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China: What happens when the free greenbacks dry up?
 

China: What happens when the free greenbacks dry up?

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- Global economic outlook

- Global economic outlook
- The FED exit
- Impact on Emerging Markets: What is it for China
- Conclusions for China

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    China: What happens when the free greenbacks dry up? China: What happens when the free greenbacks dry up? Presentation Transcript

    • 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?
    • 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 2 Global expansion moderating with China growing less than previously expected and without immediate risks of a sudden adjustment 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 Global GDP growth (%) Source: BBVA Research Page 3 2.8 -0.4 5.2 4.0 3.2 3.0 3.4 3.8 -2 -1 0 1 2 3 4 5 6 2008 2009 2010 2011 2012 2013 (e) 2014 (f) 2015 (f) Developed Mkts Emerging Mkts Baseline Jan14
    • China: What happens when the free greenbacks dry up? 0 50 100 150 200 250 300 350 400 450 500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Tapering QE3+Dragui Forecasts Monetary Policy & Capital Flows 5 6 In any case, EM Portfolio Capital Flows are still below equilibrium and should start to navigate to their long run trend After being particularly penalized by the US tapering Emerging Asia will follow this path too Page 4 Emerging Asia: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Actual: -17% (undershooting)
    • China: What happens when the free greenbacks dry up? The government will press ahead with reforms and implement measures to curtail financial risks China: Updating our baseline scenario due to poor incoming data and new assumptions on economic policy Page 5 We expect a higher adjustment in investment than in consumption Policy supports from public expenditure (infrastructure investment, tax reliefs) would be implemented if domestic economy loses momentum below the bottom line of 7.0% China: GDP Growth (%, y-o-y) Source: BBVA Research 7.7 7.7 7.2 7.0 5.0 5.5 6.0 6.5 7.0 7.5 8.0 2012 2013 2014 2015 Baseline Apr-2014 Baseline Jan-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 6
    • China: What happens when the free greenbacks dry up? US: GDP Forecast, QoQ SAAR % change Source: BBVA Research Source: BBVA Research -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 The US Tapering is already here and signs of economic improvement are materializing… The rebound after the winter months is more evident, particularly in consumption. Job growth is not expected to accelerate significantly in 2014 and inflation is expected to increase slowly. However, weaker global demand and some housing sector pressures are limiting the pace of expansion. We maintain our baseline scenario mostly unchanged (2.5% GDP growth for 2014 and 2015), slightly elevated upside risk to GDP growth Page 7
    • China: What happens when the free greenbacks dry up? US monetary policy: Fed funds scenario unchanged, risk tilted towards an earlier rate hike Mid – 2015 Maintaining the 3Q15 baseline but with lower likelihood as the probability of early rate hike increased 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 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 Fed  Measured steps of $10bn reduction of QE3  Course of policy firming remains data dependent  Anticipated changes to June projections on “pace of policy firming” due to new, incoming FOMC members  FOMC likely to introduce further modifications to the forward guidance throughout the policy normalization process Latest What do we expect? Policy pause until 4Q14 Expected End QE3 3Q15 First FFR Hike 1H16 Policy Normalization Balance sheet: let securities mature/sales Expected Timeline for Exit Strategy Page 8
    • China: What happens when the free greenbacks dry up? Outline Section 1 Global economic outlook Section 2 The FED exit Section 3 Impact on Emerging Markets compared with China Section 4 Conclusions for China Page 9
    • China: What happens when the free greenbacks dry up? Page 10 Net Portfolio Inflows : Developed vs Emerging (Country Flows over Total Assets, moving average 3 months) Source: EPFR and BBVA Research Net Portfolio Inflows : Regional Emerging Mkts (Country Flows over Total Assets, moving average 3 months) Source: EPFR and BBVA Research QE tapering at first dramatic for EMs but improving
