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).
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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%
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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
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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…
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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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