1. Art and Diseño

Nitesh Shah, Associate Director
[email protected]
2 FEBRUARY 2015
CHINA MACRO MONITOR
2015: FROM CYCLICAL TO STRUCTURAL
•
•
•
•
After half a year of spectacular equity market performance to some the clouds of slowing
economic growth cast doubt on China’s ability to maintain the rally.
However, that view over-emphasises the correlation between GDP performance and equity
market performance. The link between economic and equity market performance has never
been straight-forward. Indeed, China may follow a path similar to Japan, South Korea and
Taiwan during their early stages of development. That indicates that equity market
performance will accelerate during periods of financial market liberalisation rather than
periods of strong economic growth.
A number of exogenous events may also prove to be supportive for both China’s domestic
equity market and China’s role in the global economy. MSCI is due to evaluate the inclusion
of China A-Shares in its Emerging Markets Index this June. The IMF is also due to conduct its
five-yearly Special Drawing Rights (SDR) basket review this October. Renminbi inclusion
discussions could become a catalyst for significant currency market liberalisation and a
seismic shift in the role of the Chinese currency in international trade and finance.
We expect reform to remain the focus of policy makers’ agenda this year, with lower
economic growth an acceptable by-product of stability. The authorities are unlikely to let
growth fall substantially lower however, as that could stoke political unrest and undo the hard
work of the reform agenda. We expect some policy easing, primarily in the form of lower
interest rates and a reduction the Reserve Requirement Ratio in coming months.
Yuan: In Need of A Wider Band?
<------- Yuan Appreciation
6.45
6.40
Note:
On 16/04/2012 band set to 1% around the official mid-point
6.35
On 17/03/2014 band set to 2% around the official mid-point
6.30
6.25
6.20
6.15
6.10
6.05
6.00
Source for all charts and tables in publication: ETF Securities and Bloomberg unless otherwise stated
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
Jan 15
Jan 15
Dec 14
Dec 14
Nov 14
Nov 14
Oct 14
Oct 14
Sep 14
Sep 14
Sep 14
Aug 14
Jul 14
Aug 14
Jul 14
Jun 14
Jun 14
May 14
May 14
Apr 14
Apr 14
Mar 14
Mar 14
Mar 14
Feb 14
Feb 14
Jan 14
Jan 14
Dec 13
Dec 13
Nov 13
5.95
ETF SECURITIES
2
A ROCKY PATH TO STABILITY
Although Chinese GDP growth of 7.4% in 2014 surpassed
consensus expectations, it was the lowest reading in 24 years.
The outlook for growth is lower still in 2015. Both the World
Bank and IMF have downgraded their 2015 China growth
forecasts to below 7%t this month. The message from policy
makers in China is that sub-7% growth is acceptable, so long as
its reform agenda continues apace.
Over the next decade China’s growth model will migrate away
from cheap-currency dependent mercantilism and China will
become increasingly more capitalist. Market forces will help the
1
allocation of resources and the legal framework will be
strengthened to improve quality of China’s institutional
2
infrastructure .
Transition will inevitably involve winners and losers, but society
as a whole is likely to benefit from the new model. China will be
careful not to move too quickly and aggravate political
instability. With that in mind, it is likely that China will stimulate
the economy further in 2015 to avoid a marked slowdown,
especially in light of a faltering Euro area dampening global
demand their good and services.
In spite of economic growth deceleration in H2 2014, the
3
domestic equity market rallied 58% . That is not unusual and
the experiences of Japan, South Korea and Taiwan in their
transition paths in earlier decades highlight that this is what we
should expect. For example in Japan during the 1960s, a period
of financial repression, the stock market underperformed
relative to the overall economy. However in the 1980s when
economic growth was subdued relative its past, the stock
market performed particularly well in an environment of financial
market liberalisation. South Korea and Taiwan experienced
similar bouts of equity market outperformance during periods of
financial market liberalisation, which countered the
underperformance during earlier periods of financial repression
and relatively stronger growth.
We believe China’s equity market underformance in recent
years prior to the opening up of the Hong Kong-Shanghai
Connect initiative in November 2014 was a symptom of a lack
of market access. The Connect initiative significantly opened up
market access. The fact that volumes traded on the Connect
have not met expectations is irrelevant. The market has priced
Shanghai stocks as internationally accessible now. The
4
eventual opening of a Shenzhen Exchange link will give further
access to Chinese domestic stocks, which will also become
priced-in at some point.
We are likely to see equity market volatility rise. While structural
shifts will move the equity market higher, periodic
disappointment over growth figures are likely to lead to frequent
corrections. This tug-of-war between the structural and cyclical
drivers of the market will continue to divide analysts and see
volatility remain high. Investors attracted to the recent rally
should recognise the need for a significant degree of risk
tolerance to weather rising market volatility.
