Investing in China: Why the Media Has it Wrong
MODERATOR: Thank you for standing by and welcome to the Van Eck Global’s Investing in China: Why the Media Has it Wrong conference call. Today’s call is being recorded. At this time, I’d like to turn this call over to Mr. Ed Lopez, Marketing Director. Please go ahead.
ED LOPEZ: Great thank you very much, and thank you for joining us this afternoon. This is Van Eck's conference call "Investing in China: Why the Media Has It Wrong." I'm Ed Lopez, Marketing Director for Market Vectors ETFs here at Van Eck. This is the first of two events that Van Eck will be holding over the next month that will discuss China as an investment destination, the impact of Chinese reforms, and how the ongoing market liberalization efforts may have an effect on global portfolios. Today, we will be covering trends in market reforms, the current economic landscape, and the local fixed income market. Next month, on February 12th, we'll take a dive into equities. We will explore the local A-share market in China with our moderator from ETF.com and guest from ChinaAMC. You can find details about that call on the conference call calendar on our homepage at vaneck.com .
Why China? Why now? China is an area that Van Eck has long had an interest in and Van Eck has been a pioneer in providing investors with access to China. In 2010, under the Market Vectors ETF label we launched the first U.S.-listed ETF to provide exposure to the local A-share market, ticker symbol PEK. Last year, we introduced the SME ChiNext ETF, ticker symbol CNXT, which provides exposure to A-share equities that primarily focuses on non-state-owned or privately held companies that many consider to be part of China's new economy. Late last year we were also the first to introduce the first U.S.-listed China Bond ETF, ticker symbol CBON. It provides exposure to the large and growing onshore bond market. The fixed income area in particular is where we will concentrate our efforts today.
Our panel of speakers: Jan Van Eck, CEO of Van Eck Global and head of Market Vectors ETFs. Natalia Gurushina serves as economist for the Van Eck Unconstrained Emerging Markets Bond Fund. She has also written a recent research report on China that I think really sets the tone for today's discussion and if you're interested in reading that report you can find it directly on our homepage under ETF news or in the media library. Also joining us today is Fran Rodilosso. He is the senior investment officer for our Market Vectors fixed-income ETFs.
The agenda today will have each speaker spend a few minutes to talk about their assigned topics. Jan will cover current reform trends in China and address perceptions of China in the market. Natalia will discuss the current economic landscape and the implications for fixed-income investors. We will then continue the discussion with Fran and explore his experience in overseeing the China bond ETF.
With that, I will turn it over to Mr. van Eck.
JAN VAN ECK: Why do we think the media has it all wrong, or why do I think the media has it all wrong? I think the subtext for a lot of media stories about China is that there is some big risk that is so big it is what I call systemic risk. And whether that is because growth is slowing, or there is too much debt, or there is a real estate bubble, or there has been overcapacity in one industry or another, there seems to be, and certainly we talk to a lot of investors who have this fear and it really was priced into the market six months ago, a major systemic risk in China and the financial system could collapse. I'm just going to talk about two reforms because the Chinese policy makers absolutely do not want the existence of a systemic risk because their dream is to have a China that does not go through a boom/bust cycle, but rather can deal with its reforms in an orderly manner and have good employment – in fact, they do have a good employment situation in the country today.
Let me just set the stage for one of the concerns, which is the big growth in shadow banking. The background for that is twofold. First, as the world economy stopped in 2009, China probably had the biggest stimulus program and threw a ton of money at projects. In short, if there was a project on a bureaucrat’s desk it got approved and funded. Second, the reformers wanted to provide credit to the private sector and the banks that existed were simply not doing that. They basically said to the market: “OK, go crazy and lend to whomever you can, lend to companies that need credit." That was what was called the "Wealth Management Products." It's basically privately placed loans raised from institutional and wealthy investors for local government projects, companies, and a whole range of different things, which increased debt levels. For the last several years, especially in the last 12 months, policy makers have been addressing it through the various reforms. I could talk about the reforms for hours, but I'm just going to address two.
