China’s private wealth swelled to 165 trillion yuan ($24 trillion) last year, about twice the size of its gross domestic product and six times the level it was a decade ago, new research showed on Wednesday.
The pool of private wealth in China will rise to 188 trillion yuan by the end of this year, according to a biennial report jointly launched by Bain & Co and China Merchants Bank. Its pace of growth, however, is expected to be the slowest in a decade at 14%, down from the peak between 2014 and 2016 when the compound annual growth rate was 21%.
The number of high net worth Chinese with investable assets of at least 10 million yuan grew more than eight-fold to 1.6 million last year, up from 180,000 a decade ago, the report found. Those with at least 100 million yuan of assets also surged 12 times to 120,000 during the period.
“In short, about 400 Chinese multi-millionaires were made every day in the last decade,” said Wang Jing, general manager at China Merchants Bank’s private banking department. She described the growth of Chinese private wealth as “staggering” against the backdrop of a slowing economy and ongoing reforms to regulate wealth management products.
China’s economy expanded at 6.7% last year, its weakest pace for a quarter century, and is expected to slow further in the coming years.
The demonetization effect and the resultant slowdown in household spending and corporate investment were evident in the fall in GDP growth estimates released by the government today. The GDP growth for the Financial Year 2017 (FY17) was reported at 7.1% while for the fourth quarter of the Financial Year 2017, the GDP growth stood at 6.1%. The growth of the farming sector stood at 5.2% for the fourth quarter FY17 while for manufacturing sector it was 5.3%. The GDP growth data for 2016-17 factors in the rebased index of industrial production (IIP) and wholesale price index (WPI) data. Earlier this month, new sets of IIP and WPI data, with the base year changed to 2011-12 from the earlier 2004-05, were released. New categories of goods were added and weightages were also changed to bring the two indices more in tune with current consumption trends. Growth in Gross Value Added (GVA) in the fourth quarter FY17 was 5.6% versus 8.7% in the corresponding quarter in the previous fiscal, while in the third quarter FY17, GVA growth was 6.7% versus 7.3% in the third quarter of FY16.
In the second advance estimates released in February, the government had estimated that the growth in GVA, which is GDP minus net taxes, will slow down to 6.7 percent in 2016-17 or 1.1 percentage points lower than 7.8 percent GVA growth in 2015-16.
For the entire FY17, GVA in mining was at 1.8% falling sharply versus the 10.5 % recorded in FY16, while that for agriculture was at 4.9% in comparison to the 0.6% registered in FY16. Similarly, GVA for construction sector for the entire Financial Year 2017 was at 1.7% versus the 5% recorded in FY16, while for real estate sector GVA for the entire FY17 stood at 5.7% versus the 10.8% registered in FY16.
The GDP growth in FY16 revised to 8% from the 7.9% recorded earlier. FY15 GDP growth was revised to 7.5% from the previously recorded 7.2%. Similarly, FY14 GDP growth was revised to 6.4% from the 6.5% recorded earlier.
From a global macroeconomic perspective, we encourage readers to consider that the world is experiencing an extended, rolling process of deflating its credit excesses. It is now simply China’s turn.
For context, Japan started deflating their credit bubble in the early 1990s, and has now experienced more than 20 years of deflation and very little growth since. The US began its process in 2008, and after eight years has only recently been showing signs of sustainable recovery. The euro zone entered this process in 2011 and is still struggling six years onward. We believe China is now entering the early stages of this process.
Having said that, we believe that Chinese authorities have a viable plan for deflating their credit excess in an orderly fashion. Please stay posted as we will review this multi-pronged, market-based approach in our next column.
For now, let’s turn our attention to the size of the credit excess that China created and why we estimate it to be the largest in the world.
A credit excess is created by the speed and magnitude of credit that is created – if too much is created in too short a time period, excesses inevitably occur and non-performing loans (NPLs) emerge.
To illustrate the credit excess that has been created in China, let’s review several key indicators, including the: 1) flow of new credit; 2) stock of outstanding credit; 3) credit deviation ratio (i.e., excess credit); 4) incremental capital output ratio (efficiency of credit allocation).
The chart below shows the amount of credit created as a percentage of GDP during the five years prior to major downturns globally.
Investments in domestic capital markets via participatory notes (P-notes) have surprisingly surged to 4-month high of Rs 1.78 lakh crore at the end of March despite stringent norms put in place by Sebi to curb inflow of illicit funds. P-notes are issued by registered Foreign Portfolio Investors to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They however need to go through a proper due diligence process.
According to Sebi data, total value of P-note investments in Indian markets – equity, debt and derivatives -increased to 1,78,437 crore at March-end, from Rs 1,70,191 crore at the end of February. Prior to that, the total investment value through P-notes stood at Rs 1.75 lakh crore in January-end and Rs 1.57 lakh crore in December-end. In March, investments through the route had touched the highest level since November, when the cumulative value of such investments stood at Rs 1,79,648 crore.
Anyone in mainland China with a lot of money to move — companies foreign or domestic, or individuals — now seems likely to run into the capital controls that the authorities have thrown up in hopes of stopping a sell-off in the currency.