In 2014, it was clear that Chinese equities were cheap by
international standards. That is no longer the case. The MSCI
China A-Share P/E is now close to the MSCI World P/E. P/Es in
2009 were undesirably high (it was a period of earnings
weakness and price optimism in light of policy easing) and so
should not be treated as a benchmark for where equity markets
should go back to. Trading China on cheapness should be a
thing of the past. Investing in China is once again about buying
into structural change.
MSCI P/Es (12-Month-Trailing)
50
45
40
35
30
25
20
15
10
Dec 14
Jun 14
Sep 14
Mar 14
Dec 13
Jun 13
Sep 13
Mar 13
Dec 12
Jun 12
Sep 12
Mar 12
Dec 11
Jun 11
China A
70%
Sep 11
Mar 11
Dec 10
Jun 10
Sep 10
Mar 10
Dec 09
Jun 09
Sep 09
Mar 09
Dec 08
Jun 08
Sep 08
Mar 08
Dec 07
5
Japanese Economic and Stock Market Performance:
Correlation Broken
World
Source: ETF Securities, Bloomberg
25%
60%
20%
50%
THE GLOBAL STAGE AWAITS
15%
30%
20%
10%
10%
% y-o-y
%y-o-y
40%
5%
0%
-10%
0%
-20%
Nikkei 225 (Left)
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
-5%
1956
-30%
Japan Nominal GDP (Right)
Source: ETF Securities, FRED (Federal Reserve Bank of St. Louis), Statistics Japan
1
A number of events this year could prove to be a catalyst for
further capital market deepening in China.
“The focus of the restructuring of the economic system... is to allow
the market [forces] to play a ‘decisive role’ in the allocation of
resources”, Third Plenum Communiqué, November 2013
2
"Comprehensively advancing the rule of law", Fourth Plenum
Communiqué, October 2014
3
MSCI China A-Share, between 30 June 2014 and 31 December 2014
Firstly in June, MSCI will reconsider whether to include
domestic Chinese equities into its emerging markets index. With
approximately US$1.5tn benchmarked to MSCI China
Emerging Markets Index, even a small allocation of 0.5% to the
China A-Share market in the broader index could drive
US$7.5bn into the market on the back of index replication by
investors.
As a point of reference, the MSCI United Arab Emirates Net TR
4
Although no formal announcement has been made, Premier Li
Keqiang has openly encouraged the opening of an Shenzhen link
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
3
MSCI United Arab Emirates Net TR USD Index
800
700
CNY International Ranking in Average Daily Turnover
1998
2001
2004
2007
2010
2013
0
5
10
Higher Ranking --------->
USD index rose over 90% between the time MSCI announced
UAE stocks would enter its Emerging Market Index and actual
inclusion (see shaded area of chart). While the Chinese and
UAE markets are vastly different in size and composition, we
believe the increasing probability of index inclusion will bode
well for China A-Shares.
15
20
25
30
600
35
500
40
With the Yuan trading very close to the edge of its trading band
(see chart on front page), we could see further flexibility in the
trading band this year. The recent depreciation against the US
Dollar seems to be more about the strength of the US dollar
than Yuan weakness, with the nominal effective rate actually
having appreciated in December. Indeed there has been no
increase in foreign exchange reserves that would occur if the
authorities were intervening to depreciate the currency.
5.5
115
6.5
110
105
7
100
7.5
95
90
85
CNY/USD (Left)
Effective Exchange Rate (Right)
Source: ETF Securities, Bloomberg, BIS
December 2014
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
80
Yuan Appreciation --->
120
8
5
Dec 14
125
6
8.5
Jul 14
Feb 14
Sep 13
Apr 13
Nov 12
Jun 12
Jan 12
Aug 11
Mar 11
Oct 10
May 10
Dec 09
Jul 09
Feb 09
Sep 08
Apr 08
Nov 07
Jun 07
Jan 07
Aug 06
Dollar Appreciation Rather Than Yuan Depreciation
Mar 06
In its last review in 2010 the IMF decided not to widen the
currencies in the basket. At the time the IMF noted that China
was the third largest exporter of goods and services but felt that
the Renminbi was not a freely useable currency. However, they
urged that this issue be kept under review. Since then, the
Chinese Yuan has become the fifth most used payment
5
currency according to SWIFT , jumping from seventh position
only a year earlier. The Renminbi became the ninth most
actively traded currency according to the Bank of International
th
Settlement’s 2013 triennial survey, jumping from 17 position in
2010. Over that period average daily turnover soared from
US$34bn in 2010 to US$120bn in 2013.
While capital and exchange rate controls will continue to hold
back the Renminbi from SDR inclusion, we believe the IMF’s
review this year will facilitate a road-map for further
internationalisation of the currency. With the internationalisation
of the Renminbi a stated policy objective we believe that the
Chinese authorities will continue to dismantle controls on the
currency.
