Page 1

CONFIDENTIAL

RESEARCH July 14 2016

CHINA

Get smart

How the connected home will boost the saturated appliance market

ECONOMIC SLOWDOWN TO HELP CHENGDU MAINTAIN WAGE ADVANTAGE

REAL ESTATE LIKELY TO PROVIDE GROWTH SUPPORT THROUGH 2016

BIG BANKS PREPARING FOR SHADOW FINANCE INSTABILITY


Macro | CHINA

2

10 15

CONSUMER Smart home offers hope in saturated appliance market

Despite signs that investment growth is weakening, and broader questions of sustainability, we see no reason MACRO Chengdu’s low to expect any sharp downturn in the wages a doubleedged sword near term FINANCE Preparing for the storm amid shadow The government may announce this week that economic growth ticked lower in the second quarter, after growing 6.7 per cent in the first three months of 2016, but the finance calm

20 REAL ESTATE Real estate to remain a lifeline for growth through 2016 24 METRICS

slowdown is likely to be marginal. The economy has stabilised on the back of rampedup infrastructure investment and a resurgent housing market, which was buoyed by the record Rmb6.7tn ($1tn) in new credit created in the first quarter. Both sectors have responded to the policy easing that began at the start of this year as officials, tied to meeting annual growth targets, returned to the stimulus playbook.

Little sign of coming sharp slowdown

Despite signs that investment growth is weakening, and broader questions of sustainability, we see no reason to expect any sharp downturn in the near term and imperil the 6.5 per cent annual GDP target. The central government is continuing to encourage investment in infrastructure, while the lag between housing sales and construction points to sustained activity through the remainder of this year (see Real Estate). The FTCR China Business Activity Index recovered in June, rising to 50.8 from 48.9 in May, but remained below its historical average of 52.4 (see chart 1). Again, real estate was the swing factor: our measures of export and freight sector activity both found continued contraction in June, while our Real Estate Index jumped to 57.1 from 55.7, helped by increasing sales in first-tier cities. As our data highlights, the current stabilisation is highly imbalanced, and hopes that it would spread have so far been – and are likely to remain – disappointed. FTCR’s Consumer Index fell back in June, wiping out second-quarter gains, as outlooks for the economy, incomes and consumer discretionary spending all deteriorated (China June 23, Macro). Our monthly Labour Market Index furthermore found that employment conditions remained soft in June, while the official and unofficial purchasing managers’ indices showed manufacturing

FTCR Business Activity Index 1. FTCR Business Activity Index 2013

2014

2015

2016

70

50=no change

5

JUL 14 2016

60

50

40

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Note: An composite reading of the MoM change in activity in the real estate, exports and freight sectors. Any index reading above 50 indicates an increase; any reading below 50 indicates a decrease Source: FT Confidential Research


JUL 14 2016

3

and services activity, if anything, weakening again. Robust housing sales are helping lower bad loan risks associated with real estate. But risks linked to small business and newly started businesses are rising as the economy’s growth drivers shift in the wake of the government’s resort to stimulus (see chart 2).

Private sector struggles

Privately owned firms may be crucial to sustainable growth as the government gets on with reforming the state-owned sector – they have provided the bulk of jobs growth in the reform era (see chart 3) – but FT Confidential Research has highlighted their struggles as the economy has slowed (China May 13, Industry and manufacturing). The central government has sent teams out across the country to find out why private investment growth has collapsed this year, but we believe it is due to ongoing problems in accessing funding and the crowding out by state-owned firms identified by our surveys. A November 2013 government pledge to open up the economy to private sector participation has not been kept: our survey of infrastructure projects earlier this year found little or no private participation in the public-private partnerships the government had been pushing (China April 8, Macro). At the same time, smaller private firms are struggling to stay afloat. Deng Daoyuan, a Wuhan-based clothing company owner, borrowed Rmb4m from a private lender at an

In which sectors 2. In which sectorswas wasbad baddebt debtmost mostcommon commonthis this month? month? Real estate

Small businesses

Newly started businesses

% of respondents (3mma)

60 50 40 30 20 10 Ja n Fe -14 bM 14 a Apr-14 M r-14 ay Ju -14 n Ju -14 Au l-14 g Se -14 pOc 14 No t-14 v De -14 c Ja -14 nFe 15 b M -15 ar Ap -15 M r-15 ay Ju -15 n Ju -15 Au l-15 g Se -15 pOc 15 No t-15 v De -15 c Ja -15 nFe 16 b M -16 ar Ap -16 M r-16 ay Ju -16 n16

0

Note: Multiple-choice question with no limit on possible answers Source: FT Confidential Research

State-owned versus 3. State-owned versusprivate privatesector sectoremployment employment in in China State-owned sector

Private sector

120 100 Employees (m)

80 60 40 20 0 19 90 19 9 19 1 92 19 93 19 94 19 95 19 96 19 97 19 98 19 9 20 9 00 20 0 20 1 02 20 0 20 3 04 20 0 20 5 06 20 0 20 7 08 20 0 20 9 10 20 1 20 1 12 20 1 20 3 14 20 15

The central government sent teams out across the country to find out why private investment growth has collapsed

Macro | CHINA

Source: CEIC


JUL 14 2016

4

Macro | CHINA BLOOMBERG

The official and unofficial purchasing managers’ indices for June showed manufacturing and services activity weakened again

annualised 36 per cent (the central bank’s equivalent policy lending rate stands at 4.35 per cent) to expand capacity to fulfil a large order from a big online brand. The local bank would not help because Mr Deng lacked adequate collateral. But the private bank loan has only complicated matters because monthly service payments have wiped out any profits he may have earned on the clothing order. Mr Deng now risks missing payments on his loans, as does Chen Jianchun, owner of an auto-parts maker in Chongqing. He cannot pay off Rmb2.9m in bank and underground loans, despite his company boasting margins of more than 40 per cent, because accounts receivable owed his firm have not been paid, though Mr Chen said his creditors – both formal and informal lenders – have shown a willingness to extend.

