Group Economics Emerging Markets
China Watch
Arjen van Dijkhuizen +31 20 628 8052
Signs of stabilisation
11 June 2015
Although the May economic data present a rather mixed bag, they show more signs that the economy is stabilising, benefiting from previous easing measures. We expect some improvement in growth momentum in the next half year.
Our expectation is based on the fact that the authorities remain committed to add measured monetary and fiscal stimulus and on the assumption of higher growth in advanced economies strengthening external demand.
The plan to swap high-cost local government debt to lower-yielding bonds will reduce debt service costs.
Still, overall debt levels have risen further to an estimated 280% of GDP, representing the key long-term downside risk.
May data point to stabilisation
… as did the headline PMIs
After weak April data suggested that the economy started Q2
PMI data published in early June already pointed to some
on a weak note, the May data show more signs that the
stabilisation, although not all data were that bright. The
economy is stabilising, benefiting from previous easing
Manufacturing PMI improved a bit, to 49.2 (April: 48.9), but
measures. Admittedly, the May data present a rather mixed
remained below the neutral 50 mark for the third month in a
bag. The latest PMIs, housing sales, industrial production and
row. The output subindex fell below 50 for the first time since
retail sales show a picture of stabilisation or even improve-
December 2014, while new export orders contracted at the
ment, while trade data, headline inflation and fixed investment
steepest rate since June 2013. Meanwhile, the Services PMI
point to ongoing weakness. We expect some improvement in
tells a brighter story, rising to an eight-month high of 53.5 in
growth momentum in the next half year, based on the fact that
May (April: 52.9). New business showed the biggest rate of
the authorities remain committed to add measured monetary
expansion in three years. The composite output index
and fiscal stimulus and on the assumption of strengthening
remained quite stable at 51.2 (April: 51.3).
external demand from advanced economies. Still, imports remain in contraction mode … Industrial production and retail sales improve a bit …
In the first five months of 2015, total Chinese trade fell by 8%
After having fallen to an historic low in March, industrial
compared to the same period of 2014, falling clearly short of
production growth rose somewhat again in May, reaching
the government’s 2015 trade growth target of +6%. Annual
6.1% yoy (April: 5.9%), slightly better than expected. Retail
import growth remained negative in May, for seven months in
sales also did slightly better than market expectations, rising
a row now, falling by -17.6% yoy (April -16.2%; consensus:
marginally to 10.1% yoy (April: 10%). By contrast, fixed
-10%). Although the import contraction obviously relates to the
investment continued its downward trend, reaching a fresh low
slowdown in the manufacturing and industrial sectors, they
of 11.4% yoy in May (April: 12%), below market expectations.
also reflect the drop in commodity prices and the relative
Bloomberg’s monthly GDP estimate rose to 6.55% yoy (April:
strength of the yuan. China’s import price index has fallen to
6.4%).
89.5 in March, the lowest level since October 2009.
Manufacturing and Services PMIs still divergent
Exports to Japan and EU particularly weak
% yoy
% yoy, 3 months moving averages
65
60
60
40
55
20
50
0 45
-20
40
-40
35 08
09
10
11
Manufacturing PMI Source: Thomson Reuters Datastream
12
13 Services PMI
14
15
08
09
10
Total exports
11
12
Exports to Japan
Source: Thomson Reuters Datastream
13
14 Exports to EU
15
2
China Watch h: Signs of stab bilisation – xx June J 2015
… as well as exp ports
BoC has offere ed another CNY Y 1trn in PSL to China PB
c mo onth (-2.5% yoyy), Chinese exports ffell for a third consecutive
De evelopment Ba ank. What is moore, after frontloading a numb ber
hough the pace e of contraction n was less sharp than in Aprill alth
off investment projects in early 2015, the National Developm ment
(-6..4%) and less tthan markets had h expected (--4.4%). Exportts
an nd Reform Com mmission recenntly approved a new series off
to Japan J and to a lesser extent the EU are doing particularly
ra ailway investme ent projects forr the next five years, y worth
poo or. This partly rreflects the app preciation of the Chinese yua an
CNY 240bn. The e authorities haave also taken other measure es
verrsus the Japanese yen and th he euro, following these
uch as reducing g import tariffs to spur consum mption and eassing su
cou untries’ unconvventional QE po olicies. We do not expect the
taxes for real estate, finance annd housing serrvices.
autthorities to tolerate a sharp yu uan weakening g, although som me dep preciation may be desirable to o support expo orts.