Oct 05
Secondly, in October the International Monetary Fund will
review which currencies it will include in its Special Drawing
Rights (SDR) currency basket. The SDR is an international
reserve asset, created by the IMF in 1969 to supplement its
member countries’ official reserves. Its value is based on a
basket of four key international currencies, and SDRs can be
exchanged for freely usable currencies. If the Renminbi is
included in the basket, central banks buying/selling SDRs will
have to deliver/receive Renminbi (in proportion to its weight in
the basket).
May 05
Sep 14
Jul 14
May 14
Mar 14
Jan 14
Nov 13
Sep 13
Jul 13
May 13
Mar 13
Jan 13
Nov 12
200
Dec 04
300
Significant expansion in RMB offshore clearing centres around
the world has helped fuel this trend and access to the currency
has never been easier. In 2014, the Yuan-HK Dollar
convertibility cap was abolished in recognition of the demand
for Renminbi (timed with the opening of the Hong KongShanghai Stock Connect initiative).
Yuan Appreciation --->
400
Soure: BIS Triennial Central Bank Survey on Foreign Exchange
ETF SECURITIES
4
Level (Left)
Jun 14
%m-o-m, 3mma
Dec 14
Jun 13
Dec 13
Jun 12
Dec 12
Jun 11
Dec 11
Jun 09
Jun 10
-2.0
Dec 10
-1.0
0.0
Dec 09
0.0
0.5
Jun 08
1.0
1.0
Dec 08
2.0
1.5
Jun 07
3.0
2.0
Dec 07
4.0
2.5
Jun 06
5.0
3.0
Dec 06
6.0
3.5
Jun 05
7.0
4.0
Dec 05
4.5
Dec 04
US$ tn
China Foreign Exchange Reserves Continue to
Decline
Growth (Right)
POLICY EASING IN 2015
With consumer price inflation weakening and property prices
continuing to fall, we expect the Peoples Bank of China (PBoC)
to cut interest rates further this year. We also expect the central
bank to cut the Reserve Requirement Ratio (the amount of
reserves banks need to hold with the central bank), thus
improving banks’ ability to lend.
The transition away from shadow banks to the formal banking
sector will continue in 2015, increasing pressure on the PBoC to
nd
provide liquidity support to banks. On January 22 the PBoC
injected CNY50bn into the banking system through the 7-day
repo market. That was one of the many injections the central
bank has provided in the past six months (see page 10 for other
examples) and we expect the PBoC to maintain a strong hand
on facilitating the transition in the financial sector.
Financing Shifting From the Shadows to the Formal
Sector
70%
50%
30%
10%
-10%
-30%
-50%
-70%
RMB + FX Loans
Shadow Banks
Corporate Bond + Equity Financing
Q4 2014
Q2 2014
Q4 2013
Q2 2013
Q4 2012
Q2 2012
Q4 2011
Q2 2011
Q4 2010
Q2 2010
Q4 2009
Q2 2009
Q4 2008
Q2 2008
Q4 2007
Q2 2007
Q4 2006
Q2 2006
Q4 2005
Q2 2005
Q4 2004
-90%
Other
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
5
MACRO MONITOR
Dec -­‐13 J an-­‐14 F eb-­‐14 Mar-­‐14 A pr-­‐14 May-­‐14 J un-­‐14 J ul-­‐14 A ug -­‐14 S ep-­‐14 Oc t-­‐14 Nov -­‐14 Dec -­‐14
G rowth Indic ators
G DP G rowth (% y-­‐o-­‐y)
K eqiang Index *
Indus trial P roduc tion (% y-­‐o-­‐y)
Manufac turing P MI (L ev el)
R etail S ales (% y-­‐o-­‐y)
F ix ed A s s et Inv es tment (ytd % y-­‐o-­‐y)
T rade, R es erv es , Money and Inflation T rade B alanc e (US $ bn)
E x ports (% y-­‐o-­‐y)
Imports (% y-­‐o-­‐y)
F oreig n E x c hang e R es erv es (US $ tn)
M1 Money S upply (% y-­‐o-­‐y)
M2 Money S upply (% y-­‐o-­‐y)
C P I Inflation (% y-­‐o-­‐y)
C P I Non F ood Inflation (% y-­‐o-­‐y)
P P I Inflation (% y-­‐o-­‐y)
Interes t and E x c hang e R ates
P olic y Interes t R ate: L ending (%)
P olic y Interes t R ate: Depos it (%)
7d R epo R ate (%)
3m S HIB OR (%)
5yr B ond Yield (%)
