Outflows Ease from China04.25.2016
Investors said they do not expect a hard landing in China this year as capital outflows and the depletion of reserves have eased since last year.
James Ashley, market strategist, strategic advisory solutions at Goldman Sachs Asset Management, said on a panel at the Thomson Reuters Lipper Alpha Forum last week that he expects a soft landing in China over a multi-year horizon. “GDP growth will potentially slow to 5.25% in the next few years versus the 6.5% forecast from Chinese authorities,” he added.
Ashley continued that what keeps him up at night is the need for the Chinese economy to undergo a number of simultaneous transitions without the authorities making any missteps.
Joshua McCallum, head of fixed income economics at UBS Asset Management, said on the panel there will be a drop in growth in China as the country transitions from an industrial to a consumer economy. He added: “A consumer economy is based on what people want, rather than what they need, so the dominance of the state needs to be reduced.”
McCallum continued that what keeps him up at night is a possible freeze in liquidity in fixed income markets. “Regulation has reduced broker inventory and when everyone rushes for the exit at the same time, the door will be narrower,” he added. “This will have a knock-on effect.”
Philip Haworth, investment manager, UK equities at Kames Capital, said on the panel there will be a hard landing in China at some point – but not this year.
The Institute of International Finance, an independent provider of global economic and financial research, said in a report today that over the past two months, capital outflows and official reserve depletion have eased as the Renminbi has stabilized. “We estimate that net capital outflows were around $35bn (€31bn) in March, bringing total outflows in 2016 Q1 to around $175bn – well below the pace seen in 2015 H2,” added the IIF.
The report said the main drivers of the reduction in net capital flows seem to be a shift in investor expectations about the path of the RMB and concerns about the country’s economic outlook.
The IIF said: “We project net capital outflows to slow to $538bn in 2016 from $674bn last year, supported by a gradual recovery in non-resident capital inflows. However, there remain risks that outflows could accelerate again if concerns about RMB depreciation intensify again.”
Jonathan Horton, head of integration, governance and risk in the information services division at London Stock Exchange Group, which includes index provider FTSE Russell, said in a blog today that international investors still want more access to China despite a volatile start to this year.
“The FTSE China A50 Index has fallen 21% over the last year (as of March 31st) and a growth slow down for the world’s second largest economy has tested investors’ resolve, yet the strategic importance of China and how to access it is one of the most frequently discussed topics when we meet with our clients,” Horton added.
He said investor interest has increased due to the stock market expansion, regulatory improvements and increasing market accessibility.
In the past ten years, the total market capitalisation of the China A50 Index has grown from $41.2bn on March 31 2006 to $524.8bn at the end of last month. This represents a 13% annualized index return compared to 7% for the US large cap Russell 1000 Index over the same period.
In addition the China A50 Index has become more diversified over that period. For example, the weights of oil and gas producers and the mining sector have fallen while banks and financial services have increased.
There are quotas in place for foreign investors accessing the A-shares market and these have increased since the introduction of the RQFII scheme for qualified investors and the Shanghai-Hong Kong Stock Connect program for all investors. The Peoples’ Bank of China has also announced that it will remove the quota system for international investors to access the interbank bond market.
Horton said: “The rapid pace of recent announcements by China’s State Administration of Foreign Exchange has broadened the allowable scope of foreign investment, made existing programs easier to use and clarified rules like tax treatment. Expanded access has gone hand-in-hand with government financial and market reforms, including adjustments to interest rate policy, banking systems and currency.”
China’s A-share market is currently on the FTSE Watch List to join other existing China share classes in the Secondary Emerging category. The FTSE country classifications are Developed, Advanced Emerging, Secondary Emerging and Frontier, while the Watch List includes countries whose classification may change in the near term.
“We recognize the latest SAFE announcement is a major step forward for market access and capital repatriation,” added Horton. “This will be raised by the FTSE Country Classification Advisory Committee ahead of the formal interim update later this month.”
State Street said the regulatory path would involve more delays, and all approvals have not been resolved.
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