Nyheter
2015 From Cyclical to Structural
China Macro Monitor 2015 From Cyclical to Structural. After half a year of spectacular equity market performance to some the clouds of slowing economic growth cast doubt on China’s ability to maintain the rally.
However, that view over-emphasises the correlation between GDP performance and equity market performance. The link between economic and equity market performance has never been straight-forward. Indeed, China may follow a path similar to Japan, South Korea and Taiwan during their early stages of development. That indicates that equity market performance will accelerate during periods of financial market liberalisation rather than periods of strong economic growth.
A number of exogenous events may also prove to be supportive for both China’s domestic equity market and China’s role in the global economy. MSCI is due to evaluate the inclusion of China A-Shares in its Emerging Markets Index this June. The IMF is also due to conduct its five-yearly Special Drawing Rights (SDR) basket review this October. Renminbi inclusion discussions could become a catalyst for significant currency market liberalisation and a seismic shift in the role of the Chinese currency in international trade and finance.
We expect reform to remain the focus of policy makers’ agenda this year, with lower economic growth an acceptable by-product of stability. The authorities are unlikely to let growth fall substantially lower however, as that could stoke political unrest and undo the hard work of the reform agenda. We expect some policy easing, primarily in the form of lower interest rates and a reduction the Reserve Requirement Ratio in coming months.
A ROCKY PATH TO STABILITY
Although Chinese GDP growth of 7.4% in 2014 surpassed consensus expectations, it was the lowest reading in 24 years. The outlook for growth is lower still in 2015. Both the World Bank and IMF have downgraded their 2015 China growth forecasts to below 7%t this month. The message from policy makers in China is that sub-7% growth is acceptable, so long as its reform agenda continues apace.
Over the next decade China’s growth model will migrate away from cheap-currency dependent mercantilism and China will become increasingly more capitalist. Market forces will help the allocation of resources1 and the legal framework will be strengthened to improve quality of China’s institutional infrastructure2.
Transition will inevitably involve winners and losers, but society as a whole is likely to benefit from the new model. China will be careful not to move too quickly and aggravate political instability. With that in mind, it is likely that China will stimulate the economy further in 2015 to avoid a marked slowdown, especially in light of a faltering Euro area dampening global demand their good and services.
In spite of economic growth deceleration in H2 2014, the domestic equity market rallied 58%3. That is not unusual and the experiences of Japan, South Korea and Taiwan in their transition paths in earlier decades highlight that this is what we should expect. For example in Japan during the 1960s, a period of financial repression, the stock market underperformed relative to the overall economy. However in the 1980s when economic growth was subdued relative its past, the stock market performed particularly well in an environment of financial market liberalisation. South Korea and Taiwan experienced similar bouts of equity market outperformance during periods of financial market liberalisation, which countered the underperformance during earlier periods of financial repression and relatively stronger growth.
We believe China’s equity market underformance in recent years prior to the opening up of the Hong Kong-Shanghai Connect initiative in November 2014 was a symptom of a lack of market access. The Connect initiative significantly opened up market access. The fact that volumes traded on the Connect have not met expectations is irrelevant. The market has priced Shanghai stocks as internationally accessible now. The eventual opening of a Shenzhen Exchange link4 will give further access to Chinese domestic stocks, which will also become priced-in at some point.
We are likely to see equity market volatility rise. While structural shifts will move the equity market higher, periodic disappointment over growth figures are likely to lead to frequent corrections. This tug-of-war between the structural and cyclical drivers of the market will continue to divide analysts and see volatility remain high. Investors attracted to the recent rally should recognise the need for a significant degree of risk tolerance to weather rising market volatility.
In 2014, it was clear that Chinese equities were cheap by international standards. That is no longer the case. The MSCI China A-Share P/E is now close to the MSCI World P/E. P/Es in 2009 were undesirably high (it was a period of earnings weakness and price optimism in light of policy easing) and so should not be treated as a benchmark for where equity markets should go back to. Trading China on cheapness should be a thing of the past. Investing in China is once again about buying into structural change.
THE GLOBAL STAGE AWAITS
A number of events this year could prove to be a catalyst for further capital market deepening in China.
Firstly in June, MSCI will reconsider whether to include domestic Chinese equities into its emerging markets index. With approximately US$1.5tn benchmarked to MSCI China Emerging Markets Index, even a small allocation of 0.5% to the China A-Share market in the broader index could drive US$7.5bn into the market on the back of index replication by investors.
