China Challenges and Opportunities Murilo Ferreira, Vale CEO Rio - - PowerPoint PPT Presentation

China – Challenges and Opportunities

Murilo Ferreira, Vale CEO Rio de Janeiro, June 10, 2015

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• The Chinese economy has been slowing down albeit from a

much larger GDP base

• The Chinese Government is taking support measures to

achieve its economic growth targets and expand the country´s global influence

• China will remain very important for the world economy and be

an even more important trade partner for Brazil

Main messages

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China’s GDP growth has been slowing down to what is now considered a “new normal”

8.4 8.3 9.1 10.0 10.1 11.3 12.7 14.2 9.6 9.2 10.4 9.3 7.7 7.7 7.4 7.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E¹

GDP growth, %

¹ Projection from Chinese Government. Source: IMF

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• Investments in real estate, infra-

structure and manufacturing shrank significantly from 2013 to 2014 with reduction in investments in: − Real estate, from 19.8% to 10.5% − Industry from 18.5% to 13.5% − Infrastructure from 21.2% to 20.3%

• The main reason for the slowdown

in the Chinese economy was the contraction of the real estate sector (2014 vs. 2013): − Real estate sales fell by 7.6% − Newbuild shrank by 10.7% (residential 14.4%)

Fixed asset investments are growing at a lower pace

Fixed Assets Investments (FAI) Growth rate (% y/y 3mma¹)

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5 15 25 35 45 55 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total FAI Infrastructure Real estate Manufacturing ¹ Three month moving average Source: CEIC

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Credit has tightened as shadow bank practically ceased

• Overall credit as a percentage of

GDP increased strongly after 2009, when the central government approved a package to stimulate investments as a response to the global financial crisis ‒ Off-balance sheet credit was the main driver of credit growth after 2009

• Since 2013, the Central government

has imposed restrictions to contain

• ff-balance sheet credit, impacting

the total availability of credit

Monthly overall credit Share in GDP (%, sa, 3mma¹)

¹ Three month moving average Source: CEIC, UBS estimates

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10 20 30 40 50 2007 2008 2009 2010 2011 2012 2013 2014 2015 Corporate bond Off-balance sheet credit RMB & FX loans Overall credit

5 ¹ The real interest rate is the nominal interest rate less inflation. Source: CEIC

Real interest rates remain at higher levels despite recent rate cuts

• The PBoC cut interest rates

three times in the last six months to stimulate the economy

• Real interest rates have

increased since 2010 and remain above the 2014 average given the PPI deflation

Real interest rate % per annum, CPI & PPI average deflated

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1 2 3 4 5 6 7 8 2010 2011 2012 2013 2014 2015

Rate cut Real rate (1yr benchmark lending rate)

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Main messages

• The Chinese economy has been slowing down albeit from a

much larger GDP base

• The Chinese Government is taking support measures to

achieve its economic growth targets and expand the country´s global influence

• China will remain very important for the world economy and be

an even more important trade partner for Brazil

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The Chinese government is taking several initiatives to support GDP growth

• Support investment in the real

estate market

• Stimulate and direct local

governments investments towards key infrastructure projects

• Reduce credit risk and increase

liquidity in the financial system

• Create demand for Chinese

products and services outside China Several initiatives were taken by the Chinese government

Goals

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The new silk road economic belt will help the export of Chinese products and services

The new silk road | China assembling new trade routes, binding other regions closer to it

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Meanwhile reforms which are more supportive of growth and help rebalance China's economic structure were prioritized

• Internationalization of the RMB through less capital control and

interest rate liberalization

Financial reform

• Relaxation of the hukou policies in some small cities and

implementation of pilot projects in others to encourage "urbanization"

• f rural migrants

Social safety net and hukou reform

• Restructuring of local government´s debt to contain financial risks and

control credit growth

Fiscal reform Current priorities

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With the reforms the RMB is expected to maintain its relative value against the USD

• Even after the depreciation of

major currencies, the RMB has remained practically stable against the USD

• The Chinese government is

expected to keep the RMB relatively stable against the USD despite the expected USD strengthening and the persistent net capital outflows since China is seeking the internationalization of the RMB

• China has a sizable and

growing current account surplus, even after a continuing appreciation of the RMB started in 2011

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Main messages

• The Chinese economy has been slowing down albeit from a

much larger GDP base

• The Chinese Government is taking support measures to

achieve its economic growth targets and expand the country´s global influence

• China will remain very important for the world economy and be

an even more important trade partner for Brazil

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China is very important for the mineral commodities market

58 65 33 28 Iron ore Metallurgical coal Nickel¹ Copper² Share of global demand in 2014 - %

¹ Based on the non-integrated seaborne market for nickel concentrate (not considering ore used in production of nickel pig iron from Indonesia, the Philippines, among others). ² Based on the non-integrated seaborne market for copper concentrate Source: CRU, WoodMackenzie Share of seaborne trade, %

69 21 43 40

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Iron ore alone represents about 10% of the revenues from Brazilian exports

Brazilian exports in US$ billions

Vale’s share in iron ore exports, %

Source: MDIC – Brazilian Ministry of Development, Indusry and Commerce

13 29 42 31 32 26 153 202 256 243 242 225 2009 2010 2011 2012 2013 2014

Iron ore exports in US$ billions

82 83 83 83 82 80

14 70 92 111 147 206 271 319 378 438 628 619 705 760 840 946 987 1,028 1,047 1,052 1,061 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 1.2%

China´s iron ore imports are expected to grow only moderatly in the next years under the “new normal”

Chinese iron ore imports, Mt

20.4% CAGR 2000-2014, % CAGR 2015-2020, % Real Projected¹ ¹ Bank average (Macquarie, Citi, BTGPactual, UBS, Morgan Stanley, Clarkson) and research institutions (CRU) Source: China Customs

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But the opportunities go beyond the export of commodities

• During Premier Li Keqiang´s

visit to Brazil a few cooperation agreements were emphasized: ‒ The construction of the railway line to connect the Atlantic to the Pacific

• cean;

‒ The set up of a Latin America Fund, investing USD30 billion to help with capacity cooperation

• Vale, in particular, signed

MOUs with partners in the shipping business and with the Chinese Exim Bank

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• Chinese GDP growth has been slowing down to a “new

normal”

• However, the Chinese government is acting promptly to

support the domestic market and to create demand for Chinese products and services outside China

• Meanwhile the Chinese government is progressing with the

structural reforms and working to increase its political and financial influence in the international financial markets with the internationalization of the RMB

• In the case of Brazil, China currently is and will remain a very

important business partner as new cooperation opportunities arise Final remarks

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