Group Economics Emerging Markets
China Watch
Arjen van Dijkhuizen +31 20 628 8052
Weak start to the Year of the Sheep
12 February 2015 Just before the start of the Year of the Sheep, weak data confirm the ongoing slowdown of the Chinese economy, although special and seasonal factors in the run-up to the Chinese New Year play a role as well. We expect the slowdown to remain gradual in 2015-16, assuming the authorities to add further stimulus if needed to prevent a hard(er) landing. Moreover, the external environment is becoming more favourable (low oil prices, expected pick-up in advanced economies). Main risks continue to come from high overall debt levels, shadow banking and overcapacity issues, while fiscal pressures are rising. China remains resilient to a (faster-than-expected) Fed exit, but we expect the yuan to weaken versus the USD in 2015-16. Weak domestic demand confirmed by PMI data …,
volatile price components, core inflation dropped further to
The January PMI data did not bring a very bright picture of the
1.2% yoy, the lowest level since September 2010. Since end-
state of the Chinese economy. The official PMI for the
2013, core inflation has fallen by 0.8 %-point. Meanwhile,
manufacturing sector fell to 49.8 in January, the first reading
producer price inflation remained in negative territory for the
below the neutral 50 mark since September 2012. HSBC’s
35th consecutive month, dropping to -4.3% yoy in January.
manufacturing PMI edged up a little, reaching 49.7 (December:
Looking ahead, we still stick to our 2015 inflation forecast of
49.6). The service sectors, which had hold up pretty well in
2% yoy (after having lowered it in late 2014), assuming a
recent months, did less than expected. HSBC’s Services PMI
recovery of commodity prices and the effects of some currency
fell by 1.6 points to a six-month low of 51.8 in January. As a
depreciation. The economic slowdown and drop in inflation is
result, HSBC’s composite output index fell to 51.0, the lowest
also reflected in a slowdown in growth of minimum wages,
level since May 2014. Due to the Chinese New Year holiday
although in the current environment more wage restraint is
break (18-24 February), retail sales, industrial production and
desirable to preserve China’s external competitiveness.
fixed investment figures will not be published this month.
January trade data clearly disappoint Headline inflation drops below 1%
% yoy
60
% yoy
8
15
40 10
6
5
20
4 0 2
-5
0 -20 11
0
-10 11
12 CPI (lhs)
13 Core CPI (lhs)
14 PPI (rhs)
15 Food (rhs)
12 Export growth
13
14
15
Import growth
Source: Thomson Reuters Datastream
Source: Thomson Reuters Datastream
… and by surprisingly weak trade data … by a sharp decline in headline inflation …
Weak domestic demand also contributed to January’s poor
Next to the sharp drop in food and other commodity prices,
trade data. Import growth was negative for the third month in a
weak domestic demand and overcapacity issues – particularly
row, recording the sharpest contraction (-19.9% yoy) since the
in the manufacturing and property sectors – also contributed
global financial crisis. Still, import data often show sharp dips
to the further decline in inflation. After stabilising at around
at the start of the year, because year-to-year differences in the
1.5% yoy in late 2014, headline inflation fell to 0.8% yoy in
timing of the Chinese New Year lead to statistical distortions.
January, the lowest level since November 2009 and far below
The curtailment of overinvoicing also caused some distortion.
the PBoC’s target of 3.5%. Besides the sharp drop in energy
Finally, the sharp fall in import (particularly commodity) prices
prices, food price inflation fell to 1.1% yoy in January, the
also played a role. Meanwhile, after showing solid growth in
lowest pace since August 2009. Correcting for the most
the second half of last year, exports also disappointed last
2
China Watch: Weak start to the Year of the Sheep – 12 February 2015
month, contracting by 3.3% yoy. Exports to China’s most
factors we expect a further weakening of the yuan versus the
important destination, Hong Kong, fell by 11% yoy in January,
US dollar. We recently adjusted our 2015/16 end-of-period
partly reflecting the steps taken to combat overinvoicing (which
forecasts to 6.35 and 6.45 (see our FX Watch, More bearish
particularly relates to trade between China and Hong Kong).
on Chinese yuan) published on 11 February.
