Text | Barron's Chinese edition contributor Zhang Xiaotian
Edit | Kang Juan
The liquidity released by central banks may not enter the real economy and thus drive up inflation; but the capital market will greatly benefit from the release of such liquidity, which will lead to a sustained rise in the stock market.
On January 18, China's 2020 economic report card was released. China bucked the trend of recovery in the face of a shrinking global economy, achieving a growth rate of 2.3%, and its GDP exceeded the 100 trillion yuan mark for the first time, becoming the only major economy in the world to achieve positive growth.
In 2021, uncertainty and unevenness in the global recovery are expected to remain the main theme and will bring new challenges to investors.
Ba Shusong, executive dean of the HSBC Institute of Finance at Peking University, chief economist of the China Banking Association and vice president of the China Macroeconomics Society, recently gave a written interview to the Chinese edition of Barron's Weekly to share his views on this uneven recovery.
In Bashuson's view, the uneven recovery at different levels has also led to difficulties in forming consistent expectations for policy and inflation changes in 2021. "Policy tools and implementation space vary widely from economy to economy, and it may be difficult to say that there will be a consistent expectation, or a completely resonant trend, of liquidity, interest rate levels, and levels of inflation on a global scale." He said.
This imbalance is not only between different economies, but also between different sectors, populations and industries.
From the experience of the global financial crisis in 2008, the huge liquidity released by central banks may not enter the real economy and push up inflation, but will enter the capital market and bring about a sustained rise in the stock market.
But this also means that there will be a so-called "K-shaped recovery" scenario, in which "a group of people with assets who can participate in the capital market have benefited from the monetary policy and stock market rise in response to the fight against the epidemic and are richer than before the epidemic; and there is also a group of people with fewer assets and who are difficult to participate in the capital market, and their lives are likely to become worse than before the epidemic." ”
In the capital market, as a component of the new economy, FAANG, biomedicine and other enterprises or industries are more chased by the capital market, while some of the more traditional enterprises and industries have been greatly affected by the epidemic, and the situation that has attracted the attention of the capital market is far from the same.
The global recovery has been uneven and income disparities have widened
Barron's Chinese edition: In March 2020, the pandemic led to a sharp decline in global financial markets, but the market rebounded rapidly in a V-shaped shape as major economies quickly resorted to rare economic rescue measures. Not only that, but some major stock markets hit new highs. In your opinion, is the factor driving the rapid market rally higher mainly from liquidity support or the expectation of post-epidemic economic recovery?
Bashuson: These two factors may exist, but different factors at different times occupy different weights of influence. First of all, liquidity support is certainly an important factor in driving the rapid rebound of international markets to rush higher. We can see that the balance sheets of the world's major central banks, especially the Federal Reserve, have expanded by about $3 trillion during the pandemic, releasing very large liquidity to the market. One lesson that can be observed in the aftermath of the subprime mortgage crisis is that the liquidity released by the central bank may not necessarily enter the real economy and thus drive up inflation; but the capital market will greatly benefit from the release of such liquidity, which will lead to a sustained rise in the stock market. If you add up the liquidity stimulus provided by the global central banks during the epidemic, you will find that the liquidity stimulus this time is significantly stronger than the subprime mortgage crisis in 2008.
At the same time, the expectation of post-epidemic economic recovery is certainly also an important support for the rapid reversal of the international market trend and the subsequent rebound, especially after the progress of vaccine research and development, the international market will form an optimistic expectation that the epidemic will soon pass, although it will take time for the vaccine to be fully applied and produce global positive effects. It can be seen that not only the global equity market, but also commodity prices have increased significantly after the sharp decline in March 2020, and some commodity prices have even hit record highs. This is directly related to the expectation of economic recovery, with China taking the lead in controlling the epidemic and resuming production.
However, it should also be noted that the current economic recovery expectations under the combined influence of various factors can be said to be an "unbalanced recovery". This imbalance includes multiple angles and levels. The first dimension is the uneven recovery between different economies and regions. 2020 is over, and China is the only major economy to maintain positive growth in 2020. China is one of the most important producers in the world, the earliest resumption of work and production, can continue to export production capacity for the world; superimposed as the world's main consumption force in the european and American countries of the rescue policy, a very important way is to protect the consumption capacity of residents, which protects the global "production - consumption" chain cycle, but also for China's exports to bring strong growth momentum. In addition, after the monetary policy of major economies has been used on a large scale, the use of fiscal policy may become the focus of the policy use of major economies in the next stage, which may be more direct to stimulate economic recovery, and of course, the debt pressure that may be formed will continue to increase.
