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1 This is your presentation title Hong Kong in the New Sino-U.S. Relations Alexa Lam Professor of Legal Practice, The University of Hong Kong

2 1 China s Domestic Economy Economic rebalancing and structural reforms 2

3 China s economy - GDP Nominal GDP 2016 (US$bn) United States 18, China 11, Japan 4, Germany 3, United Kingdom 2, France 2, India 2, Italy 1, Brazil 1, GDP 2016 on PPP basis (US$bn) China 21, United States 18, India 8, Japan 4, Germany 3, Russia 3, Brazil 3, Indonesia 3, United Kingdom 2,

4 China s economy - GDP growth GDP Growth (% YoY) F 2017F World Output United States Germany France Italy Spain Japan United Kingdom Canada Russia China India ASEAN Brazil Mexico Saudi Arabia South Africa

5 China s 13th Five Year Plan (FYP) China s 13th FYP ( ) targets: o o o 6.5% GDP growth Annual income per capita to ~US$12,600 by 2020: avoid middle income trap Rebalance economy from manufacturing, exports & fixed-asset investment to service & domestic consumption 5

6 China s GDP per capita in current price (US$) Closing middle income trap Target by Source: IMF

7 Rebalancing from export... China s exports of goods and services (% of GDP) % (2006) % (2015) 7 Source: World Bank

8 Rebalancing from capital/ fixed asset investment... China s capital investment (% of GDP) China s fixed asset investment growth rate (%) 45.67% (2015) 8.1% (2016) Source: World Bank Source: The Trading Economics 8

9 Rebalancing from manufacturing... Contribution to nominal GDP growth(%) Secondary Industry 9 Sources: CEIC & Citi Research

10 to service... Contribution to nominal GDP growth(%) Tertiary industry Sources: CEIC & Citi Research 10

11 ...and domestic consumption China s final consumption expenditure (% of GDP) % (2015) % (2010) Source: World Bank 11

12 Threats to successful rebalance (1) Risks inherent in traditional investment-manufacturingbased economic model o o o Excess industrial capacity Real estate bubbles Over-leveraging (2) Underdeveloped capital market o o o Inadequate regulatory experience Weak institutional investor sector Shallow investment product choices 12

13 Real estate bubble Chinese house prices (yuan per sqm) Jan 2012 = 100 Consumer loans as % of disposable income 13

14 China s total, government, household and corporate debts (% of GDP) Over-leveraging 14 Sources: BIS, PBC, China Finance Almanac (various issues), Shen and Yan (2009), CEIC

15 Inadequate regulatory experience A-share market meltdown 15

16 Inadequate regulatory experience 2015 August 11 widening of the RMB band 16

17 Retail investors domination Percentage of retail investors in China s stock market trade Percentage of retail investors who traded at least once a month Source: Reuters Source: State Street 17

18 On the bright side... financial market reforms Source: South China Morning Post 18

19 Stabilization of property market Source: Shanghai Daily Source: Xinhua 19

20 Wealth management products (WMP) market Off-balance sheet financing in China Source: Bloomberg 20

21 2 New Sino-U.S. Relations China s positioning for global leadership as U.S. moves towards unilaterism 21

22 Trump s 100 days of Presidency Xi s Speeches in Jan 2017 Withdrawal from TPP; bring jobs home Build Mexico-U.S. Wall Immigration Ban Punish currency manipulators Threats of trade war with China China s peaceful rise Multilateral economic coordination Accord de Paris on Carbon Emission Belt and Road Initiative, AIIB 22

23 Davos, Jan 2017 Victory is ensured when people pool their strengths; success is secured when people put their heads together 23

24 UN General Assembly, Jan 2017 China s proposition is, build a community of common destiny of mankind and achieve shared winwin development 24

25 Asian Infrastructure Investment Bank (AIIB) 25

26 26 One Belt, One Road

27 No longer a currency manipulator? CNY/USD exchange rate ( ) China foreign exchange reserves ( ) Source: People s Bank of China 27

28 U.S. China trade deficit U.S. trade deficit with China Source: Office of the U.S. Trade Representative 28

29 Trade war? China s trade profile (2015) Source: World Trade Organization Source: South China Morning Post 29

30 3 Implications for Hong Kong Connecting the dots in the new Sino-U.S. Relationship 30

31 In the past... Super connector Laboratory operator...for China's reforms and market opening experiments 31

32 Market reforms and opening Offshore RMB market o o Handling 72.5% of global RMB payments Largest pool of RMB deposits of 662 billion o Total HK$275 billion offshore RMB bonds (dim sum bonds) issued in 2016 RMB QFII o Total quota for HK financial institutions is RMB 270 billion Shanghai/Shenzhen-Hong Kong Stock Connect o o Quota for SH: northbound aggregate (daily) = RMB 300 billion (13 billion); southbound aggregate (daily) = RMB 250 billion (10.5 billion) Quota for SZ: northbound daily = RMB 13 billion; southbound daily = RMB 10.5 billion Mutual Recognition of Funds o 37 approved to sell in Hong Kong in

33 Will that role diminish as China assumes a leadership position in the global order? 33

34 What is the raison d etre going forward for One Country Two Systems policy? 34

35 Onshore markets will directly compete Shanghai Stock Exchange discussing stock links with London and others Mainland Commodities Exchanges building trade links with offshore commodities markets Shanghai Free Trade Zone Qianhai Free Trade Zone 35

36 One indicator... The 11 August 2015 widening of the RMB trade band capital swings Use HK for incremental onshore market opening while China juggles with difficult but necessary reforms 36

37 The case for Hong Kong Bigger global leadership role tenable only on the foundation of trust and moral authority Respect for universal values of civil society, human liberties, accountability and transparency a prerequisite How China honors the One Country Two Systems Policy for Hong Kong will be a test of this respect 37

38 Thank You