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China-LATAM Economic Partnership: Opportunities and Challenges by Suhong Ma,CFA Urban Finance Research Institute, ICBC FELABAN, Lima Nov 20, 2012 1 Sluggish Global Economic Recovery Collaborative slowing down in developed and emerging economies Growth Outlook of Global Economy ( Oct 2012 ) % Real Growth rate of Economy Forecast Growth rate of Economy Compare with Forecast in July 2010 2011 2012 2013 2012 2013 Global Economy 5.1 3.8 3.3 3.6 -0.2 -0.3 Developed Economy 3.0 1.6 1.3 1.5 -0.1 -0.3 United States 2.4 1.8 2.2 2.1 0.1 -0.1 Euro Zone 2.0 1.4 -0.4 0.2 -0.1 -0.5 Japan 4.5 -0.8 2.2 1.2 -0.2 -0.3 7.4 6.2 5.3 5.6 -0.3 -0.2 China 10.4 9.2 7.8 8.2 -0.2 -0.2 Russia 4.3 4.3 3.7 3.8 -0.3 -0.1 India 10.1 6.8 4.9 6.0 -1.3 -0.6 Brazil 7.5 2.7 1.5 4.0 -1.0 -0.7 Emerging Market and Developing Economy Source:IMF 2 Main Theme of China’s Economy in 2012:Slowdown China’s GDP growth cumulative growth quarter growth 2012-09 2012-06 2012-03 2011-12 2011-09 2011-06 2010-12 2010-09 2010-06 2010-03 2009-12 2009-09 2009-06 2009-03 2008-12 2008-09 2008-06 2008-03 2007-12 2007-09 2007-06 2011-03 China’s GDP growth has been slowing down for 7 consecutive quarters 15 14 13 12 11 10 9 8 7 6 5 2007-03 Source:China’s National Bureau of Statistics,the same below unless otherwise indicated 3 Main Theme of China’s Economy in 2012:Slowdown Weak external demand leads to export decline -100 -200 -300 2012-09 20 2012-07 0 2012-05 25 2012-03 100 2012-01 30 2011-11 200 2011-09 35 2011-07 300 2011-05 % 40 2011-03 US$ mn 400 2011-01 -400 15 10 5 0 net export growth rate of export(y-o-y) 4 Main Theme of China’s Economy in 2012:Slowdown Industrial production slows down sharply and then maintain a low, steady growth Growth of China’s Industrial Value-added Output(y-o-y) 25 Growth of industrial value-added falling sharply from the beginning of the year and keep its growth below 10% % 20 15 10 5 2012-08 2012-05 2012-02 2011-11 2011-08 2011-05 2011-02 2010-11 2010-08 2010-05 0 2010-02 5 Main Theme of China’s Economy in 2012:Slowdown Consumption growth is stable, and stimulus takes time to come into effect Growth of consumer goods’ retail sales( y-o-y) % nominal growth rate 25 real growth rate Consumption keeps its growth around 15% 20 15 10 5 2012-10 2012-07 2012-04 2012-01 2011-10 2011-07 2011-04 2011-01 2010-10 2010-07 2010-04 2010-01 2009-10 2009-07 2009-04 0 2009-01 6 Main Theme of China’s Economy in 2012:Slowdown % 6 4 2 2012-08 2012-02 2011-08 2011-02 2010-08 2010-02 2009-08 (4) 2009-02 (2) 2008-08 0 2008-02 Average CPI of the year is expected to below 3.0% CPI(m-o-m) 8 2007-08 CPI inflation (YoY) falls to 1.7% in Oct from 4.5% of the first month of the year CPI(y-o-y) 2007-02 Inflation pressure easing 10 % 15 PPI(y-o-y) 10 PPI(m-o-m) 5 2012-08 2012-02 2011-08 2011-02 2010-08 2010-02 2009-08 2009-02 2008-08 2008-02 (5) 2007-08 0 2007-02 Policy focus has shifted from “control inflation” to “support growth” (10) 7 Main Theme of China’s Economy in 2012:Slowdown Contributors to China’s Growth (%) 2009 2010 2011 3Q2012 GDP 9.2 10.4 9.2 7.7 Consumption 4.4 3.8 4.8 4.2 Capital Formation 8.4 5.6 5.0 3.9 Net Export -3.6 1.0 -0.5 -0.4 8 Outlook for China’s Economy: Downside Risks Exports Due to fiscal austerity and weakening growth, global demand is expected to remain weak for a time. China’s export growth will fall to 8% in 2012 from 20.4% in 2011. Net export’s contribution to China’s GDP growth in 2012 wil be negative Accumulated growth of China’s exports to Developed countries % 100 80 60 40 United States European