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No matter the color of the cat providing he catches the mice.

Deng XiaoPing

The Architect

It is with this very simple quote that Deng XiaoPing set in motion the biggest economic and social transformation ever seen in human history in 1978.

Deng Xiaoping was the paramount leader of the People’s Republic of China from 1978 until his retirement in 1989. 

Born into a peasant background in Guang’an, Sichuan province, Deng studied and worked in France in the 1920s, where he became a follower of Marxism–Leninism. He joined the Communist Party of China in 1923. Upon his return to China he joined the party organization in Shanghai, then was a political commissar for the Red Army in rural regions and by the late 1930s was considered a “revolutionary veteran” because he participated in the Long March.

As the party’s Secretary General in the 1950s, Deng presided over anti-rightist campaigns and became instrumental in China’s economic reconstruction following the Great Leap Forward of 1957–1960. 

However, his economic policies caused him to fall out of favor with Mao, and he was purged twice during the Cultural Revolution.

Following Mao’s death in 1976, Deng outmanoeuvred the late chairman’s chosen successor Hua Guofeng in December 1978. 

Inheriting one of the most populated country on the planet, beset with social conflict, famine, disenchantment with the Communist Party and institutional disorder resulting from the chaotic policies of the Mao era, Deng became the paramount figure of the “second generation” of party leadership.

While Deng never held office as the head of state, head of government or General Secretary he was “the architect” of a new brand of thinking that combined socialist ideology and party organization with pragmatic market economy.

Heavily inspired by Singapore Lee Kuan Yew, he devised a new economic and political model of development for China inspired of the corporate governance of Western private corporations.

Deng opened China to foreign investment and the global market, policies that are credited with developing China into one of the fastest-growing economies in the world for several generations and raising the standard of living of hundreds of millions.

He was a surprisingly unassuming man for such a titan among statesmen. His round, cherubic face belied a will of steel that had launched his vast land on the most remarkable transformation of the modern age. 

When death came to Deng Xiaoping in 1997, at age 92, he was nearly blind, deaf, virtually invisible and the honorary chairman of only the China Bridge Association. 

Yet even in his long political twilight, he still cast a shadow over the nation, at once reassuring and restricting the Chinese as they march towards world dominance in the 21st century.

40 years of spectacular success

We all know what happened in China over the past 40 years.

I was, for one, extremely privileged to see those changes happening during my professional life.

I started going to China in 1989, almost 30 years ago, and I witnessed first hand the amazing development of both the cities and the countryside of one of the most complicated country of our planet.

Over these thirty years, I worked with many prime Chinese institutions and had the privilege – and sometimes curse – to become the first non – Chinese CEO of a Chinese bank.

I had an office and a team of analysts in Shanghai for several years, invested in Chinese equities as early as 1994 and ran Chinese equity funds since 2004, ranking them very high on the global performance tables.

The ascent of China over the past 40 years, like the development of Dubai over the same period, starting from two completely different sets of conditions have left me with one clear conclusion :


China’s system may seem opaque and threatening to us, but it is actually more efficient than any of the currently existing systems of economic and political Governance, including the American one.

The Chinese leaders are highly experimented people with pristine academic background and they are chosen to run the country by equally qualified peers on the basis of their credentials.

In exactly the way a US corporation’s  Board if Directors will consider that its main task is to identify, recruit and monitor the best possible CEO for the company.

How far are we from the American political process that brings to power people who are very little qualified for the job, to say the least….

This is why China’s long march towards prosperity and world leadership will be unstoppable and investors should ride along instead of fighting it.

Investors must also realize that XI Jing Ping is the philosophical and political heir of Deng XiaoPing and that he has been put in power to oversee the rise of China to the role of the world superpower.

Contrary to Western leaders, Xi Jing Ping has time on his side, and a mission that is a long term one.


As a tribute to Deng XiaoPing’s achievements, we would like to reproduce below the extremely interesting presentation made by Bloomberg LP’s Asia Chief Economist, Miss Chang SHU and Bllomberg LP’s Chief economist Tom OLRIK at the latest Singapore Economic Forum.

This article is a reference article that retraces the past evolution of the Chinese capital markets and their developments going forward.

It is a must read for anyone who wishes to better understand what is at stake.