Fear continues to trump reform

A People’s Daily essay in early May took the government to task over policies that helped stabilise growth in the first quarter, but only exacerbated the economy’s debt problems. That essay initially created uncertainty over policy direction, but volatility created by Brexit appears to have shifted the debate, triggering an increased government focus on maintaining growth and stability. After a string of defaults, the domestic bond market has gone markedly quiet, while the renminbi has been allowed to depreciate, both against the US dollar and the trade-weighted basket of currencies the government said last year would act as its new reference point. While capacity cuts have been announced in coal and steel, and lumbering state-owned enterprises in sectors including steel and tourism have unveiled merger plans, these are only limited steps. The government continues to talk up the primacy of reform, but the maintenance of short-term growth – however imbalanced – remains the number one priority. n

CONFIDENTIAL

RESEARCH

China: Principal David Wilder Head of Network Research Sun Yu Chief Economist Xiao Qi Director of Consumer Research Duan Yan Senior Researchers and Researchers Wang Zelei, Wu Minjie, Zhang Juanyi, Cao Xiujuan, Tan Guli, Gan Wenzhu, Wang Xinyuan, Yin Yuzhi, Tao Weibin, Wang Kunzuo, Li Huizi, Frank Zhang Research Manager Wang Suya Data Manager Bi Kexin

FT Confidential Research: Chairman James Kynge Managing Editor Jeremy Grant Head of Production Heidi Wilson Sub Editor Richard Wells Senior Designer Paramjit Virdee Commercial Director James Mann Account Manager James Troy Product Managers David Griffith, Jenny Andrews Email: research.ftconfidentialresearch@ft.com Web: www.ftconfidentialresearch.com FT Confidential Research is published by The Financial Times Limited, Number One Southwark Bridge, London SE1 9HL © The Financial Times Limited 2016 The Client acknowledges that FT cannot provide the Client with any advice on dealing in specific investments and accordingly FT is not providing any such advice or making any recommendation to the Client on the merits of buying or selling or otherwise dealing in particular investments.


5 SMART APPLIANCE MANUFACTURERS FEATURED: 8 Hisense 9 Midea 9 Haier

JUL 14 2016

Consumer | CHINA

Smart home offers hope in saturated appliance market •

The smart home will be an important source of growth for the appliance market. FT Confidential Research estimates this market segment could be worth Rmb760bn by the end of the decade, up from Rmb143.8bn last year.

There is strong upgrade demand for internet-ready TVs, but an FT Confidential Research survey found that consumers are generally lukewarm on the unproven benefits of internet-enabled washing machines, refrigerators and air conditioners.

China’s big white-goods makers will continue building market share as the industry consolidates, driven by the connected home and overseas expansion.

D

oes the average Chinese consumer want to use their smartphone to find out what is in their refrigerator? The country’s leading home appliance manufacturers are hoping they do. They see the smart home as a solution to the industry’s excess capacity and declining margins, particularly now the government has halted a subsidy programme to drive sales in rural areas.

E NC A I L PP A T AR M S SET TOP BOX

HIP S R NE W O

%o

f re

spo

nd

ent

Already own Plan to purchase

s

59.1 32.2

AIR CONDITIONER

TV LIGHTING

49.3 20.0

WASHING MACHINE

21.0

29.8 16.7

REFRIGERATOR

POWER PLUG

30.1 15.1

FIRST PUBLISHED ON JUL 12

13.2

31.3

27.2

12.2

20.2

Q: Do you currently have any smart home appliances at home? Q: In the next six months, what smart home appliance are you most inclined to purchase? Multiple-choice question with no limit on possible responses Source: FT Confidential Research


JUL 14 2016

1. Durable consumergoods goodsownership ownershiprates rates Durable consumer Washing machine 120

120 90 60 30 0

Refrigerator TV Rural households

100 80 60 40 20 0

19 93 19 95 19 97 19 99 20 0 20 1 03 20 0 20 5 0 20 7 09 20 1 20 1 13 20 15

150

Air conditioner Urban households

No. of units/100 people

(Rmb) Estimated annual smart appliance sales by the end of the decade

Chinese consumers spent a record Rmb625.3bn ($93.4bn) on home appliances in 2015, cementing the country’s position as easily the world’s largest appliance market. But appliance sales growth has been slowing as the urban market reaches saturation point and the broader economy slows. Official data shows ownership levels of TVs in rural areas catching up with urban areas, but large gaps in terms of other major home appliances (see chart 1). Unit sales of air conditioners fell more than 10 per cent last year, while refrigerator sales dropped 7 per cent, according to ChinaIOL, an industry consultancy. Washing machines were the only white good for which sales increased, rising 3.8 per cent. Given the pick-up in the property market since the first quarter, we would expect some improvement in home appliance sales, though the housing rebound may not be sustained enough to drive a significant uptick (see Real estate). Instead, the emergence of high-margin, internet-connected appliances will be critical in driving sales growth as consumers look to upgrade, with many of our survey respondents planning to purchase such appliances. FT Confidential Research estimates that Rmb143.8bn of smart appliances were sold last year in China, accounting for 81.2 per cent of TVs, 7.8 per cent of air conditioners, 4.1 per cent of washing machines and 1.2 per cent of refrigerators (see chart 2). We estimate sales of these products could hit Rmb760bn by the end of the decade.

19 93 19 95 19 97 19 99 20 0 20 1 03 20 0 20 5 0 20 7 09 20 1 20 1 13 20 15

760bn

Smart home offers hope in saturated appliance market

No. of units/100 people

6

Consumer | CHINA

Source: National Bureau of Statistics

Estimated market 2. Estimated marketsize sizeofofsmart smartappliances appliances Smart appliances’ share of total sales TVs Air conditioners Refrigerators Washing machines 0

50

Note: Calculations based on 2015 annual retail value data from AVC Sources: AVC, FT Confidential Research

100 Rmb bn

150

200


JUL 14 2016

7

Consumer | CHINA

Smart home offers hope in saturated appliance market Consumers keen to get smart

TVs: a gateway smart appliance

The Chinese smart home begins in the living room, with 59.1 per cent of survey respondents saying they own a smart TV. Upgrading has been a key driver of smart TV adoption in China. There are currently 122 TVs per 100 people, down from 136 in 2012. China Market Monitor (CMM), a Beijing-based consumer appliance consultancy, estimates that 81.6 per cent of the 48.25m TVs sold in 2015 were upgrades.