The second level of uneven recovery comes from the differentiation between enterprises and industries. In 2020, as a component of the new economy, FAANG, biomedicine and other enterprises or industries are more chased by the capital market, and have also become the main driving force for some major stock indexes to continue to reach new highs; while some more traditional enterprises and industries have been greatly affected by the epidemic, and their survival status and the situation concerned by the capital market are far worse than the former.
Another dimension of uneven recovery comes from the uneven recovery of different populations. For this economic recovery after the epidemic, many people call it a "K" recovery, which means that a group of people with assets who can participate in the capital market have benefited from the monetary policy and stock market rise in response to the fight against the epidemic, and are richer than before the epidemic; and there are also a group of people who have fewer assets and are difficult to participate in the capital market, and their lives are likely to become worse than before the epidemic. Overall, the uneven economic recovery has led to a larger global debt scale and a larger gap between rich and poor, and it remains to be seen where it will eventually go, but it is certain that through the stimulus policy of the epidemic, the income gap in developed countries such as the United States has actually widened further.
Barron's Chinese Edition: Looking ahead to 2021, will global liquidity conditions, interest rates and inflation levels change significantly from 2020? How can investors prepare?
Bashuson: Based on what has just been discussed, there is an imbalance in the pace of global economic recovery, and the rhythm and intensity of monetary and fiscal policies of global central banks are bound to be uneven.
In 2020, China's economy took the lead in recovery, and the Central Economic Work Conference at the end of 2020 stated that "there is no sharp turn", which means that with the gradual recovery of China's domestic economy, the unconventional stimulus policy in 2021 will gradually return to normal, or gradually withdraw from it should be a general trend, but the rhythm will not be too fast and too urgent, setting the general tone of macro policy stability. Reflected in monetary policy and fiscal policy, there is also more emphasis on "sustainability", but this does not mean that counter-cyclical adjustment will be vigorously increased, such as monetary policy remains loose in the New Year's Eve window, but the follow-up still needs to observe the progress of global epidemic control in 2021 and the marginal resilience and internal structural characteristics of economic data recovery.
In the United States, in mid-December 2020, the Federal Reserve announced its December interest rate decision, raising its economic growth forecast and raising its inflation forecast for the coming year. Powell also said that no one should question the Fed's commitment to support the U.S. economy, and would provide it if the Fed believes it needs more easing measures. Therefore, in the current environment where the epidemic in the United States is still severe, the peripheral easing situation may not be withdrawn for the time being, and with former Fed Chairman Yellen as Treasury secretary, it is expected that under the upcoming Biden administration, the coordination between the Fed and the Treasury department will be strengthened in 2021.
In order to cope with the second wave of the epidemic, the EcB has once again relaxed policy, and the ECB has also lowered its economic growth forecast for 2021-2022 and inflation in 2020, and its economic outlook for the next two years is more pessimistic than before.
On the whole, even if the world is facing the risk of a second outbreak of the epidemic, the external risks of different economies are still different, such as developed countries are also facing a geopolitical escalation, and the large-scale subsidy programs implemented by emerging countries due to the epidemic have also accumulated the risk of default of their sovereign debt. Policy tools and room for implementation vary widely from economy to economy, so it may be difficult to say that there will be a consistent expectation, or a fully resonant trend, of liquidity, interest rate levels, and levels of inflation on a global scale.
Gold Bitcoin reflects the trend of the US dollar more
Barron's Chinese edition: Gold, Bitcoin and other assets that are considered to have a certain hedging effect have also risen sharply recently, what potential risk factors do you think the market is digesting?
Bashuson: In the above environment, gold and bitcoin, as a type of investment variety, have certain safe-haven properties, especially the characteristics of avoiding the risk of dollar depreciation, and their price movements are more likely to reflect the currency phenomenon related to the trend of the us dollar (Editor's note: On January 4, the US dollar index fell below 89.5, a new low since April 2018).
As mentioned earlier, in response to the impact of the epidemic on the economy, the Fed's balance sheet has expanded by about $3 trillion, releasing a lot of liquidity to the market while also lowering the market's expectations for the trend of real interest rates. This will have a clear impact on both assets related to the movement of the US dollar.
Barron's Chinese edition: You mention in your new book that "there are a significant number of people who do not hold financial assets, so it is difficult to benefit from the recovery in financial markets." To change this situation, the coverage of financial assets needs to be expanded accordingly. Specifically, what are the ways and means to "expand the coverage of financial assets"?
