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The political risk and possibility of a hard landing that global markets fretted over in the past two years have diminished considerably. Following the expectations of a more resilient global economy, both consumer and entrepreneur confidence has improved further as the marginal propensity to consume and demand for capital spending have gradually picked up, trading and investing activities have been rekindled across the globe, and exports of major countries have increased sharply. The US Federal Reserve has maintained steady increases in the federal funds rate and introduced gradual balance-sheet reductions in 2017, while the European Central Bank has scaled back its asset purchase programmes. Financial markets have functioned stably. Risk appetite in global markets has firmed up, and stock markets have performed satisfactorily in general.
The upswing in the global economy is expected to continue into 2018. The US government has recently made substantial progress in its tax reform plan, which aims to stimulate the economy and attract capital back to the country through tax cuts. The tax reform consists of the largest adjustments in three decades and should help ease corporate and household tax burdens, encourage capital spending by enterprises, lift the labour participation rate, and boost household disposable income and individual spending. Generally speaking, in the short term, the tax stimulus should help fuel economic growth, while as the supply and demand of labor seeks balance, higher demand is likely to accelerate the process of reflation.
Once the optimism towards the economy and inflation begin to bear fruit amid the tax reform, the Fed may well pick up the pace of interest rate hikes. As the leader in monetary policy normalization, the hastening of rate hikes in the US and the rise of dollar interest rates would put upward pressure on global interest rates. Currently, the marginality of monetary policy tightening is more broadly seen in major countries. Against the backdrop of high inflation amid the depreciation of the pound, the Bank of England announced a rate hike at its November meeting, the first of its kind in 10 years. Canada’s central bank has raised interest rates twice since the third quarter of 2017, reflecting its optimism over the domestic economy. South Korea also announced a rate hike recently.
In general, the existing interest rate levels remain slightly lower than the degree of economic recovery may warrant, and major countries are expected to tighten their monetary policies in a relatively stable and progressive manner going forward. In the short term, the optimism over economic prospects should help offset the adverse impact of liquidity tightening in the early stage of rate hikes. As a result, risk appetite may continue to increase and help boost the prices of risk assets, which would benefit the capital market, particularly equity assets. From a medium-term perspective, there is still some uncertainty in global economic and financial markets, primarily stemming from lingering trade protectionism, nationalism and geopolitical risk. The US tax reform and gradual return to normal of major countries’ monetary policies may accelerate the flow of capital across borders and pose a challenge to macro-economic policies and the stability of financial markets.
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| Madam Li Tong, Chief Executive Officer, Bank of China International |
From a regional perspective, China’s economy will continue to grow stably, and the earnings growth of Chinese listed companies is expected to extend into 2018. The Chinese economy is transforming and upgrading itself at an increasingly rapid pace. As China enters the rank of middle-income countries, residents’ consumption levels are climbing, urbanization is deepening, consumption is gaining steam as a major catalyst, and economic growth is becoming more resilient. The 19th National Congress was held in October 2017, at which the nation pledged to devote greater energy to addressing the imbalances and inadequacies in development, advancing supply-side structural reforms, improving the quality and effectiveness of development, and promoting economic transformation and upgrading.
The growth of the Chinese economy has continuously enhanced the influence of Hong Kong as a key global capital market. By the end of November 2017, the total market capitalization of the Hong Kong stock market was the fourth largest in the world at around HK$33 trillion. By funds raised from IPOs, Hong Kong ranked the first among global funding centres in 2015 and 2016. Year to date, it still ranks in the first tier among world financial funding centres. The Hong Kong stock market has posted decent gains this year, with the Hang Seng Index up about 30% and outperforming major stock markets around the world. In addition to the positive factors including the comparatively low valuations of related stock markets, the steady rise in China’s economy, and the marked improvement in Hong Kong-listed companies’ profitability which greatly hinges on the mainland economy’s fundamentals, the Federal Reserve’s global-leading monetary policy normalization, European Central Bank’s steady withdrawal from quantitative easing, and a rebound in global risk appetite have also played affirmative roles. Furthermore, the smoothly functioning mutual stock market access mechanisms known as Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect as well as the increasing need for global asset allocation among Chinese investors have made Hong Kong’s capital market more attractive to large amounts of capital from the mainland, thus prompting its re-rating.
As a player in the international capital market, BOCI is one of the first investment banks established in China and is one of the largest and strongest China-invested banks in overseas markets. Headquartered in Hong Kong, BOCI has established 55 affiliated and associate companies across the globe, and put in place a customer-oriented and globalized marketing platform. The company provides customers with a full range of investment banking products and services in both mainland China and overseas capital markets, including corporate financing, M&A, financial advisory, securities dealings, private banking, fixed income, asset management, private equity, equity derivatives, leveraged and structured financing, and global commodities. BOCI is the first Chinese-funded financial institution to enter the global commodities business through self-clearing on the Chicago Mercantile Exchange (CME), London Metal Exchange (LME) and InterContinental Exchange Europe (ICE Europe). In 2014, BOCI successfully launched the world’s first SSE 50 Exchange-traded Fund (ETF) at the China Europe International Exchange in Frankfurt. This filled a gap in the European RMB-denominated fund market, built a bridge for European investors to access China’s stock market, further diversified the investment channels of RMB products abroad, and strongly promoted RMB internationalization and the opening-up of the Chinese capital market.
Over the past few years, BOCI has witnessed a continuous expansion in business scale. By the end of November 2017, it had participated in more than $120 billion worth of M&A financing projects, $230 billion worth of equity financing projects and $350 billion worth of bond financing projects. BOCI is widely recognized by customers and markets for its outstanding performance in Hong Kong’s IPO market. In 2016, BOC was the largest underwriter in the IPO market of Hong Kong, and it has continued to register impressive achievements. Furthermore, BOCI boasts an Asia-leading bond underwriting team and has remained at the forefront of Hong Kong’s bond issuing and underwriting market for many years in terms of bond issuing size and issued product diversification. BOCI is also among the largest retail brokers in Hong Kong and has stood as one of best local brokers for years. Jointly offering asset management service with Prudential plc, BOCI continues to rank among the top four in Hong Kong’s mandatory provident fund market.
In 2018, a year brimming with opportunities and challenges, BOCI will leverage its diversified cross-border platforms and spare no effort to support the financing and development needs of Chinese enterprises; BOCI will also help global investors tap opportunities in the Chinese market, assisting our partners to realize all their ambitions and aspirations.