Dozens of eco-city new zones in the works
http://www.reuters.com/video/2011/10/23/chinese-robots-display-ping-pong-prowess?videoId=223838974
Ping pong playing robots…
http://www.telegraph.co.uk/news/2017/08/04/legal-robots-deployed-china-help-decide-thousands-cases/
‘Legal robots' have been deployed on thousands of cases in China to help decide sentencing http://www.scmp.com/news/china/article/2112197/c
hinese-robot-dentist-first-fit-implants-patients-mouth-without-any-human
Dental robot performs procedures without human intervention
Source: Reuters, China Daily, South China Morning Post
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The FIE environment, market access, and investment
We will expand foreign trade, develop new models and new forms of trade, and tum China into a trader of quality
We will adopt policies to promote high-standard liberalization and facilitation of trade and investment
We will implement the system of pre-establishment national treatment plus a negative list across the board
Significantly ease market access
Further open the services sector
Protect the legitimate rights and interests of foreign investors
All businesses registered in China will be treated equally
Prospects?
Debated and TBD
Source: Deloitte Studies, China Daily, Xinhua Net
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Thank you! 谢谢
Q & A