Man: Welcome to the Center for Investment Excellence, a production of JPMorgan Asset Management. The Center for Investment Excellence is an audio podcast that provides educational insights across asset classes and investment themes.

Jeff Shields: Welcome everyone, thanks for taking sometime today. My name's Jeff Shields, I’m a Client Advisor in our North America Institutional Business here at JPMorgan Asset Management. On the phone with me today I'm really pleased to introduce my colleague Jing Ulrich who is the Vice Chairman of Global Banking in Asia Pacific here at JPMorgan Chase.

Jing, which I just learned was the first mainly in China undergraduate student at Harvard University, has a really unique perspective to share with all of you today. Over the last 25, 30 years she's worked tirelessly across both the east and the west connecting investment capital, but also sitting in positions on boards et cetera were she just really brings a global perspective to investors looking at the Chinese market opportunity.

We’re going to discuss the Chinese economy, the capital markets and Jing is going to share some of her current investment themes and also some of her longer term thoughts as we get past COVID-19. So Jing would you start off with some of your opening remarks and thanks so much Jing for joining us today.

Jing Ulrich: Absolutely, it’s my pleasure. Jeff, thank you very much for your kind introduction and thank you all very much for spending the time with us.  I'm turning to give everyone an overview on China in a global context. So now let me begin with the overall outlook for the Chinese and global economy and then we'll touch on financial markets.

Macroeconomic outlook this year basically has three key points.  Number 1, the COVID-19 shock is unprecedented and first half 2020 global GDP will collapse more sharply than time in World War II.  And second, unprecedented policy support from around the world is setting the stage for second half economic rebound and this rebound will be far stronger compared to past cycles.

And third, the rebound it's going to continue into next year, however, it is going to be partial and deep economic activities to depressed by the end of 2021. Now China seems to be leading the path out of this dark hole. With regard to China, we're expecting economic output and production to recover first followed by personal consumption and the services industry.

And finally, the third sector to recover will be exports develop rather grim economic picture globally. So government efforts from around the world to contain both the virus and financial stress are proving to be quite successful. So you response, we have seen corporate and sovereign credit spreads as well as global equity markets being found quite sharply.

Looking at China specifically in the first quarter 2020 GDP contracted by a record 6.8% year-over-year that basically is a contraction of 35% quarter-on-quarter.  For the full year 2020, we are expecting GDP growth for China to be around 1.3%. Now for the world economy, we’re expecting this year to contract by 4.8%.

So what does that mean that basically needs global GDP will contract by about 9 trillion US dollars over 2020 to 2021. That's basically the side of the Japanese and German economy combined. So it's really quite an astounding figure, the world is losing the equivalent of Japan and Germany combined to COVID-19.

For Asia as a whole, you know, 17 economies or so GDP growth in 2020 will be zero.  Now you can mind China is 13 trillion US dollars in terms of the size of the GDP.  It is 50% of Asia Pacific GDP.  So if you look around Japan, Korea, India, Australia, (Washington) and Southeast Asia all these economies added together in Asia Pacific add up to China.

So China represents 50% of Asia Pacific GDP and 18% of global GDP.  For the rest of this year, I think, China is going to be one of the very few large economies in the world to actually show positive growth. Looking at some of the interesting stories and anecdotes from China these days some of the economic numbers are backward looking we're literally tracking China’s recovery in May and going forward day by day, week by week using from high frequency data.

For example, we're looking at things like air pollution index, which is not backup to historical levels that basically indicate industrial activity is going back to normal.  April export numbers from China actually any stronger than expected actually rose by 3.1% month a month. That's partly due to notable pickup from exports in medical equipment.

In terms of hosting sales over the last few weeks we've seen a pretty sharp recovery back in February. Housing sales were down by 95%, but now housing sales literally be bounded in line with historical average. Coal consumption of the six major power generators actually jumped in the month of May currently 1.5% above historical average.

Coal consumption is important because coal is the main source of fuel and electricity generation in China. And then on the transportation side, we look at traffic delayed index for the top 100 cities in China. That is pretty much returns to historical levels. A lot of traffic is back on the street especially personal cars because people are reluctant to take public transportation turn from work.

