Asia in Focus - ABN AMRO Markets

March 20, 2014
Asia in Focus
Economics Research
Revising growth forecasts for China
Lowering Q1 2014 GDP forecast on weak data so far
Both trade and consumption – factors that we had expected to provide
positive support to growth this year – disappointed in the first two months
of 2014, relating to the anti-corruption efforts, which affected consumption,
and the soft DM recovery. We revise our Q1 sequential growth forecast
down to 5% from 6.7% previously (annualized).
Li Cui
+852-2978-0784 [email protected]
Goldman Sachs (Asia) L.L.C.
Yu Song
+86(10)6627-3111 [email protected]
Beijing Gao Hua Securities Company Limited
MK Tang
Expect sequential growth to pick up on more supportive policy and
external factors, as well as easing financial conditions
The support for a sequential pickup includes diminishing sequential impact
from anti-corruption and pollution controls, improving trade outlook, and
easing financial conditions (currency depreciation and lower interest rate).
Policy adjustments, such as allowing participation of private capital in
previously restricted areas, possible acceleration of fiscal outlays, and/or
incremental fiscal measures, may also help. Barring major further
downside growth surprises or a significant policy shift, we expect no RRR
cut and continued gradual deceleration of money and credit growth.
+852-2978-6634 [email protected]
Goldman Sachs (Asia) L.L.C.
Maggie Wei
+852-2978-0106 [email protected]
Goldman Sachs (Asia) L.L.C.
Growth risks are balanced, but uncertainties are still large
The reform agenda poses risks on both sides, given their lumpy effect on
the economy. There have been frequent yet sizeable cyclical swings in
recent years, mirroring the complex policy agenda amid a soft global
backdrop. We expect the government to navigate through another mini
cycle this year, though with some tolerance of slightly lower growth than
the official target of 7.5%. March data will be important for early signs of
recovery.
Exhibit 1: Old vs New forecasts
Growth
GDP yoy (new)
GDP yoy (old)
GDP qoq ann(new)
GDP qoq ann (old)
2014
7.3
7.6
2015
7.6
7.8
1Q 2014
2Q 2014
3Q 2014
4Q 2014
7.3
7.7
5.0
6.7
7.5
7.9
7.3
7.3
7.3
7.5
8.4
7.7
7.2
7.4
8.0
7.8
Inflation
CPI yoy (new)
CPI yoy (old)
CPI qoq ann(new)
CPI qoq ann (old)
2014
2.6
3.0
2015
3.0
3.0
1Q 2014
2Q 2014
3Q 2014
4Q 2014
2.5
2.8
1.5
2.9
2.6
3.0
2.5
3.0
2.6
3.0
3.1
3.1
2.6
3.0
3.3
3.1
Source: Goldman Sachs Global Investment Research.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Global Investment Research
March 20, 2014
Asia in Focus
China growth – still a bumpy road
We adjust our GDP profile in 2014, reflecting the weak January-February production data,
as well as policy developments so far this year. Our full-year growth forecast is adjusted to
7.3%, down from our previous forecast of 7.6%. We also adjust our 2015 growth forecast
down to 7.6% from our previous projection of 7.8%, on account of possible headwinds
from further domestic adjustments. We also mark down our inflation projection for this
year, on softer growth trajectory (Exhibit 1). The broader story of decelerating domestic
demand partially offset by a stronger DM growth remains unchanged (Exhibit 2).
Exhibit 2: GDP from demand side and policy forecast
GDP from demand side
GDP by expenditure
Domestic demand
Consumption
GCF
Net exports
GDP by expenditure
Domestic demand
Consumption
GCF
Net exports
Fiscal
Fiscal Balance % of GDP
Monetary
M2 growth
Total social financing (amount outstanding)
2010
10.4
8.8
7.9
9.7
2.0
2011
9.3
10.4
11.5
9.2
-0.7
2012
7.7
8.0
8.2
7.8
-0.2
2013
7.7
7.9
7.7
8.0
-0.1
2014F
7.3
7.5
7.5
7.4
0.1
%
10.4
8.4
3.8
4.6
2.0
2010
-1.7
9.3
10.0
5.6
4.4
-0.7
2011
-1.1
7.7
7.8
4.0
3.8
-0.2
2012
-1.7
7.7
7.7
3.8
3.8
-0.1
2013
-1.9
7.3
7.2
3.8
3.4
0.1
2014F
-2.1
% yoy
% yoy
2010
19.7
25.4
2011
13.6
18.5
2012
13.8
19.2
2013
13.6
17.7
2014F
13.0
15.0
% yoy
% yoy
% yoy
% yoy
PPT
PPT
PPT
PPT
PPT
PPT
Source: CEIC, Goldman Sachs Global Investment Research.
