摩根士丹利-新兴市场-投资策略-中国资本流动的转型-2019.2.11-71页.pdf

MMJames Lord,Min Dai,Sheena Shah,Kelvin Pang,David Adams,Matthew Hornbach and Chun Him Cheung are fixed income strategists and are not opining on equity securities.Robin Xing,Jenny Zheng,Zhipeng Cai,Daniele Antonucci and Jan Kozak are economists and are not opining on any securities.Their views are clearly delineated.Due to the nature of the fixed income market,the issuers or bonds of the issuers recommended or discussed in this report may not be continuously followed.Accordingly,investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers or bonds of the issuers.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research.Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of this report.+=Analysts employed by non-U.S.affiliates are not registered with FINRA,may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company,public appearances and trading securities held by a research analyst account.EM Strategy and EconomicsThe Transformation of Chinas Capital FlowsWe believe China will open its markets to foreign capital,with the current account moving to a structural deficit.Private and reserve manager portfolio inflows should rise well above consensus expectations to US$150-225bn in 2019 and US$200-380bn over 2020-30.We are bullish on HKEX and CNY.February 11,2019 09:00 PM GMTMMEM Strategy and EconomicsThe Transformation of Chinas Capital FlowsCapital inflows to China to accelerate:Chinas economy is set to become more dependent on foreign capital,given its structurally declining current account position.Indeed,2019 is likely to see the first annual current account shortfall(0.3%of GDP)since 1993 and will likely be the beginning of a sustained period of deficits.As a result,we expect the authorities to increasingly open up to foreign capital and portfolio flows in particular.We see HKEX and CNY as key beneficiaries of these trends.We recommend buying HKEX:Rising equity and bond portfolio flows will lead to greater activity on the HKEX platform and rising revenues,helping the stock do well over the next 2-3 years.We revise up our price target to HK$340(February 11 close:HK$241.8)and see limited downside risks.We recommend long CNH,revising FX forecasts stronger:An acceleration of portfolio inflows combined with more FDI on the back of a further opening up of the economy should mean ample financing for the current account position.We recommend a short SGDCNH position.We have revised our FX forecasts stronger,and now expect 6.55 in USDCNY by end-2019 and 6.30 by end-2020 with gradual appreciation in the CFETS index over the long term.Portfolio flows ramping up:We expect to see US$80-100 billion of inflows into the government bond market in 2019 compared to US$35 billion on average over 2015-18,and potentially as much as US$120 billion on average over 2020-30.For equities,we expect 2019 to be a record year of inflows for the A-share market,with as much as US$70-125 billion entering the market.Over the longer run,we expect annual inflows to normalise between US$100-220 billion.Annual corporate bond inflows could reach US$27-37 billion,but this could take time to materialise.Rising share of global reserve assets:Chinas membership of global bond indices will drive the increase in bond inflows,but we anticipate more buying from global reserve managers to help too.We think that CNY assets could reach 5-10%of global FX reserves over the next 10 years,surpassing the significance of JPY and GBP,benefit-ting government bonds first and eventually corporate bonds too.We are bullish on 10y CGBs.Not all C/A deficits are a problem:Chinas current account deficit is unlikely to pose its economy significant financial stability risks.At just 1%on average during 2019-30 it is modest compared to many other EMs and the authorities are taking active measures to attract foreign capital,while China also has a large net foreign asset position,which acts as a buffer.At the same time,while Chinas external funding need may not be large as a percentage of GDP,it is still large in absolute terms,which could pose problems for other capital-de-pendent economies,particularly in EM.MM Contributors MORGAN STANLEY&CO.INTERNATIONAL PLC+James K LordStrategist+4420 7677-3254James.LMORGAN STANLEY ASIA LIMITED+Robin XingEconomist+8522848-6511Robin.XMORGAN STANLEY ASIA LIMITED+Min DaiStrategist+8522239-7983Min.DMORGAN STANLEY ASIA LIMITED+Laura WangEquity Strategist+8522848-6853Laura.WMORGAN STANLEY&CO.INTERNATIONAL PLC+Sheena ShahStrategist+4420 7677-6457Sheena.SMORGAN STANLEY ASIA LIMITED+Kelvin PangStrategist+8522848-8204Kelvin.PMORGAN STANLEY ASIA LIMITED+Jenny Zheng,CFAEconomist+8523963-4015Jenny.L.ZMORGAN STANLEY ASIA LIMITED+Jonathan F GarnerEquity Strategist+8522848-7288Jonathan.GMORGAN STANLEY ASIA LIMITED+Anil AgarwalEquity