Internet upstarts shake up the industry

Internet company Leshi and smartphone-maker Xiaomi have moved into the TV market to offer internet-enabled TVs that come packaged with access to online video content (China May 25, Consumer). An FTCR survey last month found that, among consumers looking to buy a new TV in the next six months, 13.4 per cent want one of Leshi’s LeTV units, more than wanted a Samsung (10.8 per cent) or Sony (9.5 per cent) model. Competition has grown as internet companies begin competing directly with existing TV manufacturers. TV brands introduced by internet companies accounted for around 10.3 per cent of total sales in the first quarter of 2016, up 3.3 percentage points from the previous year, while the market share of traditional domestic brands fell 0.9 percentage points to 79.8 per cent of sales, according to CMM. Some traditional manufacturers have opted to work with the enemy. In September last year, Konka announced a strategic pact with Alibaba’s Tmall platform to produce smart TVs,

3. Consumer awarenessofofsmart smartphone technology Consumer awareness home technology I understand

I am not sure

By city tier

100

By annual household income

80

80 60 40

60 40 20

20 0

Never heard of

100

% of respondents

Of respondents said they were inclined to buy smart home appliances in the next six months

% of respondents

81%

In an FT Confidential Research survey of 2,000 urban consumers, 53 per cent of respondents had a “clear understanding” of the concept behind smart-home technology and smart home appliances (see chart 3). This percentage rose to 70.3 per cent among residents of first-tier cities and 82.8 per cent among higher-income respondents (those with annual household incomes above Rmb300,000). More importantly, there was a strong willingness to buy them. 81 per cent of respondents said they were inclined to buy smart home appliances in the next six months, climbing to 88.8 per cent among residents of first tier cities and 94.6 per cent among the most affluent cohort. 31.3 per cent of survey respondents said they intended to buy a smart refrigerator in the next six months, 30.1 per cent a smart washing machine and 29.8 per cent a smart air conditioner. Lower penetration rates for home appliances in rural areas, however, coupled with lower incomes, mean these regions do not offer the same upgrade potential as urban areas.

First-tier cities

Second-tier cities

Third-tier cities

0

Under Rmb99k

Q: Do you understand the concept of smart-home technologies and appliances? Source: FT Confidential Research

Rmb100k299k

Rmb300k and above


JUL 14 2016

8

Consumer | CHINA

Most popular home appliance brands % of respondents

Refrigerators Haier Siemens Midea Samsung Panasonic Bosch Rongsheng Philips Meiling LG 0

with the manufacturer producing the goods and the online marketplace offering software support and managing after-sales services. Major TV manufacturers have also begun to introduce smart TVs and launch sub-brands for their online channels. Some major traditional manufacturers, such as Hisense Electronics, are producing content in cooperation with online providers such as iQiyi and Tencent.

White goods’ smarts unproven

5 10 15 20 25

Washing machines Haier Siemens Little Swan Midea Panasonic Samsung Bosch Whirlpool LG Hisense 0 5 10 15 20 25 30 Air conditioners Gree Midea Haier Daikin Siemens Mitsubishi Galanz Aux Panasonic Samsung 0 10 20 30 40 50 TVs LeTV Samsung Sony Skyworth TCL Hisense Sharp Xiaomi TV Changhong Philips 0

Smart home offers hope in saturated appliance market

3

6

9 12 15

Q: Which brand of refrigerator/ washing machine/air conditioner/TV do you plan on buying in the next six months? Source: FT Confidential Research

The adoption rate for smart white goods is much lower than for TVs. Only 13 per cent of respondents said they were currently using smart refrigerators, while 15 per cent had smart washing machines and 21 per cent used smart air conditioners. Nationwide, we estimate smart refrigerators and washing machines will account for 1.2 per cent and 4.1 per cent of total sales value in 2016. Smart air conditioners are likely to account for 7.8 per cent. The relatively low popularity of smart white goods reflects more limited user potential. An internet-connected TV is a much easier sell than a WiFi-enabled washing machine. The slow take-up of smart refrigerators most likely reflects the fact that potential applications, such as allowing the machine to scan and sense its contents, have not been developed sufficiently to appeal to consumers. There is also no unified industry platform or common standard for connecting different products, which is essential for inter-connectivity between appliances. n

Appliance-makers getting smart Hisense – TV survivor

As a survivor of China’s brutal TV price wars, Hisense Electronics does not appear fazed by internet upstarts such as LeTV and Xiaomi. The Qingdao-based manufacturer continued to lead the market for smart TVs last year, with 15.8m smart TV users, compared with 11.9m and 10.8m, respectively, for chief rivals TCL and Skyworth. LeTV’s user base was relatively small at roughly 4.5m, while Xiaomi’s rose to about 1.3m. The growth in the TV market in 2015 was mainly the result of deep discounting via online promotions on platforms such as Tmall. Online sales of TVs increased 65 per cent last year, while offline sales shrank 8 per cent. This is not Hisense’s first price war, and the company has the advantage of scale by which to compete. The gross profit margin of its TV business actually increased 0.34 percentage points last year to 23.73 per cent. The growing popularity of smart TVs offers new potential revenue streams for Hisense. With 18m smart TV users and 8.4m active monthly users, Hisense has become China’s biggest TV content distributor, giving it tremendous heft in negotiating its share of revenue from advertising, subscriptions and apps. We believe these new income streams will grow rapidly. Manufacturers’ collective income from advertising and from commission for paid video will grow to Rmb11.1bn by 2020 from almost nothing now, according to Ping An Securities. Even assuming a three percentage-point drop in Hisense’s share of smart TV users by 2020, we estimate its income from these two streams at roughly Rmb1.3bn, equivalent to 90 per cent of Hisense’s 2015 net profit. Hisense is also working on its own content base. It has cooperated with iQiyi, Wasu Media, iCNTV and Tencent to enrich the video content offerings on its smart TV platform. It has also expanded its content to online education and online games via deals with market leaders like TAL Education and Tencent. But Hisense may have a brand identity problem. Only 6.9 per cent of respondents to FT Confidential Research’s consumer brands survey said they planned to buy a Hisense TV. LeTV, in contrast, was selected by 13.4 per cent of respondents, with chief rival Skyworth chosen by 8.8 per cent. More worryingly still, just 4.6 per cent of 18-29-year-olds said they planned to buy a Hisense TV. The company cannot afford to lose the younger demographic. It is attempting to bolster its popularity among this cohort, introducing Vidaa, a new sub-brand aimed at


JUL 14 2016

9

Consumer | CHINA

Smart home offers hope in saturated appliance market younger consumers, and sponsoring football’s European Championship, but will likely face an uphill battle given such fierce competition.