Bashusong: The first is to use financial technology to improve the inclusiveness of financial services, that is, to provide diversified financial service support from the perspective of customer needs. For example, financial technology combined with robo-advisors provides investors with a more accurate KYC profile, based on customer assets, trading behavior, family status, investment objectives, etc. to help customers understand their own needs and match financial assets that match their profiles. The combination of technology can not only provide existing customers with more personalized and adaptable services and enhance their cooperation stickiness; on the other hand, the development of fintech can also help us cover the long-tail customer base that was difficult to provide financial services to in the past.
The second is to broaden the scope of investment from the perspective of financial product design, for example, in 2020, China's public funds have taken an important step in REITs, and investors can better tap investment targets that meet their expectations in the choice of products. Cross-market, cross-variety, cross-institutional trading and cooperation should be encouraged, the capital market is developing rapidly, which is not only the change of system and investment targets, investors will also follow the rapid growth of the market and put forward higher asset allocation needs. In the face of a complex and rapidly changing market environment, asset management institutions need to actively embrace diversification in order to better respond to changes in the market and improve customer stickiness.
Barron's Chinese edition: Looking back at the 20th century, every 20 or so years different economic ideas prevailed and influenced decision-making and reform in some countries. In the past decade or so, it seems normal for major economies to use monetary easing to smooth out economic fluctuations and "care" for financial markets. In this case, is there a new economic theory that may become dominant?
Bashusong: On the one hand, in 2020, in the face of the impact of the epidemic and the sharp decline in the global Golden Globe financial market, some major global central banks led by the Federal Reserve have adopted unconventional monetary policy and balance sheet expansion operations, many countries use very loose macroeconomic policy tools for risk hedging, and many countries have zero interest rates and negative interest rates, which is a great challenge to traditional pricing theory and capital interest generation theory. In the context of such an unprecedented black swan shock, the implementation of monetary policy to adopt some special and unconventional means is necessary, so the research and discussion of some theories in academia and the market can also be understood, such as the rise of modern monetary theory is a representative. However, the highly relaxed global liquidity environment will help to mitigate and hedge the impact of the epidemic, and it will also leave the hidden danger of liquidity flooding, which requires precautions, which are two sides of the coin. At the same time, the financial market is also becoming increasingly large, and the impact on the economic system is also increasing, and this reality also requires a comprehensive reflection on the function and positioning of the financial system.
The pricing advantage of A-shares has shifted to professional institutional investors
Barron's Chinese edition: Data from the 2020 China Asset Management Industry Development Report shows that the proportion of public funds investing in A-shares has dropped sharply from 2009 to 2017. This proportion has risen since 2018 and 2019, can the upward trend be sustained? In what ways is the process of "de-retailing" of A-shares likely to break the game?
Ba Shusong: This "proportion" problem needs to be viewed from two aspects, one is the choice of the investor market, and the other is the fluctuation cycle of the market itself. Under the premise that the market selection factors remain unchanged, the rise and fall of the market itself will also bring about a change in the proportion, and when the market rises significantly, this market will often attract more investors to participate, so it is also a dynamic change process.
The rise in the proportion of equity investment in the past two years may be understood from the background of the transformation of new and old economic momentum and the superposition of "new asset management regulations" forcing industry transformation. With the transformation and upgrading of China's economy, it is decided that the proportion of direct financing represented by equity financing will increase significantly, and more and more high-quality enterprises representing the future development direction of China's economy will land on the capital market. Changes in underlying assets are naturally reflected in institutional investment choices. In addition, after the introduction of the new asset management regulations, the difference between different types of asset management institutions has gradually weakened, and some institutions have actively embraced the capital market in order to rush on the unified track and increase the allocation ratio of equity assets in the portfolio, which is also one of the means of their differentiated development and more market share.
For the understanding of "de-retailing", with the institutionalization, internationalization and marketization of A-shares, the market situation has undergone obvious changes, the pricing advantage has obviously shifted to professional institutional investors, and institutional investors have greater advantages in market influence and discourse. The proportion of A-share institutional investors has risen in recent years, and we believe that there are two major trends in the future, the first is that banks, trusts and other funds will continue to flow into standard assets through financial products on a large scale with the effective landing of new asset management regulations in 2021, while public fund products have a high standard degree, have the advantage of tax avoidance, and the impact on bank capital is also relatively friendly, and it is likely to be favored by institutional transformation funds. The second is the launch of fund investment advisory, intelligent investment advisory, but also to guide individual investors and institutional professional investors to further close cooperation, with the practice of financial technology in the application level and the penetration of investor education, individual investors have gradually cultivated the concept of "professional institutional financial management", the future more through the way of entrustment through institutional investors to participate in the market will also be accepted by more investors.
