China Watch
Group Economics Emerging Markets Research
28 October 2015
Hard landing fears have eased Slowdown remains gradual in Q3; wider divergence industry and services
Arjen van Dijkhuizen
Stabilising stock market and yuan help easing hard landing concerns
Senior Economist Tel: +31 20 628 8052
Imports and exports remain weak in annual, but less so in monthly terms
arjen.van.dijkhuizen@nl.abnamro.com
PBoC adds further stimulus and we expect more to come China’s leaders to draw contours of 13th Five Year Plan this week This week, the fifth plenary session of the Communist Party Central Committee will take place. The discussions should draw the contours of the 13th Five Year Plan, which contains China’s key political and economic goals and policies throughout 2020. It is expected that China’s leaders will present an quite abstract communiqué later this week, which should give further direction to the annual Central Economic Work Conference to be held in December. Final approval of the 13th Five Year Plan, including formal adoption of the 2016 growth target, is set to take place in the March 2016 meeting of the National People’s Congress.
Economic slowdown remains gradual in Q3 Last week, Chinese GDP data for Q3 were published. Annual GDP growth was reported at 6.9% yoy, just below the official target (and the releases for the first two quarters) of 7% and slightly higher than market expectations (6.8% yoy). Quarterly growth came in at 1.8% qoq, similar to Q2 and clearly higher than the weak Q1 figure (1.3%). All in all, the numbers are in line with the official target and our 2015 growth forecast (7%). Meanwhile, Bloomberg’s alternative monthly GDP estimate dropped marginally to 6.55% in September (August: 6.64%), remaining somewhat (but not that far) below the official GDP figures.
China’s economic slowdown remains gradual % yoy
Stock market and currency have stabilised Shanghai index (A shares)
14
CNY per USD
6.5
6000
12
6.4
5000 10
6.3 4000
8
6.2 3000
6 4
6.1
2000 07
08
09
10
11
Real GDP growth (official) Source: Bloomberg.
12
13
14
15
Bloomberg GDP estimate
6 13
14 Stock market index
Source: Thomson Reuters Datastream.
Insights.abnamro.nl/en
15 USD-CNY
2
China Wattch - Hard la anding fears s have eased d - 28 Octob ber 2015
Diverg gence betwee en industry and a services widens w The latest data clearrly show that the weakness is concentrated in industry and d construction, while se ervices are hollding up much better. Industryy and construc ction cooled furtherr in Q3, to 6.0% % yoy (Q2: 6.1% %). Industrial production p grow wth dropped to a six-month low of 5.7% yoy in Se eptember (Aug gust: 6.1%), wh hile growth of fiixed asset inve estment ed a new low o of 10.3% yoy (A August: 10.9%)). By contrast, ggrowth of services reache accele erated in Q3 to 8.4% (Q2: 8.3%). Retail sale es – which evenn does not fully y include consum mption of serviices – edged up higher to 10.9% yoy (Augusst: 10.8%). The e forwardlooking g PMIs also cle early point to th he ongoing dive ergence betweeen industry an nd services.
Stabillisation of sto ock market an nd currency helps h easing hard landing g fears As exp plained in our S September report, China – Te en urgent quesstions, the sharrp correction of the stock market a and the unexpe ected adjustme ent of the CNY regime in the summer s a to hard l anding concerrns. More recen ntly, the stock m market has sta abilised, have added helped d by the buildin ng-up of funds to t intervene as s well as by an improving risk sentiment. Moreover, fears of a sharp CNY de evaluation have e eased, with thhe yuan apprec ciating versus s the dollar in re ecent months helped h by FX interventions, illlustrating that the currency remain ns heavily man naged. After rising in recent months m to a peaak of 140 bp, China’s C CDS premiu um has fallen to owards the 100 0 bp level again (remaining loow by EM standards).
China a’s trade rema ains weak in annual, but less so in mo onthly terms While it is natural tha at growth of imp ports and expo orts has fallen i n line with lowe er domestic and glo obal growth, th his year’s annual trade data lo ook particularlyy weak. Import values contracted by -20.4% % yoy in Septem mber (August -13.8%). Howeever, monthly data show mproved since e early 2015. Im mports droppedd sharply in that the picture has im January/February of this year, on th he back of a drrop in investmeent and falling import i prices,, but have reco overed since March M (with vola atility also refleccting the timing g of the Chines se New Year). Still, the sharp p drop in early 2015 2 keeps afffecting the year-on-year figures s. This pattern is more or less s visible for varrious trade parttners, including g the EU, US, As sia and Latin A America. Meanw while, while export values conntracted for the e third month in a row in annual terrms (-3.7% yoy y in Septemberr), they have shhown monthly gains since April. We W expect (ann nual) trade datta to improve next year, as wee expect China a’s slowdo own to remain gradual and ne egative base effects are likelyy to fade out.
