China Outlook

1

Jan Dehn, Global Head of Research

Source: IMF forecasts up to 2023. Ashmore projections from 2024 to 2050.

China is set to be 2-2.5 times larger than US by 2050

2

Ratio of China USD GDP to US USD GDP – scenarios (assuming constant exchange rates)

Scenario 1:

China and US GDP projections

are based on a constant

population ratio and trends in

real GDP growth rates in line

with the past 43 years (1980-

2023 using IMF data and

forecasts)

Scenario 2:

China and US GDP projections

are based on a constant

population ratio and trends in

real GDP growth rates based

on IMF’s projections for 2018-

2023

0.0

0.5

1.0

1.5

2.0

2.5

3.0

China Roadmap

3

Vision: Transition from export-led to consumption-led

growth

Build political support

Encourage consumption

Adjust growth model to

deleveraging and QE in

developed economies

and diminishing labour

supply in China

Persuade domestic vested

interest groups to change

Facilitate

transmission

of monetary

policy

Consumption has major upside potential due to

49% savings rate; social safety nets, better

savings options

‘Biggest

bang’ in

history to

finance

Reduce turbulence

through foreign central

bank and institutional

participation

To facilitate

greater domestic

demand without

inflation

Supply-side

reforms to

improve

competitiveness

Liberate capital

account

Internationalise RMB

and expand RQFII

Medium term RMB

appreciation and global

infrastructure investment

Raise productivity

Reform markets, SOEs,

the judiciary & innovate

Slower growth in short term,

sustained long term growth

potential

Liberate interest rates &

develop yield curves

Reform pensions, mutual

funds and banks

Supportive for

government bonds,

‘price discovery’ for

muni/corporate bonds

Develop domestic

institutional

investor base

Source: IMF, BIS, Ashmore. Data as of December 2016.

4

Emerging Markets Developed Markets

China

0

50

100

150

200

250

300

350

400

450

0 10 20 30 40 50

Do

me

sti

c c

red

it (

% o

f G

DP

)

Savings rate (% of GDP)

0

50

100

150

200

250

300

350

400

450

0 10 20 30 40 50

Do

me

sti

c c

red

it (

% o

f G

DP

)

Savings rate (% of GDP)

China’s non-debt problem

Source: Ashmore, www.tse.export.gov

2015 trade imbalances: Top 10 countries

Trade imbalances & trade wars

5

(500) (400) (300) (200) (100) - 100 200 300 400 500 600

China

Mexico

Canada

Japan

Germany

South Korea

United Kingdom

France

India

Italy

Imports from the US

Trade balance

Exports to the US

Appendices

6

Source: Ashmore, BIS. “F” indicates Ashmore forecasts.

China is already the biggest market in EM

7

15 largest EM issuers

Rank Country Region

Size Structure of market

USD trn % of total EM Local External Govt Corp

1 China Asia and Pacific 11.6 48% 11.4 0.2 4.3 7.3

2 Brazil Latin America and Caribbean 2.3 9% 2.2 0.1 1.6 0.7

3 South Korea Asia and Pacific 1.9 8% 1.7 0.2 0.6 1.2

4 India Asia and Pacific 0.9 4% 0.9 0.0 0.9 0.0

5 Mexico Latin America and Caribbean 0.8 3% 0.5 0.3 0.4 0.4

6 Hong Kong Asia and Pacific 0.5 2% 0.4 0.0 0.1 0.3

7 Russia Eastern Europe 0.4 2% 0.3 0.1 0.2 0.3

8 Singapore Asia and Pacific 0.4 2% 0.3 0.1 0.1 0.3

9 Taiwan Asia and Pacific 0.4 2% 0.4 0.0 0.2 0.2

10 Malaysia Asia and Pacific 0.4 2% 0.3 0.0 0.2 0.2

11 Thailand Asia and Pacific 0.4 2% 0.4 0.0 0.1 0.2

12 Poland Eastern Europe 0.3 1% 0.3 0.1 0.3 0.1

13 Indonesia Asia and Pacific 0.3 1% 0.2 0.1 0.2 0.1

14 Turkey Middle East and Africa 0.3 1% 0.2 0.1 0.2 0.1

15 Argentina Latin America and Caribbean 0.3 1% 0.2 0.1 0.2 0.1

Source: Ashmore, IMF (April 2017), Bloomberg (yields as of 20 August 2018).

