140915 China Watch - ABN AMRO Markets

Group Economics
Emerging Markets
China Watch
Arjen van Dijkhuizen
+31 20 628 8052
Signs of cooling illustrate rebalancing
15 September 2014
Economic data published in recent days show that domestic demand is slowing further as the property market correction and
the curtailment of shadow banking are leaving their marks. At the same time, stimulus effects are fading out. Still, lending
data have recovered from the low July levels, while the pick-up of exports is a welcome tailwind. Risks to the 2014 official
growth target (and our forecast) of 7.5% are increasing. Still, should data continue to disappoint we expect the authorities to
add more targeted stimulus to prevent the deleveraging process from becoming disorderly. We believe they will remain
cautious in putting in place very aggressive easing, as that could jeopardise the needed deleveraging from high debt levels.
Lending recovers from July dip …,
After dropping sharply in July to the lowest levels since the
global financial crisis, lending data clearly recovered in August.
This highlights that the July data were distorted by seasonal
and special factors. That said, aggregate social financing
clearly remained below the levels seen in the first half of this
year. This drop reflects sharper regulation for off-balance
sheet lending, impacting the issuance of bills and trust loans.
The drop in lending also coincides with a correction on the real
estate market, despite a general easing of housing restrictions
earlier this year. Meanwhile, the volume of new loans almost
doubled, while still remaining somewhat below the average
reached in the first half of the year. Growth of M1 and M2
slowed as well, by around 1%-point. We think that the
slowdown of credit growth still is not too much of a concern
and even is welcome in several ways. It reflects the authorities’
attempts to tweak China’s growth model, while aiming
– amongst other things – for a deleveraging in an orderly way
and for reducing the role of the shadow banking system.
further slowdown. Industrial production fell to 6.9% yoy in
August (July: 9.0% yoy), the slowest pace since December
2008. Growth of fixed asset investment and retail sales
continued their downward trend as well, slipping to 16.5% yoy
and 11.9% yoy, respectively, in August (versus 17.0% yoy and
12.2% yoy in July). These developments illustrate that the
effects of the targeted stimulus measures are fading out.
Retail sales and industrial production
% yoy
25
20
15
10
5
0
08
Aggregate lending data
09
10
11
Retail sales
CNY bn
2500
12
13
14
Industrial production
Source: Thomson Reuters Datastream
2000
1500
1000
500
0
11
12
13
Total social financing
14
New loans
Source: Thomson Reuters Datastream
… but domestic demand is slowing …
Meanwhile, there are more signals that domestic demand is
losing momentum, as the correction of the property market and
the curtailment of shadow banking are leaving their marks.
High frequency data published over the past days point to a
… with imports contracting further
The slowdown of domestic demand is also reflected in imports,
with annual growth negative in July and August. Imports of
commodities and industrial metals were particularly hit. This is
indicative for the slowdown of investment, certainly in the
property sector. Export growth slowed somewhat to 9.4% yoy
in August, but remains high compared to recent standards.
Exports to the US and ASEAN continue to do particularly well.
The pick-up of export growth in the course of this year is a
welcome tailwind. As a result, the trade surplus hit another
high in August, reaching USD 49.8 bn (July: 47.3 bn). This
could lead to renewed international pressure on the Chinese
authorities to revaluate the yuan.
Business surveys show more mixed picture
Still, forward-looking business surveys released early this
month show a more mixed picture. The official Manufacturing
2
China Watch: Signs of cooling illustrate rebalancing – 15 September 2014
PMI fell to 51.5 in August (July: 51.7), but remains above the
neutral 50 mark. In addition, the HSBC Manufacturing PMI fell
from 51.7 in July to 50.2 in August. However, the official nonmanufacturing PMI and the HSBC Services PMI improved,
with the latter jumping from 50 in July to 54.1 in August, the
highest level since March 2013. As a result, HSBC’s
Composite PMI rose to a 17-month high of 52.8 in August.
Inflation drops as well
Since October 2013, headline (CPI) inflation has been on a
downward trend, reaching 2% yoy in August. Besides by a
weakening of domestic demand, this decline has to a
significant extent been driven by falling food price inflation.
