Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Speaker: Hello and welcome to the Macro Viewpoint podcast, our weekly look at the big macroeconomic reports here at HSBC Global Research from our economists and strategists.
Speaker: I'm P.S.
Speaker: Butler and I'm joined by our managing editor, Chris Brown-Humes.
Speaker: The rising wealth of China dominates our agenda this week.
Speaker: In a moment, we'll be speaking with our chief China economist, Xu Hongbin, and three members of his team about their new report on Chinese wealth and how it might develop over the next five years, as well as what it means for the economy and investors.
Speaker: Also coming up, we'll be measuring the pace of the UK economic recovery with economist Liz Martins, as well as the performance of the British pound with our head of FX research, Paul Macall.
Speaker: This podcast was recorded for publication on the 21st of May 2021.
Speaker: All our disclosures and disclaimers associated with this edition must be viewed on the link attached to the media player.
Speaker: While attention on China's economy is sometimes focused on the implications of its shrinking labor force and rising debt burden, our China team has been looking at the other side of the economic equation, the assets.
Speaker: These include China's public assets such as infrastructure, net foreign assets, and the household assets which form the biggest component of the country's wealth.
Speaker: Households include a rising number of tech millionaires and a growing middle class, the size of which roughly outstrips the total US population already.
Speaker: We asked Chief China Economist Xu Hongbin to give us the main findings of his team's research.
Speaker: In a nutshell,
Speaker: We found that China's total household wealth is likely to expand by over 50% in the next five years, mainly driven by the tech millionaires as well as the expansion in the new urban middle classes.
Speaker: Despite the rising public debt burden,
Speaker: The government's net assets are still huge with the equivalent to 1.6 times of the GDP and we expect the continent to grow.
Speaker: That will leave more room for Beijing to mitigate the debt risk in the years ahead.
Speaker: Meanwhile, we also expect China's net foreign assets to continue to expand because currently it's still at a relatively low level compared with other emerging markets as well as developed countries.
Speaker: Now to help look at each of the three pillars of China's asset base in more detail, we're going to hear from senior China economist Jing Liu and greater China economist Jin Yang Chen and Erin Shin.
Speaker: Jing, can we start with you on households?
Speaker: What are the implications of this increasingly wealthy sector?
Speaker: So maybe let me first mention that household wealth represents the largest share of China's wealth.
Speaker: As of 2019, China's household wealth stood at 575 trillion renminbi, which is about six times of China's GDP.
Speaker: Actually, over the past two decades, the compound growth rate of household wealth has been somewhere over 15%, which is much faster than the nominal GDP growth.
Speaker: And this is mainly led by both the fast economic growth and also the high savings rate, as well as the asset appreciation.
Speaker: So going forward, what do we expect?
Speaker: Actually, by 2025, we're seeing that China's household wealth will be somewhere over $900 trillion.
Speaker: We believe the fast growth will be led by, first, the millionaires actually created, especially by the new economy sectors, and second, the expanding middle class.
Speaker: And from an investment perspective, what is a key takeaway?
Speaker: So let me give you some figures.
Speaker: As of today, China has 2 million high net worth individuals and some 300 million
Speaker: middle class.
Speaker: By 2025, we're seeing these two figures growing to 5 million for the millionaires and 500 million for the middle class.
Speaker: So that's going to be a massive growth.
Speaker: We expect this group of people are more interested in
Speaker: financial assets investment, that means huge opportunities for wealth managers and other types of financial service providers.
Speaker: And also these people have a deep pocket to consume.
Speaker: That is a massive market for consumer goods.
Speaker: Jingyang, let's turn to you to look at the government side.
Speaker: A similar growth story?
Speaker: The public sector in China has been accumulating assets rapidly.
Speaker: At the end of 2018, the government's net assets have reached 1.6 times of China's nominal GDP.
Speaker: Although the headline news often concentrates on the debt builds up, the fact is that a bulk of the government's borrowings have been used to finance new infrastructure and other tangible assets.
Speaker: The rising debt load is thus matched with rising asset level, so the government's balance sheet is not deteriorating in the recent years.
Speaker: A majority of the investment infrastructure and the commercial projects have a substantial positive spillover effect to regional productivity, as well as long-term economic growth.
Speaker: In addition, the government, especially the local authorities, have accumulated financial assets.
Speaker: Total financial assets rose by 19 times in the last decade.
Speaker: In particular, net holdings of corporate shares have been rising quickly.
Speaker: total corporate shares and equity holding of the government reached 85 trillion RMB at the end of 2019.
Speaker: If the government can better capitalize these equity holdings, it would help generate capital inflows.
Speaker: And these capital inflows could help fund budget spending, tax reductions, as well as pension liabilities.