Midea – Size matters

Midea intends to ship more than 30m smart appliances this year, up from 5m in 2015

Midea is China’s largest white-goods maker by revenue, accounting for a quarter of the air conditioner market by sales and just over a fifth of the market for washing machines. It has quickly established a foothold in the market for smart appliances, introducing over 100 internet-enabled products since announcing its smart home strategy in 2014. The company intends to ship more than 30m smart appliances this year, roughly 15% of its total shipments, up from 5m in 2015. In FT Confidential Research’s consumer brands survey, Midea came second for air conditioners and, along with its Little Swan brand, also for washing machines. It was the third-most-popular refrigerator brand. Midea also enjoyed strong brand loyalty in secondand third-tier cities, where it has more than 95% geographical coverage, thanks to its 70,000 distributors, 15,000 specialty stores and 45,000 points of sale at county and township level. The growth of the market for white goods may be slowing, but China’s biggest whitegoods maker continues to gain market share. The company this year launched a full suite of smart products. For Rmb25,000 ($3,735), consumers can have a home filled with internet-enabled devices, including three air conditioners, a front-loading washing machine, a refrigerator, a water heater, a microwave, a rice cooker and an electric kettle. The price is relatively affordable, but the commercial case for an internet-enabled electric kettle is unproven and we remain sceptical that some of Midea’s vast array of smart products will generate significant demand. Midea risks being smart for the sake of being smart, but consumers tend to be smarter. These are early days, however. Midea has open-sourced its smart home platform, inviting participation from other manufacturers to introduce products capable of talking to Midea’s range of smart appliances. This is not new: other big manufacturers have adopted a similar strategy but Midea’s market position means it is best-positioned to establish an industry standard.

Haier – Looking global on struggles at home

Haier has struggled at home and abroad as China’s economy has slowed and its attempts to expand overseas have proved challenging. The company is looking to address both problems via its purchase of General Electric’s (GE) home appliance division in January. That purchase has not distracted Haier from hopping on the smart appliance bandwagon, with its sales of these goods rising 169 per cent last year to 2.1m units. The company has open-sourced U+ Smart Life Platform, its smart appliance protocol, in the hope of setting an industry standard and is cooperating with Apple, Huawei, Alibaba and JD.com in developing smart appliances. However, we believe Haier is not that well positioned to become a rule maker in the market for smart appliances. Revenue fell 7.4 per cent last year, losing ground to younger upstarts. Haier management has largely failed to adapt to a changing market at home, leaving it burdened with 8,000 own-brand stores. Inventory management is another problem: almost all home appliance companies have been destocking, but Haier’s inventory rose 3.8 per cent last year. Haier nevertheless still has a brand advantage in lower-tier cities, where the penetration of smart appliances is low, according to FTCR’s consumer brands survey. With sales growth falling at home and overseas, it is not clear that smart appliances will be a panacea for Haier’s woes. On the other hand, the company’s $5.6bn acquisition of GE’s appliance division will serve its longstanding goal of building global market share. Moreover, Haier can leverage GE’s smart home technology – including “If This Then That” (shortened to IFTTT), a service that allows users to give their network-enabled home appliances commands to follow – to strengthen its own smart home division. However, digesting this acquisition will be challenging and time consuming. n


JUL 14 2016

Macro | CHINA

10 FOLLOW US ON TWITTER: @FTCR_CHINA

Chengdu’s low wages a double-edged sword •

Chengdu continues to benefit from a sizeable wage advantage over more affluent east coast rivals, according to an FT Confidential Research survey of employers, though that gap is narrowing.

While the gap is shrinking, there is little sign of Chengdu wages overtaking those in any of the eastern powerhouses, as a slowdown in economic growth and the manufacturing sector will cap pay.

Growth in low-skilled service jobs helps absorb lost manufacturing and construction jobs, but it does not help hiring managers trying to convince talent to migrate away from more developed cities.

C

hengdu, the capital of Sichuan province in China’s south-west, has built a reputation as an upwardly mobile low-wage manufacturing hub. The city of 14m is often described as the economic centre of western China and is widely perceived as a future challenger to more established coastal urban metropolises. The local government never wastes an opportunity to mention that over 200 of the Fortune 500 have invested in the city.

CHENGDU: WESTERN CHINA’S ECONOMIC HUB

271

SICHUAN

No. of Fortune 500 companies that had invested in Chengdu by July 2016

Chengdu

GDP growth in 2015

CHENGDU: 7.9%

CHINA: 6.9%

University students per 1,000 residents

CHENGDU: 52

NATIONWIDE: 34 FDI growth in 2015

CHENGDU: 5.8% FIRST PUBLISHED ON JUL 6

Sources: National Bureau of Statistics, Chengdu Statistical Bureau, Chengdu Daily

CHINA: 5.6%


JUL 14 2016

Offering the big bucks to attract talent

The wage gap between inland provinces and the more affluent coast has, nevertheless, narrowed. Private sector wages in western China, including Chengdu, grew an average of 13.9 per cent a year between 2009 and 2015, compared with 12.6 per cent in eastern regions (see chart 3).

2. FTCR China LabourCost CostMoM MoMIndex Index FTCR China Labour

How How did did your your company’s company’slabour labourcosts costscompare comparewith withlast lastmonth? month? Nationwide

Western region

90 80 50=no change

Of respondents said their average wages were lower than those paid by coastal counterparts

Wages in Chengdu are indeed growing faster than in major east coast centres, but our research suggests its wage advantage is likely to continue, as slowing investment drags on local and national economies and manufacturing steadily declines. As China’s long rebalancing process towards a consumption-led economy inches forward, Chengdu’s problem is that it has a surplus of the wrong kind of worker, with its employers struggling to convince higher-skilled labour to move out west. In an FTCR survey of 69 employers in the city, 92.2 per cent of respondents said their average wages were lower than those paid by coastal counterparts. The gap was especially large for skilled workers, with 31.3 per cent of respondents saying they pay over 30 per cent less than firms in similar industries in eastern China. And the FTCR China Labour Cost MoM Index found little sign that this gap will be bridged imminently, with the sub-index for western China, which includes Chengdu, falling to 53.1 in June, an historical low (see chart 2).

70 60 50

Ju n Au -12 gO c 12 tDe 12 cFe 12 bAp 13 rJu 13 nAu 13 gO c 13 tDe 13 cFe 13 bAp 14 rJu 14 nAu 14 gO c 14 tDe 14 cFe 14 bAp 15 rJu 15 nAu 15 gO c 15 tDe 15 cFe 15 bAp 16 rJu 16 n16

92.2%

Chengdu’s low wages a double-edged sword

Source: FT Confidential Research

3. Average privatesector sectorannual annualwage wageby byregion region Average private Western China

Eastern China

50 40 Rmb (000s)

11

Macro | CHINA

30 20 10 0

2008

2009

Source: National Bureau of Statistics

2010

2011

2012

2013

2014

2015


JUL 14 2016

Many local firms are already paying Shanghai-level wages in an attempt to retain talent. At Envee In-Flight Entertainment, an in-flight WiFi service provider, programmers make on average more than Rmb10,000 ($1,500) a month, roughly the same as those in Shanghai. The firm recently offered a researcher with General Electric in Shanghai Rmb360,000 a year plus stock options to convince the candidate to make the move west. Chengdu wages are also being forced up by stricter enforcement of social security payments: 71.9 per cent of surveyed employers said they are paying full social security benefits to their workers, while 25 per cent make partial payments.

