China: Risk amidst stabilized growth
AIG Global Economics Henry Mo, Ph.D., CFA Head of Macro Research and Modeling July 11, 2014
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1
China economic outlook
Ø Chinese economic growth has stabilized, but lacks significant upside momentum. Ø While short-‐term growth risk has declined, medium-‐to-‐long term risks remain. Ø Structural reform is the key to rebalancing the Chinese economy, but the path should be bumpy. Ø To ensure a smooth transi@on, China should leverage up central government and households and deleverage local governments and corpora@ons.
2
A sharp slowdown in Q1
China Real GDP Growth
15 14
QoQ% Ann.
13
YoY%
12 11 10 9 8 7 6 5 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: NBS, AIG
3
Sales growth was particularly weak during the Chinese New Year
Source: Ministry of Commerce, Credit Suisse; Note: Catering and retail sales during the Chinese New Year golden week holiday period. 4
Li Keqiang Momentum Index showed the signs of growth stabilization
 CS Li Keqiang momentum index monitors the sequential momentum of China’s macro activities by tracking sectorial high frequency data like industrial power consumption, railway cargo volumes and bank long-term credit.
Source: NBS, Credit Suisse 5
Both NBS and HSBC PMIs have picked up since May
55
HSBC PMI
54
NBS PMI
53 52 51 50 49 48 47 Jan-‐11
Jul-‐11
Jan-‐12
Jul-‐12
Jan-‐13
Jul-‐13
Jan-‐14
Source: Markit Economics, NBS, AIG
6
Improving exports with stronger external demand: I 80
60
60 55
40 20
50
0 45
-‐20 -‐40
40
China exports (% 3m/3m saar)
-‐60
NBS Mfg. PMI export order index (2m lead, RHS) -‐80 Jun-‐08
35 Jun-‐09
Jun-‐10
Jun-‐11
Jun-‐12
Jun-‐13
Jun-‐14
Source: China Customs, NBS, AIG
7
Improving exports with stronger external demand: II
Source: China Custom, Credit Suisse, AIG
8
While growth has stabilized, it lacks significant upward momentum
NBS Manufacturing PMI 60 57 54 51 48
5y average
2014
45 Jan
Feb
Mar
Apr
May
Jun
Source: NBS, Barclays Research 9
Employment growth more resistant to slower economic growth
14 12 10
11.7
11.0
12.2
1.8
13.1
12.7
1.7
10.4
1.6
9.3
9.2
7.7
8
7.7
1.5 1.4
6
1.3
4
1.2
2
1.1
0
1.0 2009 New urban workers (mn)
2010
2011
Real GDP growth (%)
2012
2013
New urban workers per unit of real GDP growth (mn)
Source: NBS, AIG
10
Private investment has slowed, forcing Beijing to focus on infrastructure investment
60 50 40 30 20 10 0 Manufacturing investment (% yoy, ytd)
-‐10
Infrastructure investment (% yoy, 3mma)
-‐20 05
06
07
08
09
10
11
12
13
14
Source: NBS, Credit Suisse, AIG
11
Recent growth is built on a surge in shadow banking
200 Total Credit to GDP (%)
180
Bank Credit to GDP (%)
160
Alterna@ve Financing: 45%
140 120 100 80 02
03
04
05
06
07
08
09
10
11
12
13
14
Source: BIS, NBS, AIG; Note: Credit to non-financial private sector.
12
… while risks are accumulating
On-‐balance sheet loans
Off-‐balance sheet credits
Source: Wind, Credit Suisse
13
A weakened property market posts major risk
Source: NBS, Credit Suisse
14
2H14-1H15 is the next peak season for trust fund repayment
Trust Fund Repayment (Rmb bn)
1600 1400 1200 1000 800 600 400 200 0 1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
Source: Wind, Credit Suisse; Note: Based on updates @ May 2014.
15
China has both the highest credit-to-GDP gap and DSR among major EM countries
25 20 15
23.6
Credit-‐to-‐GDP Gap
Debt Service RaFo 10
17.4
8 13.7
6
10 5
9.4
4 4.1
3.7
2
3.5
4.0
3.4 0.8
0.5
0
0 -‐2.7 -‐3.1
-‐5
Credit/GDP gap >10 2≤Credit/GDP gap≤10
-‐1.0
-‐2
DSR>6 4≤DSR≤6
Source: BIS estimates, AIG; Note: Credit-to-GDP gap and debt service ratio refer to deviation from trends.
16
We expect the central government to inject capital to settle the local debt issue
35
Debt to GDP (%, as of June 2013) 33.2
8
7.0
6
30 25
Fiscal Balance (% of GDP, 2013)
23.0
4 2
20
0
15
-‐2
10
-‐4
5
-‐6 -‐8
0 Central government Local government and related bodies
-‐10
-‐8.8 Central government Local government
Source: NBS, Credit Suisse, AIG; Note: Debt figures include direct debt, debt guaranteed by governments and those with contingent liabilities. 17
Deleveraging corporations while leveraging up households
200
Debt to GDP (%)
160
180
140
160
120
140
100
Debt to GDP (%)
80
120
60
100
Household Non-‐financial corpora@on
40 80
20
60 92 94 96 98 00 02 04 06 08 10 12 14
0 06 07 08 09 10 11 12 13 14
Source: NBS, PBoC, AIG
18
But it is getting harder to boost growth now …
8 7 Nominal GDP per unit of new credit
6 5 4 3 2 1 05
06
07
08
09
10
11
12
13
14
Source: NBS, PBoC, AIG; Note: Credit refers to total amount of social financing.
19
The party’s reform agenda
Ø Fiscal reform Ø Financial reform Ø Hukou system reform Ø Opening up the service sector to private investment Ø Reducing government approvals Ø Higher dividend payments by SOEs Ø Mixed ownership reform for SOEs
20
Private capital dominates manufacturing sector, but not service sector
RaFo of Private to State Fixed Asset Investment 8 Manufacturing
7 6
IT
5 Finance intermedia@on
4 3
Leasing and business service
2
Techinal services
1 0 2008
2009
2010
2011
2012
Source: NBS, AIG; Note: Private investment includes both domestic, HK/Macro/Taiwan and foreign private enterprises, while state investment refers to state owned enterprises. 21
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