China in 2014: Growth, deleveraging and reform John Calverley May 2014
China’s slowdown – A policy balancing act
1. Slow the excessive growth of credit 2. Reduce the investment ratio 3. Implement wide-ranging, potentially disruptive reforms against vested interests 4. Meanwhile – maintain reasonable economic growth. Jobs are key 5. Above all – avoid the “middle income trap”
2
Services are doing better than manufacturing Official PMIs 65
60 Non-manufacturing
55 Manufacturing 50
Neutral
45
40
35 Jan/08
Jan/09
Jan/10
Jan/11
Jan/12
Jan/13
Jan/14
Sources: CEIC, Standard Chartered Research
Producer confidence has fallen recently
25
1.12
Producer confidence
1.10
20
1.08
15
1.06
10
1.04
5
1.02
0
1.00 0.98
-5
0.96
Inventory cycle outlook -10
0.94
-15
0.92
-20
0.90 2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: CEIC, Standard Chartered Research
4
The industrial proxies are weak
30% Electricity
25% 20% 15% 10% 5% 0% -5% Railway freight -10% 2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: CEIC, Standard Chartered Research
5
Housing market is weakening Residential FAI, residential floor space under construction, newly started, sold, y/y %, 3mma 100%
Residential floor space sold
80%
Residential floor space, new starts
60%
40%
20%
0%
-20%
-40% 2007
2008
2009
2010
2011
2012
2013
2014
Source: CEIC, Standard Chartered Research
6
Housing inventory has risen again Standard Chartered estimates, months of sales
45 40 35 30 Tier 2
25 20 15 10
Tier 3 Tier 1
5 0 2008
2009
2010
2011
2012
2013
2014
Source: Soufun, Standard Chartered Research
7
Investment growth is slowing, except infrastructure investment FAI growth by industry, y/y %, 3mma 60% 50%
Manufacturing FAI
Real estate FAI
40% 30% 20% 10% 0% Infrastructure FAI -10% -20% 2007
2008
2009
2010
2011
2012
2013
2014
Source: CEIC, Standard Chartered Research
Income and spending is holding up Urban disposable income and consumption y/y % 18% 16% 14% 12% Disposable income
10% 8% 6% Consumption expenditure
4% 2% 0% 2006
2007
2008
2009
2010
2011
2012
2013
Source: CEIC, Standard Chartered Research
9
The labour market is still solid
112
Labour demand to supply ratio
108
104 Neutral level
100
96
92
88
84 2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: CEIC, Standard Chartered Research
10
The deleveraging challenge Nominal GDP and our measure of total credit, % y/y
40% Standard Chartered estimate of total credit (on/offshore), % y/y
35% 30% 25% 20% 15% 10%
Nominal GDP, % y/y
5% 0% 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Standard Chartered Research
11
The PBoC’s tightening agenda hits‌and then fades a bit Yields, % 8 3m collateral repo 7 6 5 4
WMP
3 3m deposit rate, %
2 1 0 2007
2008
2009
2010
2011
2012
2013
2014
Source: Standard Chartered Research 12
China’s leverage has risen sharply Global debt-to-GDP ratios 62%
Indonesia Philippines India Taiwan Thailand Malaysia Germany Australia China Korea France Italy United States Spain Singapore United Kingdom Hong Kong SAR Japan
81% 145% 150% 167% 179% 198% 211% 208%
Jun-13
Jun-08
Jun-06
237% 253% 258% 260% 265% 266% 278% 293% 409% 0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Source: BIS, IMF, Standard Chartered Research
13
China’s debt is mostly in the corporate sector ‌ Debt-GDP ratios by sector, June 2013
Indonesia Philippines India Taiwan Thailand Malaysia Germany Australia China Korea France Italy United States Spain Singapore United Kingdom Hong Kong SAR Japan
Households
Corporate
Government
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Source: BIS, IMF, Standard Chartered Research