ocal government debt swap p plan brough ht to live Lo Ea arlier this year, the authoritiess launched a plan to swap CN NY
CP PI falls back, but core, PPI and a house pric ces stabilise
1ttn of high-cost local governmeent debt (aroun nd 5% of the
Afte er stabilising around 1.5% yo oy in recent months, CPI
ou utstanding) into o low-yielding bbonds. This pla an will help low wer
inflation fell back to 1.2% in Mayy, driven down by lower food
the debt service burden for loca cal governmentts. Initally, the
inflation. Still, core e inflation rose e marginally, to 1.6% yoy. All in
efffectiveness of the plan was qquestioned, as banks did not
elow the 3% tarrget for this yea ar, all, inflation levelss remain far be
sh how much appe etite for local ggovernment bo onds. However,,
ven down by lo ow commodity prices, p industrial overcapacityy driv
the government took additionaal measures in support of the
and d weak domesttic demand. Altthough we exp pect inflation to
plan. The authorrities loosened controls on the e financing of
gra adually rise in th he course of th his year, as the e effects of lowe er
nt financing vehhicles (LGFVs)), made local local governmen
com mmodity pricess will fade, we have h cut our 20 015/16 inflation n
overnment bonds eligible as ccollateral in certain lending go
fore ecasts by 0.5 % %-point, to 1.5% % and 2%, respectively.
facilities and use ed moral suasioon to get banks s buying them..
Pro oducer price infflation (PPI) remained negativ ve at -4.6% yo y
Alllegedly, the go overnment is coonsidering laun nching a secon nd
in May, M similar to the March and d April levels. The T drop in
CNY 1tn debt sw wap programmee. Following th hese measuress,
hou use prices also o stabilised in re ecent months, while housing
the Jiangsu, Xinjjian and Hubeii (9/6) provincia al governmentss
sales posted grow wth in April for the first time in n the 16 monthss
uccessfully com mpleted bond ssales in May an nd early June. su
policy easing. following recent p In n conclusion ay for further monetary m easing … paving the wa
Alll in all, we expect the Chinesse economy to gain some
t past half ye ear, the PBoC cut c the 1-year best lending ra ate In the
momentum arou und the middle of this year. We W have left ourr
by a cumulative 9 90 bp, in three steps s (Novemb ber, February,
20 015/16 forecasts at 7% so farr (2014: 7.4%) and hence exp pect
ay), to 5.1%. Th he PBoC also cut c banks’ rese erve requireMa
China’s slowdow wn to remain grradual in nature e, assuming th he
me ents (RRRs) byy in total 150 bp p, partly in reac ction to rising
uthorities will ke eep adding stim mulus if needed. Key risks to au
cap pital outflows affecting the mo onetary base. The T authoritiess
this outlook stem m from elevatedd overall debt levels (around
also eased requirrements for the e purchasing off second home es.
80% of GDP, almost a half of it being non-fina ancial corporate e 28 de ebt), overcapac city in several ssectors includin ng real estate,
Witth the policy rates currently at 5.1% and corre inflation
stronger fiscal pressures, the eexternal environment and
aro ound 1.5%, there is plenty of room r for furthe er monetary
eopolitical issue es. ge
eas sing in our view w. Going forward, we expect the t PBoC to con ntinue with furth her measured monetary easing, as we do n not
K forecasts fo Key or the economy of China 2012
2013
2014e
2015e
2 016e
G GDP (% yoy)
7.7
7.7
7.4
7.0
7.0
C inflation (% yoy CPI y)
2.6
2.6
2.0
1.5
2.0
see e the need for llarge-scale uncconventional QE Q policies (for varrious reasons, e explained in ou ur May 2015 China Watch). W We exp pect further RR RR cuts to add liquidity to the banking system m. We e also have pen nciled in 25-50 bps of addition nal policy rate cutts for the remaiinder of this year. We expect the authoritiess to use e other moneta ary tools availab ble in their toollkit as well.
-1.6
-1.9
-2.0
-2.5
-3.0
G Government debt (% ( GDP)
15
15
16
17
19
C Current account (% % GDP)
2.7
2.1
2.0
2.5
2.0
G Gross fixed investm ment (% GDP)
45.7
45.9
45.5
43.8
42.9
G Gross national sav vings (% GDP)
50.3
49.7
48.7
48.0
46.4
U USD/CNH (eop)
6.3
6.1
6.2
6.3
6.4
E EUR/CNH (eop)
8.2
8.4
7.5
6.3
7.4
B Budget balance (% % GDP)
mulus … and other stim e authorities co ontinue to use more direct ins struments to The stim mulate growth a as well, such as a Pledged Sup pplementary Len nding (PSL) to policy banks which w is earmarked for concre ete targ gets such as in nfrastructure orr renovation. Allegedly, the
B Budget b alance, current acc. for 201 14,2015 and 2016 6 are rounded figu ures
S Source: EIU, ABN N AMRO Group Economics E
3
China Watch h: Signs of stab bilisation – xx June J 2015
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