S ov ereig n 5yr C DS R ate (bps )
C NY/US D
E ffec tiv e E x c hang e R ate
Other K ey Indic ators
R es idential B uilding S ales (% y-­‐o-­‐y)
T otal B uilding S ales (% y-­‐o-­‐y)
70 C ity R es idential P ric e (% y-­‐o-­‐y)
A g g reg ate F inanc e (C NY bn)
MS C I C hina A S hare Index
MS C I World Index
7.6
8.5
9.7
51.0
13.6
19.6
17.9
7.4
4.8
8.8
50.3
12.2
17.6
4.5
8.7
50.4
11.9
17.3
6.2
8.8
50.8
12.5
17.2
7.5
6.2
9.2
51.0
12.4
17.3
4.9
9.0
51.7
12.2
17.0
3.2
6.9
51.1
11.9
16.5
7.3
4.1
8.0
51.1
11.6
16.1
3.0
7.7
50.8
11.5
15.9
3.1
7.2
50.3
11.7
15.8
7.3
2.3
7.9
50.1
11.9
15.7
7.0
-­‐1.1
50.5
50.2
25.3
4.3
8.3
3.8
9.3
13.6
2.5
1.7
-­‐1.4
32.0
10.5
9.8
3.9
1.2
13.2
2.5
1.9
-­‐1.6
-­‐22.6
-­‐18.1
9.7
3.9
6.9
13.3
2.0
1.6
-­‐2.0
8.0
-­‐6.6
-­‐11.5
3.9
5.4
12.1
2.4
1.5
-­‐2.3
18.7
0.8
0.7
4.0
5.5
13.2
1.8
1.6
-­‐2.0
36.3
7.1
-­‐1.7
4.0
5.7
13.5
2.5
1.7
-­‐1.4
31.9
7.2
5.3
4.0
8.9
14.7
2.3
1.7
-­‐1.1
47.3
14.5
-­‐1.7
4.0
6.7
13.5
2.3
1.6
-­‐0.9
49.9
9.4
-­‐2.4
4.0
5.7
12.8
2.0
1.5
-­‐1.2
31.1
15.3
6.9
3.9
4.8
12.9
1.6
1.3
-­‐1.8
45.4
11.6
4.5
3.9
3.2
12.6
1.6
1.2
-­‐2.2
54.5
4.7
-­‐6.7
3.8
3.2
12.3
1.4
1.0
-­‐2.7
49.6
9.7
-­‐2.4
3.8
3.2
12.2
1.5
0.8
-­‐3.3
6.0
3.0
5.3
5.6
4.5
79.8
6.05
6.1
6.0
3.0
5.0
5.6
4.2
98.2
6.06
6.0
6.0
3.0
3.5
5.5
4.0
89.7
6.15
6.1
6.0
3.0
4.2
5.5
4.1
92.3
6.22
6.2
6.0
3.0
4.2
5.5
4.0
88.9
6.26
6.3
6.0
3.0
3.3
4.9
3.9
73.2
6.25
6.2
6.0
3.0
3.9
4.7
3.8
77.0
6.20
6.2
6.0
3.0
4.0
4.7
4.0
79.7
6.17
6.2
6.0
3.0
3.8
4.7
4.0
70.2
6.14
6.1
6.0
3.0
2.9
4.5
3.9
88.8
6.14
6.2
6.0
3.0
3.3
4.4
3.6
79.0
6.11
6.1
5.6
2.8
3.5
4.2
3.4
77.3
6.15
6.2
5.6
2.8
4.8
5.1
3.5
94.8
6.21
6.2
9.0
2600
2200
9684
-­‐3.7
8.2
937
2184
10297
-­‐10.7
-­‐5.2
7.3
2093
2144
10409
-­‐15.3
-­‐7.8
6.4
1526
2143
10564
-­‐11.3
-­‐8.5
5.4
1401
2145
10715
-­‐5.4
-­‐6.7
4.1
1967
2159
10817
-­‐17.8
-­‐8.2
2.4
274
2343
10586
-­‐13.8
-­‐8.9
0.5
958
2342
10739
-­‐10.3
-­‐8.9
-­‐1.1
1136
2473
10425
-­‐3.2
-­‐7.9
-­‐2.5
681
2528
10444
-­‐7.8
-­‐7.8
-­‐3.6
1146
2793
10685
4.2
-­‐6.3
-­‐4.3
1695
3379
10613
3.6
26.3
9.2
1232
2301
10053
L as t 3 m onth trend improving
L as t 3 m onth trend flat
L as t 3 m onth trend wors ening
* T he K eqiang index is the e qual-­‐weighted a verage of the year-­‐on-­‐year c hange in bank loans , rail freight volumes a nd elec tric ity produc tion
STOCK MARKET PERFORMANCE AND
VALUATION
MSCI China index Top Five Stock Gainers and Decliners
MSCI China A Share Index
3600
19
MSCI China A Share Index and P/E Ratio
18
3400
17
3200
T op 5 G ainers
C S R C orp L td
A vic C apital C o L td
C hina C NR C orp L td
C hina L ife Ins urance C o L td
C hina N ational S oftware & S ervice C o L td
P ric e
(% m -­‐o-­‐m)
133.1
131.5
116.7
53.1
52.3
Weig ht (% )
0.56
0.38
0.59
0.65
0.12
C ontribution
(p x w )
0.75
0.50
0.68
0.34
0.07
B ottom 5 D ec liners
G uangdong W eihua C orp
C hina Merchants S ecurities C o L td
C hangjiang S ecurities C o L td
S inolink S ecurities C o L td
G uangdong H E C T echnology H olding C o L td
P ric e
(% m -­‐o-­‐m)
-­‐31.6
-­‐25.1
-­‐23.8
-­‐21.3
-­‐21.1
Weig ht (% )
0.05
0.40
0.41
0.23
0.06
C ontribution
(p x w )
-­‐0.02
-­‐0.10
-­‐0.10
-­‐0.05
-­‐0.01
16
3000
15
2800
14
2600
13
2400
12
Index (Left)
MSCI China A Share Sector Breakdown
Jan 15
Nov 14
Dec 14
Sep 14
Oct 14
Aug 14
Jun 14
Jul 14
Apr 14
May 14
Jan 14
Feb 14
Mar 14
Dec 13
Oct 13
Nov 13
Sep 13
Aug 13
Jun 13
Jul 13
Apr 13
May 13
Jan 13
Feb 13
Mar 13
10
Nov 12
Dec 12
11
2000
Sep 12
Oct 12
2200
Financials (77 members)
P/E Ratio, 12-Month Trailing (Right)