The first reform to address is that of local government debt. Local governments are very subservient to the central government for funding and had to use a lot of unconventional ways to get funds. One was selling property that was in the cities, and another was getting bank loans through companies that they owned and they borrowed money from, off budget. About a year ago, the central government said, “alright, no more shadow loans. You can't raise any more money that way. I'm going to approve the creation of a municipal bond market." They basically said, "look, if you can't pay your debts, we're going to go to the companies that are owned by your local government, go after their profits, their capital, and then sell the assets or sell the company if we have to." So there was transparency in terms of the assets that they would go to if there were credit problems with this local government debt. There has been about ten major municipal issues all trading at the same or similar credit rating as the central government, but radical reforms. All of that debt has to appear on the books of the local government now. So there's transparency there, which mitigates some of the concerns over debt.
In the financial sector there are basically four stools of financial reform. Number one, the out of control gray market, the private debt, the wealth management products that have been increasingly regulated whereas a bank that's involved in that or other institution has to either very explicitly guarantee the debt or not. Either that's on the bank's books or the investor has to beware. There was a trial balloon, semi-default restructuring last year to clarify the message that the policy makers had towards that market. Secondly, they've removed restrictions on commercial bank lending. There are no restrictions on the lending rate and there are no restrictions on deposit rates beyond five years. Thirdly, there has been the emergence of a bond market that serves corporates. And fourth, they reinvigorated the equity markets. They allowed IPOs again and there were 120 IPOs in mainland China last year. They're looking at issuing preferred stock and in reforming their de-listing systems. That’s the two major reforms: local government and the whole financial sector.
With that, I will turn it over to my colleague, Natalia, and say "OK, so that's nice to know. What about 2015? What's the outlook and why do you own Chinese debt in our actively managed fund?"
NATALIA GURUSHINA: Thanks, Jan. I would like to focus on four factors that I think are the most relevant from the local fixed income point of view. Point number one: China's growth is slowing down and this is part of a process of transition to a more sustainable growth model. Point number two: the government is willing and hopefully able to assist this process of transition through policy easing. Point number three: there are no signals that we see or signs of inflationary pressures in the economy and we think this should provide suitable microeconomic background for further monetary policy easing. And finally, on the currency side, I believe the current account surplus is likely to stay in place and the influence on the capital account is likely to provide further support for the currency. I believe these four factors are the most relevant from the point of view of long exposure in local currency debt in China and I would like to go through them one by one.
Let’s start with moderating growth. There are several factors here which are relevant to our discussion. First, investment growth in China has to moderate. It's not moderating or slowing by chance or because nobody paid attention to it. It has to moderate. If you look at the big capital capacity expansion in China, it took place over the past many years when arguably, interest rates were dislocated, right? They were probably way too low. And one result of this process is that the leverage in the economy is extremely high. If you look at certain standard ratios which I use as an economist, for example private credit to GDP, it's close to 160%. If you look at M2 to GDP, it's close to 200% and that's one of the highest in the world.
I think it's important to look at these ratios in the context of per capita GDP. China is just off the charts. These ratios are way too high for the level of per capita GDP in China so this has to be dealt with. Estimates also suggest that the marginal product of capital in China has been declining steadily and is probably below one, a development the Chinese authorities have to address.
Another point that is important is the big push in capex in China, which actually brought that level close to the often-mentioned 50% of GDP and took place on the back of a massive fiscal stimulus that the authorities implemented in the aftermath of the 2008 crisis. And even though we do expect, and Jan mentioned this and I mentioned this, some policy easing but definitely nothing like the kind going forward.
One final point to make is that housing construction will have to cool off. The government will have to reduce overcapacity in sectors like coal mining and steel production. These are the factors which I believe will support this particular component of growth slowdown which will come through a weaker, or really a more moderate investment expansion.
Another component which I think is also important is consumption. Consumption is good. That is the ultimate policy goal of the Chinese government, but it also will not happen overnight. I don't think anybody expects consumption to just explode all of a sudden. Why? Point number one is the savings rate in China is high for a number of reasons. First of all, there are some demographic trends in China. One of them is the dependency ratio has actually started to go up. Point number two, the social safety net in China is not great. And point number three, which is closer to my heart, is that China is a net creditor. It enjoys a sizeable current account surplus. Until China's capital account opens up, the more fundamental reason for having a fairly sizeable savings ratio in China will remain.
Another trend that I think is worth mentioning when we talk about consumption is that nominal wage growth in China has actually declined, and that’s something you may not necessarily pick up if you just go through press articles. Nominal wage growth in China has been close to 20% year-over-year in 2011 and into early 2012. It has declined since and is now close to 10%. I think this trend is likely to continue as we are progressing in 2015 and 2016, which perhaps means support for consumption but is nothing explosive.