Wages hit by slowdown

However, Chengdu’s wage gap is more likely to remain – if not widen – than to narrow as a slowing economy caps income growth. FTCR’s monthly nationwide survey of hiring managers found average wages in western China, where Chengdu is located, had risen an average 3.5 per cent in the year through June. Wages were up 2.2 per cent over the same period in the more-developed eastern region (see chart 4). For all of Chengdu’s apparent dynamism, fixed-asset investment is still the main driver of its local economy and slowing activity is dragging on overall growth. For China’s hinterlands, this is a particular problem given the state of local public finances after years of runaway spending and falling revenue growth. Investment in fixed assets in Chengdu rose just 5.8 per cent last year against 10 per cent nationally. An FTCR survey of labour exchanges in Chengdu provides clear evidence of the investment fatigue that is plaguing the construction industry. A third of labour exchanges surveyed by FTCR said the sectors with the slowest increase in wages since the beginning of this year were construction, manufacturing and real estate.

Manufacturing jobs disappearing

There is still opportunity in Chengdu. 12 of the 15 labour exchanges FTCR surveyed said they posted more jobs in the first half of this year than in the same period in 2015. Zhaopin, one of China’s largest jobs sites, reported a 30 per cent jump in openings in Chengdu during the first half of this year despite a 5 per cent decline across western China. Furthermore, 58.1 per cent of employers reported an increase in payrolls during that time, while 71 per cent of employers said they intend to increase their workforce in the coming 12 months (see chart 5). But these opportunities are not in manufacturing. As the local economy reflects national trends, and rebalances towards services, the number of manufacturing workers in Chengdu fell 7.7 per cent year-on-year to 2.9m in 2014, the first drop in 12 years,

What is is the average companythis 4. What the averagewage wagefor foraaregular regularemployee employee at at your your company this month? month? Nationwide

Eastern region

Western region

5

Rmb (000s)

4

3

2

n1 Ju 4 l-1 Au 4 g Se -14 pOc 14 t No -14 vDe 14 cJa 14 n Fe -15 bM 15 ar Ap 15 r-1 M 5 ay Ju 15 n1 Ju 5 l-1 Au 5 g Se -15 pO c 15 t No -15 v De -15 cJa 15 nFe 16 b M -16 ar Ap 16 r-1 M 6 ay Ju 16 n16

12 of 15 surveyed labour exchanges said they posted more jobs in H116 than in H115

Chengdu’s low wages a double-edged sword

Ju

12

Macro | CHINA

Source: FT Confidential Research


JUL 14 2016

13

Macro | CHINA

Chengdu’s low wages a double-edged sword How dodo you expect coming12 5. How you expectyour yourfirm’s firm’sworkforce workforceto to change change in the coming 12 months? months? 50

% of respondents

40 30 48.4

20

22.6

10 0

9.7

12.9

Increase over 30%

Increase 10-30%

6.5 Increase less than 10%

Stay the same

Decrease less than 10%

Source: FT Confidential Research

Rise in new openings in manufacturing in H116

• • •

Rmb4,183 in construction; Rmb3,807 in manufacturing; and Rmb3,728 in services.

Skills shortage bites

Services may be helping absorb lost manufacturing and construction jobs, but that does not help the city’s skills shortage. 73 per cent of employers said it is hard to recruit while 6.4 per cent said they cannot find the staff at all. Skilled workers are harder to find, with

Number ofof workers 6. Number workersininChengdu Chengduby byindustry industry Manufacturing

Services

5

No. of people (m)

1%

according to the local statistics bureau. Services employment rose 8.8 per cent in the same period (see chart 6). Labour exchanges surveyed said openings in “home services” rose 12.8 per cent over the first half of the year, while openings in transport and warehousing increased 12.2 per cent. In contrast, new openings in manufacturing rose just 1 per cent, while those in construction fell 1 per cent. The changing job landscape may put downward pressure on wages, as manufacturing and construction employers tend to pay better than low-skilled services, such as cleaning apartments or delivering goods as part of China’s army of couriers. In FTCR’s latest monthly survey, average monthly wages were:

4 3 2 1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Sichuan Provincial Bureau of Statistics

2012 2013 2014


JUL 14 2016

13.9%

Chengdu’s population growth between 2009 and 2015

Chengdu’s low wages a double-edged sword experienced manufacturing workers, cited by all survey respondents, the most difficult to recruit of all. Wu Jin, a 32-year old furniture maker in Guangdong province in China’s south-east is weighing up the benefits of returning home to Chengdu. On the one hand, Mr Wu’s son will get a better education – his Chengdu hukou limits his choices in Guangdong to only lowquality schools – and his parents will be nearby. But the return home comes with a 20 per cent pay cut. “I am young, energetic and experienced but Chengdu furniture firms won’t offer me a higher salary,” he said. An official surnamed Hou at the Chengdu branch of Changchun Tower Golden Ring Automotive Products, an auto-parts maker, acknowledged that few engineers based on the east coast are willing to move to Chengdu, where positions offer roughly 30 per cent less money. “We’re constantly struggling to find the right people,” the official said. Chengdu-based programmers were paid an average of Rmb76,876 last year, about half that paid to those in Beijing, according to local government data. Yan Jun, a software engineer, took a 20 per cent pay cut when he moved from Shenzhen to manage a team of programmers at a Chengdu mobile gaming firm. Mr Yan said his firm pays developers Rmb6,000 on average each month, compared with roughly Rmb9,000 in Shenzhen. “Salaries here aren’t competitive at all,” said Mr Yan. Instead of trying to poach from his former company, he is recruiting from local vocational schools, hiring computer science graduates eager to get a foot on the job ladder.