Ch hinese imporrts by region
Low in nflation, lower growth trigg ger further sttimulus % / % yoy y
Imp port values in USD D, index, January 2012 = 100
%
2 200
20
22
175
15
21
150
10
125
5
100
0
20 19 18 17
-5
75
16
-10
50 13
12 EU U
14 US
Asia
15 Latin America A
Sou urces: Thomson R Reuters Datastream m, ABN AMRO Group Economics
15 08
09
10
11
12
Headline inflation (lhs) H ( P Policy rate (lhs) Source: Thomson T Reuters Datastream.
13
14
15
Producer price innflation (lhs) Bank RRRs (rhs))
3
China Wattch - Hard la anding fears s have eased d - 28 Octob ber 2015
PBoC C adds furtherr stimulus Headline and core in nflation remain at around 1.5% % yoy, clearly bbelow the 3% target, while produc cer price inflatio on remains sha arply negative (around -6%). This creates ro oom for the authorrities to add furrther stimulus on o top of previo ous easing meaasures embark ked throughout 2015. Lasst week the PB BoC lowered po olicy rates and RRRs further, to lower borrow wing costs and add liquidity to o the banking system. s In line w with our expec ctations, the 1-yearr lending rate w was cut by anotther 25 bp to a record low of 44.35%, the sixtth cut since Novem mber 2014, whiile overall RRR Rs were lowered by 50 bp, to 17.5%, bringin ng the total reduction this year att 250 bp. The 1-year 1 deposit rate was also ccut by 25 bp, to o 1.5%, but more importantly wass the announce ement to libera alise deposit rattes, showing th he PBoC’s commitment to move e to more mark ket-oriented inte erest rates. Thee PBoC also announced last we eek it had provvided 11 banks with loans of USD U 16.6 bn thhrough its medium-term lending g facility to safe eguard liquidity y in the banking g system.
… and d we expect m more to come e The difference betwe een the key policy rate (4.35% %) and headlinee inflation (1.6% % yoy in Septem mber) remains large. Althoug gh we expect in nflation to rise tto 2% next yea ar, we see room for f some furthe er rate cuts and d have now pen ncilled in anothher 50 bps in 2016. We expectt more action frrom RRR cuts,, as RRRs remain high from aan internationa al perspe ective while RR RR cuts help to o compensate for f the liquidity drain stemmin ng from FX interve entions. We exp pect another 150 bp in RRR cuts in 2016. W We expect the PBoC to use other parts p of its mon netary toolkit as s well, including its lending faacilities, targete ed lending to policy banks (which h has been used d to finance add ditional infrastruucture spendin ng) or targete ed RRR cuts fo or financial insttitutions with a specific mandaate (like SME lending). We expectt ongoing fisca l stimulus (suc ch as infrastructure spending aand tax cuts) and a easing of prud dential requirem ments (e.g. dow wnpayment req quirements for housing) as well. w
In con nclusion All in all, a we expect C China’s structural slowdown – in place sincee 2007 when growth peaked d at 14.2% - to o continue in th he coming years, as China’s nneeded transition comes hand in hand with low wer growth rate es. However, we w expect the sslowdown to re emain gradua al. The authoritties are still able and willing to o add support, gradually work king its way into the e economy as illustrated for instance by rising lending acttivity and impro oving house prices.. Our growth fo orecast for 2016 is 6.5%, as we w are of the viiew that aiming g again for 7% gro owth next yearr would become e too challenging and costly, while the relative strength of the labour market suggests that China can also o live with 6.5% % growth. Key risks r to our s of a grradual slowdow wn stem from elevated e debt leevels, significa ant base scenario overca apacity in indusstrial and real estate e sectors, financial liberaalisation adding g to capital outflow ws and from fin nancial sector is ssues (includin ng shadow bannking and rising g NPLs).
4
China Wattch - Hard la anding fears s have eased d - 28 Octob ber 2015
Key forecasts f for the economy y of China 2012
2013
2014
2015e
2016e
GDP (% % yoy)
7.7
7.7
7.3
7.0
6.5
CPI inflation (% yoy)
2.6
2.6
2.1
1.5
2.0
-1.6
-1.9
-2.0
-2.5
-3.0
Budgett balance (% GDP P) Government debt (% GD DP)
15
15
15
17
19
P) Current account (% GDP
2.5
1.9
2.0
2.5
2.5
f investment (% ( GDP) Gross fixed
44.5
44.6
44.2
42.4
41.3
Gross national n savings (% ( GDP)
49.0
48.4
48.1
47.2
45.8
USD/C NY (eop)
6.3
6.1
6.2
6.4
6.6
EUR/C NY (eop)
8.2
8.4
7.5
7.2
6.6
Growth, CPI, budget bala nce, current account for 2015 and 2016 2 are roundedd s: EIU, ABN AMRO O Group Economiics Sources
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