Finally, I don't know how to interpret this, but it is probably supportive from the fixed income point of view – the Chinese consumer might not be able as yet to fully benefit from a massive decline in the price of oil. Why? Because an important component of those reforms that Jan was referring to is environmental. So what is happening? The authorities are using lower oil prices to boost some of the gasoline related prices in order to deal with excessive driving and environmental pollution in China.
All of these factors I think are important to understand why even though consumption might be nudging up, even as a share of GDP (which it has been for the past two years), there has been no explosive growth there yet. And frankly, if you look at some of the alternatives surveys out there, they show a similar picture.
If you look at what's been driving the growth slowdown in China, it has been a slowdown in investments. Looking at the services level PMI, there has been a pickup in that sector over the past few months. But again, consumption is yet to pick up quickly. Even if you have some doubt over the official numbers in China, alternative surveys point to a similar picture that I'm describing.
One thing that I just mentioned, the environmental component, I believe will contribute to slower growth in the near term as authorities will be phasing out some of the most hazardous and dangerous productions out there while aiming to improve energy efficiency. Longer-term, this is a great development and may support balanced growth in China.
Now what I would like to stress is that even though we expect a slowdown in growth in China, we are by no means in the camp that expects a hard landing. First, growth rebalancing in China does not imply that investments will dry out all of a sudden. Why? Because China has to invest in social infrastructure including schools and hospitals. China has to improve infrastructure and affordable housing. And I also dare to say one thing that is mentioned in the press often: roads that lead nowhere in China. I do not quite agree with this explanation. Let me just give you some of the numbers. China...forty-three. Costa Rica...eighty-three. India...one hundred forty-three. These numbers show road density which is the length of a country's total road network relative to the country's land area. So China is forty-three. Countries in approximately the same per capita group are much higher than that. The way I interpret these numbers is that there is definitely room for improvement there, even in terms of transportation infrastructure in China. China has to invest more -- probably not on housing -- but in other parts of its infrastructure.
Lower oil prices may also support China's growth. There are different estimates out there showing that I think approximately twenty dollar decline in the price of oil per barrel might result in higher GDP growth by 0.2, 0.5 percent. We know about how much oil prices went down so I think at least some area of support for China's growth should be provided through this particular channel and I think ultimately if you look at some of the surveys they also show the general improvement in manufacturing in China which is actually happening in many regions so I think just once again to emphasize the point is that China growth is slowing down, but it's not collapsing, and we see it in many areas. But I think what is perhaps even more important is that what Jan has already alluded to, is the authorities willingness to aid this process. One channel through which authorities can help is the fiscal channel and the expectations are that the fiscal deficit will expand somewhat in 2015 probably by 0.5 percent of GDP, not massive, but perhaps more targeted. Not as all-encompassing as Jan was referring to earlier reforms, right? More targeted, less but not that huge, but nevertheless it's there. I think some of the other numbers to mention here and perhaps more from the monetary policy side, if you look at the demand for money versus supply of money it's a good thing to gauge actually the tightness monetary conditions in the economy or the excess liquidity as it's sometimes referred to. The demand for money is often proceeded by nominal GDP growth and the supply of money let's aim to growth. What do we see here? There was a huge explosion in this differential in the aftermath of the crisis, which spooked a lot of people. But it's been going down since then and right now it's probably close to 3-4%. So it's still positive, so it tells me that the authorities are not squeezing the local producers. And again from my point of view it's supportive of the thesis that we try to establish here that there is support for a gradual and controlled slowdown in China's growth. Another fact worth mentioning is supply growth. Supply growth in China has been relatively stable. Again, it's a level of stability that I don't know to what extent the authorities want to actively signal to local economic agents but I think it's encouraging from the economist's point of view. So we talked about two of the four factors. One is that from what I can deduce there is a conscientious process of the growth slowdown. It's part of the reform drive that has been implemented by the local authorities.
