Asia Briefing Exclusive
By Dezan Shira & Associates
Editor: Cameron Turnbull
World financial leaders gathered in Hong Kong on Monday, January 18 for the Asian Financial Forum. The two day event is meant to bring together representatives from finance and government for a discussion about economic growth prospects in Asia for 2016.
What will this year’s economic growth look like? What is at stake? And who will play a leading role in 2016? These were the questions on the collective mind of everyone in the packed Hong Kong Exhibition and Convention Center.
Plenary Session – Asia: Shaping the New Paradigm for Growth
First to speak during this session was Mr. Arkady Dvorkovich, Deputy Prime Minister of the Russian Federation. He stated that despite low oil prices and harsh economic sanctions imposed on the Russian Federation, the Russian economy is well equipped to weather the storm and make it through this period of slow growth. Over the past decade, the Russian government has built up vast foreign currency reserves with the expectation that commodity prices (ie Oil prices) would eventually fall as they did in 2015. Mr. Dvorkovich also stressed that the low Russian Rupee presented fantastic opportunities for cheap Russian exports (textiles, food) to China.
Mr. Liu Zhenmin, Vice Minister of Foreign Affairs for the People’s Republic of China spent the majority of his speech promoting the benefits and opportunities for investors along the new Silk Road. In fact, China’s One Belt One Road (OBOR) initiative got quite a bit of attention from all of the speakers.
Mr. Pierre Gramegna, Minister of Finance for Luxembourg, stressed the importance of AIIB (Asia Infrastructure Investment Bank) and OBOR (One Belt One Road) as a means to bring about peace and limit geopolitical risk in the Middle East and Africa. He felt that in the face of slower projected Asian economic growth in 2016, quality of growth should be valued over quantity of growth, particularly considering the environmental issues that our planet is currently facing. He also encouraged the audience to get more excited about free trade and multi-national economic agreements as they are key to finding the new economic growth paradigm.
The Swedish Deputy Minister for Finance, Mr. Per Boland, was the next to take the stage. He echoed Mr. Gramegna’s sentiments about valuing quality over quantity of growth, stating that green investment and economic growth go together. He stressed the need for all countries to end the use of fossil fuels and lower carbon emissions by using a cap and trade system. The Swedish cap and trade system has reduced emissions by 25 percent while growing the economy 64 percent since its implementation. Green energy is also a fast growing industry in China, with ample opportunity for investment.
The final speaker in the Plenary Session was Mr. Kiatchai Sophastienphong, Thailand’s Vice Minister for Finance. Thailand has been going through a tough economic period recently, struggling, as many exporters have, with the cooling demand for exports from the developed economies and raising wages domestically. The Thailand government is trying to create a new economic growth model by providing subsidies for more high tech, value added industries such as robotics and logistics. Subsidies combined with large investment in relevant infrastructure illustrate Thailand’s attempt to replace the cheap export growth model of the past decade.
Pessimism about Asian Growth
Conference participants were generally pessimistic about Asian economic growth in 2016. Perhaps spurred on by low commodities prices, US interest rate normalization, or slow Chinese economic growth, the audience gave pessimistic response after pessimistic response to live polling questions.
Meanwhile, business and government leaders from both Asia and Europe tried to convince the audience to see the silver lining in the looming economic storm clouds, insisting that Asia showed economic promise in the coming year.
During the Panel discussion about opportunities in China, the panellists all agreed that no hard landing is expected for the Chinese economy, with Chinese economic growth predicted to be somewhere between 6.5 and 7 percent in 2016.
The always colorful Wanda CEO Wang Jianlin added that the polling questions must have been written abroad, saying that major cities such as Shanghai, Shenzhen, and Beijing are showing fantastic growth and, to really understand what is happening with the Chinese economy, you have to be in China.
One Belt One Road
One of the biggest takeaways from the conference is that One Belt One Road will be a huge economic story for 2016 and beyond. It is an undertaking that directly affects 2/3 of the planet and was mentioned in every speech and discussion that occurred during the first day of the conference.
The panellists all agreed that there are big opportunities for investment, with banks in the liberated financial markets of Shanghai and Hong Kong in place to support the project’s need for capital and financing.
It seems that the OBOR initiative and the liberalization of the Chinese financial industry are not coinciding by coincidence. The OBOR requires a huge amount of foreign investment and the cooperation of numerous other countries. Throughout the conference, speakers continually insisted that the OBOR initiative was open to all countries and will be a team effort. The recent policy decisions to gradually internationalize the RMB by allowing Hong Kong banks to issue RMB denominated loans in the FTZ is a step towards a fully convertible RMB.
If the RMB becomes fully convertible, it will be a more liquid and useful reserve currency. Foreign banks are gradually getting closer to being able to make RMB denominated loans in China at a lower interest rate than that of the current government controlled interest rate regime.
Many investors see the opportunities in the OBOR initiative but are sceptical about whether the financing will be available. China’s answer to this is to create a more liberated financial environment that encourages banks to make more loans at lower interest rates.
All of the panellists agreed that Domestic Consumption will be the main economic growth driver in China for 2016. Currently, the U.S.’s economic consumption accounts for about 80 percent of GDP while in China it is only 50 percent. If the Chinese population starts to consume more, the economic opportunities are endless. This is a big “if”, however, considering that many Chinese habitually save money because of underdeveloped social safety nets, and a culture that values stability and frugality.
The fact is that Chinese authorities will need to find a way to stimulate domestic consumption as a means to foster new economic growth in the face of slowing exports.
The panellists insisted that there was hope, stating that domestic travel / tourism was experiencing large growth. 2015 saw a large rise in disposable income spending (entertainment, movies, etc.), and the Chinese property market is still healthy despite the appearance of oversupply in certain cities.
Another hot topic was the Trans-Pacific Partnership agreement. With a consensus on trade issues reached and signed off on in October, and the notable omission of China from the list of included countries, the TPP was an elephant in the room throughout most of the discussions.
When the audience was posed the question of what factor will have the biggest impact on economic growth in 2016, the TPP and OBOR came in 2nd place behind the possible hard-landing of the Chinese economy.
The TPP Free Trade Deal will be signed on February 4th in New Zealand, marking the end of the TPP negotiation process. The 12 signing countries will now have 2 years to implement the required reforms on issues such as tariffs, transparency and labor standards.
China has quite a bit of reform to do before it can also be allowed to join the partnership, including the further dismantling of the country’s State Owned Enterprises (SOEs). During the OBOR discussion, the panellists insisted that Chinese SOEs will lead the way in terms of outgoing Chinese investment. Perhaps this is a sign that such reform is still a way off.
The discussion also turned to the emerging Chinese FinTech industry. Financial technology and Internet finance are becoming very popular ways for Chinese start-ups to gain quick access to cheap capital. Internet banks operate entirely online without any physical branches, and companies and individuals can access banking services on their smartphones or through self-service ATMs. The panellists insisted that Internet finance is going to play a key role in Chinese development, but is still risky and needs to be regulated.
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