40 Years On, China’s Markets are Still Growing and Opening Up

Forty years ago, China’s leadership led by Deng Xiaoping unleashed reforms that would open up and transform the economy. 

These days, China’s financial market reform and opening continue at a rapid pace. Bond, equity, and foreign exchange markets are getting bigger, more sophisticated, and more open to global investors. 

These positive developments hold out the promise of a more efficient allocation of capital.

This analysis was originally published on Oct. 30 for the New Economy Forum in Singapore, and forecasts the path forward for China’s capital markets. 

There is further distance to travel. 

Using major advanced and emerging markets as a benchmark, we estimate that Chinese stocks held by foreign investors could grow six times by 2025, and bonds close to 16 times

The estimates reflect forecasts for what could be achieved if reform and opening stay on track and there’s no significant setback in growth. 

Critical to success: a consistent approach that alleviates fears of sudden policy reversals.

The Benefits of Financial Reform and Opening

A larger role for bond and equity markets, more sophisticated financial instruments, and greater openness to cross-border capital flows are critical to sustaining China’s growth in the medium term:

A top priority for the government — managing down risks from elevated debt levels. 

By reducing funding costs and allowing investors to monitor corporate performance, greater intermediation through bond and equity markets should mean a more efficient allocation of capital. 

An additional benefit — diversifying risk away from the banking system. 

Also high on the priority list for Beijing — rebalancing the growth model, with a larger role for consumption and less dependence on capital spending. 

A wider variety of investment channels for domestic savers should support that objective, boosting incomes and accelerating gains in household spending power.

Carefully managed, continued opening of China’s financial markets would speed progress on a number of fronts. 

Deeper and stronger linkages with international markets would expand
efficiency and promote diversification. Learning from international experiences and spreading best practices could accelerate developments. 

Steps So Far – Stock Market

China’s stock market capitalization has grown from just $53 billion in the early 1990s when the Shanghai and Shenzhen exchanges opened their doors, to close to $6 trillion today even after recent sharp corrections, ranking behind only the U.S. and Japan.

Overseas linkages began in 1993, when the first Chinese share was listed in Hong Kong. Since then, Chinese companies have listed in Hong Kong, Singapore and the U.S. 

More significant opening began in the 2000s, leading to rapid growth in foreign participation in recent years.

* QFII and RQFII: The Qualified Foreign Investors Investment Scheme started in 2002, allowing overseas investors to access China’s onshore stocks using the dollar. 

It was later broadened to yuan investment, known as the Renminbi Qualified Foreign Investors Investment Scheme. 

* QDII: In 2007 the Qualified Domestic Investors Investment scheme started to allow Chinese investors to invest overseas. 

* ‘Connect’ programs: The Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect were opened in 2014 and 2016, respectively.

The Shanghai-London Connect is expected to start operation by year-end. Under these mutual access programs, investors do not need to go through specific financial institutions to make cross-border investments. 

Reflecting the growth, reform and opening of China’s stock market, the MSCI included 226 Chinese stocks in its emerging market index from June 1, 2018, with their weights expected to increase over time.

Milestones in China’s Financial Markets

Steps So Far – Bond market

The development of the bond market has many parallels with the stock market. 

Since the first treasury issuance in 1981 and interbank bond market opening in 1997, the bond market has grown from $6.2 billion in the early 1990s to more than $12 trillion today, the second biggest bond market in the world.

Product diversification is also underway:

* After a decade of exclusively government bond issuance, the People’s Bank of China began to issue notes in 1993. That was followed by corporate bonds, chipping away at the dominance of government issuance. 

* More rapid innovation occurred after 2005 with the emergence of a wider variety of instruments, such as asset-backed securities and derivatives. 

* International organizations began to issue yuan bonds in China in 2005, referred to as panda bonds. Issuance of yuan bonds overseas — known as dim sum bonds — began in 2007. 

The QDII, QFII, RQFII and the recent Bond Connect also provide the bond market with international linkages. 

In addition, foreign central banks, sovereign wealth funds and a few international organizations were allowed direct access in 2015 to the interbank market, which accounts for more than 90% of China’s bond market. 

Subsequently, foreign institutional investors have been given access.

The bond market reached an important milestone in March 2018, when Bloomberg decided to include China’s government and policy bank bonds in its Global Aggregate Bond Index from April 2019, and more securities by 2020.