As a point of reference, the MSCI United Arab Emirates Net TR USD index rose over 90% between the time MSCI announced UAE stocks would enter its Emerging Market Index and actual inclusion (see shaded area of chart). While the Chinese and UAE markets are vastly different in size and composition, we believe the increasing probability of index inclusion will bode well for China A-Shares.
Secondly, in October the International Monetary Fund will review which currencies it will include in its Special Drawing Rights (SDR) currency basket. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. If the Renminbi is included in the basket, central banks buying/selling SDRs will have to deliver/receive Renminbi (in proportion to its weight in the basket).
In its last review in 2010 the IMF decided not to widen the currencies in the basket. At the time the IMF noted that China was the third largest exporter of goods and services but felt that the Renminbi was not a freely useable currency. However, they urged that this issue be kept under review. Since then, the Chinese Yuan has become the fifth most used payment currency according to SWIFT5, jumping from seventh position only a year earlier. The Renminbi became the ninth most actively traded currency according to the Bank of International Settlement’s 2013 triennial survey, jumping from 17th position in 2010. Over that period average daily turnover soared from US$34bn in 2010 to US$120bn in 2013.
Significant expansion in RMB offshore clearing centres around the world has helped fuel this trend and access to the currency has never been easier. In 2014, the Yuan-HK Dollar convertibility cap was abolished in recognition of the demand for Renminbi (timed with the opening of the Hong Kong-Shanghai Stock Connect initiative).
While capital and exchange rate controls will continue to hold back the Renminbi from SDR inclusion, we believe the IMF’s review this year will facilitate a road-map for further internationalisation of the currency. With the internationalisation of the Renminbi a stated policy objective we believe that the Chinese authorities will continue to dismantle controls on the currency.
With the Yuan trading very close to the edge of its trading band (see chart on front page), we could see further flexibility in the trading band this year. The recent depreciation against the US Dollar seems to be more about the strength of the US dollar than Yuan weakness, with the nominal effective rate actually having appreciated in December. Indeed there has been no increase in foreign exchange reserves that would occur if the authorities were intervening to depreciate the currency.
POLICY EASING IN 2015
With consumer price inflation weakening and property prices continuing to fall, we expect the Peoples Bank of China (PBoC) to cut interest rates further this year. We also expect the central bank to cut the Reserve Requirement Ratio (the amount of reserves banks need to hold with the central bank), thus improving banks’ ability to lend.
The transition away from shadow banks to the formal banking sector will continue in 2015, increasing pressure on the PBoC to provide liquidity support to banks. On January 22nd the PBoC injected CNY50bn into the banking system through the 7-day repo market. That was one of the many injections the central bank has provided in the past six months (see page 10 for other examples) and we expect the PBoC to maintain a strong hand on facilitating the transition in the financial sector.
1 “The focus of the restructuring of the economic system… is to allow the market [forces] to play a ‘decisive role’ in the allocation of resources”, Third Plenum Communiqué, November 2013
2 ”Comprehensively advancing the rule of law”, Fourth Plenum Communiqué, October 2014
3 MSCI China A-Share, between 30 June 2014 and 31 December 2014
4 Although no formal announcement has been made, Premier Li Keqiang has openly encouraged the opening of an Shenzhen link
5 December 2014
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority. When being made within Italy, this communication is for the exclusive use of the ”qualified investors” and its circulation among the public is prohibited.
Last week, I was in Washington, DC to attend the DC Blockchain Summit and to meet with regulators and policymakers to share our experiences as a crypto-focused asset manager over the last seven years.
The Summit, hosted by The Digital Chamber, included speeches from dozens of members of Congress, regulators, and industry leaders. After listening to presentations and speaking with a number of regulators and policymakers I have one key takeaway: Regulatory clarity for crypto will come much faster than I previously anticipated.
A dramatic shift in tone
As I wrote in January, US policymakers and government leaders—at nearly every level—are embracing this technology. For years, the lack of clear rules for digital assets in the US has been a major obstacle for institutional investors and financial firms looking to enter the crypto space. However, this past week in DC, as well as several of the conversations I’ve had with advisors and wealth managers over the last several weeks, has left me with an even higher sense of optimism.