When we looked ahead to 2014 in late 2013, we had expected the government to provide
signs of stable growth, but believed that the complicated reform/policy agenda would likely
imply more uncertainties and a bumpier road. Although we had expected a dip in growth
at the start of 2014, the actual outturn was much softer. A boost from improving exports
and stronger consumption was expected to offset the cooling in investment and give room
for domestic adjustment (see, Asia Economics Analyst: China outlook for 2014 and beyond:
Steady drive on a bumpier road, dated December 6, 2013 and Global Economics Weekly:
Showtime for the DM recovery, dated November 20, 2013). Both of these factors, however,
surprised on the downside in the first two months, pointing to an outsized impact from the
new rounds of anti-corruption campaign on spending (we estimate around 1.5 ppt cut in
Q1 sequential growth, similar to that in early last year) and soft global recovery. The
manufacturing sector in particular was depressed by the ongoing restructuring of
overcapacity sectors and anti-pollution curbs. The exit of overcapacity sectors, along with
the emerging default cases in the related sectors, are negatively impacting growth in the
near term but are necessary from a longer-term perspective by allowing proper signals to
dampen wasteful investment. We revise down our Q1 sequential growth forecast from
6.7% to 5% (annualized).
We maintain our forecast of a sequential pickup over the remainder of the year, for three
main reasons:
1) Diminishing sequential impact of anti-corruption and pollution control measures. The
impact of the former is usually front-end loaded, and the implied fiscal stance should
become more accommodative for the rest of the year. The pollution control measures tend
to concentrate in winter months and the drag on growth should ease as well. Indeed, some
of such spending and production cut in Q1 could represent delayed activities and see some
Goldman Sachs Global Investment Research
2
March 20, 2014
Asia in Focus
payback in Q2/Q3, though the magnitude is likely to be limited against the broader policy
drives to improve government transparency and the environment.
2) Support for cyclical demand from policy adjustments and easing in financial conditions
(more below). Policy adjustments could include administrative easing (e.g., allowing more
participation of private capital in previously restricted areas), as well as acceleration of
planned fiscal outlays and/or incremental new fiscal measures, and could operate within
the framework of the recently unveiled urbanization initiatives, for instance. We expect the
property sector to be on the relatively weak side this year as housing purchases have
cooled, and thus overall property construction activity will likely remain relatively soft—
though if it weakens sharply, further administrative measures such as implicit relaxation of
purchasing restrictions in lower-tier cities cannot be ruled out.
3) Improvement in trade account: We project exports to recover from softer-than-expected
DM/US demand, and imports are likely to ease at least temporarily given soft domestic
demand in Q1.
While a three-percentage point acceleration in sequential growth from Q1 to Q3 may look
aggressive, this is roughly comparable to the pickup from Q2 to Q3 last year. The relatively
open economy, large cyclical sectors, and the frequent policy cycles (credit and
administrative) to manage growth have contributed to such swings. (see EM Macro DailyChina: A new intra-year cycle in the Chinese economy?, dated March 12, 2014 and Exhibit
3).
Exhibit 3: Cyclical swings in growth – Déjà vu
% chg
% chg
20
GS Forecasts
18
18
GDP (yoy)
16
20
16
GDP (qoq sa ann)
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
Mar-08
0
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Source: Goldman Sachs Global Investment Research.
Mix of macro policies
As observed in recent years, the government tends to ease policies in response to growth
disappointment and tighten them when growth improves, reflecting a combination of
restrained policy support, complicated policy objectives, and uneven global recovery (see
EM Macro Daily: Tracking reforms in China: The balancing act of a credit slowdown, dated
January 13, 2014). Structural reforms tend to have lumpy effects on the economy, the
sequence of which matters to the cyclical path. The mini policy cycles intend to moderate
the impact of structural reforms and uneven DM recovery, though often with the result of
Goldman Sachs Global Investment Research
3
March 20, 2014
Asia in Focus
amplifying the quarterly swings instead. The government still has scope to manage or
“fine-tune” growth; unlike many other emerging markets, policy makers are equipped with
a broader set of policy tools, a still sound public balance sheet despite structural fiscal
issues, and also face limited exposure to external debt. The use of the policy room,
however, is likely to become incrementally more cautious, so as to avoid short-term gains
at the expense of more long-term distortions. Indeed, so far the government has refrained
from any significant easing in credit growth and major infrastructure plans observed in
past slowdowns.