    • China: What happens when the free greenbacks dry up? Emerging Markets: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Path of recovery strong but should moderate Actual: -14% (undershooting) -200 -100 0 100 200 300 400 500 600 700 800 900 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Tapering QE3+Dragui Eq. reached by Dec 2014 (model forecasted pace) Emerging Asia*: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR (*) Includes: China, India, Indonesia, Philippines, Thailand, Korea, Taiwan, Hong-Kong and Singapore Actual: -17% (undershooting) 0 50 100 150 200 250 300 350 400 450 500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Tapering QE3+Dragui Eq. reached by May 2015 (model forecasted pace) Page 11
    • China: What happens when the free greenbacks dry up? -10 0 10 20 30 40 50 60 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 20 40 60 80 100 120 140 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 50 100 150 200 250 2006 2007 2008 2009 2010 2011 2012 2013 2014 -45% +6% +2% Turkey: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Mexico: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Brazil: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Russia: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR -24% Asymmetry in capital flows adjustment remains… 0 20 40 60 80 100 120 140 2006 2007 2008 2009 2010 2011 2012 2013 2014 Page 12
    • China: What happens when the free greenbacks dry up? -10 0 10 20 30 40 50 2006 2007 2008 2009 2010 2011 2012 2013 2014 China: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Thailand: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Philippines: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR Indonesia: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR 0 5 10 15 20 25 30 35 40 45 50 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 5 10 15 20 25 30 35 40 45 50 2006 2007 2008 2009 2010 2011 2012 2013 2014 -14% -10% -31% 0 20 40 60 80 100 120 140 160 2006 2007 2008 2009 2010 2011 2012 2013 2014 -13% … with a some particular “damage” to Asia… Page 13
    • China: What happens when the free greenbacks dry up? China: Total Net Portfolio Flows Drivers (External (Global and Regional) + idiosyncratic) Source: BBVA Research Global Factors dominant when tapering started… increasing role of domestic factors thereafter 75% 25% 60% 40%35% 65% 40% 35% Emerging Markets: Total Net Portfolio Flows Drivers (External (Global and Regional) + idiosyncratic) Source: BBVA Research 60% 40% QE3+Dragui Tapering Page 14
    • China: What happens when the free greenbacks dry up? China: Retail Net Portfolio Flows Drivers ( External(Global and Regional) + idiosyncratic) Source: BBVA Research China: Institutional Net Portfolio Flows Drivers ( External(Global and Regional) + idiosyncratic) Source: BBVA Research -10 -8 -6 -4 -2 0 2 4 6 8 10 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Local Global/Regional Flows Tapering QE3&Draghi In China institutional flows recovering -10 -8 -6 -4 -2 0 2 4 6 8 10 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Local Global/Regional Flows Tapering QE3&Draghi Page 15
    • 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) Page 16 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 0.00 0.20 0.40 0.60 0.80 1.00 0 1 2 3 4 5 6 Shock to Bund Shock to 10y Bill -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 0 1 2 3 4 5 6 Shock to Bund Shock to 10y Bill 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 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 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
    • China: What happens when the free greenbacks dry up? EMs have introduce a wealth of measures to contain capital outflows Decrease in Capital Inflows Market Absorption Tighter Macro- prudential Rules Targeted Prudential Measures Capital Controls Structural and Financial Mkts Reforms Fiscal Stabilization Tighter monetary policy FX Reserve Buffers Exchange Rate Interventions Allow FX Rate Depreciation Increase in Interest Rates Counter Cyclical Fiscal Policy Stricter Capital Requirements Limit on Banks FX Open Positions Easing Capital Inflow Regulation Temporary restrictions on Capital Ouflow Regulation Macroeconomic Policy Prudential Measures Policy options to cope with a sudden deceleration in capital inflows Source: World Bank Tight Neutral Loose 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? The fluctuation of reserve increase is mainly driven by capital flows China: BOP’s situation Page 19 Net error and omission reflect somewhat growing amount of outflows Capital controls partially insulate China from external shocks bit it might change with the deepening of liberalization China: Balance of payments Source: BBVA Research USD bn -100 -50 0 50 100 150 200 250 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 Current account Financial account Capital account Net error and omission Reserve increase
    • 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 alicia.garcia-herrero@bbva.com.hk Page 21