Net capital outflows in 2014 …,
RRR cuts further proof of ongoing support commitment
The January export and import data resulted in a record
The authorities remain committed to do what it takes to
monthly trade surplus of USD 60 bn. The current account
prevent a hard landing. Last month, they decided to lower
surplus rose to USD 214 bn last year, 2.1% of GDP. By
loan-to-deposit ratios and to frontload infrastructure projects.
contrast, China recorded a deficit on the capital and financial
Early this month, the PBoC decided to cut the required reserve
account last year, mainly driven by developments in Q4 (net
ratio (RRR) for banks by 50 bp, the first such move since
outflow of USD 91.2bn). Next to 2012, this was only the
2012. Together with the extended medium-term lending
second deficit on the capital and financial account since 1998.
facility, this adds around USD 110 bn in liquidity to the financial system. This should also help to tackle liquidity shortages prior
Strong external position, despite net capital outflows
to the Chinese New Year. The PBoC also lowered the RRRs for some city and agricultural (development) banks. We expect
USD bn, 4 quarters rolling
500
the authorities to add further measured monetary easing,
400
including two policy rate cuts, a tweaking of reserve requirements and ongoing use of dedicated lending facilities).
300
Targeted fiscal stimulus will likely remain in their toolbox as well. We do not expect aggressive easing, as seen in Japan
200
and other advanced economies, as that would run counter to
100
the overall strategy of rebalancing and deleveraging. 0
In conclusion
-100 00
02
04
06
Current account
08
10
12
14
Capital and financial account
Source: Thomson Reuters Datastream
The January data highlight the challenges for the Chinese economy, although special and seasonal factors play a role as well. We still project China’s slowdown to remain gradual in 2015-16. Our base scenario does not project a hard(er)
… but China’s external position remains healthy We would like to place these developments in some perspective. The rise of capital outflows should be seen as a consequence of the gradual opening up of the economy and financial markets. Second, in part these outflows relate to the repayment of FX denominated debt, which is even beneficial for China’s external position. Moreover, taken the current account and the capital and financial account together, China still enjoys balance of payment surpluses for the foreseeable future. Finally, FX reserves have risen further last year and amply cover total external debt and almost 1.5 year of imports. All in all, thanks to its strong external fundamentals, China can has room to manoeuvre with respect to rising capital outflows. We expect some yuan depreciation versus USD Thanks to these strong external indicators, we still think that China is relatively well-placed to weather potential market contagion stemming, for instance, from (faster-than-expected) rate hikes by the US Federal Reserve. The authorities are ‘leaning against’ the wind in reaction to recent currency pressures and have adjusted the reference rate upwards.
landing, as we assume the authorities will continue to add additional support where needed. Moreover, the external environment is becoming more favourable (low oil prices, expected pick-up in advanced economies). Main risks stem from elevated overall debt levels, shadow banking and overcapacity in several sectors including real estate and from stronger fiscal pressures. A sharper than expected Fed exit could trigger market contagion, but in our view China remains relatively resilient to such turmoil. Key forecasts for the economy of China 2012
2013 2014e 2015e
2016e
GDP (% yoy)
7.7
7.7
7.4
7.0
7.0
CPI inflation (% yoy)
2.6
2.6
2.0
2.0
2.5
-2.5
Budget balance (% GDP)
-1.6
-1.9
-2.0
-2.5
Government debt (% GDP)
15
15
17
19
21
Current account (% GDP)
2.7
2.1
2.5
2.5
2.0
Gross fixed investment (% GDP)
45.7
45.9
45.7
45.2
44.4
Gross national savings (% GDP)
50.3
49.7
49.1
48.4
47.2
USD/CNY (eop)
6.3
6.1
6.2
6.4
6.5
EUR/CNY (eop)
8.2
8.4
7.5
6.7
6.1
Nevertheless, due to monetary policy divergence and other
Budget b alance, current acc. for 2014,2015 and 2016 are rounded figures
Source: EIU, ABN AMRO Group Economics
3
China Watch: Weak start to the Year of the Sheep – 12 February 2015
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