Losing out to peers

Despite being one of China’s largest inland centres, Chengdu appears to be losing out in the race for talent. The city’s population, a barometer of its popularity, rose 13.9 per cent between 2009 and 2015. That is not only slower than the first-tier city giants like Beijing and Shenzhen, but also lags comparable inland centres such as Zhengzhou and Wuhan (see chart 7). “People move here for the laid-back lifestyle, not the opportunities,’ said the official with Changchun Tower Golden Ring. Chengdu has not been immune to the national economic slowdown, and as growth continues to weaken, wage inflation may cool. Respondents to our employer survey said they expect wages to increase by an average of 6.3 per cent in the coming 12 months, down from 7.4 per cent over the past year. Labour exchanges are even more pessimistic, forecasting only a 4 per cent increase in the 12 months ahead. Unsurprisingly, employers intend to raise pay for skilled worker by an average of 8.1 per cent, against just 4.5 per cent for unskilled labour. n

7. Average annualpopulation populationgrowth, growth,2009-2015 2009-2015 Average annual Selected cities 30 25 20 % YoY

14

Macro | CHINA

15 23.7

10 5 0

13.9

14.4

Chengdu

Shenzhen

Source: National Bureau of Statistics

27.2

16.6

Wuhan

Beijing

Zhengzhou


Finance | CHINA

15 READ MORE ON SHADOW FINANCE ON OUR WEBSITE: FTCONFIDENTIALRESEARCH.COM

JUL 14 2016

Preparing for the storm amid shadow finance calm •

Shadow finance assets have not been caught up in the defaults gripping the bond market or banking system. Regardless, bank behaviour suggests growing concern among big lenders about credit risk.

Although core shadow finance segments are shrinking, non-core segments – including directional asset management plans (DAMPs) – are expanding rapidly, helping drive the extraordinary growth of investment receivables on bank balance sheets.

While the surge in the issuance of wealth management products (WMPs) is causing concern, headline growth rates mask the fact that the structure of these products is far more conservative than in recent history.

M

ay credit data from the People’s Bank of China (PBoC) showed further shrinkage in core shadow finance segments, but it is developments not captured in the monthly total social financing (TSF) data release that is prompting a newfound conservatism among the big banks. Irrespective of the game of cat-and-mouse between regulators and agents in China’s shadow finance industry, we believe shifts in how WMPs are being structured indicate that the country’s big banks are preparing for more financial system volatility. The net increase in entrusted loans in May fell 7.56 per cent year-on-year to Rmb156.6bn ($23.8bn), while trust loan growth was just Rmb12.1bn, down from Rmb26.9bn in April. The standout was bankers’ acceptance bills (BAs), one of the primary means by which banks transfer liquidity between formal and shadow finance assets, issuance of which fell a record Rmb506.6bn in May, likely the result of an ongoing crackdown following a series of fraud cases.

TSF: not the whole shadow finance story

FIRST PUBLISHED ON JUN 17

Even as these core shadow finance segments have slowed, holdings of investment receivables have increased, particularly among non-Big Four banks. Investment receivables are a line item on the asset side of bank balance sheets, containing corporate debt and government bonds, but mostly trust beneficiary rights (TBRs) and DAMPs. These complex structures also enable banks to skirt regulatory curbs and get loans to companies using trusts or asset management companies as middlemen. We believe the rapid growth of these assets reflects an understanding among regulators, and the banks themselves, of the dangers of holding illiquid shadow finance assets as part of their interbank business – illustrated starkly by the 2013 liquidity crunch. This trend therefore reduces interconnectivity between banks via shadow finance. But investment receivables are nevertheless masking lending activity: they are not treated as loans and so enjoy a lower risk weighting. Investment receivables are quickly becoming the fastest growing assets on the balance sheets of most listed banks, excluding the Big Four, both in percentage terms and by absolute value. Their outstanding value soared to Rmb8.96tn at the end of last year, from just Rmb2.32tn at the end of 2012. In the first quarter of 2016, the value of investment receivables surpassed those of


JUL 14 2016

127% YoY increase in Industrial Bank’s investment receivables

Preparing for the storm amid shadow finance calm interbank assets for the first time, accounting for 7.89 per cent of assets of 16 A-share listed banks (see chart 1), which together account for around 60 per cent of system assets. Industrial Bank reported the highest level of investment receivables, at Rmb1.98tn, 127 per cent higher year-on-year.

Crackdown coming, but likely to be moderate

The China Banking Regulatory Commission is now moving to further clamp down on activity related to TBRs and DAMPs, in part to encourage a more transparent process for the disposal of non-performing loans. However, given the liquidity crunch that rocked the financial system in mid-2013 when the PBoC last tried to force deleveraging, we do not expect a major crackdown (China May 5, Finance). DAMPs have been growing much faster than TBRs as a proportion of investment receivables since 2014 as a result of previous regulatory measures. China Merchants Bank, for example, recorded a sharp rise in DAMP holdings last year, their value jumping 140% year-on-year to Rmb606.7bn (see chart 2), while its holdings of TBRs fell 30.3 per cent to Rmb78.1bn (see chart 3).

1. Investment receivablesvsvsinterbank interbankassets assets Investment receivables % % of of total totallisted listedbank bankassets assets

Investment receivables

Interbank assets

13 11 9 % 7 5 3

Q113

Q213

Q313

Q413

Q114

Q214

Q314 Q414

Q115

Q215

Q315

Q415

Q116

Source: Wind

2. Holdings DAMPsunder underinvestment investmentreceivables receivables Holdings ofof DAMPs Holdings of five five listed listedbanks banksthat thathave havereleased releaseddata data CITIC Ping An Bank

China Merchants Bank Bank of Beijing

China Minsheng Bank

2,500 2,000 Rmb bn

16

Finance | CHINA

1,500 1,000 500 0

H113

H213

Sources: Wind, FT Confidential Research

H114

H214

H115

H215


JUL 14 2016

17

Finance | CHINA

Preparing for the storm amid shadow finance calm 3. Holdings TBRsunder underinvestment investmentreceivables receivables Holdings ofof TBRs CITIC Ping An Bank

China Merchants Bank Bank of Beijing

China Minsheng Bank

500

Rmb bn

400 300 200 100 0

H113

H213

H114

H214

H115

H215

Sources: Wind, FT Confidential Research

We think it is likely that the growth of DAMPs on bank balance sheets has helped keep some key shadow finance segments alive, with the funds channelled through them being used to buy shadow finance assets. Trust assets under management (AUM), for example, grew 15.1 per cent in the first quarter over the same period last year, low by historical standards but striking in a climate of cooling core shadow finance activity.

Surging WMPs

Fresh concerns about risks associated with China’s shadow finance sector tend to focus on the extraordinary growth of WMPs since the collapse of the stock market bubble in the second quarter of 2015. Growth rates had previously slowed following a government crackdown on shadow finance that sought to close off this channel between the formal and informal funding sectors (China Oct 8 2014, Finance) (see chart 4). The outstanding stock of WMPs hit a record high of Rmb23.5tn at the end of last year, up from Rmb15.02tn a year earlier, according to China Central Depository & Clearing Company. Growth continued into the first quarter of 2016 and we estimate it may have reached Rmb26tn by the end of that quarter, 62.5 per cent higher year-on-year. China Merchants Bank had Rmb1.8tn of outstanding WMPs at the end of last year, while Shanghai Pudong Development Bank, Industrial Bank, China Everbright Bank and China Minsheng Banking each had comfortably more than Rmb1tn.