Barron's Chinese edition: In recent months, RMB assets represented by Chinese government bonds have been popular among overseas investors. What do you think are the causes and persistence of this trend?
Ba Shusong: The participation of foreign investors in China's bond market is the result of the comprehensive impact of many factors such as the improvement of China's bond market opening up system and the difference in the implementation of monetary policy at home and abroad under the influence of the epidemic. In recent years, the bond market opening up system has been continuously improved, such as the introduction of the Bond Southbound Connect, the abolition of QFII and RQFII investment quota restrictions, and the interconnection and cooperation between banks and relevant infrastructure institutions in the exchange bond market. With the advancement of these policies, the convenience of foreign investment in China's bond market has increased significantly. In April 2019, the Bloomberg Barclays Global Aggregate Bond Index was included in China's treasury bonds, in September, the emerging market government bond index was included in China's treasury bonds, and in October 2021, Chinese government bonds will be included in the World Government Bond Index, which will also provide more allocation funds for the Chinese bond market. Under the new crown epidemic in 2020, the Fed's monetary policy continues to be loose, which is also a great test for the economic resilience and exchange rate stability of emerging market countries, compared with other countries, the renminbi has steadily strengthened, the Interest Rate Differential between China and the United States has widened significantly, and the international expectations for China's future economic growth are also relatively optimistic, which I think is also the basic reason for the increase in overseas investors' investment in China's government bonds.
At present, overseas investors have paid more attention to RMB assets, but the share of foreign institutions in China's bond market is still low. As of October 2020, the total amount of bonds held by foreign institutions in the interbank market is less than 3 trillion yuan, accounting for only about 3% of the total custody of the interbank bond market. Therefore, returning to the most basic asset allocation and capital flow analysis, the cost performance of China's bond investment, coupled with the acceleration of RMB internationalization and financial opening up, will make the proportion of foreign institutions in China's bond market continue to increase.
The development of China's asset management industry exceeded expectations
Barron's Chinese edition: As China increases the opening up of the financial industry, foreign asset management institutions are intensively entering the Chinese market. For China's asset management industry, what kind of opportunities and challenges will this bring? How should foreign-funded institutions prevent the problem of "water and soil incompatibility"?
Bashuson: Differentiated and diversified competition is conducive to providing the market with a fully diversified choice of products and services, so it is of positive significance to improve the efficiency of the asset management market. In an increasingly internationalized market, different shareholder backgrounds, cultural differences, and differences in advantages and capabilities lead to differences in strategic positioning and planning of various asset management institutions. The entry of foreign institutions will bring differentiated products and services on the one hand; on the other hand, it will also introduce more different ways of investor education, portfolio management and risk control concepts to promote the formation of a differentiated asset management ecosystem.
For foreign-funded institutions, the biggest challenge comes from a deep understanding of the Chinese market, which will directly affect the regulatory policies and economic direction of these foreign-funded institutions in the Chinese market. Now many foreign-funded institutions that enter A-shares carry out their work through Sino-foreign cooperation, and some institutions have already had a certain influence in the market, I believe that more foreign-funded asset management institutions will know more and more about the Chinese market, because the most important resource in the asset management industry is people, and foreign financial institutions can also make achievements in the Chinese market as long as they find an excellent team familiar with the Chinese market.
Barron's Chinese Edition: The Asset Management Industry Development Report is the fifteenth consecutive year it has been published. What is the trend that impressed you most about after such a long period of research?
Bashusong: Observing the asset management industry for fifteen consecutive years, we can first clearly see the rapid development of China's asset management industry. Fifteen years ago, China's asset management industry was still a very small industry, not large, not many players, and a very limited role in China's financial system. However, the development speed of China's asset management industry in the past decade or so may have exceeded the expectations of many people, not only the nominal scale of the industry has reached tens of trillions, but the group of industry participants has also become large and diverse. As an important part of China's financial system, China's asset management industry has also played an important role in promoting the conversion of Chinese residents' savings into investment, supporting the development of the real economy, and improving the efficiency of financial resource allocation.
In the future, China's asset management industry will also have very broad prospects for development: according to forecasts, in 2035, if China completes the doubling target set by 2020 on schedule, it may become the largest economy in the global economy, and it is matched that China should have a very large and efficient asset management industry, including a large number of asset management companies that should have influence in the world, and also provide more investment opportunities for investors around the world. This is something that will most likely happen in the next decade or so. Therefore, we can fully expect higher expectations for the future opening up and development trend of China's asset management industry.