Download Global economic outlook

China: What happens when
the free greenbacks dry up?
Alicia García-Herrero
Chief Economist Emerging Markets
BBVA Research
Foreign Correspondents’ Club of China, Beijing
May 2014
China: What happens when the free greenbacks dry up?
Outline
Section 1
Global economic outlook
Section 2
The FED exit
Section 3
Impact on Emerging Markets: What is it for China
Section 4
Conclusions for China
Page 2
China: What happens when the free greenbacks dry up?
Global Economic Outlook
1
Global expansion moderating with China
growing less than previously expected
and without immediate risks of a sudden
adjustment
Global GDP growth
(%)
Source: BBVA Research
6
5.2
5
4
4.0
3.8
3.2
2.8
3.0
3.4
3
2
The combination of the Fed tightening
and (further) adjustments of China’s
growth will be the dominant factors in the
coming months (absent an ECB’s QE) with
an heterogeneous impact on EM
2
1
0
-0.4
-1
-2
2008
2009
2010
Developed Mkts
2011
2012
2013
(e)
2014
(f)
2015
(f)
Emerging Mkts
Baseline Jan14
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China: What happens when the free greenbacks dry up?
Monetary Policy & Capital Flows
Emerging Asia: Cumulative Net Capital Flows
(Cumulative since 2005, US$ bn)
5
In any case, EM Portfolio Capital Flows
are still below equilibrium and should
start to navigate to their long run
trend
Source: BBVA Research, IMF and EPFR
500
450
400
350
Forecasts
300
Tapering
2013
150
QE3+Dragui
200
Actual: -17%
(undershooting)
100
50
2016
2015
2014
2011
2010
2009
2008
2007
0
2006
6
After being particularly penalized by the
US tapering Emerging Asia will follow
this path too
2012
250
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China: What happens when the free greenbacks dry up?
China: Updating our baseline scenario due to poor
incoming data and new assumptions on economic policy
China: GDP Growth (%, y-o-y)
Source: BBVA Research
8.0
7.7
The government will press ahead with
reforms and implement measures to curtail
financial risks
7.7
7.5
7.2
7.0
7.0
We expect a higher adjustment in investment
than in consumption
6.5
6.0
Policy supports from public expenditure
(infrastructure investment, tax reliefs) would
be implemented if domestic economy loses
momentum below the bottom line of 7.0%
5.5
5.0
2012
2013
Baseline Apr-2014
2014
2015
Baseline Jan-2014
Page 5
China: What happens when the free greenbacks dry up?
Outline
Section 1
Global economic outlook
Section 2
The FED exit
Section 3
Impact on Emerging Markets: What is it for China
Section 4
Conclusions for China
Page 6
China: What happens when the free greenbacks dry up?
The US Tapering is already here and signs of economic
improvement are materializing…
US: GDP Forecast, QoQ SAAR % change
Source: BBVA Research
The rebound after the winter months is more
evident, particularly in consumption.
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
However, weaker global demand and some
housing sector pressures are limiting the pace
of expansion.
Job growth is not expected to accelerate
significantly in 2014 and inflation is expected
to increase slowly.
We maintain our baseline scenario mostly
unchanged (2.5% GDP growth for 2014 and
2015), slightly elevated upside risk to GDP
growth
Source: BBVA Research
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China: What happens when the free greenbacks dry up?
US monetary policy: Fed funds scenario unchanged,
risk tilted towards an earlier rate hike
Latest
What do we expect?
FOMC Statement: April 29-30, 2014
 Monthly pace of asset purchases tapered
to $45bn – spread to $20bn in MBS and
$25bn of Treasury securities
 Forward guidance left untouched bringing
back unanimous FOMC vote
Fed
Expected
Timeline
for
Exit
Strategy
Changes to FOMC voting members by
June 17-18 meeting.
 Two incoming Governors, vice-chair
Fischer and Brainard, will likely be in place
to vote, one Governor, Stein, leaving
 Centrist voter, Pianalto, Cleveland FRB, will
be succeeded, by likely hawkish Mester
 Measured steps
reduction of QE3
of
Policy pause until
$10bn
 Course of policy firming remains
data dependent
 Anticipated changes to June
projections on “pace of policy
firming” due to new, incoming
FOMC members
Mid – 2015
Maintaining the
3Q15 baseline but
with lower
likelihood as the
probability of early
rate hike increased
 FOMC likely to introduce further
modifications to the forward
guidance throughout the policy
normalization process
4Q14
3Q15
1H16
Expected End QE3
First FFR Hike
Policy Normalization
Balance sheet: let securities
mature/sales
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China: What happens when the free greenbacks dry up?
