Treasury Strategy & Transformation
After the Ballots
How the ‘year of elections’ reshaped treasury priorities
- Mark Mobius
- Ph.D. Executive Chairman, Templeton Asset Management Ltd
by Mark Mobius, Ph.D. Executive Chairman, Templeton Asset Management Ltd
Dr. Mark Mobius, Executive Chairman, Templeton Asset Management Ltd and Fund Manager of the Templeton Emerging Markets Investment Trust (TEMIT), discusses the outlook for China
On January 26th, China and Chinese all over the world celebrated the beginning of the Year of the Ox. I would prefer to call it the Year of the Bull because we expect that 2009 will be the year that the emerging stock markets witness a substantial recovery and China should lead the way to that recovery. The investment prospects and long-term outlook for China are excellent for a number of reasons:
(1) The Chinese leadership is intelligent, resourceful and enlightened with an interest in maintaining growth with a better standard of living for all Chinese,
(2) that leadership has the organisational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world,
(3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and
(4) China has one of the healthiest banking systems in the world and most individuals have little debt.
Undoubtedly, China will not be able to achieve the double digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programmes targeted at the domestic market, which are designed to replace export-led growth with the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption should be more attractive. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.
Since 15 September, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were in 2008 designed to restrain banks from lending, will probably be unofficially abandoned.
With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints on inflation has been the crunch in trade financing which became a global problem, but as a result of new support from Beijing, this problem seems to have eased. [[[PAGE]]]
The Chinese currency, the Renminbi, is currently undervalued on a price parity basis. There is therefore pressure for it to strengthen against the US$. However, the Chinese are concerned with further erosion of export businesses and are proceeding cautiously regarding any further appreciation. The government is probably fearful of a large devaluation since it could result in a backlash from the US. Structurally, this would be a good opportunity for China to introduce further reforms on the opening of its capital account and currency convertibility. With the Renminbi taking a bigger role in the international market, it could become another reserve currency along with the US$ and Euro.
There are now signs of recovery in China's economy with the government's infrastructure projects beginning to have an impact.
There are now signs of recovery in China’s economy with the government’s infrastructure projects beginning to have an impact and as the Purchasing Managers New Orders Index (PMI) rebounds. The December PMI rebounded to 41.2, 2.4% higher than the previous month, which represents the first meaningful rebound since March 2008.
New export orders have also rebounded. The current 2009 GDP growth forecast for China is 8%1. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact. Of particular interest is the rise in orders for infrastructure-related material and machinery. This reflects the effects of the government’s fiscal stimulus measures. The slow down in China’s industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows. Moreover, stocks of major inputs and finished goods are stabilising.
Electricity consumption is another good indicator of growth. China’s power output grew only 5.2% year-on-year in 2008, the weakest annual growth since 1998. Output fell for the third consecutive month in December and weakened further to a 9.0% year-on-year contraction, versus the declines of 7.4% in November and 5.3% in October. However, in absolute terms, consumption started to increase in December and with fiscal stimulus measures kicking in later in the second half, electricity consumption is likely to register positive growth in 2009.
In November 2008, the government announced a stimulus package and should be able to spend up to RMB 4tr (or US$586bn) in new investment programmes. The package is scheduled to be spent before the end of 2010 in 10 key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support. There are also other supplementary programmes geared towards promoting incomes and consumption. For example, the “Home electronics go rural” programme was introduced, providing a 13% rebate to rural residents purchasing household electronics, including televisions, refrigerators, mobile phones and washing machines. Starting in February, the programme will cover the entire country and will last for four years.
Funding is certainly not a problem for the Chinese government as it is in fiscal surplus. Also, given the high savings rate and low loan to deposit ratio with the banking system, there is ample room for the government to raise debt. Local governments will also be spending as a result of Beijing’s measures to ease restrictions on municipal bond issuance. China’s budget law prohibits local governments from issuing bonds. Yet the latest indications are that Beijing is now reviewing this issue. Another likely way to get around the rule is to encourage local government-owned investment corporations to issue debt to finance infrastructure investment. In fact, some big cities such as Chongqing have already been raising billions in funds through Chongqing City Development Corporations over the last few years. We expect more cities to follow suit in the coming years.