Excluding food and energy, core inflation has been very stable
recently, at 1.6/1.7% yoy since February 2014. Producer price
inflation has been in negative territory since March 2012,
reaching -1.2% yoy in August (July: -0.9%). This partly reflects
the fact that some industries still face price pressures due to
overcapacity, but also stems from companies passing on lower
commodity prices down the production chain. We do not
expect the decline in inflation to continue much longer, given
that cost push factors such as rising pork prices and utility
tariffs will leave their mark. Even with inflation currently below
the central bank’s target of 3.5%, we conclude from repeated
policy statements that the authorities remain cautious with
opting for more aggressive, comprehensive monetary easing.
Inflation and policy rate
% yoy / %
15
10
5
statements are supportive of this view. Last week, Prime
Minister Li stated that the government will not be distracted by
short-term fluctuations, but will stick to its reform strategies. In
August, the central bank stated it will take multiple measures
to lower borrowing costs, while refraining from aggressive
monetary easing. The PBOC has given banks larger re-lending
quotas at lower rates to support the agricultural sector and
SMEs. The State Council recently pledged to speed up the
approval of more infrastructure projects. All in all, risks to the
2014 official growth target (and our forecast) of 7.5% have
increased. Still, should economic data continue to disappoint
going forward, we expect the authorities to add further targeted
stimulus to prevent the deleveraging from becoming disorderly.
Hence, we have left our 2014 and 2015 growth forecasts at
7.5% and 7% for now.
New budget law should improve fiscal transparency
In early September, the State Council passed an important
and long-awaited revision to the 1994 Budget Law. According
to this amendment, which will become effective on January 1
2015, all government revenue and spending should be
included in the budget. This should reduce off-budget
borrowing by local governments and make it easier to monitor
and assess the build-up of government debt. Currently, around
one-third of government spending takes place off-budget,
particularly infrastructure investment by special financing
vehicles (LGFVs) guaranteed by local governments. Hence,
official figures are clearly overstating the health of public
finances. The new regulations enable provincial governments
and municipalities to issue bonds to finance capital spending
under certain conditions, reducing the reliance on LGFV
borrowing and land sales. We think the changes to the Budget
Law are a key step into the right direction, but it remains to be
seen what this will mean for the overall fiscal stance.
0
Key forecasts for the economy of China
-5
09
10
CPI
11
CPI Core
12
Food prices
13
14
Policy rate
2011
2012
2013
2014e
2015e
GDP (% yoy)
9.3
7.7
7.7
7.5
7.0
CPI inflation (% yoy)
5.5
2.6
2.6
2.3
3.0
-2.0
Source: Thomson Reuters Datastream
Budget balance (% GDP)
Authorities still likely to prefer targeted stimulus
Earlier this year, the authorities came with targeted ‘mini’
stimulus instead of more aggressive, comprehensive easing.
For instance, they cut specific reserve requirements to support
the agricultural sector and SMEs and supported loan supply by
excluding certain items from the numerator of the loan-todeposit ratios. We think that the authorities will for now stick to
the strategy of providing targeted stimulus to sectors which are
most in need of that and are not subject to overcapacity
issues. A massive monetary and/or fiscal easing programme
would run counter against the goal of rebalancing the economy
away from high debt levels. We believe that recent policy
-1.1
-1.6
-1.9
-2.0
Government debt (% GDP)
15
15
15
17
18
Current account (% GDP)
2.0
2.7
2.1
2.0
1.5
Gross fixed investment (% GDP)
45.6
45.7
45.9
46.1
45.7
Gross national savings (% GDP)
50.2
50.3
49.7
48.9
48.3
USD/CNY (eop)
6.30
6.3
6.1
6.1
6.2
EUR/CNY (eop)
8.18
8.3
8.4
7.8
7.4
Budget b alance, current acc. for 2014 and 2015 are rounded figures
Source: EIU, ABN AMRO Group Economics
3
China Watch: Signs of cooling illustrate rebalancing – 15 September 2014
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