Industrials (125 members)
P erformanc e
MS C I C hina A Index
MS C I W orld Index
S &P 5 00 Index
E uro S toxx 5 0 Index
F TS E 1 00 Index
-­‐1M
7.8%
-­‐0.9%
-­‐1.4%
-­‐2.0%
0.3%
-­‐12M
55.3%
6.6%
15.6%
-­‐8.0%
-­‐6.1%
YTD
49.8%
5.9%
14.3%
-­‐8.6%
-­‐5.5%
P E R atio*
17.7
17.6
18.2
23.7
19.6
* Bas ed on c urrent pric e and 12-­‐month trailing earnings
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
Consumer Discretionary (58 members)
Materials (76 members)
Information Technology (57 members)
Health Care (56 members)
Consumer Staples (32 members)
Utilities (21 members)
Energy (21 members)
Telecommunication Services (2 members)
ETF SECURITIES
6
ECONOMIC GROWTH
China GDP Growth and Keqiang Index
25
13
•
Q4 2014 GDP grew at a better-than-expected 7.3% y-o-y,
bringing full-year growth to 7.4% in 2014. As China seeks a
stable level of economic expansion we are likely to see
growth in 2015 come in below 7%.
•
The “Keqiang index” index pointed to a weaker fourth
quarter than the GDP figures imply. We are likely to see
more easing by the PBoC to assist a smoother recovery.
•
Industrial production growth in December edged up to 7.9%
y-o-y from 7.2% in November and 7.7% in October.
•
The official manufacturing purchasing manager’s index
(PMI) however fell to 50.1 in December from 50.3 in
November.
•
Preliminary HSBC/Markit manufacturing PMI for January
2015 rose to 49.8, an improvement from December 2014,
but still below the 50 threshold separating expansion from
contraction.
•
China retail sales appear to have stabilised in the 11-13%
range from the overheated levels of the 2009-10
government stimulus period. Retail sales growth in
December rose to 11.9% y-o-y from 11.7%.in November.
•
Fixed asset investment grew by 15.7% in 2014,
significantly lower than the 19.6% recorded in 2013. As
China strives for stable economic growth, fixed asset
investments will continue to be rationalised in 2015.
•
The clamp-down on corruption in 2014 contributed to a
sharper deceleration in fixed asset investment than would
otherwise have been the case. With local governments now
able to borrow under their own name, we expect the pullback from investment to abate.
12
20
11
15
10
9
10
The Keqiang index, named after
Premier Keqiang is the equalweighted average of the year-onyear change in bank loans, rail
freight volumes and electricity
production
5
8
7
Keqiang Index 6mma (left)
Jun 14
Dec 14
Jun 13
Dec 13
Jun 12
Dec 12
Jun 11
Dec 11
Jun 10
Dec 10
Jun 09
Dec 09
Jun 08
Dec 08
Jun 07
Dec 07
Jun 06
Dec 06
Jun 05
Dec 05
6
Dec 04
0
GDP y-o-y (right)
China Industrial Production and Manufacturing PMI
25
65
60
20
50
Level
% y-o-y
55
15
10
45
5
40
Industrial Production Growth, y-o-y (Left)
Dec 14
Apr 14
Aug 14
Dec 13
Aug 13
Apr 13
Dec 12
Aug 12
Apr 12
Dec 11
Aug 11
Apr 11
Dec 10
Aug 10
Apr 10
Dec 09
Apr 09
Aug 09
Dec 08
Apr 08
Aug 08
Dec 07
Apr 07
Aug 07
Dec 06
Aug 06
Apr 06
35
Dec 05
0
Manufacturing PMI (Right)
China Retail Sales
25
23
% y-o-y, 3mma
21
19
17
15
13
11
Dec 14
Jun 14
Dec 13
Jun 13
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
Jun 06
Dec 05
Jun 05
Dec 04
9
China Fixed Asset Investment
35
33
31
27
25
23
21
19
17
Dec 14
Jun 14
Dec 13
Jun 13
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
Jun 06
Dec 05
Jun 05
15
Dec 04
% ytd, y-o-y
29
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
7
TRADE, MONEY AND PRICES
China Trade Trends
60
80
•
Both export and import growth has been trending lower in
recent months with imports contracting 2.4% y-o-y in
December 2014.