Speaker: And finally, let's turn to you, Erin.
Speaker: How does the third asset pillar, China's net foreign asset position, change in the coming years?
Speaker: So China is already ranked third globally for its top creditor position, and its net foreign assets reached 2.2 trillion US dollars at the end of 2020.
Speaker: And this is about 14.5% of nominal GDP.
Speaker: Now, China's external assets have accumulated rapidly because of China's
Speaker: strong exports growth since its entry into the WTO.
Speaker: And this in turn has meant that China's currency reserves have grown quite quickly.
Speaker: However, we see that the structure of China's external assets have actually been shifting more towards investment-oriented assets such as foreign direct investment and increased portfolio investment.
Speaker: As more firms are looking to increase their development and look more for technological know-how in other developed countries,
Speaker: as well as increase their investment returns.
Speaker: Now, in terms of foreign liabilities, this has actually increased quite rapidly as well, as China has engaged in a lot of opening and reform.
Speaker: So this has been through programs such as Stock Connect, Northbound Bond Connect, as well as lifting of foreign ownership restrictions on services, particularly in financial services.
Speaker: So we see capital flows continuing to accelerate in the coming years on the back of
Speaker: continue two way capital account liberalization.
Speaker: Additionally, China has sufficient room for capital flows to grow.
Speaker: If you look at its assets and liabilities as a percent of GDP, it's only about half of GDP.
Speaker: When you compare this to other developed countries, this is well over 100% in both directions for its assets and liabilities.
Speaker: Erin Shin ending that summary of the report, which has just been published by the China team.
Speaker: Some really great work there and recommended reading on the implications for China investors, as well as the financial services industry as a whole.
Speaker: A couple more striking stats.
Speaker: China's household wealth is set to grow by around 8.5% every year over the next five years.
Speaker: And a statistic from the People's Bank of China cited in the report is that China's urban home ownership rate is the highest in the world at a remarkable 96%.
Speaker: That's a quick look at our report.
Speaker: The rising wealth of China, millionaires and the middle class lead the way.
Speaker: Now here in the UK, even though the economy shrank in the first quarter, it performed better than expected.
Speaker: And since then it has become increasingly clear that a recovery is taking hold, as shown by PMI data, consumer and business confidence surveys, retail sales, and a buoyant housing market.
Speaker: So Liz, everything is looking a bit rosier for the UK economy these days.
Speaker: Is it just because of the successful vaccine rollout?
Speaker: Well, that's certainly a big part of it.
Speaker: Of course, people feeling more and more confident that the virus numbers are falling and they can go back out and about and resume kind of normal life.
Speaker: But it's not just that.
Speaker: It's also that a lot of money's been saved and is there to be spent.
Speaker: You know, people have had a year in which they haven't been spending on going on holiday, going
Speaker: out to eat to dinner, spending money on train fares, etc, etc.
Speaker: So there's a lot of these accumulated savings, which in conjunction with the pent up demand from lockdown, and the fact that we are now allowed to go out and do those things again, means that things are looking up.
Speaker: So we see consumer confidence higher, we also see business confidence higher in the surveys.
Speaker: And yeah, we're looking forward to a few more months of very good growth in the UK.
Speaker: And all of that has led you to raise your forecast for UK GDP growth in 2021.
Speaker: It has indeed.
Speaker: So we have revised our forecast up from 5.8% to 6.8% for 2021.
Speaker: That's not quite as dramatic as it might sound.
Speaker: Most of the judgements we've made here is bringing forward some of the growth that we expected to happen.
Speaker: So Q4 was better than expected, Q1 was better than expected, and the momentum going into Q2 was stronger than we'd anticipated.
Speaker: you know if we look at the surveys the PMIs the other real-time data it's looking pretty good into Q2 so we've brought forward some of that growth and we've then brought down growth our growth forecast for 2022 from 6.1% to 5.1% and we end up actually in exactly the same place as we'd previously forecast so by the end of 2022 we expect GDP to be 1.6% above
Speaker: where it was pre-pandemic, but 2.8% lower than where it would have been had it continued to grow at pre-pandemic trends.
Speaker: So we haven't changed those major judgments about the extent of the recovery and the extent of the damage done by the pandemic, but we have brought forward some of the growth that we'd already expected into 2021.
Speaker: And what are the upside and indeed the downside risks to your outlook?
Speaker: So I think the major upside risk is that people spend more of their accumulated savings than we've allowed for.
Speaker: And we have included only a relatively modest drawdown of those savings, largely because savings have been accumulated disproportionately by people who were already at the higher income, wealthier bracket of the population and therefore have a lower income.
Speaker: marginal propensity to consume.