4. WMPs: outstandingstock stockand andgrowth growthrate rate WMPs: outstanding Outstanding WMPs

YoY growth

QoQ growth

35

70

30

60

25

50

20

40

15

30

10

20

5

10

0

Q213

Q313

Q413

Q114

Q214

Source: China Central Depository & Clearing Company

Q314 Q414

Q115

Q215

Q315

Q415 Q116E

0

%

Rmb tn

The outstanding stock of WMPs hit a record high of Rmb23.5tn at the end of last year


JUL 14 2016

18

Finance | CHINA

Preparing for the storm amid shadow finance calm

WMP bond investments A more conservative bent FT Confidential Research has noted the calm in shadow finance, even as the bond market by credit rating % of total AAA AA100

AA+ AA below AA-

80 %

60 40 20 0

2014

2015

Source: Chinawealth.com.cn

has been roiled by a series of defaults (China May 17, Finance). However, our analysis of the structure of WMPs indicates that bigger banks are taking steps to mitigate risk, particularly in the wake of the stock market crash. The reallocation of assets within WMP investment portfolios could help shield banks should shadow finance asset defaults start rising. That said, banks cannot shield themselves entirely if or when the storm comes because of the increase in the size of non-standard assets in recent years. Even if they account for a much smaller proportion of overall portfolios, the absolute value of non-standard assets has still risen along with the expansion of WMPs, with Rmb3.72tn of the funds held in WMPs invested in non-standard assets in 2015, up from Rmb3.14tn in 2014. The maturity mismatch which has dogged these products still exists, but WMPs are now increasingly invested in highly liquid assets, such as bonds and money market products. They accounted for 51 per cent of the total Rmb23.67bn invested in WMPs at the end of 2015, up from 43.8 per cent in 2014, according to China Central Depository & Clearing Company (see chart 5). WMPs have also invested more in higher-rated corporate paper (AAA or AA+), including corporate bonds, enterprise bonds, medium-term notes, short-term commercial paper and privately placed notes. Of the corporate paper held by WMPs in 2015, 53.5 per cent was rated AAA and 26.4 per cent was rated AA+, a combined proportion 7.2 percentage points higher than in 2014. The proportion of WMP assets accounted for by higher-risk, non-standard assets, which are those not traded in interbank markets or on the two stock exchanges, fell to 16 per cent last year from 26 per cent in 2013. This proportion could fall further in 2016 as banks continue to shift away from these assets.

Banks outsourcing WMP management

Since the stock market crash last summer, banks have increasingly outsourced management of assets from pools of WMP funds to third-party asset managers, such as mutual funds and brokers, for them to invest in equity and bond markets. The brokers either directly manage the funds or serve as professional investment advisors in what amounts to an entrusted investment scheme. In effect, banks are lending money to nonbank financial institutions for a fixed return of 4-5%. We consider this further evidence of risk aversion: banks are sacrificing higher potential interest elsewhere for a fixed return on their WMP investments, allowing other financial

5. WMP underlyingassets assets WMP underlying % % of of total total

Bond and money market Equities

Cash and bank deposits Other

Non-standard assets

100 80 60 % 40 20 0

2013

Source: China Central Depository & Clearing Company

2014

2015


JUL 14 2016

Preparing for the storm amid shadow finance calm

GETTY

19

Finance | CHINA

institutions to assume the risk. This model emerged during the final stages of the stock market bubbles last year. FTCR noted that bank WMPs contributed to the excesses of the market via an estimated Rmb1.7tn in stock-pledge financing, income rights for margin financing and securities lending, as well as through umbrella trusts (China Aug 20 2015, Finance). They took the fixed return and let others gamble. In recent months, we believe this kind of bank lending has helped fuel rallies in bond and futures markets. Regulators have taken note and are investigating. We estimate at least Rmb2tn in WMP funds was outsourced in this manner by the end of the first quarter of the year.

Interbank business contracts

Interbank business has not accelerated in lockstep with that of WMP asset growth since the second quarter of 2015. Furthermore, banks have been continuously lowering their exposure to shadow finance assets in their WMP-funded interbank business. The interbank assets of 16 A-share listed banks surged from Rmb4.58tn at the end of 2009 to Rmb11.17tn by the end of CITIC Bank reported the sharpest fall in interbank assets March 2013. However, since the June 2013 liquidity crunch, there among listed banks has been a marked reduction in interbank activity, in line with much more stringent regulations (see chart 6). The mid-2013 liquidity crunch demonstrated how illiquid the interbank market can become during times of financial system stress, convincing banks of the need to bring some of these assets onto their balance sheets. The ongoing decline in interbank assets has largely been the result of a fall in reverse repurchase agreements, including those backed by bonds and BAs, which accounted for the largest share of interbank assets through the end of 2015. In their first quarter bank results, 14 of 16 listed banks reported a fall in reverse repos since the end of last year. CITIC Bank reported the sharpest decrease among listed banks, with quarter-on-quarter growth of negative 96.3 per cent. The balance of reverse repos dropped to Rmb2.88tn at the end of the first quarter, down 36.5 per cent year-on-year, while as a proportion of interbank assets, it fell to a record low 32.6 per cent from 53.3 per cent in the second quarter of 2014. n

Interbank assets 6. Interbank assetsheld heldbybylisted listedChinese Chinesebanks banks Claims on other banks

Reverse repurchase agreements

Due from other banks

15

Rmb tn

12 9 6 3 0

Q113

Source: Wind

Q213

Q313

Q413

Q114

Q214

Q314 Q414

Q115

Q215

Q315

Q415

Q116


20 RELATED RESEARCH:

Jun 28 | FTCR Real Estate Index ticks up in June as big city sales rebound Apr 15 | Credit flood lifts 1Q16 GDP but stores up problems

JUL 14 2016

Real estate | CHINA

Real estate to remain a lifeline for growth through 2016 •

We expect real estate investment to remain relatively buoyant for the remainder of the year, continuing to cushion the slowdown evident in other areas of the economy.

Year-on-year sales growth is likely to moderate in the second half – at least partly due to base effects – but the likelihood of a sharp slowdown is low, given expected policy support. This should continue to drive construction activity across the second half.

The government has little appetite to clamp down hard on the property market. It has played a significant role in supporting economic growth, while excess inventory in lower-tier cities needs to be run down.