Two other factors that I think make sense if you think about fixed income exposure in China is that inflation pressure is extremely low. And this extremely low pressure should provide room for authorities if they are willing to ease monetary policy further perhaps through a combination of different instruments. We are talking about potential reduction in the benchmark rate, a lower reserve requirement, and perhaps some of the alternative vehicles that are used on the market to ease liquidity conditions. And one final point I would like to make before passing it to Fran, is that I believe the current account balance in China will remain surplus this year and probably a year from now. It actually might increase relative to 2014. Why? Because on the export side, which looks stable, the global conditions might not be deteriorating as fast. The U.S. economy is picking up. But on the import side, there is domestic demand slowdown and also again oil prices are helping. So again we might be seeing actually a somewhat larger current account surplus which is well, provides some stability for the currency and I think what is even more important is - we haven't seen it in China a lot - what we've seen in the central bank intervening on the appreciation side cutting off a lot of appreciation. What we've seen over the past few months is the central bank actually stepping in and willing to intervene on the depreciation side which is again I think is important if you want to have exposure in the local currency debt where a certain currency stability is a significant consideration so with that I would like to pass it to Fran.
FRAN RODILOSSO: Great, thank you Natalia. Just a couple of months ago we launched the first onshore, the first ETF to provide access to China's onshore bond market. The rationalization for that product, and I shouldn't use the word "rationalization" because I'm about to use it about three more times, really reflects some of what Jan was talking about, the rationalization of the Chinese economy. There are transitions taking place, and part of that process is a rationalization of how capital is being allocated. And what we're looking for, and part of this discussion, is how China, how it's authorities, and how it's economy is going to try to allocate capital more efficiently. And part of that process is rationalizing your capital markets. And ultimately liberalizing your capital markets and that's really what CBON is trying to capture. It's also trying to capture access to what is a very large liquid bond market right now. Overall the size of China's onshore bond market is about 5 trillion US dollar equivalent. CBON tracks an index, the "China Bond China High Quality Bond Index" which reflects just the triple A portion of the Chinese onshore bond market. By "triple A," I mean bonds that receive a triple A rating by a local Chinese ratings agency. So that does not necessarily imply the same thing as "triple A" would in the US. It implies that these are probably something within the investment-grade range if they were rated outside of China, and that is how they are recognized in China as the investment-grade universe within the country. The index CBON tracks is comprised of really three separate components: government bonds, quasi-government bonds in the form of policy bank bonds and then corporate, or credit, bonds which may be enterprise bonds which are issued by companies basically under control of either local or central governments but most that credit component is comprised of quote-on-quote private issuers. They're not fully controlled by government entities, although government entities do own a large component of many of those companies. This index today yields somewhere around somewhere around 4.2 percent on average yield to maturity with a duration right around four in RMB, in the local currency. Mind you, by the way, China is a double-A rated country by international agencies and relative to any other emerging markets its currency has been stable the last several years in part because it is a managed float and in part because of some of the numbers that Natalia just referred to. The components of the index though, contribute to yield and duration in different ways. The government debt portion has a duration of over 6, around 6.2, and the average yield in that part of the index is around 3.4-3.45 percent. Policy banks, which are really three development type banks in the agricultural sector, export-import bank, and the China development bank...they yield around four percent with a duration in the high 3's around 3.8. The credit part of the index has a higher yield, around 4.7 percent and brings down the overall duration of the index. The duration of that component is around 3.4 percent. All in there are about three hundred different issuers in the index, and that is what the fund is tracking. Just a quick note on our experience, the execution ability, and the execution costs in this market have proven to be the ability quite good. The market has proven to be liquid so far. Execution costs have proven to be very low. We partner with a local asset management company to help execute and manage the portfolio onshore during China market hours. Another part of the experience is simply that the market has responded, there was a policy ease shortly after we launched, where China did actually lower the benchmark rates. We saw the bond market respond, then we saw the bond market actually reverse. And part of that I think is what Natalia was saying. The government is willing to pursue easy policies, but the market does not expect a very aggressive stance by the PBOC next year. Not at least in terms of rate cuts. They're very unwilling to pour excess liquidity into the market at this point, so what you've got is a...you know what I consider at least a mildly supportive backdrop without raising alarms for near term excess, or pouring fuel on any fires people perceive in the market.
LOPEZ: That's an interesting point because every time you open the paper you hear about China slowing down, the GDP slowing down, and you wonder I think as a regular investor "should I just stay away?" But you're saying that there are opportunities for investors despite this backdrop. And you mentioned, Natalia, you said there's room for further easing. Is that a boon for equities or is that helpful for fixed income investors? How do you look at it?