Analyst+8522848-5842Anil.AMORGAN STANLEY&CO.LLCDavid S.Adams,CFAStrategist+1212 761-1481David.S.AMORGAN STANLEY&CO.LLCMatthew HornbachStrategist+1212 761-1837Matthew.HMORGAN STANLEY&CO.INTERNATIONAL PLC+Jan KozakEconomist+4420 7425-2571Jan.KMORGAN STANLEY&CO.INTERNATIONAL PLC+Daniele AntonucciEconomist+4420 7425-8943Daniele.AMORGAN STANLEY ASIA LIMITED+Zhipeng CaiEconomist+8522239-7820Zhipeng.C+=Analysts employed by non-U.S.affiliates are not registered with FINRA,may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company,public appearances and trading securities held by a research analyst account.MORGAN STANLEY ASIA LIMITED+Chun Him CheungStrategist+852 2239-1261Chun.Him.CMM Contents 6Executive summary:The race for foreign capital9The long-term outlook for Chinas current account16What bond inflows could China see?24What FDI inflows will China receive?31Could CNY become a reserve currency and what would it mean for bond inflows?42What impact will Chinas index inclusion have on USTs and other EMs?44 What equity inflows will China receive?2019 a year of record A-share foreign inflows52Implications for CNY and CGBs55China onshore corporate bond market:The last to benefit61HKEX a big beneficiary of capital inflows into China65The euro as a reserve currency:Not rivalling the dollarMMORGAN STANLEY RESEARCH5MExhibit 1:Key forecasts in this reportChina to shift to current account deficit(0.3%of GDP)in 2019.While the deficit could gradually widen to 1.6%of GDP by 2030,external stability would remain in check Current Account US$80-100bn inflows into the government bond market in 2019(vs.US$35bn on average over 2015-18),and 2019 to be a record year of inflows(US$70-125bn)for the A-share market Portfolio Flows Net FDI inflows to remain robust at US$110-230bn per year in 2019-30(vs.US$126bn per year in the past decade),on the back of further reforms and opening up and rational growth in outward FDI FDI CNY assets could gradually reach 5-10%of global FX reserves over the next 10 years,surpassing the significance of JPY and GBP Reserve Currency Limited impact on DM bonds but smaller EM countries such as Columbia to be more affected Bond Inclusion OW in China equities:Growth in the A-share market cap over the long run,rising weight of A-shares in the MSCI,and a stabilisation in China growth China Equity We recommend buying HKEX as rising equity and bond portfolio flows will lead to greater activity on the HKEX platform and rising revenues HKEX We recommend short SGDCNH.FX forecasts revised stronger:USDCNY to be 6.55 by end-2019,6.30 by end-2020 with a gradual appreciation in the CFETS index FX We recommend long 10y CGBs targeting 2.8%:Bond index inclusion,reserve manager diversification,disinflationary pressure and further PBOC easing Rates US$300-400bn of inflows into the China corporate bond market by 2030,but most will come in the back end due to the asset class being the last destination status for foreign fixed income investors Corporate Bonds Source:Morgan Stanley ResearchM6MWhy is this topic important for investors in 2019?Chinas relationship with the global economy is undergoing a struc-tural transformation.The economys current account is in long-term decline and the future growth of the economy will be increasingly dependent on foreign capital.Indeed,2019 will likely mark the first annual current account deficit since 1993.Unlike that year,though,this coming shift to a deficit position should be sustained and we expect the reliance on foreign capital to only grow in 2020 and beyond.This transformation will bring both uncertainty and oppor-tunity for investors,with major implications not only for Chinas economy and financial markets,but also for the global economy and other foreign capital-dependent economies.In this note we focus primarily on the impact this trend will have on Chinas economy and financial markets.We explain the primary forces driving Chinas current account deterioration,with our fore-casts for the long-term outlook.We expect a declining savings rate and aging population to lead to a current account deficit of US$50 billion(0.3%of GDP)in 2019 and reach US$420 billion(1.6%of GDP)by 2030,but simultaneously encourage an opening up of Chinas economy and financial markets to foreign investors.Where is the consensus?We believe that the majority of investors expect limited inflows to China and tend to interpret Chinas shift from a net saver to a net debtor more negatively.Investors see minimal reforms or opening up of the financial market despite the growing pressure for China to move in this direction.The general belief is that the authorities are opening up the financial market door wider than before,but it only opens inward and represents symbolic rather than substantive market reform.In particular,concerns tend to