So traffic jams a literally back on the streets of the major cities in China. On the consumption side we're looking at retail sales of passenger vehicle that's still recovering it's about 8% below the long-term average and these numbers varied week to week.  And finally on the consumption side is quite interesting to look at the May golden week holiday, which happened between May 1st and May 6th.  So it was a six day holiday.

You can see actually doing the May Day holiday people were still relatively cautious.  We're seeing tourism revenue dropped by about 53% year-over-year compared to the last year May Day holiday and you can see people are still quite reluctant to go out shopping. The tourist sites were largely opened by capacity what kept at about one-third of normal levels to avoid overcrowding.

So the economic recovery in China is definitely continuing and I would say in some areas you're seeing the rebounding numbers quite strongly in other areas the numbers remain (unintelligible).

In terms of policy response, the Chinese government on the fiscal side, the government is basically increasing budgetary fiscal deficit target to about 3.2% of GDP. They're also increasing special local government bond quarter to support investments in infrastructure especially new infrastructure such as 5G the digital economy and public health.

On the monitor policy trend we are expecting another great cut in the second quarter also another requirement ratio cut in mid-2020. Here I want to say that Washington actually has been much more aggressive compared to Beijing in terms of fiscal and monetary stimulus. In fact, Washington has been emulating what Beijing did back in 2009 when China unleashed the 4 trillion (unintelligible) economic stimulus program, which really helped lift the world out of the best during a great financial crisis.

By this time around Beijing stimulus program are much more conservative compared to what the US has done so far.  And on the standard policy friend we're actually expecting the Chinese lend to be relatively stable and this is because economic rebound from the second quarter onwards it's going to provide supportive growth fundamentals for the Chinese currency. Also the Chinese current account surplus it’s going to widened in 2020 because lower oil prices we hope reduced Chinese oil import bill.

China is the single largest oil importer in the world.  So lower oil prices benefit China.  And secondly, travel restrictions could significantly reduce China's tourism service deficit. So in the process, you know, China used to have 150 million people travel overseas every single year. A lot of the Chinese tours we spent a huge amount of money overseas helping support overseas economies.

But this time around in 2020 because the borders restrictions Chinese travelers are not going to travel far not wide beyond China borders.  So this is going to help reduce China’s tourism service deficit hoping support the Chinese event.  Also you have a pretty wide interest rate differentials between China and the US because of the more aggressive rate cuts by the Federal Reserve compared to the Chinese Central Bank.

So for the rest of this year, we expect the Chinese currency to relatively stable against the US dollar and this is important for institutionally investors in the U. S. as you're planning perhaps investing Chinese equity or Chinese bonds. You need to pay attention to the extend rate dynamics between the Chinese currency versus the US dollar.

Now let me also share with you some interesting anecdotes on the consumption side.  A lot of investors from around the world are asking how fast consumption is recovering in China.  Consumers are actually coming back in the recent days our analysts in China had visited Shanghai and also a third tier city called (unintelligible) to get some on the ground information on how fast consumption is coming back.

So for example traffic in the Shanghai high speed railway station is about 30% to 40% lower compared to previous weekend or long holidays. Local governments and large retailers had issued consumption coupons to stimulate consumption and that seems to be working. So restaurants in the bigger cities such as Shanghai are about 60 to 70% occupied on average.

The one providing the unique menus and experiencing with their actually fully booked. Many of the brands in China from milk to beers from heater to rice cookers are offering attractive discounts to the stock their channel inventory.  Speaking up global luxury goods sales performance are divided depending on the category positioning and pricing.

 I'm hearing from some of the luxury group companies in the last few days during the May Day holiday. They actually have some really great sales numbers after historical highs on certain days.  I'm calling this phenomenon retail events because some consumers have been cooked up inside their homes for number of months and they're actually out there shopping.

Also this event opened in Shanghai on May 11 to one-third of the usual capacity actually the ticket for this event was sold out within the first two minutes.  So, in general, we're quite excited about China’s pent up demand recovery as evidenced by consumer companies, business updates, industry data and also our own channel checks.

On (unintelligible), however, the outbreak has resulted in global travel and logistics than business disruption and also tension between China and some of the other countries around the world.  So this may trigger further economic challenges leading to rising concerns about the (macro) economy perhaps unemployment as well as domestic consumption recovery.