Outline
Section 1
Global economic outlook
Section 2
The FED exit
Section 3
Impact on Emerging Markets compared with China
Section 4
Conclusions for China
Page 9
China: What happens when the free greenbacks dry up?
QE tapering at first dramatic for EMs but improving
Net Portfolio Inflows : Developed vs Emerging
(Country Flows over Total Assets, moving average 3 months)
Source: EPFR and BBVA Research
Net Portfolio Inflows : Regional Emerging Mkts
(Country Flows over Total Assets, moving average 3 months)
Source: EPFR and BBVA Research
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China: What happens when the free greenbacks dry up?
Path of recovery strong but should moderate
Emerging Markets: Cumulative Net Capital Flows
Emerging Asia*: Cumulative Net Capital Flows
Source: BBVA Research, IMF and EPFR
Source: BBVA Research, IMF and EPFR
(Cumulative since 2005, US$ bn)
(Cumulative since 2005, US$ bn)
500
900
Eq. reached
by Dec 2014
(model forecasted
pace)
800
700
450
400
350
2016
Actual: -17%
(undershooting)
2015
Tapering
Eq. reached
by May 2015
(model forecasted
pace)
2014
2011
2016
2015
2014
2013
2012
2011
0
2010
-200
2009
50
2008
-100
2007
100
2006
0
2010
150
2013
200
2009
100
250
2008
200
Tapering
QE3+Dragui
300
2007
400
300
2012
Actual: -14%
(undershooting)
2006
500
QE3+Dragui
600
(*) Includes: China, India, Indonesia, Philippines, Thailand, Korea, Taiwan,
Hong-Kong and Singapore
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China: What happens when the free greenbacks dry up?
Asymmetry in capital flows adjustment remains…
Russia: Cumulative Net Capital Flows
Turkey: Cumulative Net Capital Flows
(Cumulative since 2005, US$ bn)
(Cumulative since 2005, US$ bn)
Source: BBVA Research, IMF and EPFR
Source: BBVA Research, IMF and EPFR
70
+2%
60
50
140
120
100
80
30
-24%
2013
2012
2011
2010
2009
2006
2014
2013
2012
2011
0
2010
-10
2009
20
2008
0
2007
40
2006
10
2008
20
2007
60
2014
40
Brazil: Cumulative Net Capital Flows
Mexico: Cumulative Net Capital Flows
(Cumulative since 2005, US$ bn)
(Cumulative since 2005, US$ bn)
Source: BBVA Research, IMF and EPFR
Source: BBVA Research, IMF and EPFR
250
140
120
+6%
100
200
150
80
60
100
-45%
40
50
20
2014
2013
2012
2011
2010
2009
2008
2007
2014
2013
2012
2011
2010
2009
2008
2007
2006
2006
0
0
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China: What happens when the free greenbacks dry up?
… with a some particular “damage” to Asia…
China: Cumulative Net Capital Flows
Indonesia: Cumulative Net Capital Flows
(Cumulative since 2005, US$ bn)
(Cumulative since 2005, US$ bn)
Source: BBVA Research, IMF and EPFR
Source: BBVA Research, IMF and EPFR
160
50
140
40
120
30
100
-13%
80
-31%
20
60
Thailand: Cumulative Net Capital Flows
Philippines: Cumulative Net Capital Flows
Source: BBVA Research, IMF and EPFR
50
45
40
35
30
25
20
15
10
5
0
Source: BBVA Research, IMF and EPFR
(Cumulative since 2005, US$ bn)
50
45
40
35
30
25
-14%
20
15
-10%
10
2014
2013
2012
2011
2010
2009
2008
2007
0
2006
2014
2013
2012
5
2011
2010
2009
2008
2007
(Cumulative since 2005, US$ bn)
2006
2014
2013
2012
2011
2010
2009
2008
2006
2014
2013
2012
2011
2010
2009
-10
2008
0
2007
0
2006
20
2007
10
40
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China: What happens when the free greenbacks dry up?
