More monetary easing is possible for China and other major economies if macro conditions deteriorate from the repercussions of the British decision to exit the European Union, said Jing Ulrich, JPMorgan Chase & Co’s Managing Director and Vice Chairman of Asia Pacific in an interview with the Maeil Business Newspaper.

Her bank maintains view that the U.S. Federal Reserve will carry out the second hike in interest rates in December.

Here is the full text of her interview.

Maeil Business Newspaper Interview with Jing Ulrich, Managing Director and Vice Chairman of Asia Pacific, JPMorgan Chase & Co.

World Economy

1. Outlook / The World Bank had some gloomy projections of this year`s economic outlook, which was already downgraded twice to 2.4%. In this period of the economic slowdown, we are also facing major global challenges such as Brexit, terrorists’ attacks, and the still low level of commodity prices. Do you see more downside risks going forward? What is the biggest threat in the rest of this year and Year 2017 as well?

Global GDP growth rate has stayed relatively steady within the 2%-3% range in recent years, after the economic and monetary union (EMU) debt crisis. Such a period of “Great Moderation” could be due to a variety of factors, such as inflation targeting efforts by the central banks, technological advancement in inventory management and the increasing importance of the service sector.

Although the shock from Brexit would add pressure on European and global growth this year, we think that in the short term, the shock is primarily contained in the U.K. with only some spillover to other parts of Europe.

Perhaps one of the bright spots in the global economy now is that there is a notable acceleration in the demand for goods. US and China consumer spending posted strong gains in June, while both capital goods shipments from the G-3 and global capital goods imports have strengthened in recent months. In addition, global capex stabilized last quarter and will likely pick up further in 2H16.

2. Brexit / It`s been a month since the UK`s EU referendum shocked global financial market. It has shaken the market severely for a couple of days, but now the global stock market is actually higher than it was before. So, it doesn`t look quite as scary as the market expected. What would you think of the impact of Brexit on Asian economy in the medium/longer term?

The direct macro impact on EM Asia is not expected to be material, as EM Asia has built up stronger policy buffers in recent years, in terms of stronger current account balances, better fiscal space and larger spaces. These allow EM Asia to better cope with the Brexit impact, although the impact could be larger if Brexit increases the likelihood of referenda in the rest of the EU member nations.

Turning specifically to China, while the near-term economic impact is likely to be limited, it could affect exchange rate and monetary policy operations and the strategy in capital account liberalization. While we expect the PBOC will not deviate from the current exchange rate regime, Brexit could lead to more asymmetry in capital account openness in China – policymakers could announce measures which encourage more capital inflows but restrain capital outflows.

Brexit also reinforces our view that China’s monetary policy will stay neutral rather than shift towards tightening. In fact, if global macro condition weakens after Brexit, there is a slight bias towards easing, for both China and other major economies in the world.

3. U.S. Fed rate / Besides Brexit and China’s growth deceleration, another major concern affecting the global economy is the Fed rate hike. There are different views on the Fed’s plan to raise rates: single or double interest hikes by December. What are the market expectations and the impact of a potential hike?

July’s FOMC statement was more upbeat than the June FOMC statement. The statement observed that labor markets have “strengthened,” labor utilization has increased, and, notably, “near-term risks to the economic outlook have diminished.” These changes were modest but the tone is more optimistic and could pave the way for a hike in the coming months, as long as the data is supportive.

J.P. Morgan continues to look for a second rate hike in December, and we still believe we’d need to see some really excellent employment and inflation data before a September hike could become a reality.

With Yellen’s relatively dovish and cautious stance, she will likely take very gradual and small steps to normalize the policy rate, and thus the market impact of any eventual hikes is likely to be contained and moderate.

4. Global monetary policy / What are your thoughts on the ultra-loose global monetary policies of recent years?

In an effort to fight low nominal growth rates, many central banks around the world have engaged in extensive monetary easing to generate growth and push up inflation levels.

However, despite some unconventional monetary policies, such as negative interest rate policy (NIRP), the growth rates of many advanced economies have not been successfully lifted. Moreover, global real GDP growth has averaged 2.6% over 2013-16, a full percentage point below the pace during similar periods in each of the past two global expansions. Meanwhile, global headline CPI inflation has averaged 1.7% since 2013, the lowest recorded during an expansion in the past half-century.

With the declining effectiveness of monetary policy, there is now a call for fiscal policy to play a greater role in boosting growth. In particular, expansionary fiscal and monetary policies should be employed concurrently to stimulate the economy. Fiscal policy is important if supply-side bottlenecks are the main culprit for weak growth performance. Moreover, fiscal action such as tax cuts and spending increases will boost demand directly, and as a result, elevate equilibrium interest rates and improve the efficacy of monetary policy.