Now let me just wrap up the China situation with a couple of final comments.  So we are expecting China’s sequential V shaped recovery to continue in the second quarter and third quarter.  In the second quarter, we're forecasting the economy to grow 1% year-over-year and that basically represent a quarter-on-quarter growth of 44%.

So you have first the normalization in economic activity in China that is going to continue with COVID-19 basically under control in the country.  And Number 2 investments are really picking up especially infrastructure related investments and real estate investments.  And those investments are going to accelerate in the second quarter benefiting from China’s policy support.

Now let me speak about the financial market before a top. So financial markets risky assets are generally valid over the past six weeks and there are various stages of recovery would commodity lacking equities retracing to houses there plunge and investment grade credit healing the farthest. So at JPMorgan, we are detaining all pro risk allocation even the improving virus dynamics and also extraordinary monitoring fiscal support from the Federal Reserve and the treasury as well as by the defensive investor positioning.

In terms of equities, which rallied very strongly in late March and April. The pace of the game has moderated over the past couple of weeks, but we remain positive equity as for the rest of the year.  We're actually seeing a return to previous highs by first half of 2021. That's because buyers dynamics seem to be improving the impact of the fed's actions raised and credit spreads more than offset the impact of temporary hit to corporate earnings.

So we maintain a moderate equity overweight on expectation that equities we continued to rebound ahead of a rebound in macroeconomic activity.  So our bullish extends on equity basically is underpinned by the following factors.  Number 1 is massive liquidity interaction. Number 2 Euro cash rates and low bond yield.  Number 3 equity underweight position among global investors.  Number 4 that the relaxation of lockdowns and signs of bottoming out the economic activity, and finally the heating up of credit markets.

And in terms of bonds we maintain a underweight positions in government bond as we’re expecting yields to move higher in the coming months and also the federal reserve will be pulling back is treasury purchases.  In terms of credit markets last month so we added a credit overweight position focusing on high-grade bonds even the central bank backstop.  With the federal reserve beginning to purchase high grade credit by ETS we're maintaining an overweight credit position to expect basically further were tightening even though we expect the pace of tightening to moderate going forward.

So that the quick backdrop on the financial markets. So Jeff at this point, I spoke long enough. So thank you very much.

Jeff Shields: Yes, great, great.

Jing Ulrich: I'm happy to answer questions.

Jeff Shields: Thanks so much, Jing. Yes, I really appreciate your overview and your insights. You know, one of the things, you speak to so many different investors and companies globally is way, you know, kind of seek your advice from a strategy standpoint. Do you here one or two maybe three additional themes that are coming from them that would be helpful to other investors to be thinking about specific to China?

Jing Ulrich: Sure. Absolutely, one of the key questions, I often get ask by global institution is whether China can be used as a comfort for the rest of the world in terms of the comeback against the Coronavirus. So here I want to say that China is a very different in terms of culture, in terms of economic structure compared to the US for example.

Culturally in Asia especially in China, you have a large degree of compliance and conformity. Also there's a sense that individuals to sacrifice their personal freedom for the collective goal to society. So as soon as the lockdown was instituted in China in the City of Wuhan in the province of (unintelligible).

Everyone complied and China at one point basically lock down on the entire country in February and also in the first half of March. So there's a great sense of personal sacrifice and people get that without complaint and people really strictly abided by all the rules and regulations such as mass wearing such as personal distancing.

Now, in the US, I think the culture is very different people value so much individuals freedom in the lockdown I think the U. S. are not nearly as strict compared to the lockdown in China. That's perhaps why it's taking much longer for the US to control the spread of the virus.

The second question that often here from investors is whether China offers any diversification benefits the global institution. If you look at financial markets in the last several months, obviously, the US market rebounded very sharply so far the NASDAQ is actually up 2% year-to-date and the S&P is down about 9%.

For the Chinese market, the recovery has not been nearly as strong, but also keeping in mind the plunge earlier in February or March was also not quite as sharp.  So year-to-date the Shanghai composite index is down by about 5%. The Shenzhen composite index is up by about 5%. China seems to be in a world of its own the correlation of the Chinese equity market is not very high compared to global markets.

So I would say in the medium to long-term global institution should consider adding some exposure to China as overtime China should offer diversification benefits.