focus on Chinas cur-rency risk,continued capital controls,debt problems,as well as fric-tion caused by regulatory differences.Executive summary:The race for foreign capital Big-picture conclusionsTransforming financial markets:The biggest changes are likely to be seen in the structure of Chinas financial markets,which at present are not particularly integrated into the global economy.As shown by Exhibit 2,China has received limited levels of portfolio inflows over the past two decades and,as a consequence,foreign ownership of the domestic equity and bond markets is very small,at 2.6%and 2%,respectively.This is very likely to change.We expect to see a large increase in portfolio flows as Chinas share of global bond and equity indices looks certain to grow,while global reserve managers will probably increase their share of CNY fixed income in their FX reserve assets gradually.Two major beneficiaries of these inflows will likely be HKEX,which serves as the major gateway for the Stock Connect and Bond Connect,and CNY(CNH),which should rise on the back of adequate financing of the external deficit.Rapid increase in portfolio flows:We expect to see US$80-100 bil-lion of inflows into the government bond market in 2019 compared to US$35 billion on average over 2015-18,and potentially as much as US$120 billion on average over 2020-30.For equities,we expect 2019 be a record year of inflows for the A-share market,with as much as US$70-125 billion entering the market.Over the longer run,we expect annual inflows to normalise between US$100-220 billion.Lastly,in the China onshore corporate bond market,we are fore-casting US$300-400 billion of inflows by 2030.However,most of the inflows will come in the back end due the asset class being the last destination status for foreign fixed income investors.Exhibit 2:Breakdown of Chinas balance of payments:Past and forecast-400-300-200-10001002003004005006002000200120022003200420052006200720082009201020112012201320142015201620172018*20192019-30C/AFDIE&OPortfolioNetMS Forecast Source:CEIC,Morgan Stanley Research forecastsMMORGAN STANLEY RESEARCH7MRising reserve currency status:We think that CNY assets could reach 5-10%of global FX reserves over the next 10 years,surpassing the significance of JPY and GBP.A further opening up of Chinas finan-cial markets should help to internationalise RMB further,encour-aging inflows from reserve managers.We only expect a gradual increase though,as to more seriously challenge EUR(let alone USD)as a share of global FX reserves deep reforms would be required,which for now seem less likely.We expect resilient FDI financing:China will likely remain a large recipient of FDI for two reasons.First,China still possesses competi-tive advantages including a highly skilled labour force,well-sourced supply chain and efficient logistics,rising innovation capability,and enormous domestic market.Second,China will open up more sectors of the economy to foreign involvement as policy-makers are acceler-ating the pace of reforms and opening up (see Exhibit 3 for the roadmap of Chinas reforms and opening up).We thus expect to see net FDI inflows of US$110-230 billion per year in 2019-30(versus US$126 billion in the past decade),offsetting half or more of the US$210 billion average annual current account deficit and helping to keep Chinas external funding risks at bay.Exhibit 3:Roadmap of Chinas reforms and opening upWhat China Could Do to Attract FDI and Portfolio InflowsImprove Business Environment Market oriented reforms:More inclusive and coherent industry policy;SOE competitive neutrality Lower taxes and fees,in particular VAT and social security contribution ratio Enhance IPR protection:to establish a legal system of punitive damages for IP infringementsWiden Market Access Continue to shorten negative list for foreign investment Relax joint-venture shareholding restrictions in manufacturing and various service sectorsAttracting Portfolio Inflows Expand stock and bond connect programs,and promote Chinas stock and bond inclusion to major global indices Enhance domestic credit rating system More clarification on tax rules and less restriction on foreign fund remittance Wider access to onshore FX and security hedging toolsNear-term Catalyst to WatchFeb 2019MSCIs could increase the A-share inclusion factor from 5%to 20%Mar 2019Draft Foreign Investment Law to be passed by legislation in NPCMar 2019Further cut in VATApr 2019Bloomberg will formally include China in the Global Aggregate IndexJun 2019FTSE RUSSELL will include A shares into its global indices1H2019draft Patent Law to be passed by legislation1H2019To lower social security contribution ratio by 3-5ppt2019To launch London-Shanghai Connect2019-2020Citi WGBI and JPM GBI-EM might include China in their indices2019-2022Gradually removing JV