There are, of course, risks in Chinese investment. Currently, unemployment is on the rise and labour activism is increasing. Therefore there are risks of disruption which could impact stock prices. Employment has dropped to a record low, indicating stress in the job market. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%, with most unemployed being migrant workers in the coastal areas and new college graduates. Compared to the last down cycle, the government now has greater fiscal strength to handle the situation. Farm ownership reform and wider social security coverage shall help ease the impact on social stability.
The benefits, however, far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population; clearly China must be an investment destination for any intelligent investor.
1. Source: Consensus Economics as at
8th December 2008
On January 26th, China and Chinese all over the world celebrated the beginning of the Year of the Ox. I would prefer to call it the Year of the Bull because we expect that 2009 will be the year that the emerging stock markets witness a substantial recovery and China should lead the way to that recovery. The investment prospects and long-term outlook for China are excellent for a number of reasons:
(1) The Chinese leadership is intelligent, resourceful and enlightened with an interest in maintaining growth with a better standard of living for all Chinese,
(2) that leadership has the organisational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world,
(3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and
(4) China has one of the healthiest banking systems in the world and most individuals have little debt.
Undoubtedly, China will not be able to achieve the double digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programmes targeted at the domestic market, which are designed to replace export-led growth with the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption should be more attractive. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.
Since 15 September, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were in 2008 designed to restrain banks from lending, will probably be unofficially abandoned.
With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints on inflation has been the crunch in trade financing which became a global problem, but as a result of new support from Beijing, this problem seems to have eased.
The Chinese currency, the Renminbi, is currently undervalued on a price parity basis. There is therefore pressure for it to strengthen against the US$. However, the Chinese are
concerned with further erosion of export businesses and are proceeding cautiously regarding any further appreciation. The government is probably fearful of a large devaluation since it could result in a backlash from the US. Structurally, this would be a good opportunity for China to introduce further reforms on the opening of its capital account and currency convertibility. With the Renminbi taking a bigger role in the international market, it could become another reserve currency along with the US$ and Euro.
There are now signs of recovery in China’s economy with the government’s infrastructure projects beginning to have an impact and as the Purchasing Managers New Orders Index (PMI) rebounds. The December PMI rebounded to 41.2, 2.4% higher than the previous month, which represents the first meaningful rebound since March 2008.
New export orders have also rebounded. The current 2009 GDP growth forecast for China is 8%1. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact. Of particular interest is the rise in orders for infrastructure-related material and machinery. This reflects the effects of the government’s fiscal stimulus measures. The slow down in China’s industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows. Moreover, stocks of major inputs and finished goods are stabilising.
Electricity consumption is another good indicator of growth. China’s power output grew only 5.2% year-on-year in 2008, the weakest annual growth since 1998. Output fell for the third consecutive month in December and weakened further to a 9.0% year-on-year contraction, versus the declines of 7.4% in November and 5.3% in October. However, in absolute terms, consumption started to increase in December and with fiscal stimulus measures kicking in later in the second half, electricity consumption is likely to register positive growth in 2009.
In November 2008, the government announced a stimulus package and should be able to spend up to RMB 4tr (or US$586bn) in new investment programmes. The package is scheduled to be spent before the end of 2010 in 10 key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support. There are also other supplementary programmes geared towards promoting incomes and consumption. For example, the “Home electronics go rural” programme was introduced, providing a 13% rebate to rural residents purchasing household electronics, including televisions, refrigerators, mobile phones and washing machines. Starting in February, the programme will cover the entire country and will last for four years.
Funding is certainly not a problem for the Chinese government as it is in fiscal surplus. Also, given the high savings rate and low loan to deposit ratio with the banking system, there is ample room for the government to raise debt. Local governments will also be spending as a result of Beijing’s measures to ease restrictions on municipal bond issuance. China’s budget law prohibits local governments from issuing bonds. Yet the latest indications are that Beijing is now reviewing this issue. Another likely way to get around the rule is to encourage local government-owned investment corporations to issue debt to finance infrastructure investment. In fact, some big cities such as Chongqing have already been raising billions in funds through Chongqing City Development Corporations over the last few years. We expect more cities to follow suit in the coming years.
