BNP Paribas recently hosted a briefing on exploring the Chinese economic and market outlook, and the new opportunities emerging from the London Shanghai Stock Connect. The event was hosted by Xingdong (Xd) Chen, chief China economist at BNP Paribas, Jason Lui, head of equity and derivative strategy for Asia Pacific and Gary O’Brien, regional head of custody product for Asia Pacific.
As the trade war continues between the US and China, Chen suggested that China “may have to play tai chi with the US”.
Chen explained that like tai chi, there are principles to follow. “In regards to the trade war, China will try to avoid the US heat, in other words the US is going to pressure China and China is not going to directly respond. Second, China is waiting for opportunities because the trade war and the pressure will not only hurt China, it will, in turn, hurt the US,” he said.
Chen suggested that the keyword is pressure: “The US wants to put extreme pressure on China, and they want China to bend under the pressure.”
“This is because China is currently seen to challenge the US in regional and global interests, China is also becoming able to undermine the US. China is not interested in conflict against the US, however, as it has its own political issues to deal with.”
During the briefing, it was noted that the escalation of trade tensions would pressure China’s growth, which has been on a downward trend for cyclical and structural reasons, but negative impacts of the trade war have in fact pushed growth, as both exports and imports rose faster than expectations as a result of trade delivery intensifying in July, August and September.
China’s growth rate is likely to continue to decelerate and, although this will increase concerns, overall financial risks will remain under control.
According to BNP Paribas, China sees the trade imbalance as a result of globalisation, structural difference, supplementary trade, and base of cooperation, while manufacturing, real estate investment, and retail sales remain strong.
Meanwhile, China is ready to compromise on trade, domestic marketing opening, and intellectual protection, but not its growth model.
Lui discussed whether the structural change will be good for China in the long run.
He suggested: “From an investor’s or market’s standpoint, at this stage, given the size of China, it is actually a lot more US-like than before, especially in the context of an emerging market.”
“Today, the most interesting thing about China is that interaction between the structural shift in China’s current account, because of dual drivers of trade wars (lower exports), and domestic demand (higher imports) on the capital account side, we may see some replenishment of foreign capital, in conjunction with the index inclusion of Chinese assets, to provide buffer against the account deficit.”
“We also see a stable rise of ‘market share’ of RMB within global central bank’s currency reserve balance”, he added.
Discussing the topic of gaining market access, O’Brien said: “In the custody and settlement area, China investment is unique in that there are a lot of schemes to assist in the settlement flow, all tailored in specific ways.”
He suggested that some of the key models that people are using include the Hong Kong Stock Connect solution, CIBM Direct onshore and the Bond Connect.
According to O’Brien, “policymakers are not saying that Bond Connect is the way forward, they want these solutions to continue to exist, and for different investors, different types of solutions will make sense”.
O’Brien also noted that it is important for people to consider the London Shanghai Stock Connect, which has not yet launched.
He said: “It is clear, that this will be an interesting solution to British, European and US investors as it looks like it will be further aligned to the norms they are used to when it launches later this year.
It is therefore important that we are ready from day one to support this need; even if it looks to have a somewhat ‘soft’ launch.”
The challenge for custodians such as BNP Paribas, O’Brien explained, is that schemes have continued to evolve, and evolutions happen very quickly.
He said: “For example, the decision to move to delivery versus payment was announced on a Thursday and went live the following day, so we had to be able to facilitate that in a very short space of time.”
He added: “Even in the asset management space, if we look at the bond schemes, we are still seeing global asset managers on CIBM when most were of the view that Bond Connect was the right one for them going forward.”
O’Brien concluded: “The reality is that the schemes are continuing to evolve, so it doesn’t make sense to throw all your eggs in one basket right now.”