14
Leverage and credit growth across Asia Colours indicate leverage and potential stress: red = high, yellow = moderate/sustainable, green = low June 2013
AU Total credit/GDP
Economy
Non-financial sector
IN
211% ↑ 208% ↑↑ 293% ↑↑ 145% ↓
ID 62% ↓
JP
KR
MY
PH
409% ↑ 237% ↑ 179% ↑
SG
TW
TH
81% ↓ 266% ↑↑ 150% ↓ 167% ↓
137
881
601
127
-50
32
275
638
-40
409
200
487
(Credit growth - µ)/10-yr σ
-1.0 ↓
-0.3 ↑
0.7 ↑↑
-0.8 ↓
0.9 ↓
2.0 ↑↑
-1.1 ↓
-0.7 ↓
-0.2 ↓
0.9 ↑
-0.6 ↓
1.2 ↓
Total borrowings/GDP
182% ↓ 159% ↑↑ 259% ↑↑ 78% ↓
37% ↓
Credit-GDP growth gap (bps)
227 ↑↑ 1,315 ↑↑ 874 ↑↑
1,168 ↓
Credit growth less LT average (ppt)
433 ↓
167% ↓ 202% ↑ 122% ↑ -5 ↓
333 ↑↑
515 ↑↑
40% ↓ 128% ↑↑ 109% ↓ 123% ↓ 111 ↓
1,026 ↑↑ -137 ↓
375 ↓
-275% ↑ 595% ↑ 485% ↑↑ -620% ↓ 750% ↓ 153% ↑ -262% ↓ 120% ↓ 197% ↓ 768% ↑ -369% ↑ 477% ↓ 13% ↓
6% ↓
72% ↓ 125% ↑↑ 142% ↑↑ 59% ↓
17%
Business borrowings/GDP
17% ↑↑ 26% ↑↑
24% ↓
15% ↑
4%
15% ↑
10%
16% ↓
19% ↓
102% ↓ 115% ↓
38% ↓
33% ↓
75% ↑
61% ↓
54% ↓
15%
Debt/Equity
85% ↑↑
39% ↓
83% ↑↑
61% ↓
48% ↓
58% ↓
58% ↑↑
76% ↓
Debt/EBIT
6.9x ↑
6.7x ↓
4.5x ↓
2.9x ↓
5.6x ↓
4.6x ↓
6.9x ↑↑
4.8x ↓
Interest-burden ratio
41% ↑↑
14% ↑
62% ↓
31% ↑↑
29% ↓
19% ↓
13% ↑↑
24% ↓
DSR
92% ↑↑ 74% ↑↑
83% ↓
47% ↑↑
72% ↓
57% ↑↑
76% ↑↑
61% ↓
109% ↑
33% ↑
62% ↑
19% ↑
18% ↑
65% ↓
87% ↑
84% ↑↑
6% ↓
77% ↑
48% ↓
69% ↑
157%
33% ↑
85% ↓
34% ↓
26% ↓
111%
134% ↓ 184% ↑↑
13%
147% ↓
62%
95% ↓
Interest-burden ratio
9%
2% ↓
2% ↓
4% ↓
3% ↓
3%
8% ↓
11% ↑
2%
6% ↓
1%
7% ↓
DSR
17%
3% ↑
8% ↓
5% ↓
4% ↓
10%
15% ↓
21% ↑↑
2%
14% ↓
6%
12% ↓
29% ↓
50% ↓
34% ↓
67% ↓
25% ↓
242% ↑
35% ↓
57%7 ↓
42% ↓
114% ↑
41% ↓
44% ↓
Int. payments/Govt. revenue
2%
2%
1%
6%
4%
6%
4%
1%
10%
2%
2%
4%
DSR
7%
5%
18%
7%
193%
22%
3%
4%
17%
11%
Household borrowings/GDP Borrowing/Household income Household
Government debt/GDP Government4
HK
Credit-GDP gap (bps) 5 yrs
DSR
Corporate
CN
Arrows indicate change from June 2012: ↑ moderate increase
↑↑ fast increase
↓ decrease
Source: Bloomberg, BIS, IMF, Standard Chartered Research estimates
15
How to deleverage
Slow credit growth Bankruptcies and write-offs of bad debt May require some bank recapitalisation later Supply-side reforms to boost efficiency: Opening up the services sector to private-sector investment Force SOEs to sell non-strategic assets Financial reform – deposit rates and FX Land reform Inflation? Keep growth going!
16
SOE reform will come, but slowly, and in dribs and drab Return on assets, %
12%
The SOEs contribute little to social spending 2013 budget, CNY bn Non-SOEs
700 600
10%
500 8%
400 6%
SOEs 300
4%
200
2%
100
0% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: CEIC, Standard Chartered Research
0 Social spending
SOE dividends
SOE dividends used for social spending
Source: MoF, Standard Chartered Research
17
China still has plenty of investing to do Capital stock per capita, USD at constant 2005 prices 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2010
2010
China
China at PPP
1930
2009 US
Sources: Dragonomics, Standard Chartered Research
Household income and consumption are under-estimated Three estimates of household income, % of GDP NBS survey, flow of funds, Wang Xiaolu estimates
Two estimates of household consumption, % of GDP 55%
80%
Household consumption, % of GDP (ZZ) 70%
Household income (WXL)
60%
50%
45%
Household income (FoF)
50%
40%
Household income (NBS survey)
40%
30% 2005
2008
2011
Household consumption, % of GDP (NBS) 35%
30% 2004
2005
2006
2007
2008
2009
Source: CEIC, Wang Xiaolu, Standard Chartered Research
What can go wrong?