Union Japan ASEAN countries India South Africa Russia 2012/05 2012/03 2012/01 2011/11 2011/09 2011/07 2011/05 2011/03 2011/01 2010/11 2010/09 2010/07 2010/05 (20) 2010/03 0 2010/01 2012/05 2012/03 2012/01 2011/11 2011/09 2011/07 2011/05 2011/03 2011/01 2010/11 2010/09 2010/07 2010/05 2010/03 20 2010/01 40 30 20 10 0 (10) % 120 Accumulated growth of China’s exports to Emerging countries Brazil 9 Outlook for China’s Economy: Downside Risks Property Markets Property tightening to continue, especially to control speculative demand Investment growth in property development falls sharply since 4Q2011 Property market collapse unlikely to occur: Huge rigid demand in housing due to urbanization Low leverage in housing market Flexibility of government’s policy 10 Outlook for China’s Economy: Policies China: benchmark lending and deposit rates Loose Monetary Policy 1-year lending rate 8 Interest rate cuts in June and July ,totally 50 percentage points 1-year deposit rate % 7 6 5 4 3 2012-10 2012-04 2011-10 2011-04 2010-10 2010-04 2009-10 2009-04 2008-10 2008-04 2007-10 2007-04 2006-10 2006-04 2005-10 2005-04 Requirements of depositreserve ratio cut twice, totally 1 percentage 1 2004-10 2 China: reserve requirements ratios for % per annum financial institutions 25 23 21 19 17 RRR for large banks 15 13 2011-04 2010-04 2009-04 RRR for medium and small banks 2008-04 2007-04 2006-04 2005-04 7 5 2012-04 11 9 2004-04 China Central Bank declares to continue prudent monetary policy, make it more targeted, flexible and forward-looking, while finetuning it according to the economic situation development 11 Outlook for China’s Economy: Policies Proactive Fiscal Policy to support growth and economic restructuring Increasing government spending (project of people’s livelihood,) while carrying out structural tax reduction (SMEs, Service Industry, Strategic Emerging Industries, etc.) Moves since May 2012: • Accelerating major projects approval and implementation • Subsidy for energy saving and emission reducing Probability of launching massive stimulus policies has been largely decreased 12 Outlook for China’s Economy: Soft Landing In The Near Future Due to policy easing, there’re some new signals indicating that China’s economy may moderately rebound in the fourth quarter this year, and continue steady growth in 2013.In other words, a soft landing is expected in the near term. Outlook for China’s Economy Main Economic Indicators 2011 The first 3Qs of 2012 2012(F) 2013(F) GDP(%) 9.2 7.7 7.8 8.0 Urban Investment in Fixed Assets(%) 23.8 20.5 21.0 21.5 Total Retail Sales of Consumer Goods (%) 17.1 14.1 14.5 15.0 Export(%) 20.3 7.4 7.8 8.5 Industrial Added Value(%) 13.9 10.0 10.5 11.0 CPI(%) 5.4 2.8 2.8 3.0 PPI(%) 6 -1.5 -1.8 0.3 M2(%) 13.6 14.8 15.0 14.5 New Loans(Trillion Yuan) 7.47 6.72 8.1 8.9 13 Outlook for China’s Economy: Potentials In The Long Run In the long run, China is still in the process of industrialization, marketization, urbanization and internationalization, which will provide long-term source for resilient economic growth.In the next coming years, China’s economy will grow at a comparatively low rate, but still around 7%. China’s increasing integration into global economy Political and social stability China’s economy still enjoys middle and long term potential Enormous social demand generated from urbanization and industrialization Upgrading of household consumption 14 China to deepen financial reform in support of sustainable growth Financial Reforms will be further advanced, so that financial sectors can play a role in optimizing