China

1. Outlook / The growth momentum in China continues to trend down and the policy emphasis seems to be shifting from supply-side reforms to demand-side stimulus. In this sense, 6.5% growth target seems still high. Do you agree? What is your reasonable guess?

China’s 2Q16 GDP growth shows stabilization as macro policy support since late last year continues to work its way through the real economy. June activity indicators surprised on the upside, with solid readings in factory output, retail sales and exports, positing to positive momentum as we turn towards 2H. Capital outflows seem to have abated in recent months and FX reserves are stabilizing. There are also encouraging signs that excess capacity in industry (cement, steel, etc.) is being reduced.

Looking ahead, as the impact of the earlier round of policy support cools off, we expect GDP growth to ease modestly in 2H. While new economic sectors, i.e. high-tech and services, will likely continue growing at respectable rates, structural adjustments could drag on fixed investment growth further, despite government’s efforts to boost infrastructure spending. Overall, our forecast for full-year 2016 real GDP growth remains unchanged at 6.7%.

2. Sovereign ratings / Earlier this year, credit rating agency S&P revised the outlook for China`s sovereign credit rating to negative from stable followed by Moody`s. Do you think these agencies actually downgrade China`s long-term ratings which supposedly cause massive capital outflow and falling FX reserves? What do you expect about the impact of Shenzhen-HK Stock Connect on HK and China stock markets?

A detailed analysis of China’s Balance of Payments data suggests that a variety of factors contribute to recent capital outflows: First, corporate balance sheet adjustment has been a major driver of capital outflow, accounting for $620 billion capital outflows in the six quarters between 3Q14 and 4Q15. Second, capital flight in the household sector (the residual component) has picked up rapidly since 3Q15, and became the largest contributor to capital outflows. Third, net FDI came down from a surplus of about $30-40 billion per quarter to about zero in 2H15, perhaps suggesting that MNCs repatriated FDI profits. Fourth, portfolio investment also reversed its direction, turning from net inflows to net outflows in 2015, although its small size indicates that global institutional investors only play a limited role in capital flows.

The Shenzhen-HK Stock Connect represents an important step for China in opening up its capital market to the outside world – allowing foreign investors to buy China A-shares via Hong Kong, and mainland investors to invest in Hong Kong H-share market. It will help to bring more international companies and products to the Greater China region and also provide a channel for the global deployment of Chinese capital. In the long run, such an internationalization of the capital market is essential for the development of China’s financial system – a deeper and more sophisticated equity market will reduce companies’ reliance on bank loans and provide an alternative source for financing.

3. Volatile stock market / There`s been a huge volatility in Chinese stock market at the beginning of this year, which caused huge loss to the global investors. Should we expect these kinds of highly volatile stock market quite often in the future? How much impact does Chinese equity prices` plunging to the real economy of China?

The impact of China’s stock market slump on its real economy is not expected to be significant. This is because China’s stock market is still developing and has limited influence on its real economy – households only hold about 5 percent of their total assets in the stock market and equity funding only represents about 5 percent of total financing flows to the real economy.

Banks (rather than capital markets) still dominate the financial system in China. In 2015, bank loans made up 69 percent of new financing, and the big four state-owned banks typically increase lending to stimulate the economy when necessary.

However, such a model is not sustainable in the long-term. Policymakers are still working hard to develop the equity and debt markets in China, and hopefully in due course, as the capital markets grow in size and depth, they will become more stable and a more important funding source for the real economy.

4. Advice for global investors / What indicators do you think global investors should keep closely monitor when you put your money in China?

One key advice to foreign corporates and investors – follow the policy direction of the Chinese government as closely as possible in the coming years! Instead of just analyzing the economic data, it’s far more important to listen and watch closely the policy announcements of the Chinese government which will drive China’s economy in its desired direction, and will also have a significant impact on the entire Asia Pacific region, where many countries rely on exports to China for growth.

For example, in recent years, they have highlighted the importance of transition to a service-oriented economy where high-tech and service industries will be the future drivers of economic growth. These are the industries which are likely to receive government incentives and support in the near term and thus have better growth outlook. In the new 5-year plan, they have stressed the importance of environmental protection. This could mean more opportunities for industries focusing on energy preservation, energy efficiency, renewable energy, etc.

In short, the government’s policy announcements will give important clues to foreign corporates and investors where the country is moving next, and will help to uncover the next best areas to invest in China.

By Han Ye-kyung

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