China s Economy: The Real New Norm

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1 Summit Series Forums 2017 China s Economy: The Real New Norm Scott Leiberton Managing Director Principal Global Equities Jiang Yanze Strategist, CCB Principal Asset Management Craig Feldman Executive Director MSCI

2 Brief glimpse

3 Economic morass is over Deflation Over PPI: back above 0 in 16H1 and peaked in 17Q1 Inventory: recovered to 2012, the start of NEW NORMAL No more deflation or recession worries 3

4 Manufacturing and exports rebound Manufacturing investment bottomed Exports rebounded with global recovery 4

5 What s next? New Urbanization Made in China 2025 Consumption 5

6 New urbanization: City-clustering City-clustering with industry clustering Based on the physical network: the Great High-speed Railway System 6

7 New urbanization: Region-based, labor reorganized China s sub-region population growth (%) China s sub-region urban labor supply and demand ratio 7

8 Made in China 2025 Rail transit equipment, 3C&Electrics and other high-end manufacturing contributes more in industrial production (right): New economy is taking more than 60% The super-high growth since the recovery has been concentrated in those areas (left) 8

9 Consumption Short-term loan for residents overwhelms seasonal changes Monthly average is 150 billion since 2017, and the data in 2014/15/16 is 122/88/ 54 billion 9

10 Consumption Residents leverage rallied but still reasonable The residents' leverage ratio has experienced a rapid growth since 2013, but is still in a reasonable position in international comparisons. Residents leverage ratio 10

11 Discretionary consumption spread The consumption driven in the liquor industry has gone to the masses The proportion of health care spending per capital continues to rise 11

12 Internet and e-commerce provide powerful stimulus The retail sales volume of consumer goods is huge, among which E-commerce and Internet consumption are still growing rapidly along with the development of high-speed railway and other logistics network and mobile Internet connection. 12

13 Conclusion China s mid-term cycle bottomed: ROIC becomes attractive and supported by consolidated turnover. A mid cycle may contain 2-3 short cycle, we are now peaking the first short-term cycle. This round of recovery confirms the end of deflation shadow and the very start of future expansion It s possible to see the second rally of short cycle in 218H2, with the second upward of PPI but we should closely track the influence of any macroeconomic policy changes since we are now stepping into a new political period. For a long-term view, the future driven factors would focus on new urbanization, high-end manufacture, and consumption, where we should invest. 13

14 Conclusion The SHCOMP stays in concussion around 3300, probably peak 3500 this year. Some possible shrink may appear in 18Q1, since the economic data may be disappointed in the downward of the first short cycle. But along with the second economy short-cycle confirms, the index concussion would upward to 3600 till the end of This should be more closely tracked. Investment opportunities root in economic restructuring, highly recommend consumption and high-end manufacturing, specific industries include: Food and beverage, Medicine, High-end machinery, 3C equipment, New energy vehicles and equipment. 14

15 Thank you

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