Overseas Investors Are Most Concerned About China'S Macroeconomic Problems

Despite the slowdown in China's foreign exchange outflow in February, most investors are worried about the consumption rate of China's foreign exchange reserves.

On the one hand, we need to clarify the true scale of China's foreign exchange reserves and government foreign exchange assets (after excluding foreign exchange assets not included in official foreign exchange reserves, total foreign exchange assets amounted to 4.3~4.4 trillion US dollars) and reiterate our estimation of the RMB's overestimation of 5~10%.

On the other hand, the following changes that may occur in the macro environment in 2016 will alleviate the downward pressure on the RMB exchange rate and / or foreign exchange reserves:

The US $1. index may not reproduce the unilateral appreciation trend in 2015 (up by 9.3% in 2015).

It is worth noting that the dollar index has depreciated by 2.2% at the beginning of 2016, which not only helps to alleviate the devaluation of the RMB, but also brings about US $30 billion in the positive valuation of China's foreign exchange reserves.

2., after the nominal growth rate of GDP in China dropped from 8.2% in 2014 to 6.4% in 2015, the nominal growth rate of GDP in 2016 years is likely to be stabilized, thereby easing the pressure on RMB depreciation.

The change in the structure of China's foreign debt has narrowed in 3.2015 years.

The potential space for the decline in foreign exchange reserves, as of September 2015, has fallen from 42% in the US dollar to 80% in the end of 2014. During this period, the share of external debt denominated in renminbi rose to 47%.

Although the first reaction of most investors is to try to find clues about the target of investment growth from the "13th Five-Year plan" blueprint announced last weekend, most of them also agree with our view that the most influential factor in the 13th Five-Year plan is the policy goal of achieving 45% of the registered population urbanization rate in 2020.

This means that in the next five years, the urbanization rate of registered population will increase by 1.5 per cent per year, which is three times the average annual increase in the past ten years.

The acceleration of China's so-called "real urbanization" will have a profound impact on domestic consumption growth, urban infrastructure construction, consumption and industrial upgrading during the "13th Five-Year" period.

As the market generally believes that the rate of bad loans announced by China is obviously low, investors are likely to highly doubt the asset quality of China's banks before making substantial progress in the recognition and clearance of non-performing loans.

Although the CICC macro group and bank group believe that China's current non-performing loan ratio will not be higher than 10%, and the CICC group estimates that the overseas listed Chinese bank shares have reflected the 13~15%'s non-performing loan ratio, investors are still cautious about investing in overseas listed Chinese bank shares.

Another moment is not over matching.

The reason is the undervaluation of global banking stocks.

We believe that the current round of non-performing loans will be resolved through a combination of various policy instruments, including direct non-performing loans verification, securitization of non-performing loans, debt to equity swap, and local government debt replacement.

The additional equity financing required for NPL clearance is likely to be raised through the use of the bank's own balance sheet (which may also reduce the provision for bad loans) plus the injection of government agencies.

Although most investors agree with our view, that is, this government has a solid foundation.

To clean up the bad loans, they are still worried that the repeated delays in non-performing loan liquidation may deteriorate the existing asset quality problem. We also agree that the sooner we can clean up the hidden danger.

But we also remind our investors that liabilities will increase at a slower pace than nominal growth when the cycle begins to pick up. Therefore, we should pay special attention to the stabilization and sustainability of the cycle this year.

On the other hand, most investors believe that in the long run, if China's financial system wants to develop healthfully, it will need to carry out a successful market-oriented reform to continuously increase the rate of return on investment in China, and vigorously develop direct financing channels, and adopt a more pparent and more market-oriented pricing mechanism for financing.