resource allocation and supporting real sector growth. Financial Reform Interest Rate Liberalization RMB Exchange Rate Regime Reform Capital Account Opening Expanding Cross-border Use of RMB 15 China to deepen financial reform in support of sustainable growth Interest Rate Liberalization Asymmetric interest rate cuts Expanding the scope of interest rate fluctuations Financial Institutions will be given more pricing power, and there’ll be differentiated interest rates in the market More intensive competition, and narrowed NIM. China: benchmark lending and deposit rates 1-year lending rate 8 1-year deposit rate % 7 6 5 4 3 2012-10 2012-04 2011-10 2011-04 2010-10 2010-04 2009-10 2009-04 2008-10 2008-04 2007-10 2007-04 2006-10 2006-04 2005-10 2005-04 1 2004-10 2 16 China to deepen financial reform in support of sustainable growth Reform of RMB Exchange Rate Regime Since the fluctuation range of exchange rate was widened from 0.5% to 1% on April 6th, exchange rate of RMB against US dollar had terminated its one way appreciation trend, and start its two-way fluctuation CNY CNH NDF 6.70 6.65 6.60 6.55 6.50 6.45 6.40 2012/10 2012/09 2012/08 2012/07 2012/06 2012/05 2012/04 2012/03 2012/02 2012/01 2011/12 2011/11 2011/10 2011/09 2011/08 2011/07 2011/06 2011/05 2011/04 2011/03 2011/02 2011/01 6.35 6.30 6.25 6.20 17 China to deepen financial reform in support of sustainable growth Capital Account Opening Expanding cross-border RMB direct investment RQFII Personal overseas direct investment pilot program Steady Progress of Capital Account Convertibility Capital Account Opening Progress of China Full Opening Partial Opening 8 18 Restricted Not Opening Opening 11 6 Total Number 43 source:IMF unit:number of capital account 18 - 18 - China to deepen financial reform in support of sustainable growth RMB Cross Border Use ¥bn 3000 Cross-border trade settled in RMB 2500 2500 RMB cross-border trade settlement 2100 2000 1500 1000 500 500 RMB offshore market 0 3.6 2009 China has signed currency swap agreements with 18 monetary authorities, the total size amounts to RMB1.7trillion. ¥bn 800 2010 2011 RMB offshore deposits 2012(F) 727 680 700 600 500 400 320 300 200 100 63 0 2009 - 19 - source:PBC 2010 2011 1H2012 19 China’s Economy Outlook: Middle and long term potentials Long term: China is still in the process of industrialization, marketization, urbanization and internationalization, which will provide long-term source for resilient economic growth. Middle-term: The probability of property market’s hard-landing is very small Impetus Short term: Policy easing to support economic growth 20 China is expected to become the largest economy in the world China: China and US Nominal GDP Real GDP Growth: 2012-15: 8% US$trillion 40 36.9 35 China 30 30.9 USA 19 15 10 10 5 12.6 14.5 13.2 US: 5.9 1.2 2.3 Real GDP Growth: 0 2000 2005 Inflation:4% 2012-2015 RMB appreciation: 10% 25 20 2016-25:6.5% 2010 2015f 2025f 3% Inflation:2% 21 Outlook for China-LATAM Co-operation China and LATAM economies are highly complementary China’s demand has become a key driving force in economic growth in Latin American economies. China's GDP% of global GDP China's foreign trade% global trade % 12 10.4 10 8 9.3 6 4 2 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 0 22 China-LATAM:Closer Economic Partnership China-LATAM trade maintain steady growth in recent years: LATAM’s share of China’s foreign trade rose to 6.9% in 3Q2012, from 4.7% in 2007. China's exports and imports US$bn 4500 4000 3500 3000 2500 2000 1500 1000 500 0 China-LATAM trade has been growing more rapidly than