A financial crisis like Thailand 1997? Unlikely because: Borrowers and lenders are mostly state-owned – fiscal issue, not domino risk Massive FX reserves Investment slows too much (Russia 1970s, Japan 1990) Reforms could dampen some investment opportunities before new ones open up Our view is that the overcapacity problem is less serious than many believe
20
Growth will shift down as per capita income rises China forecasts to 2015 12
Hong Kong, China
Japan
Chinese Taipei
15,000
20,000
Singapore
Korea
China
Annual average growth (%)
10
8
6
4
2
0 0
5,000
10,000
25,000
30,000
35,000
40,000
45,000
GDP per capita (current USD PPP) ) Source: Standard Chartered Research
Introducing two-way volatility into the CNY USD-CNY onshore spot more volatile 2.5%
6.40
HIGH
LOW
2.0%
6.35
1.5%
6.30
Top Band
1.0% Upper Band
6.25
Day High Day Low Fix
6.20 6.15
0.5% 0.0% -0.5% -1.0%
Low Band
-1.5%
6.10
-2.0%
6.05 6.00 Jan-13
Lower Band Apr-13
Jul-13
Oct-13
Jan-14
-2.5% Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Forecasts
Q2-14
Q3-14
Q4-14
Q1-15
Q2-15
USD-CNY
6.16
6.13
6.04
5.95
5.90
USD-CNH
6.16
6.13
6.03
5.94
5.89
Source: Bloomberg, Standard Chartered Research
22
Our forecasts for 2014-15
2010
2011
2012
2013
2014F
2015F
GDP growth, %
10.4
9.2
7.7
7.7
7.4
7.0
CPI, %
3.3
5.4
2.6
2.6
2.4
3.0
1-yr base saving rate, %
2.75
3.50
3.00
3.00
3.00
3.00
Current account, % of GDP
4.0
1.9
2.3
2.1
3.6
3.9
USD-CNY (year end)
6.623
6.301
6.28
6.05
6.04
5.85
FX reserves, USD bn (increase)
2,847 (448)
3,181 (334)
3,350 (169)
3,820 (300)
4,400 (300)
4,500 (100)
Source: Standard Chartered Research
23
Global Disclaimer (page 1 of 2) Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Global Disclaimer: Standard Chartered Bank and or its affiliates (“SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to on the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately following its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for any queries relating to the legal or tax implications of any investment. SCB, and/or a connected company, may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or any member of the SCB group of companies or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the website or have a material interest in any such securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary damages) from use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services. This material is for the use of intended recipients only and, in any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors.
24
Global Disclaimer (page 2 of 2) Country-Specific Disclosures - If you are receiving this document in any of the countries listed below, please note the following:
United Kingdom and European Economic Area: SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services License for SCB is License No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this document was prepared for wholesale investors only within the meaning of section 761G of the Australian Corporations Act 2011 and the Corporations Regulations. This document is not directed at persons who are “retail clients” as defined in the Australian Corporations Act 2011. Brazil: SCB disclosures pursuant to the Securities Exchange Commission of Brazil (“CVM”) Instruction 483/10: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. China: This document is being distributed in China by, and is attributable to, Standard Chartered Bank (China) Limited which is mainly regulated by China Banking Regulatory Commission (CBRC), State Administration of Foreign Exchange (SAFE), and People’s Bank of China (PBoC). Germany: In Germany, this document is being distributed by Standard Chartered Bank Germany Branch which is also regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Hong Kong: This document, except for any portion advising on or facilitating any decision on futures contracts trading, is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. Japan: This document is being distributed to Specified Investors, as defined by the Financial Instruments and Exchange Law of Japan (FIEL), for information only and not for the purpose of soliciting any Financial Instruments Transactions as defined by the FIEL or any Specified Deposits, etc. as defined by the Banking Law of Japan. Malaysia: This document is being distributed in Malaysia by Standard Chartered Bank Malaysia Berhad only to institutional investors or corporate customers. Recipients in Malaysia should contact Standard Chartered Bank Malaysia Berhad in relation to any matters arising from, or in connection with, this document. Singapore: This document is being distributed in Singapore by SCB Singapore branch, only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact SCB Singapore branch in relation to any matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS.
© Copyright 2014 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any way without the prior written permission of Standard Chartered Bank.
25