•
Yuan depreciation has helped exports remain brisk with
growth of 8.7% in December 2014. However, export growth
has slowed from 13.1% in September 2014.
•
With exports still growing and imports contracting, the trade
surplus had risen to all-time high of US$54.5bn in
November before easing to US$49.6bn in December.
•
China’s foreign exchange reserves have been falling since
an all-time high was reached in August 2014.
•
China’s reserves remain the highest in the world and more
than three-times as high as Japan’s (the country with the
second largest reserves).
•
M2 growth fell to 12.2% y-o-y in December compared to
12.9% y-o-y in September.
•
A late-2014 pick-up in aggregate financing could see
money supply growth increase in coming months.
•
CPI inflation fell to 1.5% at the end of 2014 from 2.5% a
year earlier.
•
With commodity price declines reducing the costs of
production, producer price deflation has accelerated.
•
With inflation so low and far below the 3.5% target, the
PBoC has plenty of room for further policy stimulus.
50
60
30
40
% y-o-y, 3mma
% US$bn 3mma
40
20
10
20
0
0
-10
-20
-20
-30
-40
Dec 04
Apr 05
Aug 05
Dec 05
Apr 06
Aug 06
Dec 06
Apr 07
Aug 07
Dec 07
Apr 08
Aug 08
Dec 08
Apr 09
Aug 09
Dec 09
Apr 10
Aug 10
Dec 10
Apr 11
Aug 11
Dec 11
Apr 12
Aug 12
Dec 12
Apr 13
Aug 13
Dec 13
Apr 14
Aug 14
Dec 14
-40
Trade Balance, US$ bn (Left)
Exports (Right)
Imports (Right)
Jun 14
%m-o-m, 3mma
Dec 14
Jun 13
Dec 13
Jun 12
Jun 11
Jun 07
Level (Left)
Dec 12
-2.0
Dec 11
-1.0
0.0
Jun 10
0.0
0.5
Dec 10
1.0
1.0
Jun 09
2.0
1.5
Dec 09
3.0
2.0
Jun 08
2.5
Dec 08
4.0
Dec 07
5.0
3.0
Jun 06
6.0
3.5
Dec 06
4.0
Dec 05
7.0
Jun 05
4.5
Dec 04
US$ tn
China Foreign Exchange Reserves
Growth (Right)
China Money Supply
45
2500
40
35
% y-o-y
30
1500
25
20
1000
15
10
CNY Bn, 3mma
2000
500
5
0
Dec 04
Apr 05
Aug 05
Dec 05
Apr 06
Aug 06
Dec 06
Apr 07
Aug 07
Dec 07
Apr 08
Aug 08
Dec 08
Apr 09
Aug 09
Dec 09
Apr 10
Aug 10
Dec 10
Apr 11
Aug 11
Dec 11
Apr 12
Aug 12
Dec 12
Apr 13
Aug 13
Dec 13
Apr 14
Aug 14
Dec 14
0
M1 (Left)
M2 (Left)
All-System Financing (Right)
China Inflation
15
% y-o-y
10
5
0
-5
CPI Inflation
Dec 14
Jun 14
Dec 13
Jun 13
Dec 12
Jun 12
Jun 11
CPI Non Food Inflation
Dec 11
Jun 10
Dec 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
Jun 06
Dec 05
-10
PPI Inflation
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
8
INTEREST AND EXCHANGE RATES
China Policy Interest Rates
8
3.7
7
•
Policy interest rates were cut for the first time in over two
years in November as the PBoC stepped up its fight
against flagging growth and deflationary headwinds.
•
The cuts to the lending and deposit rates were asymmetric.
The PBoC cut the 1-year benchmark lending rate 40bps (to
5.6%) and cut the 1-year deposit rate by 25bps (to 2.75%).
•
We expect several interest rate cuts to come in 2015,
although policy efforts are more likely to focus on Reserve
Requirement cuts.
•
After spiking close to 6% in December 2014, the 7-day
repo rate fell back to 3.9% on 23 January 2015 after the
PBoC intervened by injecting CNY50bn into the banking
system via the 7-day repo market.