8

Gross government debt (% of GDP) Real and nominal 5yr yields

Debt and the compensation to taking exposure to debt

0

50

100

150

200

250

300

Japan UnitedStates

UnitedKingdom

Germany China

-2

-1

0

1

2

3

4

Germany Japan UK US China

Nominal yield

Real yield

Source: Ashmore, Bloomberg, JP Morgan (data as of March 2018)

China in a EM local currency portfolio

9

Efficient allocations based on returns in USD terms

EM China Correlation

Return 6.6% 5.4%

Volatility 10.0% 3.8%

Efficient weight 13.0% 87.0%

Return 6.6% 4.8%

Volatility 10.7% 3.1%

Efficient weight 7.0% 93.0%

Return -1.0% 2.9%

Volatility 9.4% 3.3%

Efficient weight 0.0% 100.0%

Return 5.8% 2.2%

Volatility 9.6% 3.6%

Efficient weight 27.0% 73.0%

Return 15.9% 10.0%

Volatility 6.9% 3.9%

Efficient weight 30.0% 70.0%

Since 2004 11.1%

10 years 16.1%

5 years 24.0%

3 years 28.6%

1 year 24.0%

10

Appendix: linked to per capita GDP

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

-60 -40 -20 0 20 40 60

GD

P

per

capita (

US

D)

Net commodity specialiation (% of GDP)Net commodity specialisation (% of GDP)

Source: Ashmore, UNCTAD, IMF. Data as at 01-May-18.

All

commoditiesFuel Food Other

All EM countries

All 5% 2% 1% 3%

Asia -1% -3% 1% 2%

Eastern Europe 2% 1% 0% 1%

Latin America 6% 0% 3% 3%

Africa 9% 2% 0% 7%

Middle East 10% 13% -3% 1%

Specialist commodity exporters

All 12% 7% 1% 5%

Asia 17% 1% -1% 16%

Eastern Europe 21% 20% 0% 1%

Latin America 8% 1% 4% 4%

Africa 10% 2% 0% 7%

Middle East 24% 28% -3% 2%

Non-specialists

All -5% -5% 0% 0%

Asia -4% -4% 1% -1%

Eastern Europe -3% -4% 1% 1%

Latin America -3% -4% 0% 0%

Africa -8% -8% 0% 0%

Middle East -10% -7% -3% 0%

Source: Ashmore, IMF as at end 2016

China in the world

11

China’s share of EM trade

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Four major EM regions' trade with China (% of regional GDP)

China GDP as % of four EM regions' GDP

China trade: Share of four major EM regions' total trade (%)

Source: Ashmore, IMF, data as of 31-Jan-18.

Central banks control +75% global FX reserves…

12

Region Reserves (USD bn) % of global reserves GBI index weight (%) GBI weighted reserves (USD bn)

World 11,457 100%

Emerging Markets 8,726 76%

GBI 2,212 19% 100% 159

Argentina 62 0.5% 1% 0.5

Brazil 384 3.3% 10% 38.4

Chile 38 0.3% 2% 0.9

Colombia 48 0.4% 7% 3.3

Czech Republic 148 1.3% 4% 5.8

Hungary 27 0.2% 5% 1.3

Indonesia 130 1.1% 10% 12.4

Malaysia 102 0.9% 6% 5.9

Mexico 173 1.5% 10% 16.7

Peru 64 0.6% 3% 1.7

Philippines 82 0.7% 0% 0.2

Poland 108 0.9% 9% 9.6

Romania 45 0.4% 3% 1.3

Russia 443 3.9% 8% 34.3

South Africa 46 0.4% 8% 3.8

Thailand 209 1.8% 8% 16.7

Turkey 89 0.8% 7% 6.4

Uruguay 16 0.1% 0% 0.0

Non-GBI 6,513 57%

China 3,140 27.4%

India 415 3.6%

Egypt 37 0.3%

Nigeria 41 0.4%

Slovakia 1 0.0%

Other EM 2,880 25.1%

Developed economies 2,731 24%

Japan, Switzerland 1,952 17.0%

Other 779 6.8%

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