EMTA Seminar on the Outlook for China (London) - Oct. 3

EMTA SEMINAR ON THE OUTLOOK FOR CHINA
Tuesday, October 3, 2017 

Sponsored by


London Capital Club
15 Abchurch Lane
London, EC4N 7BW 

 Topics will include: 

• What are the likely political outcomes of the Party Congress? 
• Will President Xi appoint a successor or will he signal interest in a third term? 
• Will be deleveraging become a top priority post-Congress? 
• Will the North Korea crisis bring the US and China closer, or further apart? 
• Should investors be concerned by Chinese GDP growth prospects? 
• What progress can be made in the transition to a service economy? 
• What is the outlook for greater index inclusion, and increased access to the Chinese bond markets? 
• Will China push back vs. further RMB appreciation, and how? 

3:30 p.m. Registration 

4:00 p.m. Panel Discussion 
The Economic and Political Outlook for China
David Hauner (Bank of America Merrill Lynch) – Moderator
Gene Frieda (PIMCO)
Chris Kushlis (T. Rowe Price)
Jonathan Fenby, CBE (TSLombard)
Bhanu Baweja (UBS)

5:00 p.m. 

Cocktail Reception 

Cautious Views on China Conveyed at EMTA Special Seminar

Speakers at EMTA’s Seminar on the Economic and Political Outlook for China expressed generally cautious or bearish views, while not anticipating a major financial crisis for the world’s most populous country. The event took place on Tuesday, October 3, 2017 in London, sponsored by Tradeweb, with additional support provided by Bank of America Merrill Lynch and UBS.

David Hauner (Bank of America Merrill Lynch) led the discussion, asking for views on the political outlook just two weeks before the country’s Party Congress. “It’s extraordinary how opaque the situation is. This Congress will be different because it is a coronation of President Xi Jinping,” stated TS Lombard’s Jonathan Fenby, who highlighted that, with only two central committee members remaining, and a number of seats in the next level of decision-making also being vacated, “it’s an opportunity for President Xi to put his men…in the top jobs.” Fenby added that Beijing’s top prioritization of GDP growth was changing, with emphases on cutting excess capacity in sectors such as steal and coal, as well as environmental measures, now viewed as having equal importance.

“There has been a commonly accepted view that President Xi would spend his first five years consolidating power, and then spend five years on reforms…but I don’t agree with that,” declared Bhanu Baweja of UBS. “Unlike Deng Xiaoping’s liberal reform, Xi leans towards muscular nationalist policies.”

Baweja believed that “sound bites” of reforms were possible, but as for the heavy lifting of attacking the shadow-banking sector, “I don’t believe they are going to tackle that.”

PIMCO’s Gene Frieda recommended that investors view China as “re-shaping” rather than “reforming” the economy. Chinese officials may intend to deleverage, but instincts for control dominated. Frieda believed that the next 12 months were likely a litmus test for what the Chinese president intended to accomplish.

“There is an oscillation between attempts to deleverage, and a stepping back whenever growth gets threatened or unemployment concerns arise,” agreed T. Rowe Price’s Chris Kushlis, despite Beijing’s best intentions. He added that in his view Xi’s track record was “fair,” with improvements in centralization and “bigger, better SOEs.” In Kushlis’ view, deleveraging remained possible if officials would allow the growth rate to reach its equilibrium, which he specified would be below 6.5%.

On the RMB, Frieda anticipated modestly greater volatility in the currency (whose regime he described as “floating, with Chinese characteristics”). He maintained a moderately bearish view, with a forecast range of 6.65 to 7.30 RMB/USD and did not foresee a more liberalized floating currency even under a new PBOC governor. Baweja noted it remained a question when capital outflows could occur, and offered a 6.8 RMB/USD estimate. Fenby commented that decisions on the FX rate would continue to be decided by politicians, not technocrats.

Hauner asked speakers to address future of Sino-American economic and political relations. US President Trump has inadvertently aided President Xi, with the former’s cancellation of the TPP and the Paris Climate accord creating opportunities for China, and making Xi look better on the environment, surmised Fenby. There was minimal belief in China that a “grand bargain” with Trump could be achieved. The Chinese goal vis-à-vis North Korea would be containment of its nuclear weapons, rather than risk anarchy or refugee inflows in case of regime change. Furthermore, it was not in its interest to see a reunified Korea which could potentially bring the US to its doorstep. Frieda believed that trade issues between China and the US could heat up (“probably on more of a micro basis rather than macro”).

Hauner noted that, with Chinese assets expected to be added to industry indices, “we in the market are all about to increase our exposure to China, whether we want to or not.” Investors should “push back” and urge index providers to delay Chinese inclusion as much as possible, urged Kushlis. “You still can’t bring money in and out freely, and the BondConnect program has some issues to be worked out,” he added.