•
On 19 January 2015, Credit Default Swap spreads rose to
their highest level since China’s first ever corporate bond
default (March 2014). A series of growth forecast
downgrades (IMF, World Bank) have cast doubt on China’s
ability to maintain sufficient expansion to weather through
its ambitious reform programme. We believe those fears
are over-blown and CDS spreads have fallen markedly in
recent days on the back of PBoC repo market intervention.
•
The Renminbi is trading close to the upper-end of its
trading band at the moment after three months of
continued depreciation against the US Dollar.
•
Those thinking that Yuan appreciation was a one-way bet
have no doubt been burnt by two bouts of sharp
depreciation in the past year.
•
The lack of reserve accumulation indicates that the
depreciation is not being forced by the PBoC and could be
symptomatic of weaker economic growth in China relative
to strengthening economic growth in the US.
3.5
6
%
4
3.1
3
%
3.3
5
2.9
2
2.7
1
Spread (Right)
Jun 14
Dec 14
Jun 13
Dec 13
Jun 12
Lending (Left)
Dec 12
Jun 11
Dec 11
Jun 10
Dec 10
Jun 09
Dec 09
Jun 08
Dec 08
Jun 07
Dec 07
Jun 06
Dec 06
Jun 05
Dec 05
2.5
Dec 04
0
Deposit (Left)
China Market Interest Rates
11
9
%
7
5
3
3m SHIBOR
Jan 15
Jul 14
Jan 14
Jul 13
Jan 13
Jul 12
Jul 11
Jan 12
Jan 11
Jul 10
Jul 09
7d Repo
Jan 10
Jan 09
Jul 08
Jan 08
Jul 07
Jan 07
Jul 06
-1
Jan 06
1
5yr Bond Yield
China Sovereign 5y CDS
300
250
150
100
50
Jan 15
Jul 14
Jul 13
Jan 14
Jan 13
Jul 12
Jan 12
Jul 11
Jan 11
Jul 10
Jan 10
Jul 09
Jan 09
Jul 08
Jan 08
Jul 07
Jan 07
Jul 06
Jan 06
Jul 05
Jan 05
0
China Exchange Rate
6.45
6.40
Note:
On 16/04/2012 band set to 1% around the official mid-point
6.35
On 17/03/2014 band set to 2% around the official mid-point
6.30
6.25
6.20
6.15
6.10
6.05
6.00
Jan 15
Nov 14
Sep 14
Jul 14
May 14
Mar 14
Jan 14
Nov 13
Sep 13
Jul 13
Mar 13
May 13
Jan 13
Nov 12
Sep 12
Jul 12
May 12
5.95
Mar 12
<------- Yuan Appreciation
bps
200
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
9
PROPERTY AND FINANCE
China Property Market
200
150
Residential Building Sales
14.0
Total Building Sales
12.0
70 City Residential Property Prices (Right)
10.0
•
China saw residential building sales grow for the first time
in a year in December 2014. The rate of decline in total
building sales has also slowed in recent months indicating
that sales are responding to lower prices.
•
The average price of newly built houses across 70 cities fell
by 4.3% y-o-y in December.
•
While the government will likely maintain its policy of
clamping down on real estate speculation, given the scale
of urbanisation taking place in China it is unlikely that
prices will fall substantially more except in some of the
more speculative projects and locations.
•
Floor space sold continued to decline at a pace of 7.6% yo-y in December 2014, a small improvement over the
November 2014 decline of 8.2% y-o-y.
•
Property building seemed to have gotten ahead of itself
with a sharp acceleration in October being countered by a
large contraction in November and December 2014.
•
The shadow banking sector has historically played an
important role in financial sector intermediation in China.
However, we expect interest rate liberalisation and other
banking sector reforms to displace the role of shadow
banks.
•
Trusts, the largest part of shadow banking, are regulated
by the China Banking Regulatory Commission (CBRC), the
same entity that regulates banks. With trusts playing a vital
role in capital market deepening (one of key goals of the
government), close oversight as well as support from the
government is expected.
•
Shadow banks contracted in 2014, especially in the second
half, as a clamp-down on corruption reduced local
government reliance on opaque financing vehicles for their
funding needs. With local governments now able to borrow
under their own name we expect further decline in the role
of shadow banks.
•
A surprising increase in shadow banking activity in
December is likely to be more of an aberration than a trend.