Jeff Shields: Well, thanks.  In a lot of the callers on today's call would be long-term investors it was a long time horizons.  And one of the questions that we've been seeing among our client base is asking who might be the secular winners and losers coming out of this crisis in China.  And how best to kind of think about that for their portfolios?

Jing Ulrich: Sure.  Jeff, we're always looking at the secular winners, losers or you could call them the veterans -- or the victims clearly there's going to be greater demands for online virtual digital services and infrastructure. So this includes things like telemedicine online education. So I think they'll be permanent increases in demand for health services as well therapeutics, serology test, vaccines also there will be permanent increases in demand with the true interactions, entertainment and gaming.

So not surprisingly you're seeing, obviously, the large stocks in the digital sector in the US beating the market performance.  It's the same in China and also we are going to see some accelerated and probably a permanent shift in demand for online retail, you know, going from Brick and mortar to ecommerce.  But on the flip side, there will be some long-term losers I would say from COVID-19.

So long-term border restrictions will be limiting international air travel until such a time of vaccine is widely available there would be permanent increases in the share of work force working from home. So perhaps they'll be less demand for commercial (real estate). There will be permanently increase in international air travel for business and leisure and also sea travel for leisure.

So therefore, this doesn’t felt there well for global oil demand as you know no transportation is 50% oil demand and at Asian is 8% of global oil demand. So as people travel less by air, by cruise or just the drive less as their working from home that's going to perhaps slow the demand recovery for oil. Now, in general, with the secular winners are identified tech communications and health comprise a larger share of the US market is around 52% for the European region that's 22%, for Japan is 33%.

So I think this bodes very well for the US market at the secular winners comprised a much larger share of the US market compared to other regions.  And not surprisingly, we’re seeing the top technology companies leading the recovery, in fact, the top five stocks, you know, who they are, they are bigger than the bottom 350 stocks in the S&P 500.

Jeff Shields: Well thanks. And again a follow up question around China is that we often are told by portfolio managers and research analysts that a lot of the opportunity in China centers around consumer consumption.  And we often here the term this company is just like X right just some, you know, western brand that we're familiar with.

Is this the primary or dominant theme, you expect to continue in the future or are there new themes on the horizon and investors should be considering?

Jing Ulrich: Well the personal consumption store in China is very strong compared to the US where personal consumption accounts for 70% of GDP, in China this ratio is still below 40%. So the potential for increase in personal consumption as a share of GDP in China is tremendous. Now because Chinese people behave a bit differently compared to Americans. Number 1 the Chinese consumers save a lot, they say 40% the income while in the US people savings rates are much lower.

So from the Chinese government standpoint they need to stimulate personal consumption for that to become really the number one driver for China’s GDP.  Going forward at the global environment remain unstable they cannot really count on exports to drive to GDP growth anymore. So I would say in the coming few years, the Chinese leadership will focus their attention on domestic consumption.

One of the reasons why Chinese citizen say so much is because the nature of the saving is precautionary. They're worried about retirement, they're worried about the day make it sick because the social safety net is not yet in place. So I think in the wake of the pandemic, the Chinese leadership will put a lot more emphasis on building up the social infrastructure such as retirement, provisions, pension services and also healthcare.

So that people can reduce their precautionary savings and they would feel much more confident saving less and spending more.

Jeff Shields: Yes, interesting. So, I guess, the next question, we often get from investors as you talking about themes and correlations diversification benefits.  Is how important on the Chinese equity and fixed income markets and how do you counsel clients and their viability.  I mean it just seems to all of us is healthy markets would result in a reflection of the strong economy, good governance et cetera.

In your conversations as investors continue to build out Chinese equity allocations. How are you thinking about that in talking to them?

Jing Ulrich: Yes, Jeff, we spoke a little bit about Chinese equity markets earlier already and so I'm happy to speak about the bond market as well. So China, as I said before is 18% of global GDP, but in terms of China’s share in global indices is still very, very small, in fact, if minuscule certainly cannot compare to China's importance in terms of the economic side and contribution to global GDP.

So over time in the coming five years, ten years I would imagine China's index waiting will only go up. So China equities now are included in the major benchmarks, but the offshore Asia markets, the thousands of docks listing in China. The inclusion is only partial. So if the Chinese Asia market get included in the MSCI global indices that would trigger a lot more passive inflows and you could amount to some 450 billion US dollars inflow is 100% of the China Asia’s are included.