GURUSHINA: It's definitely a boon for fixed income, that's for sure, but what I also think is encouraging is what Fran just mentioned. It's not, kind of a, it's not aggressive expansion which perhaps can bring the results in the short term, but it's difficult to build a longer term exposure strategy when such policy is conducting. I think the fact that the Chinese authorities, especially the central bank, is conducting policy in a more measured way allows us to have a view for a more longer term exposure in China. It's a longer term view, it's a longer term policy without excesses of the past and I think that's what makes it attractive for me as an economist when I think about the fixed income exposure in China.
LOPEZ: One of the other areas about the fixed income market in China is this kind of a more recent development, would be around defaults. How do you view defaults in China today? Do you expect more of them? Is that a negative? Is that a positive?
RODILOSSO: Well I'll start if you'd like, and Jan alluded to defaults last year, like a lot of things in China they've been managed to a degree until last year. No matter the ratings scale, on the onshore bond market there had not been a default. Investment grade or sub-investment grade. China...it was in the national interest to develop a bond market to promote the dispersion of capital in a more efficient way. It's a part of signaling, is to allow companies to default. This is also part of a, again, a liberalization of the markets. So yes, long story short, I would expect to see more defaults. I would not expect to see them in the triple A component, and I hope I don't see them. But in the lower rated segments within the Chinese onshore market, mind you, some of the offshore issuers in China, you know, companies have issued dollar bonds. Some property companies have alluded to the property sector. There is one in default now, they're not out of their grace period yet and perhaps they make a coupon payment before the end of the grace period. These are not the typical issuers in the onshore market index we're looking at right now. But both offshore and onshore will see more defaults. Never a good thing per say, on the other hand when you're looking for an economy to behave in a more open and liberalized way, it is a good thing to see bad debts get realized.
GURUSHINA: And I think it's also from the fiscal point-of-view, provides reassurance that probably if companies are allowed to default there will be no more additional pressure perhaps on the government to save some of them, especially we are talking about state-owned enterprises. Which again, it's a healthier sign as regards the more general economic framework.
LOPEZ: You guys are investing in China. How do you reconcile one of the fears that many investors have which are problems with the data? "I just don't trust the data, and I'm going to stay away because of that." How do you deal with that, or how do you internalize that?
GURUSHINA: For me, it's just by looking at as many sources as possible. Even when looking at the official data, trying to combine perhaps some of the other sources and components in order to gauge growth. But as I said, looking at alternative surveys, it's a great source to prove or disprove your macroeconomic thesis. So that's...it's not something terribly unique to China, you know, we have long experience in emerging markets. A lot of countries go through the same experience where some of the external entities actually have to generate sometimes, alternative statistical data as was the in case in Russia, where I started my career. So China is not unique in this regard in any respect. As I said, just by looking at as many sources as possible and try to combine - just see how compatible - whether individual data series basically tell you the same story because if they don't, that perhaps is cause for some alarm and further investigation.
VAN ECK: I guess I'd add two sentences to that. Number one, if you're looking at macroeconomic data and you don't want to look at the government's data look at IMF data or World Bank data. I'd say that's very reliable, they have processes; they invest a lot of money in developing those data series. I know policy makers in China refer back to them as well. But that I say is relatively un-manipulated macro data. Obviously, all financial market data is absolutely accurate, you know, it's the second largest stock markets in Asia, billions of dollars trade on prices, it's all on Bloomberg, so there's no hiding that. I think there is a statistical chart in Natalia's white paper on our homepage that I really love, which I think tells a great story about the economy, which is the triple A and triple B interest rates in China which right now are five percent for the triple A and about fourteen percent for triple B. And triple A is investment grade, as Fran said. Triple B is sort of, those entities barely able to get credit, so probably, like, I don't know single B or worse. But as this financial sector reforms, those are market-based prices. You know, there's money changing hands at those bond prices, and I think it's a really helpful way to look at what's going on. And they don't always tell a good signal. Interest rates went up, the triple B's went up from ten and a half to fourteen percent in 2013 and I think, you know you saw economic stress about six months later to a certain level within China. Again, policy makers were okay with that because that's the signals they were trying to send, but that's something in particular that I like.
LOPEZ: Excellent. I want to open it up to questions if there are any. Those are the main statements that we've made so far, but I want to open it up to questions if there are any?
BODIE: I'd like to know as far as your optimism on China, do you like the A-share China fund, or the regular onshore from Hong Kong, China investment?
LOPEZ: The China "A" versus the "H?"