8.0
% y-o-y
100
6.0
4.0
50
2.0
0.0
0
-2.0
-4.0
Jul 14
Oct 14
Apr 14
Jan 14
Jul 13
Oct 13
Apr 13
Jan 13
Jul 12
Oct 12
Apr 12
Jan 12
Jul 11
Oct 11
Apr 11
Jan 11
Jul 10
Oct 10
Apr 10
Oct 09
-6.0
Jan 10
-50
China Floor Space Started and Sold
250.0
60.0
50.0
200.0
40.0
150.0
30.0
100.0
20.0
10.0
50.0
0.0
0.0
-10.0
-20.0
Oct 09
Dec 09
Feb 10
Apr 10
Jun 10
Aug 10
Oct 10
Dec 10
Feb 11
Apr 11
Jun 11
Aug 11
Oct 11
Dec 11
Feb 12
Apr 12
Jun 12
Aug 12
Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13
Dec 13
Feb 14
Apr 14
Jun 14
Aug 14
Oct 14
Dec 14
-50.0
Floor Space Started (Left)
Floor Space Sold (Right)
China Sources of Finance
3-month Aggregate, CNY Bn
7000
6000
5000
4000
3000
2000
1000
RMB + FX Loans
Shadow Banks
Corporate Bond + Equity Financing
Jun 14
Dec 14
Dec 13
Jun 13
Jun 12
Dec 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
Jun 06
Dec 05
Jun 05
Dec 04
0
Other
China Contribution to Financing Growth
70%
50%
30%
10%
-10%
-30%
-50%
-70%
RMB + FX Loans
Shadow Banks
Corporate Bond + Equity Financing
Q4 2014
Q2 2014
Q4 2013
Q2 2013
Q4 2012
Q2 2012
Q4 2011
Q2 2011
Q4 2010
Q2 2010
Q4 2009
Q2 2009
Q4 2008
Q2 2008
Q4 2007
Q2 2007
Q4 2006
Q2 2006
Q4 2005
Q2 2005
Q4 2004
-90%
Other
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
10
POLICY EASING
Date
Policy
Branch responsible
Mar-14
Currency trading band widened and Renminbi depreciated
People’s Bank of China
Apr-14
CNY 800bn investment injection into railway infrastructure
Apr-14
Apr-14
Increased social housing target to 7 million units of new starts (4.7 million units will
come from shanty town redevelopment)
Small businesses (with annual taxable income less than 100,000 yuan) will have tax
halved from Jan 1 to end of 2016
Reserve requirement ratio cut for rural banks
China Railway
Corporation
Central Government
Jun-14
Cash injections to reduce short-term funding costs
People’s Bank of China
Jun-14
CNY 100bn quota set for relending to agriculture and small businesses
People’s Bank of China
Jun-14
Further reserve requirement ratio cut for small and rural banks
People’s Bank of China
Jun-14
Exclude certain loans and widen deposit definition for loan-to-deposit ratios to free
up capacity of banks to lend
Cut utility company taxes by CNY24bn
People’s Bank of China
Central/Local
Government
Sep-14
Li Keqiang reminds local governments of their "inescapable responsibility" to help
meet annual growth targets. Widely viewed as a prod to speed up spending and
avoid procrastination by local governments who have been reluctant to spend for
fear of getting caught up in the corruption probe
From October, small businesses (with annual revenue less than 30,000 yuan) will be
exempted from VAT and business income tax, raising the threshold from 20,000
currently
CNY 500bn of liquidity injected into five state-owned banks
Sept 14
14-day repo rate target cut from 3.7% to 3.5%
People’s Bank of China
Sep-14
Mortgage rates and downpayment levels cut for some borrowers
People’s Bank of China
Oct-14
Central/Local
Government
Oct-14
State Council gives local governments the ability to borrow in their own right, while
curbing borrowing via local government financing vehicles. While more a structural
reform, it could help revive lending to sectors that were previously being crowded
out.
14-day repo rate target cut from 3.5% to 3.4%
Oct-14
CNY200bn injected into 20 large national and regional banks
People’s Bank of China
Apr - Oct 14
Local Governments
Nov-14
Selective housing policy stimulus. Relaxation of house purchase restrictions (e.g.
limitations on number of properties people can own) saw some easing of rules
1-year benchmark lending rate cut by 40bps to 5.60%
Nov-14
1-year benchmark deposit rate cut by 25bps to 2.75%
People’s Bank of China
Nov-14
Deposit ceiling widened from 1.1 times to 1.2 times the deposit rate
People’s Bank of China
Nov-14
The number of lending and deposit benchmarks reduced, taking another step
toward interest rate liberalisation
th
PBoC refrains from selling repos on 27 November to avoid draining funds from the
banking system
CNY50bn injected into banking system through 7-day reverse repos
People’s Bank of China
Apr-14
Jun-14
Jun-14
Sep-14
Nov-14
Jan-14
Central Government
People’s Bank of China
Central Government
Central Government
People’s Bank of China
People’s Bank of China
People’s Bank of China
People’s Bank of China
People’s Bank of China
INVESTMENTS MAY GO UP OR DOWN IN VALUE AND YOU MAY LOSE SOME OR ALL OF THE AMOUNT INVESTED
ETF SECURITIES
11
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