Global Factors dominant when tapering started… increasing
role of domestic factors thereafter
Emerging Markets: Total Net Portfolio Flows Drivers
China: Total Net Portfolio Flows Drivers
Source: BBVA Research
Source: BBVA Research
(External (Global and Regional) + idiosyncratic)
Tapering
QE3 + Dragui
(External (Global and Regional) + idiosyncratic)
35%
60%
40%
35%
65%
40%
25%
40%
75%
60%
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China: What happens when the free greenbacks dry up?
In China institutional flows recovering
China: Institutional Net Portfolio Flows Drivers
China: Retail Net Portfolio Flows Drivers
( External(Global and Regional) + idiosyncratic)
( External(Global and Regional) + idiosyncratic)
Source: BBVA Research
6
8
6
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
Local
Global/Regional
Flows
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Aug-12
Oct-12
2
Jun-12
4
Apr-12
4
Tapering
8
10
Local
Global/Regional
Flows
QE3 & Draghi
10
Tapering
QE3 & Draghi
Source: BBVA Research
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China: What happens when the free greenbacks dry up?
Impact of QE tapering seems bigger in China than in
rest of EM (especially for bonds)
China Net Bond Inflows: Response of 40 bp reduction in US 10yr & Bund
( in % over baseline, Total Assets Under Management)
Source: BBVA Research Capital Flows DLM-FAVAR Model
EM Net Bond Inflows: Response of 40 bp reduction in US 10yr & Bund
( in % over baseline, Total Assets Under Management)
Source: BBVA Research Capital Flows DLM-FAVAR Model
1.00
Shock to Bund
0.80
Shock to 10y Bill
0.60
0.40
0.20
0.00
0
1
2
3
4
5
6
China Net Equity Inflows: Response of 40 bp reduction in US 10yr & Bund
( in % over baseline, Total Assets Under Management)
Source: BBVA Research Capital Flows DLM-FAVAR Model
EM Net Equity Inflows: Response of 40 bp reduction in US 10yr & Bund
( in % over baseline, Total Assets Under Management)
Source: BBVA Research Capital Flows DLM-FAVAR Model
1.00
0.80
0.60
Shock to Bund
0.40
Shock to 10y Bill
0.20
0.00
-0.20
-0.40
0
1
2
3
4
5
6
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China: What happens when the free greenbacks dry up?
EMs have introduce a wealth of measures to contain
capital outflows
Policy options to cope with a sudden deceleration in capital inflows
Source: World Bank
Macroeconomic Policy
Allow FX
Rate
Depreciation
Prudential Measures
Exchange
Rate
Interventions
Stricter
Capital
Requirements
Market
Absorption
Tighter
Macroprudential
Rules
FX Reserve
Buffers
Increase
in Interest
Rates
Tighter
monetary
policy
Tight
Decrease
in Capital
Inflows
Targeted
Prudential
Measures
Limit on
Banks FX
Open
Positions
Easing Capital
Inflow
Regulation
Neutral
Loose
Fiscal
Stabilization
Counter
Cyclical
Fiscal Policy
Capital
Controls
Structural and
Financial Mkts
Reforms
Temporary
restrictions
on Capital Ouflow
Regulation
Page 17
China: What happens when the free greenbacks dry up?
Outline
Section 1
Global economic outlook
Section 2
The FED exit
Section 3
Impact on Emerging Markets compared with China
Section 4
Conclusions for China
Page 18
China: What happens when the free greenbacks dry up?
China: BOP’s situation
China: Balance of payments
Source: BBVA Research
USD bn
The fluctuation of reserve increase is mainly
driven by capital flows
250
200
150
Net error and omission reflect somewhat
growing amount of outflows
100
50
0
-50
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
-100
Current account
Capital account
Reserve increase
Capital controls partially insulate China from
external shocks bit it might change with the
deepening of liberalization
Financial account
Net error and omission
Page 19
China: What happens when the free greenbacks dry up?
How should China react?
• Domestic factors increasingly important at explaining China’s reaction to QE tapering
– Capital outflows very influenced by political/business uncertainty
– Bond flows from institutional investors leading specially relevant
• The latest data points to new capital inflows as in the rest of EMs but situation can worsen
– The key is no longer the speed of tapering
– But rather earlier increase in hikes in the US
• Other things given, QE tapering, implies a more restrictive monetary policy in China as
sources of liquidity are reduced.
– PBoC can, of course, counterbalance this impact but might not be the right time (trade-off
with reforms)
Page 20
China: What happens when the free greenbacks dry up?
Thank you!
Comments welcome
[email protected]
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