that of China’s total foreign trade. Trade structure:China mainly imports natural resources (such as minerals) and agricultural produce from LATAM,and exports manufactured goods in return. China-LatinAM trade 241 183 103 2175 2007 60 40 30 20 2563 2008 197 122 2208 2009 2974 2010 3642 2011 46.1 23.5 39.7 34.7 17.9 31.5 22.5 12.0 6.2 0 (20) 3Q2012 50.2 10 (10) 2842 China's foreign trade growth yoy China-LatinAM trade growth yoy % 50 143 2007 2008 2009 2010 (13.9) (15.2) 2011 3Q2012 23 China-LATAM:closer economic partnership $mn China’s FDI in LATAM has witnessed a dramatic growth since global financial crisis: China’s FDI to LATAM in 2011 amounts to $12 billion.As of 2011,China’s FDI to LATAM accumulates to $55 billion. FDI(China) 100,000 90,000 10,538 80,000 70,000 3,677 60,000 Tax havens is the main driving force for China’s FDI in LATAM,the Cayman Islands and the English Virgin Islands accounts for more than 90% of China’s FDI in LATAM. 11,936 7,328 50,000 40,000 8,469 30,000 20,000 4,902 55,907 56,529 68,811 74,654 21,164 26,506 10,000 0 2006 Since 2009,LATAM has become the second largest target region with regards to China’s FDI. FDI:LatinAM(China) 2007 FDI(China,accumulated) $mn 600,000 2008 2009 2010 FDI:LatinAM (China,accumulated) 55,172 500,000 400,000 43,876 300,000 200,000 100,000 0 2011 30,595 19,694 24,701 32,240 183,971 90,631 117,911 2006 2007 2008 424,781 317,211 245,755 2009 Source: Ministry of Commerce (China) 2010 2011 24 Outlook for China-LATAM Co-operation Opportunities: Trade: • Slumping growth from the United States and economic recession in Euro Area China’s domestic demand is expected to be further released (National Income Double-growth Plan,18th National Congress of CCP ) LATAM’s exports to China is expected to gain speed and be more diversified FDI: To implement the strategy of “Going Out”, China will accelerate its investments overseas, LATAM is one of the most important target region LATAM requires significant capital with regards to infrastructure construction, mining and manufacturing industry RMB cross border settlement : RMB settlement in trade and investment will both be enlarged LATAM region can introduce RMB settlement to make the monetary system more diversified, so as to reduce exchange rate volatility risk 25 Outlook for China-LATAM Co-operation Challenges: Trade frictions between China and LATAM economies are on the rise China’s FDI in LATAM be faced with more political risks M&A in LATAM become more difficult and complex 26 Outlook for China-LATAM Co-operation How to take advantage of the opportunities? How to meet the challenges? Focus on interests and benefits for both sides Enhance Communications Win-win cooperation 27 Enhance Financial Service to Facilitate China-LatinAM Cooperation ICBC_the largest bank in China and also in the world 400,000 employees 17,000 domestic outlets 260 overseas branches and sub-branches 4.1 million corporate customers 280 million individual consumers ICBC Ranks first in the world’s banks with regards to: Market Capitalization:$240 billion(2012) Profit: USD40 billion( 2012, forecast ) 28 Enhance Financial Service to Facilitate China-LatAM Cooperation • ICBC Argentina:ICBC got approval from Central Bank of Argentina to take over 80% stake in the Standard Bank Argentina. After the takeover, ICBC Argentina Branch will become the largest Chinese bank in Latin America with the most extensive branch network and biggest business scale. • • ICBC Peru:subsidiary opening soon in the 1Q2013 ICBC Brazil:waiting for approval of Brazil authorities 29 Thank you! 30