Speaker: But it is possible that they and the broader population spend a little bit more than we've allowed for in our forecasts.
Speaker: On the downside, I think there are two major risks.
Speaker: One is a vaccine resistant variant of COVID-19, which results in the delaying, unlocking or even the re-imposition of restrictions, which of course would create a completely different picture
Speaker: than we're currently anticipating, although thank goodness the evidence so far suggests that the variants that are in the UK do respond to the vaccine.
Speaker: The other big risk is the labour market because there are two to three million people
Speaker: registered on the job retention scheme.
Speaker: And we don't know what happens when government support is withdrawn at the end of September.
Speaker: Are all of those jobs viable?
Speaker: Do people go back to those jobs to find new jobs?
Speaker: Or do they become unemployed?
Speaker: If a large proportion of them do become unemployed, then that certainly puts the brakes on this positive consumption story.
Speaker: How big a risk is inflation?
Speaker: Because we had quite a dramatic jump in the numbers earlier this week.
Speaker: We did indeed, so we saw CPI inflation double from 0.7% year on year to 1.5% year on year.
Speaker: And there were two parts to that story.
Speaker: One was an imported side reflecting energy base effects, which had been well flagged.
Speaker: But the other part was more of a domestically driven
Speaker: rise in inflation.
Speaker: And, you know, this has got economists divided.
Speaker: Some people think this is a very temporary phenomenon.
Speaker: Others are more worried about the long term impact of the supply hit to the economy on the back of the pandemic.
Speaker: Now, we are in the first camp.
Speaker: We think that there's enough slack in the economy due to elevated unemployment and all those people on the job retention scheme that that will keep demand relatively contained and therefore prices as well.
Speaker: But we do acknowledge upside risks.
Speaker: And it's really telling that the debate has changed in the UK from talking about negative interest rates to the next move being possibly upwards.
Speaker: Although I should say, we're not forecasting that in our forecast period, which is this year and next.
Speaker: Liz, that's a great overview.
Speaker: Thanks very much for your time.
Speaker: Thank you.
Speaker: Coinciding with the UK economic rebound, we've seen the pound appreciating as well.
Speaker: Sterling is up year to date against the dollar around 3.8%, nearly touching an intraday high for the year in the past week.
Speaker: To discuss the currency, we're joined by Paul Mackel, our global head of FX research from Hong Kong.
Speaker: So Paul, we've heard the economic backdrop laid out by Liz there.
Speaker: How has that influenced what's been happening with the pound?
Speaker: Well, thanks a lot for the question.
Speaker: And it's a very important one because simply sterling has done very well this year.
Speaker: And in some ways it's exceeded our expectations.
Speaker: And I think a lot of it has come down to this positivity with regards to the UK economic outlook.
Speaker: But importantly, we've also had a change in market pricing for short term interest rates.
Speaker: Earlier this year, there was still a sense of view out there, that is, that perhaps the Bank of England could even adopt negative interest rates, but that quickly changed from February onwards.
Speaker: I think that that was very important in helping to support the British pound.
Speaker: And are those the only factors driving it higher?
Speaker: Short answer is no.
Speaker: I think there could be another feature and it comes down to equity flows.
Speaker: Now, it's very difficult to visualize what has happened in terms of getting a real-time sense of that flow.
Speaker: We don't get the balance of payments data for the first quarter until the end of June.
Speaker: However, there are some other signs from other data that foreign investors have been indeed buying more UK equities.
Speaker: Is it a function of yield?
Speaker: Is it a function of underweight positioning?
Speaker: very possibly could also be connected to how the UK economy has been getting stronger.
Speaker: Now, these factors, as I said, have been supporting the British pound, but our longer term outlook is still one of caution.
Speaker: And why are you still cautious?
Speaker: I think a lot of the good news is in the price, whether it's coming down to interest rates.
Speaker: So if you consider the message from Simon Wells and Liz Martins, they're telling us that the Bank of England is going to keep its policy rate on change for the next couple of years.
Speaker: So the level of interest rates implied by the market is actually quite high.
Speaker: On top of that, I believe that there are still lingering uncertainties in the aftermath of Brexit through the trade and investment channel.
Speaker: This is something that my colleague Dominic Bunning has been referencing for quite some time.
Speaker: And ultimately, I think that these forces could prove to weigh on sterling in the quarters to come.
Speaker: Paul, thank you very much for your time today.
Speaker: Thank you very much.
Speaker: So that's the end of the Macro Viewpoint podcast for this week.
Speaker: Special thanks again to Xu Hongbin, Jing Liu, Jing Yang Chen, Erin Chin, Liz Martins and Paul McElhin.
Speaker: Thanks for listening.
Speaker: We'll be back next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
