Research on China


“Research on China” from AB Investment


investors may be underestimating China’s upside potential

China’s extraordinary capacity to marshal its social and economic resources in the pursuit of its policy objective

the key policy challenge is

  1. reducing excessive systemic debt
  2. while avoiding a hard economic landing  and preserving social harmony
  3. pushing through much-needed financial and economic reform in the face of institutional inertia and vested interests

Given the pace of China’s reforms to date has outrun many expectations, the country has better-than-even chance of turning its aspirations into reality


The decisive factor: the will and the ability of the government to drive the changes

  1. China’s one-party political structure, backed by a network of elites with strong connections to both politics and business, is highly conducive to the successful implementation of national government policy
  2. track record to date (reform and open the market in 1970s, reform to market-oriented economy in 1990s)

(2 is not evidence but result,and if 1 is the reason for 2, we should review whether 1 have been changed or still works under recent environment)

Internal reforms:

  1. the overhaul of SOEs and the financial sector
  2. stimulate consumer demand and private sector
  3. crackdown on corruption
  4. liberalization of capital markets

External reform:

  1. internalization of RMB
  2. liberalization of capital markets

(They are all interlinked, in other words, their impact will be cumulative and mutually enforcing)


Internalization of RMB

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The currency already accounts for 9% of the global letter-to-credit market, ahead of euro and yen and behind only the US dollar

Expects: 1. no CNH CNY, offshore and onshore as RMB; 2. more flexible guide to rate-setting; 3. sufficiently liberalized capital account


6 likely disruptive changes from China’s reform

  1. RMB will expand to 50% of country’s global trade settlements
    With continuing deglobalization, the US dollar, euro and RMB will have own currency bloc, which will dilute US monetary policy effects
  2. China’s slower growth economy will win investor support
    Reason: a bigger domestic consumer sector, a more diverse and stable economy, more opportunity for investors comparing to the rest of the world
  3. Benchmark changes, reallocation in bond market
  4. First sector plays, particularly consumption.
    Then less volatile with more institutional investors, stock selection
  5. “Made in China” will set trends that the Western consumer will follow
  6. Geopolitical realignments in Eurasia


Economic rebalancing: enter the consumer

The problem is the middle-income trap [1]

The key lies in reorganizing the financial system and capital markets – more efficient capital allocation


  1. more effective application of the rule of law
  2. market pricing in financial system
  3. restructuring of the SOE sectos


  1. a number of corporate defaults and even collapse
  2. productivity rise, helped by competition, new tech and exports moving up value chain
  3. growth in small business finance, no longer LGFVs, rapid expansion of China’s domestic debt market
  4. increased private participation in key industries
  5. growth in company profit leads to higher wages and the rise of insurance, healthcare, and pension schemes


Capital market liberalization

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China’s capital markets – equity and fixed income – were worth about RMB44.5 trillion at Jan 2015, the amount of foreign capital permitted to be invested at that date was 715 billion, less than 2%.


A worldwide cultural influence and deglobalization

creative industry: industry design, advertising, and marketing

AIIB and NDB, “New Silk Road”

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Trends towards divergence and desynchronization in global patterns may intensify



A developing country loses its competitive advantage in export markets as wage rises