There are, of course, risks in Chinese investment. Currently, unemployment is on the rise and labour activism is increasing. Therefore there are risks of disruption which could impact stock prices. Employment has dropped to a record low, indicating stress in the job market. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%, with most unemployed being migrant workers in the coastal areas and new college graduates. Compared to the last down cycle, the government now has greater fiscal strength to handle the situation. Farm ownership reform and wider social security coverage shall help ease the impact on social stability.
The benefits, however, far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population; clearly China must be an investment destination for any intelligent investor. n
1. Source: Consensus Economics as at
8th December 2008
(1) The Chinese leadership is intelligent, resourceful and enlightened with an interest in maintaining growth with a better standard of living for all Chinese,
(2) that leadership has the organisational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world,
(3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and
(4) China has one of the healthiest banking systems in the world and most individuals have little debt.
Undoubtedly, China will not be able to achieve the double digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programmes targeted at the domestic market, which are designed to replace export-led growth with the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption should be more attractive. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.
Since 15 September, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were in 2008 designed to restrain banks from lending, will probably be unofficially abandoned.
With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints on inflation has been the crunch in trade financing which became a global problem, but as a result of new support from Beijing, this problem seems to have eased.
The Chinese currency, the Renminbi, is currently undervalued on a price parity basis. There is therefore pressure for it to strengthen against the US$. However, the Chinese are
concerned with further erosion of export businesses and are proceeding cautiously regarding any further appreciation. The government is probably fearful of a large devaluation since it could result in a backlash from the US. Structurally, this would be a good opportunity for China to introduce further reforms on the opening of its capital account and currency convertibility. With the Renminbi taking a bigger role in the international market, it could become another reserve currency along with the US$ and Euro.
There are now signs of recovery in China’s economy with the government’s infrastructure projects beginning to have an impact and as the Purchasing Managers New Orders Index (PMI) rebounds. The December PMI rebounded to 41.2, 2.4% higher than the previous month, which represents the first meaningful rebound since March 2008.
New export orders have also rebounded. The current 2009 GDP growth forecast for China is 8%1. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact. Of particular interest is the rise in orders for infrastructure-related material and machinery. This reflects the effects of the government’s fiscal stimulus measures. The slow down in China’s industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows. Moreover, stocks of major inputs and finished goods are stabilising.
Electricity consumption is another good indicator of growth. China’s power output grew only 5.2% year-on-year in 2008, the weakest annual growth since 1998. Output fell for the third consecutive month in December and weakened further to a 9.0% year-on-year contraction, versus the declines of 7.4% in November and 5.3% in October. However, in absolute terms, consumption started to increase in December and with fiscal stimulus measures kicking in later in the second half, electricity consumption is likely to register positive growth in 2009.
In November 2008, the government announced a stimulus package and should be able to spend up to RMB 4tr (or US$586bn) in new investment programmes. The package is scheduled to be spent before the end of 2010 in 10 key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support. There are also other supplementary programmes geared towards promoting incomes and consumption. For example, the “Home electronics go rural” programme was introduced, providing a 13% rebate to rural residents purchasing household electronics, including televisions, refrigerators, mobile phones and washing machines. Starting in February, the programme will cover the entire country and will last for four years.
Funding is certainly not a problem for the Chinese government as it is in fiscal surplus. Also, given the high savings rate and low loan to deposit ratio with the banking system, there is ample room for the government to raise debt. Local governments will also be spending as a result of Beijing’s measures to ease restrictions on municipal bond issuance. China’s budget law prohibits local governments from issuing bonds. Yet the latest indications are that Beijing is now reviewing this issue. Another likely way to get around the rule is to encourage local government-owned investment corporations to issue debt to finance infrastructure investment. In fact, some big cities such as Chongqing have already been raising billions in funds through Chongqing City Development Corporations over the last few years. We expect more cities to follow suit in the coming years.
There are, of course, risks in Chinese investment. Currently, unemployment is on the rise and labour activism is increasing. Therefore there are risks of disruption which could impact stock prices. Employment has dropped to a record low, indicating stress in the job market. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%, with most unemployed being migrant workers in the coastal areas and new college graduates. Compared to the last down cycle, the government now has greater fiscal strength to handle the situation. Farm ownership reform and wider social security coverage shall help ease the impact on social stability.
The benefits, however, far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population; clearly China must be an investment destination for any intelligent investor. n
1. Source: Consensus Economics as at
8th December 2008
Article Last Updated: May 07, 2024
