Dr. Thierry Apoteker, CEO, TAC Lunch Discussion at Japans - - PowerPoint PPT Presentation

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TAC’s view on China

Waiting for the Black Swan?

• Dr. Thierry Apoteker, CEO, TAC

Lunch Discussion at Japan’s International Institute for Monetary Affairs March 2013

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Structure de la présentation

• 1. Short introduction to TAC
• 2. China’s situation through TAC’s

RiskMonitor tool

• 3. China’s structural transformation and

key risks

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Structure de la présentation

• 1. Short introduction to TAC

2. China’s situation through TAC’s RiskMonitor tool 3. China’s structural transformation and key risks

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Présentation de TAC

• TAC is a fully independent European research group providing

advisory services on international economic and financial issues for financial investors and industrial companies. TAC also provides policy advisory services through research funded by multilateral institutions.

• TAC has expanded significantly its research capabilities and is covering

now a large range of macro issues and macro risks (mature / emerging / frontier markets, cyclical outlooks/ exchange rates / interest rates,

• il prices forecasts….).
• With a staff of around 20 persons, customer relation advisors in

Singapore and Tokyo, and a research office in New Delhi, TAC has the critical size to engage into original, powerful and ready-to-use economic and financial research.

• 1. Introduction to TAC

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Présentation de TAC

• 1. Introduction to TAC

Full independence, not afraid of being contrarian, impressive track record Fundamental research capabilities based on transversal expertise Full customization to fit each customer’s requirement Heavy investment and key expertise in quantitative developments

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Structure de la présentation

1. Short introduction to TAC

• 2. China’s situation through TAC’s

RiskMonitor tool

3. China’s structural transformation and key risks

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Economic Risk Transmission Political Risk Growth Balance Real GDP, current account,… Debt Balance External debt, FDI Liquidity Balance Short-Term debt, rfx level Exchange Rate Balance Currency overvaluation, rfx dynamic Cyclical Balance Business cycle, monetary policy Banking System Balance Domestic credit, intern. refinancing KKZ Methodology Voice & Accountability Political Stability Regulatory Quality Government Effectiveness Rule of Law Control of Corruption Four Channels

• Fx. Requirements

Asset Prices Banking Real Economy Country Groups Three groups Major arbitrage markets Commodity exporters High number of past restructuring

2. China’s situation through RiskMonitor

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Economic & Financial Risk Crisis Signals Transmission Political Risk Economic Risk Ratings Political Risk Ratings Group Premium Overall Country Risk Premium, calibrated on JPMorgan’s EMBI+ Country Groups Transmission Risk

Statistical Calibration Combination of 6 Fundamental Balances Data Mining 5 non parametric models (e.g. Neural Networks) Statistical Normalization

2. China’s situation through RiskMonitor

Historical

• bservations

and standard econometrics Ad hoc additions

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2. China’s situation through RiskMonitor

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2. China’s situation through RiskMonitor

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2. China’s situation through RiskMonitor

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2. China’s situation through RiskMonitor

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China

2. China’s situation through RiskMonitor

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2. China’s situation through RiskMonitor

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Structure de la présentation

1. Short introduction to TAC 2. China’s situation through TAC’s RiskMonitor tool

• 3. China’s structural transformation and

key risks

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3. China’s structural transformation and key risks

Rebalancing the economy’s engines of growth by promoting household-driven demand instead of export and investment

 The process has already started (70% contribution to GDP growth last year), including expanded social safety net.  But will need a much larger share of wages in aggregate GDP to be sustained: this implies a compression of gross corporate savings (i.e. gross margins) at a time of excessive leverage and localized excess capacities, and when the medium-term growth prospect is much lower than in the 2000s.

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3. China’s structural transformation and key risks

Managing the excess financial leverage while avoiding a cyclical and banking shock

 The overall level of financial leverage is excessive, heavily concentrated on corporate (SOEs first) and local governments or their SPVs.  A need to improve allocation of capital while keeping a control: role and problems of the shadow banking system.  Higher equity / own funds required in many corporates, with related issues of inadequate returns.

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3. China’s structural transformation and key risks

International challenges in trade, finance and politics

 Market diversification is driving China’s external trade policy and developments, but many irritants appear in their “market share grabbing” in these new markets; in parallel, China is among the top five “offenders” in trade restrictive policies since 2009.  Improvement in capital allocation suggests large international involvement: China’s ability to open up while increasing the international role of the RMB.  Geopolitical issues.

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Thierry Apoteker

CEO, thierry.apoteker@tac-financial.com

Thierry Da

Senior Advisor, thierry.da@tac-financial.com

Masatoshi Watanabe

Senior Advisor, mwatanab@sage.ocn.ne.jp

TAC sas

La Saigeais, 35140 Saint Hilaire des Landes, France Tél: +33 (0)2 99 39 31 40 www.tac-financial.com

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