VAN ECK: I guess I'd say...I got pointed at to answer the question. So let me say just a couple things about the Chinese equity markets. First of all, they are very momentum driven, but you know they've risen, the local A-share market have risen a lot in the last, you know, quarter or two partially because I think the systemic risk was being priced out of the market. But you really want to be careful how you trade it, don't put in all your money at once. Scale in, and scale out. So that's just something because it's such a volatile momentum driven market even though we may have a positive view on certain things. So that's one. If you look at the three different components, I guess there's three different parts of the Chinese stock market that I look at. I'd call it the Hong Kong market, the A-share large caps, and then the smaller mid-caps. And I think the small...they all capture different parts. The Hong Kong is obviously more tied to the mainstream capital markets. The correlation of the Hong Kong equities is much higher to the US than A-shares. A-shares are really dominated by large state-owned enterprises, and they have a heavy financials and bank component so if you thought that the banking system wasn't going to go to zero then that was a great way and that had the most appreciation over the last six months. From a long-term growth perspective, what I own for my kids, I guess so to speak, is the, we have a CHINEXT ETF with a smaller mid-cap exposure which is largely not state-owned enterprises. And so these are companies that I guess in my dreams, are driven by the profit incentive like any other CEO or shareholder base in the United States. But it's expensive, it's at 30 times earnings....adjusted earnings. So I guess obviously we suggest a mix. There's been such a big run-up in the A-shares very short term that the "H" have become a little bit more attractive. I think kind of a rotation, a re-balancing between all three is probably the best way to go. Sorry if that, I can't...we don't pick target prices so I guess that's the best answer.
BODIE: What's your symbol on your smaller mid-cap product?
VAN ECK: It tracks a sort of small...SME. Sorry, the symbol is CNXT, so that's "China, Nancy, X-ray, Tango" and it tracks a mix of small-medium enterprises, so-called "SME's" and then some technology healthcare kind of companies.
BODIE: Thank you very much.
VAN ECK: Yeah.
JOHN COMBS (OPPENHEIMER): Yeah I had two questions related to your views in the Chinese equity market because a lot of most of the call has been talking about financial reforms in the bond market. One was what would you point out as the likely enduring impact of these financial market changes on equities in China and the operations of Chinese companies? And then I'm also wondering whether you see any impact on these companies from what's been going on outside of China? I'm thinking particularly of the lowering of rates and the uncoupling the Swiss Franc for financial markets other than those in the US. You know, the Bank of Canada action, the action in Denmark and the ECB action today.
VAN ECK: I'll take the equity market story I guess and then I'll turn it over to you for the other issues. In terms of the reforms, clearly the market has been pricing in reduced systemic risk which has helped the large-cap Chinese local equities the most because people basically had complete nightmare scenarios. I think they were... I think the biggest Chinese banks were trading below book value. I mean they were just assuming everything...they had no view into NPL's and I would absolutely concede that that's probably the statistic that I worry about the most...non-performing loans within Chinese banks. And part of the reason for that game is a mismatch in maturities so where a lot of borrowers, including the local governments talked about, were borrowing short-term one year and constantly rolling over so there was never any real discipline because the banks would just keep re-lending to pay off the old loan to re-lending and no one wanted to have the default and the local government reforms are going to lengthen maturities dramatically, but you'll see some kind of local government default at some point in the next twenty-four months as a signaling would be my bet. So the biggest short-term beneficiary has been the A-shares. The bit large-cap A-shares. CSI 300. You know there's a debate in the market whether it's now fairly priced or not so I'll leave that for your own analysis but it started this run-up as the cheapest emerging market in the world pretty much. You know, major market. Single-digit price-to-earnings ratios with still growing profitability. And it's because Chinese equities were absolutely hated for four years. I mean hated. And so it's recovering from a very low base. You know, where it goes here probably should just trade in line with earnings growth, which is, I don't know, five to ten percent a year depending on what you're looking at.