Steps So Far: FX Market

China’s foreign exchange market has also come a long way, driven by international trade, capital market opening, currency internationalization and exchange rate policy. 

The FX market in China was formed in 1994 with the unification of multiple exchange rates. 

In 2005, China officially moved away from a dollar peg, beginning a process of gradual yuan appreciation. 

In August 2015, the PBOC shifted to a managed float.

Following the 2008 financial crisis, China actively promoted international use of the yuan:

* Starting from July 2009, China began to allow the use of yuan in current account transactions. China’s rapid trade expansion generated commensurate growth in demand for the currency.

* Under capital account transactions, the yuan has seen increased use for a wider variety of purposes and on a growing scale, including onshore interbank bond market transactions by offshore institutions, foreign direct investment by foreign firms, and under the R-QFII scheme. 

* The PBOC had set up 29 bilateral local currency swap facilities with other central banks by 2017, to support yuan use internationally. 

* Yuan internationalization culminated in the inclusion of the currency in the International Monetary Fund’s Special Drawing Right basket in October 2016, with a weight of 10.9%. 

These measures have led to rapid growth in yuan trading.

According to the triennial FX market survey by the Bank for International Settlements, daily yuan trading increased from $2 billion in 2004 to more than $200 billion in 2016. 

It is now the most traded emerging market currency, and the eighth most traded currency, albeit still small compared with the U.S. dollar’s daily turnover of $4.4 trillion.

Product varieties have also grown. 

Trading in futures, swaps and options started between 2005-2011, and more currency pairs have been added over time. The 2016 BIS survey revealed a
significant rise in yuan over-the-counter derivatives trading, which accounted for around two thirds of yuan trading.

An offshore yuan market — known as the CNH — began in late 2010. Policy support and strong market demand, partly driven by appreciation expectations, led to rapid growth of the CNH market initially at the expense of the non-deliverable forwards. 

The more recent yuan weakness and suspected PBOC intervention in the offshore market have modulated growth.

Prospects for Growth and Opening

Where do we go from here? 

The government has called for increasing the share of direct financing in China’s financial system. 

A low starting point, with China’s stock and bond markets smaller as a share of GDP than in major advanced and some emerging market economies, points to considerable room for expansion.

So too do expectations of continued rapid growth in China’s economy, and scope for bond and equity finance to take some of the pressure off bank lending as the main channel for finance.

Stock Market Capitalization and Foreign Ownership

The potential to expand foreign participation in the mainland markets is, if anything, even larger.

Foreign participation in both the stock and bond markets is low even
compared with many other emerging markets.

Bond Market Capitalization and Foreign Ownership

* Foreign investors own 9% of Chinese stocks — the lowest among major advanced and emerging markets. 

Germany has the highest share of foreign investors, with 37%, and the ratio ranges between 25% and 30% for other major advanced economies. 

Among emerging markets, Mexico and South Korea have the highest share
of foreign investors.

* Foreign ownership of China’s bond market, at 3%, has an even
larger gap with comparator countries.

Foreign investors own close to 60% of Australian bonds, and 31% of U.S. bonds. The Japanese bond market’s foreigner ownership is at the low end
among advanced economies at just over 10%. 

Among emerging markets, the share of foreign ownership is high in Indonesia (40%) and the Philippines (31%), and low in South Korea and
Thailand (12%). 

Carefully managed, greater financial market opening holds out the prospect of a win-win for China and international investors.

For China, it attracts foreign capital, facilitates risk sharing, and accelerates learning from global best practices. 

For foreign investors, the size of China’s financial markets and high yields mean an attractive channel for diversification. 

Of course, the experience of Asian neighbors that opened their markets too quickly in the 1990s, and paid a price in instability, is a reminder that a measured approach is required. 

Opening first to patient, long-term investors — the approach China is following — makes sense.

From Big to Bigger – Forecasting China’s Market Size to 2025

We use a combination of international benchmarks and the goals set out by Beijing to project the size of China’s bond and equity markets out to 2025. 

We also make projections for the size of foreign participation. 

It should be emphasized that these forecasts represent estimates of what is possible if China’s reform and opening stay on track, and rotation from bank lending to direct finance picks up.