In general, we believe more targeted fiscal support (tax relief, subsidies, etc) is needed to
manage the downside risks of the economy and support consumption. Some policies have
been introduced in recent months to support the economic restructuring. The slightly more
expansionary budget in 2014 (with a deficit of 2.1% of GDP, up from 1.9% of GDP last year)
should have a positive impact on growth though only marginally. Indeed, the fiscal stance
is likely to have been contractionary so far this year, accompanying the curbs on official
spending. We expect the sequential fiscal impulse to turn slightly positive for the rest of the
year, as the impact of spending curbs diminish somewhat.
The easing of financial conditions so far this year – particularly through a reversal of the
strong currency in recent years – is positive for growth too, although the impact tends to
come with a lag. The depreciation of CNY – mostly on the back of the FX reforms – could
help to improve enterprise margins, strengthen cyclical demand, and support investment
on the margin. We’ve argued that the RMB is within the range of its fair value and
economic fundamentals point to a weaker currency in coming years, and thus we expect
limited further appreciation as the increased currency risks should make the carry trade
less attractive (see Asia Economics Analyst: Has CNY come to a turning point?, dated
February 28, 2014 and EM Macro Daily - The implications of CNY band widening, dated
March 16, 2014). The interbank rate has eased significantly after the Lunar New Year, as the
7-day repo dropped from around 4.5% in January to below 3% over the past two weeks,
though the immediate growth impact is likely to be limited. We estimate that financial
conditions eased by 70 bps between January and February (Exhibit 4), and that it will likely
ease further by a similar magnitude in March, putting FCI roughly back to the level seen in
the first half of 2013. Such easing is expected to benefit growth in H2. We don’t expect
visible signals of further liquidity easing such as a RRR cut, however. Money and credit
policies are expected to remain neutral barring major policy shifts, and we maintain our
forecast of a gradual climb of the interbank rates (with the 7-day repo expected to move to
about 4¼% in H2). This will see M2 and credit stock growth decelerate further this year.
Goldman Sachs Global Investment Research
4
March 20, 2014
Asia in Focus
Exhibit 4: FCI has eased since February, and will likely ease further in March
Index
Index
106
106
Tightening
China FCI
104
104
102
102
100
100
98
98
96
96
94
94
92
92
2008
2009
2010
2011
2012
2013
2014
Source: Goldman Sachs Global Investment Research.
Risks to our updated forecasts are on both sides. Downside risks include muted global
recovery, further drags of overcapacity sectors on investment, and a sharper-than-expected
slowdown in property activities. New policies to eliminate excesses and opaque official
spending (including the drives for officials to report their household assets), and recent
travel disruptions could also have an uncertain impact. The main upside risks are a more
robust-than-expected policy easing and a bigger-than-expected near-term impact from
supply-side reforms (such as the launch of the further opening up of SOE sectors to private
enterprises and a boost to low-end consumption from urbanization initiatives). With this
high level of uncertainty, data in upcoming months, particularly in March, will be important
to gauge whether the expected pickup in activity in Q2 is on track. In the report to the
National People’s Congress, the Prime Minister softened his commitment to the growth
target of 7.5% (a rough English translation is that the target was framed as “about” 7.5%)
and emphasized protecting jobs rather than protecting growth, implying some tolerance of
slightly lower growth. We believe the tolerance is likely to be quite limited with the pledge
to create more jobs (a target of 10 million new jobs in 2014 vs. 9 million in 2013).
Goldman Sachs Global Investment Research
5
March 20, 2014
Asia in Focus
Disclosure Appendix
Reg AC
We, Li Cui, Yu Song, MK Tang and Maggie Wei, hereby certify that all of the views expressed in this report accurately reflect our personal views,
which have not been influenced by considerations of the firm's business or client relationships.
Disclosures
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global
basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on
macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd
(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs
Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in
Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs
New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in
the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in
the United Kingdom and European Union.
European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority
and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;
Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our
proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our
proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views
expressed in this research.
The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may
discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity
securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any
such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's
return potential relative to its coverage group as described herein.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase
and sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research or data available on a particular security, please contact your sales representative or go to
http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
© 2014 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior
written consent of The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research
6

Download Report