Real estate tycoon Pan Shiyi has given up on selling the Hongkou Soho, a striking Shanghai office tower whose tenants include Japanese electronics group Panasonic. Located just north of the Bund, the city’s iconic waterfront, the building was designed by Japanese architect Kengo Kuma. Pan had been looking to invest proceeds from the sale overseas but sees little hope of gaining approval for that.
Similar cases of apparent official obstruction have surrounded other foreign deals. Online game developer Giant Interactive’s agreed-on purchase of an Israeli peer for 30.5 billion yuan ($4.42 billion) remains under review. Technology group LeEco and conglomerate Dalian Wanda Group have yet to complete their respective U.S. acquisitions of television maker Vizio and TV studio Dick Clark Productions.
Meanwhile, total social financing, China’s broad measure of credit and liquidity, continues rising by double digits. With limited outlets to overseas, Chinese money has nowhere to go but domestic assets.
The world’s largest sovereign wealth fund overcame sluggish markets at the start of last year to deliver a return of 6.9 per cent in 2016.
Norway’s $905bn oil fund was boosted by strong stock markets in the second half of the year with equity investments returning 8.7 per cent. Fixed income returned 4.3 per cent in 2016.
Yngve Slyngstad, chief executive of Norges Bank Investment Management, the manager of the fund, said:
“The return in 2016 was characterised by falling international interest rates in the first half of the year and strong equity markets in the second half. The year began with a downturn in the markets, and uncertainty regarding developments in China.”
The fund had 62.5 per cent of assets invested in equities at the end of the year but is expected this spring to be given permission to increase that to 70 per cent. Fixed income assets accounted for 34.3 per cent and real estate 3.2 per cent.
India’s Tata Sons Ltd has agreed to pay Japan’s NTT Docomo about $1.17 billion in connection with the termination of a joint venture in the South Asian nation, the Nikkei daily reported, without citing its sources.
The deal could be announced as early as Tuesday, the Nikkei reported. Tata Sons and DoCoMo were not immediately available for comments. Tata Teleservices and DoCoMo have been locked in a long tussle over the Japanese company’s move to exit a partnership formed in 2009.
Under the terms of that deal, in the event of an exit, DoCoMo was guaranteed the higher of either half its original investment, or its fair value.
When DoCoMo decided to get out in 2014, Tata was unable to find a buyer for the Japanese firm’s stake and offered to buy the stake itself for half of DoCoMo’s $2.2 billion investment. India’s central bank blocked Tata’s offer, saying a rule change the previous year prevented foreign investors from selling stakes in Indian firms at a pre-determined price.
Docomo proceeded to initiate arbitration in a London court, and won it. Tata was asked to pay a penalty of $1.17 billion, which it has deposited with the Delhi High Court.
Norway’s government has proposed making the biggest changes to the world’s largest sovereign wealth fund in decades, increasing its risk by investing about $90bn more in stock markets and cutting the amount of oil money it can use in the budget.
The $900bn oil fund should be able to invest 70 per cent of its assets in equities, up from the current 60 per cent, as the centre-right government backed proposals by both the fund itself and an expert group.
The shift, which needs parliamentary approval, would be significant for global markets as the oil fund on average already owns 1.3 per cent of every listed company. The increase in equities would come at the expense of bonds, as the oil fund, which has an investment horizon of a century or more, tries to increase its returns.
At the same time, the Norwegian government is aiming to reduce the amount of money from the fund Oslo is allowed to use in budgets. Under the so-called spending rule introduced in 2001, the government is allowed to take up to 4 per cent of the fund each year – which is meant to be equivalent to the real return from investments. This would be reduced to a maximum of 3 per cent in the future under the new proposal, as the outlook for returns has fallen.
India’s economic growth is likely to remain muted in the first quarter of this calender year with the GDP likely to grow at 5.7% in the January-March period amid subdued activity, says a report.
According to the global financial services major Nomura, following subdued growth in the first quarter, a V-shaped recovery is on the cards due to remonetisation, wealth redistribution and the lagged effects of lower lending rates.
“We expect growth to remain subdued in the first quarter of 2017 as the activity level remains below its recent peak,” Sonal Varma chief India economist at Nomura said in a research note. Nomura expects economic growth to remain in a downtrend.
As per the report, from 7.3% GDP growth in the July-September 2016, the October-December 2016 quarter GDP growth is likely to slow to 6% and further to 5.7% in the first quarter of 2017 (January-March).
“We expect GDP growth to slow from 7.3% in Q3 2016 to 6.0 % in Q4 and 5.7% in Q1 2017,” it said.
A new report from Standard Chartered estimates capital flows out of China totalled almost $730bn in 2016, a near-record level.
Analysts Shuang Ding and Lan Shen estimated outflows had moderated in December to $66bn, down from November’s $75bn.
Beneath the headline figure foreign direct investment flows turned positive for the first time in eight months with a $3bn inflow, while non-FDI outflows remained unchanged from the previous month at $69bn.
The analysts estimated December’s outflows brought the annual total for 2016 to $728bn, close to the previous year’s record high of $744bn.
They also estimated China’s foreign exchange reserves had fallen $41bn last month to end the year at $3.01tn as depreciation of the euro, yen and pound against the greenback. That reduced the dollar value of China’s holdings in those currencies by about $13bn.