Stock Market Projection

Looking first at the stock market, we consider two cases, both assuming nominal GDP is projected to grow at an annual pace of 6.5% in 2018-2019, and 6% thereafter.

* In the high-end case, we assume market capitalization would reach the global average of 100% of GDP. 

Under that scenario, stock market capitalization would reach $23.1 trillion in 2025. 

The more-than threefold growth from 2017 would lead to China’s stock market surpassing Japan’s at today’s value, but still lagging behind the $31 trillion U.S. market.

* Further assuming foreign ownership reaches the average of 30% among major stock markets in comparator countries, Chinese stocks owned by foreigners would grow to $6.9 trillion, around 10 times the value in 2017. 

* In the low-end case, market capitalization is projected to reach 80% of GDP — the average for emerging markets in our sample. 

Under that scenario, stock market capitalization would reach $18.5 trillion in 2025. 

* In this scenario, foreign ownership is also assumed to reach the emerging market average of 25%. Chinese stocks owned by foreigners would grow to $4.6 trillion in 2025, more than six times the 2017 level. 

Bond Market Projection

Former PBOC Governor Zhou Xiaochuan once projected bond market capitalization would reach 100% of GDP. 

That is not far from China’s current level of 93% of GDP. 

Based on the same assumptions on GDP growth, this would mean a $23.1 trillion bond market in 2025, twice the 2017 size but still behind the U.S. bond market at today’s value.

On foreign ownership, we assume a high-end case of 27% foreign ownership — the average of advanced and emerging market economies, and a low-end case of 23% — the average of emerging markets. 

In the high-end case, the value of Chinese bonds owned by foreign investors could grow almost 20-fold to $6.2 trillion.

In the low case, it would expand to $5.3 trillion.

FX Market Projection

Projecting growth for the FX market, we assume that it keeps pace with the expansion of transactions in the current and financial account. 

A flat path is assumed for trade, while transactions on the financial account are expected to expand at the same pace as the stock and bond markets.

Under these assumptions, yuan trading would expand by four times between 2016 — the last survey point by the BIS — and 2025, to $822 billion daily turnover in the high case.

With this trading volume, the yuan would leapfrog to become the fourth most traded currency after the U.S. dollar, euro and yen.

In the low case, the turnover would grow to $660 billion.

There are, of course, multiple uncertainties beyond our projected high and low cases. 

China’s growth could slow. 

Policy could shift away from the focus on financial reform and opening.

Market corrections or policy missteps could reduce the appeal of China to foreign investors. 

Convergence to global averages could be slower than we assume. 

Even so, the projections provide a way into thinking about the scale of the potential expansion of China’s markets, and the opportunity that presents to global investors.

Policy Agenda – Consistency Is the Key

Apart from market size, there are many other areas for development, including but not limited to increasing product and investor diversification, reducing market fragmentation, improving transparency.

In the near term, a few areas are ripe for further reform and opening:

* Further relaxation in the QFII and QDII programs. The overall quota for these schemes could be removed after the recent removal of the monthly remittance and lock-up requirement. The market could be opened up to more types of foreign institutions.

* Widening of Connect programs: daily quotas for overall flows may be removed, and more products such as ETFs can be connected.

* Hedging tools could be expanded, reducing hedging cost in the FX market. This is crucial for foreign institutions’ participation in China’s financial markets. 

* In the stock market, increased participation by institutional investors could help stabilize the market and improve capital market efficiency. 
In the bond market, unification of fragmented bond markets should be accelerated. 

For financial market opening to make continued progress, a consistent policy to bring down barriers is required.

Foreign investors are often fearful of entering Chinese markets due to
risks from policy reversals. 

Trading restrictions on equities and increased costs of yuan trading following financial market volatility in 2015, for example, have left a lasting memory.

Rebuilding investor confidence will require patience and persistence.

Chang SHU. Bloomberg LP

The 2018 30 % correction in Chinese euituies and 8 % fall in the value of the Chinese Yuan open an incredible window of opportunity for global investors to increase substantially their exposure to Chinese Assets. 

The Macro-economic trends that are in place are un-stoppable and China’s management is actually extremely effciient as testified by the developments of the past 40 years.

Chinese stcoks and bonds have the potential to re-rateupwards significantly as China becomes the largets economy of the world.

And its currency should soon start a path of structuaral appreciation that will see it double in value.