GURUSHINA: Yeah I think the question that you asked with regard to the impact of other central banks. I think, in part the actions...what the Canadian Central Bank has done, and the of the Bank of England showed that there was no further support for tightening there. It's a reflection of the same global trend we are talking about here which is weaker growth and deflation, or disinflation trends, right? It's exactly the same what we see in China. But I think what I would like to mention here is perhaps more in connection with what Jan was saying to which the Swiss National Bank or the Canadian Bank I think will not be having any impact is when you think about interest rates in China, in a sense, China is not the whole economy. It's like two economies. You've got state-owned enterprises and you've got everybody else, and that's the chart and that huge discrepancy that Jan was referring to. It will require further reform. It will require further internal liberalization which is not dependent on what the central bank - in terms of the policy in China would do - or what other central banks in the world will be doing. It's not a reflection of inflation in China, it's not a reflection of growth rate in China, it's the need to unify these two systems and basically make the interest rate lower than down for the rest of the economy. Make them more organic, improve the transmission mechanism in China and this is...I don't think this is just part of the easing cycle. That's part of the reform cycle that Jan started with and we mentioned here on a few occasions, but to the extent that other banks are on the same boat and easing because of certain trends in growth and certain trends in inflation which are, as we establish presence in China, that provides a certain level of comfort perhaps for local policy makers.
VAN ECK: Next question.
OPERATOR: It appears we have no further questions at this time.
LOPEZ: So with that I'll wrap it up and say thank you very much for joining us on this conference call. Again, we have a conference call that will focus primarily on equities February 12th that will be hosted by ETF.com and will feature the sub-advisor for our PEK, our China A-share fund. And for more information about that you can find that on our conference call calendar on our homepage at vaneck.com. Thank you very much for joining us today.
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Market Vectors ChinaAMC A-Share ETF (Ticker: PEK) is subject to elevated risks associated with investments in securities of Chinese securities, including A-Shares, which include risk of the RQFII regime and Stock Connect program, adviser and sub-adviser risk, political and economic instability, inflation, confiscatory taxation, nationalization, and expropriation, market volatility, less reliable financial information, differences in accounting, auditing, and financial standards and requirements from those applicable to U.S. issuers, and uncertainty of implementation of existing Chinese law. In addition, the Fund is also subject to liquidity and valuation risks, currency risk, non-diversification risk, and other risks associated with foreign and emerging markets investments. The Fund’s assets may be concentrated in a particular sector and subject to more risk than investments in a diverse group of sectors.
CSI 300 Index and its logo are service marks of China Securities Index Co., Ltd. (“CSI”) and have been licensed for use by Van Eck Associates Corporation. The Market Vectors ChinaAMC A-Share ETF is not sponsored, endorsed, sold or promoted by CSI and CSI makes no representation regarding the advisability of investing in the Market Vectors ChinaAMC A-Share ETF.
Market Vectors ChinaAMC SME-ChiNext ETF (Ticker: CNXT) is subject to risks which include, among others, those associated with investments in Chinese securities, particularly A-Shares, adviser and sub-adviser risk, risk of the RQFII regime, political and economic instability, inflation, confiscatory taxation, nationalization, expropriation, and market volatility, all of which may adversely affect the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Small and medium-capitalization companies may be subject to elevated risks. The Fund’s assets may be concentrated in a particular sector and subject to more risk than investments in a diverse group of sectors.
Market Vectors ChinaAMC China Bond ETF (Ticker CBON) may be subject to risk which include, among others, credit risk, interest rate risk, sovereign and quasi-sovereign defaults, adviser and sub-adviser risk, and risk of the RQFII regime, all of which may adversely affect the Fund. Investments in mainland China may be subject to local customs, duties and rights of ownership, which might change at any time should policy makers deem them in China's best interest. As the Fund invests in securities denominated in Chinese Renminbi, changes in currency exchange rates may negatively impact the Fund's return. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. The Fund's assets may be concentrated in a particular sector and subject to more risk than investments in a diverse group of sectors.
Through the Renminbi Qualified Foreign Institutional Investor (RQFII) program or Qualified Foreign Institutional Investor (QFII) licenses, RMB Bonds are made available to certain foreign investors. The RQFII approves a specific aggregate dollar amount in which the RQFII or QFII can invest in RMB Bonds. The size of the Fund’s direct investment in RMB Bonds will be limited by the size of the RQFII quota, and should this quota be depleted, there is no guarantee more will be granted.
China Bond China High Quality Bond Index is compiled and calculated by China Central Depository & Clearing Co., Ltd. All copyright in the China Bond China High Quality Bond Index values and constituent list vests in China Central Depository & Clearing Co., Ltd.
Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. Bonds and bond funds will decrease in value as interest rates rise. Please read the prospectus and summary prospectus carefully before investing.
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