And China industry confirms emerging Asia why in the emerging markets asset class and also in terms of the debt market is huge. The Chinese debt market is around 13 trillion US dollars is second only to the US in terms of the size.  Overseas investors currently hold a very modest amount of onshore Chinese equities and bonds.

The Chinese bond market is very much under owned by global institutions I think with only 2.5% of onshore bonds in held by global institution I think that amount is around 290 billion US dollars. In terms of speech emerging market debt universe, obviously, including China, the size is around $22 trillion and China is a larger chunk of that as I mentioned 13 trillion U. S. dollars.

And in the recent weeks, during the pandemic, the Asian credit markets actually has performed in a resilient manner versus developed markets due to fundamental and technical reasons. I think this reflects the fact that China is further helped in overcoming COVID-19 and China credit basically dominates the Asia credit market representing roughly 62% of market share and the Chinese credit markets really benefited from early signs that China has contained COVID-19 and the economy is gradually recovering.

Also China is (unintelligible) commodity importer as we talked about oil a bit earlier. So benefits is the beneficiary of lower energy prices. China's oil and gas sector is largely made up of state owned enterprises with close links to China as a sovereign country. So therefore, it's really insulates the final credit rating risk from pressure on the standalone financials.

So I think overtime global investors will take a closer look at the Chinese equity and bond markets as most of the investors we talked to are still very much underweight both equities bonds in China. So the opportunity for them to increase their waiting is tremendous.

Jeff Shields: You know, interesting because often times you don't have to we're done talking to clients about China. One of the questions that comes up the risks it comes up is the government household and corporate debt levels are often kind of just referenced as a potential risk to Chinese investments. And it doesn't appear that it's really hampered the government's response to COVID-19, but ultimately what is the rise of debt not only in China, but globally mean for investors?

Jing Ulrich: Well, the rise of debt is a major concern in the years to come because of extraordinary fiscal stimulus that we have seen from around the world. I mean in the US you're seeing the treasury I think you're seeing over 3 trillion US dollars of government securities in the coming quarter. And that's a huge amount of securities for the market to digest. So, obviously, debt level is not going up and that perhaps means taxes will go up and corporates and individuals in the US and perhaps elsewhere.

In China, the situation is a little bit different because if you look at China’s debt profile before the pandemic outbreak total debt levels to GDP was already very high around 270%. So that includes governance, debt, household and corporate debt. So in China, the nature of the debt and the profile is debt is different from the US. For example, in China, the central government has a very healthy (balance sheet). If debt level is a very low perhaps 40% of GDP.

The US federal debt is rising by the day as you know. In China also debt levels are very low because as I mentioned earlier Chinese households are big savers. Share in the US we do have a lot of household debt both in the form of mortgages, tuition well like the credit card debt. So in China, the household debt levels are very low and household balance sheet are very healthy.

Corporate debt in China is a major problem especially among the large industrial companies as state owned enterprises. And corporate debt GD is well over 100%. Here in the US is different because a lot of the large technology companies have huge amounts of cash on the balance sheet and also in China local governments are heavy in debt basically the provinces and municipalities having incurred a lot of debt for local consumption and local expenditure.

Here in the US the states obviously of high debt levels but they can also finance themselves the municipal bonds. In China, the municipal bond market is not nearly as developed. So I would say at this point for China the leadership is focusing on rejuvenating the economy their certainly are increasing debt levels to help fund some expenditure. So by yearend this year 2020 we’re expecting total debt GDP July from 270% to perhaps close of 300%.

Obviously, you know, long-term such a high ratio is not sustainable, but keeping in mind that, you know, the central government in China really on the other side of the balance sheet and have a lot of assets. They owns the majority of the state owned enterprises that they own a land. So there's not a lot of risks for solving before to a large corporate before in China. For the situation, I think, compared in contrast to just now it's very different from the situation in the US.

Jeff Shields: Okay, great. Well, first of all, Jing, thank you so much for joining us this afternoon it's terrific get your insights. I know everyone appreciated them.  We hope that today's call was impactful. Thank you so much for the ongoing partnership if you need additional information about anything that was discuss. Please reach out to your JPMorgan Client Advisor.

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