One of the most striking takeaways from my meetings was the shift in how policymakers are discussing crypto. Just a year ago, many in Washington viewed digital assets primarily through the lens of risk—concerns over fraud, illicit finance, and speculative volatility dominated the conversation. While these concerns still exist, the discussions now are much more nuanced and focused on the opportunities that crypto can create to the American economy and how to address these risks through a clear regulatory framework.
Bipartisan support for legislation
Perhaps the most encouraging sign is the concrete progress being made on both legislative and regulatory fronts. Several key developments indicate that clearer guidelines for crypto businesses and investors could arrive sooner than expected. There is growing bipartisan momentum behind crypto-related legislation. The House Financial Services Committee and the Senate Banking Committee are moving forward with stablecoin legislation, and it is possible legislation could be signed into law as early as this summer. Stablecoins have also been a key focus of regulatory discussions, with growing consensus that they should be subject to clear guidelines similar to those governing payment systems and money market funds.
House and Senate committees are also actively discussing proposals that aim to define the jurisdiction of regulatory agencies, clarify the status of digital assets, and establish consumer protections. Unlike previous years, these efforts are being taken seriously by both parties, increasing the likelihood of meaningful legislative progress.
Adding to these regulatory discussions is the growing demand for crypto exposure from institutional investors. This demand is influencing policymakers and regulators, as they recognize that a lack of clarity is pushing innovation overseas.
What does this shift mean for investors?
The acceleration of regulatory clarity is a significant development for investors. While the approval of spot bitcoin ETFs last year was a watershed moment, it’s just the beginning. Several large financial institutions, including major banks and asset managers, are actively exploring tokenization, digital asset custody, and blockchain-based financial infrastructure. These institutions are engaging with regulators, advocating for a clear framework that allows them to enter the market with confidence.
Uncertainty has been one of the biggest barriers to broader crypto adoption by financial institutions and institutional investors in particular. As regulations become clearer this year, we expect to see:
• Increased institutional participation: With regulatory uncertainty diminishing, more traditional financial institutions will feel comfortable offering crypto products and using crypto technologies such as stablecoins to offer more efficient services, driving further mainstream adoption.
• Growth in tokenization and blockchain use cases: Clearer regulations will pave the way for asset tokenization, improving efficiency in markets like real estate, bonds, and private equity.
• A stronger US crypto market: By establishing a clear regulatory framework, the US can assert itself as a global financial leader, which we believe will help spur more regulatory clarity in other jurisdictions.
Final thoughts
The message from Washington is clear: crypto regulation is coming, and it’s coming faster than many expected. While there are still hurdles to overcome, the shift from uncertainty to structured regulation is well underway. For investors, this marks an important transition. Clearer rules will reduce risks, enhance market stability, and unlock new opportunities for institutional and retail participants alike.
At Hashdex, we remain committed to navigating these changes and providing investors with access to the best opportunities in this evolving landscape. As we move forward, continued engagement with regulators, policymakers, and financial institutions will be key. The crypto industry has a critical role to play in shaping the future of regulation, and by working collaboratively, we can help ensure that the next phase of crypto’s growth is built on a foundation of clarity and trust.
Vem ska ha en LEI-kod?
BSE9 ETF bara företagsobligationer med förfall 2029
Crypto’s political tailwinds are blowing hard: Lessons from a week in Washington
SPUT ETC spårar priset på uran
VanEck ETF utökar sitt kryptoerbjudande med Celestia ETN
Fonder som ger exponering mot försvarsindustrin
WisdomTree lanserar europeisk försvarsfond.
Warren Buffetts råd om vad man ska göra när börsen kraschar
De bästa börshandlade fonderna för tyska utdelningsaktier
Trumps återkomst får europeiska aktier att rusa
-
Nyheter2 veckor sedanFonder som ger exponering mot försvarsindustrin
-
Nyheter3 veckor sedanWisdomTree lanserar europeisk försvarsfond.
-
Nyheter1 vecka sedanWarren Buffetts råd om vad man ska göra när börsen kraschar
-
Nyheter3 veckor sedanDe bästa börshandlade fonderna för tyska utdelningsaktier
-
Nyheter3 veckor sedanTrumps återkomst får europeiska aktier att rusa
-
Nyheter3 dagar sedanSvenskarna har en ny favorit-ETF
-
Nyheter4 veckor sedanUtdelning i XACT Norden Högutdelande mars 2025
-
Nyheter2 veckor sedanHANetf lanserar Europa-fokuserad försvars-ETF
