TAC’s view on China Waiting for the Black Swan? Dr. Thierry Apoteker, CEO, TAC Lunch Discussion at Japan’s International Institute for Monetary Affairs March 2013 www.tac-financial.com
Structure de la présentation 1. Short introduction to TAC 2. China’s situation through TAC’s RiskMonitor tool 3. China’s structural transformation and key risks 2
Structure de la présentation 1. Short introduction to TAC 2. China’s situation through TAC’s RiskMonitor tool 3. China’s structural transformation and key risks 3
Présentation de TAC 1. Introduction to TAC TAC is a fully independent European research group providing advisory services on international economic and financial issues for financial investors and industrial companies. TAC also provides policy advisory services through research funded by multilateral institutions. TAC has expanded significantly its research capabilities and is covering now a large range of macro issues and macro risks (mature / emerging / frontier markets, cyclical outlooks/ exchange rates / interest rates, oil prices forecasts….). With a staff of around 20 persons, customer relation advisors in Singapore and Tokyo, and a research office in New Delhi, TAC has the critical size to engage into original, powerful and ready-to-use economic and financial research. 4
Présentation de TAC 1. Introduction to TAC Full independence, not afraid of being contrarian, impressive track record Fundamental research Heavy investment and key capabilities based on expertise in quantitative transversal expertise developments Full customization to fit each customer’s requirement 5
Structure de la présentation 1. Short introduction to TAC 2. China’s situation through TAC’s RiskMonitor tool 3. China’s structural transformation and key risks 6
2. China’s situation through RiskMonitor Economic Risk Political Risk Country Groups Transmission Growth Balance KKZ Methodology Three groups Four Channels Real GDP, current account,… Voice & Major arbitrage Fx. Requirements Accountability markets Debt Balance Asset Prices Political Stability Commodity External debt, FDI Banking exporters Regulatory Quality Liquidity Balance Real Economy High number of Government Short-Term debt, rfx level past restructuring Effectiveness Exchange Rate Balance Rule of Law Currency overvaluation, rfx dynamic Control of Cyclical Balance Corruption Business cycle, monetary policy Banking System Balance Domestic credit, intern. refinancing 7
2. China’s situation through RiskMonitor Country Economic & Financial Risk Political Risk Transmission Groups Statistical Data Mining Historical Calibration Statistical Ad hoc observations 5 non parametric Combination of 6 Normalization additions and standard models (e.g. Fundamental econometrics Neural Networks) Balances Economic Risk Crisis Political Risk Group Transmission Ratings Signals Ratings Premium Risk Overall Country Risk Premium , calibrated on JPMorgan’s EMBI+ 8
2. China’s situation through RiskMonitor 9
2. China’s situation through RiskMonitor 10
2. China’s situation through RiskMonitor 11
2. China’s situation through RiskMonitor 12
2. China’s situation through RiskMonitor China 13
2. China’s situation through RiskMonitor 14
Structure de la présentation 1. Short introduction to TAC 2. China’s situation through TAC’s RiskMonitor tool 3. China’s structural transformation and key risks 15
3. China’s structural transformation and key risks Rebalancing the economy’s engines of growth by promoting household-driven demand instead of export and investment The process has already started (70% contribution to GDP growth last year), including expanded social safety net. But will need a much larger share of wages in aggregate GDP to be sustained: this implies a compression of gross corporate savings (i.e. gross margins) at a time of excessive leverage and localized excess capacities, and when the medium-term growth prospect is much lower than in the 2000s. 16
3. China’s structural transformation and key risks Managing the excess financial leverage while avoiding a cyclical and banking shock The overall level of financial leverage is excessive, heavily concentrated on corporate (SOEs first) and local governments or their SPVs. A need to improve allocation of capital while keeping a control: role and problems of the shadow banking system. Higher equity / own funds required in many corporates, with related issues of inadequate returns. 17
3. China’s structural transformation and key risks International challenges in trade, finance and politics Market diversification is driving China’s external trade policy and developments, but many irritants appear in their “market share grabbing” in these new markets; in parallel, China is among the top five “offenders” in trade restrictive policies since 2009. Improvement in capital allocation suggests large international involvement: China’s ability to open up while increasing the international role of the RMB. Geopolitical issues. 18
Your contacts at TAC Thierry Apoteker CEO, thierry.apoteker@tac-financial.com Thierry Da Senior Advisor, thierry.da@tac-financial.com Masatoshi Watanabe Senior Advisor, mwatanab@sage.ocn.ne.jp TAC sas La Saigeais, 35140 Saint Hilaire des Landes, France Tél: +33 (0)2 99 39 31 40 www.tac-financial.com 19
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