A

s we have repeatedly highlighted, China’s stabilisation, which started at the end of the first quarter of 2016, is fragile. It has been built largely on infrastructure investment and a rebound in real estate investment (China May 10, Macro), and driven by rapid credit expansion, particularly in mortgage lending (see chart 1). Our proprietary consumer (China Jun 23, Consumer), freight (China Jun 22, Macro) and export (China Jun 27, Trade) indices have not moved upward in any meaningful way despite the improvement in some headline economic growth numbers. As such, the trajectory of China’s property market will continue to have an outsized influence on economic performance as we move through the second half. Our analysis offers grounds for cautious optimism.

Sales growth still robust

FT Confidential Research’s monthly survey of the real estate market has tracked the rise and subsequent slowdown in sales growth (China Jun 28, Real estate). Both of our

Mediumand long-term year 1. Mediumand long-termnew newhousehold householdlending lendinghas has surged surged this year YoY growth 200

500

150

400

100

300

50

200

0

100

-50

%

Rmb bn

Medium- and long-term new household lending 600

Ju

n1 Au 3 g13 Oc t-1 De 3 c1 Fe 3 b14 Ap r-1 4 Ju n1 Au 4 g14 Oc t-1 De 4 c14 Fe b15 Ap r-1 5 Ju n1 Au 5 g15 Oc t-1 De 5 c1 Fe 5 b16 Ap r-1 6

0

FIRST PUBLISHED ON JUL 8

Sources: Wind, People’s Bank of China

-100


JUL 14 2016

Real estate to remain a lifeline for growth through 2016

BLOOMBERG

21

Real estate | CHINA

forward-looking indices – our Home Sales Outlook Index that measures expectations for the following month and our Inquiry Volume Index – have gradually declined since March, yet both also remained above 50 in June, the level separating decline from growth (see chart 2). Developers’ positive outlook seems to have been reflected in robust sales data entering July. Though sales slipped slightly earlier in June, there was a sharp rebound in weekly sales in 30 major cities in the week to July 3.

No appetite for a severe clampdown

As ever, what happens next will depend largely on the availability of credit. While the government will continue trying to clamp down in those cities with the most rapid price growth, and the unprecedented expansion in mortgage lending recorded in the first five months of the year is unlikely to be sustained, there would be little to be gained from a wider tightening of mortgage access. First, the government has little appetite to halt the economic momentum that property has played a significant role in creating. Given global market instability following the UK’s vote to leave the EU, the limits of China’s economic stabilisation and uncertainty related to the US Federal Reserve’s plans to raise rates again, a significant tightening of housing policy is unlikely. Our Home Sales Outlook Index and our Inquiry Volume Index have Second, there is much to gain from sustained sales gradually declined since March growth, particularly in lower-tier cities, where inventory overhang is most severe. Authorities are acutely aware of the need to run this down. Our June real estate survey found that, while the steepest discounts to the benchmark lending rate have gradually disappeared, lenders reported that less dramatic discounts were still widely available (see chart 3). There has been no significant tightening of the sort that drove down sales in 2014.

Economic uplift to be sustained

Though there is currently little sign of a significant cooling in sales, year-on-year growth, buffed in the first half of the year by weak sales in early 2015, is likely to

Developers’ outlooks 2. Developers’ outlooksremain remainpositive positive FTCR China Home Sales Outlook Index

FTCR China Inquiry Volume Index

80

50=no change

70 60 50 40 30

De

c1 Fe 2 b1 Ap 3 r-1 Ju 3 nAu 1 3 g1 Oc 3 t-1 De 3 cFe 13 b1 Ap 4 r-1 Ju 4 nAu 14 g1 Oc 4 t-1 De 4 c1 Fe 4 b1 Ap 5 r-1 Ju 5 nAu 15 g1 Oc 5 t-1 De 5 cFe 15 b1 Ap 6 r-1 Ju 6 n16

20

Note: Any index reading above 50 indicates positive sentiment/improvement, any reading below 50 indicates negative sentiment/deterioration Source: FT Confidential Research


JUL 14 2016

22

Real estate | CHINA

Real estate to remain a lifeline for growth through 2016 Mortgage discounts 3. Mortgage discountsremain remainwidely widelyavailable available

What was the average averagemortgage mortgagerate ratefor forpeople peoplelooking lookingtotobuy buya afirst firsthome homeororupgrade upgrade this this month? 85-90% of benchmark Above benchmark interest rate

90-100% of benchmark

100 80 60 % 40 20

De

c1 Fe 2 b1 Ap 3 r-1 Ju 3 nAu 13 g1 Oc 3 t-1 De 3 cFe 13 b1 Ap 4 r-1 Ju 4 nAu 14 g1 Oc 4 t-1 De 4 c1 Fe 4 b1 Ap 5 r-1 Ju 5 nAu 15 g1 Oc 5 t-1 De 5 cFe 15 b1 Ap 6 r-1 Ju 6 n16

0

Source: FT Confidential Research

moderate in the second half as support from those base effects dissipates. Furthermore, price data suggests that a little fizz has gone out of the market, perhaps reflecting government measures to cool price growth in larger cities. Month-on-month average price growth across 100 cities fell to 1.32 per cent in June, from a peak of 1.9 per cent in March. Even if sales were to fall off, from a broader economic perspective the impact would not be felt immediately, as it takes about six months for home sales activity to be reflected in construction activity. Indeed, a six-month forward reading of sales suggests that real estate construction activity still has room to grow in the coming months. The recent improvement in the pace at which factories are turning out new excavators tells a similar story (see chart 4). An increase in starts should help lift real estate fixed-asset investment (FAI), though this rise is likely to be limited by excess inventory. Historically speaking, the correlation

4. Forward readingofofsales salessuggests suggestsroom room for further Forward reading furtherconstruction constructiongrowth growth Monthly residential floor space sold, six months forward Excavator output

Monthly residential floor space started

100 80 % YoY (3mma)

60 40 20 0 -20 -40

r-1 Au 0 g1 De 0 c10 Ap r-1 Au 1 g1 De 1 c1 Ap 1 r-1 Au 2 g1 De 2 c1 Ap 2 r-1 Au 3 g1 De 3 c1 Ap 3 r-1 Au 4 g1 De 4 c1 Ap 4 r-1 Au 5 g1 De 5 c1 Ap 5 r-1 Au 6 g16

-60

Ap

Price data suggests that a little fizz has gone out of the market, reflecting government measures to cool price growth in larger cities

<85% of the benchmark interest rate Benchmark interest rate

Sources: Wind, National Bureau of Statistics


JUL 14 2016

between sales (on a six-month forward basis) and real estate FAI has been fairly tight, but the sluggish rise in investment at the end of last year and into this highlights the dampening influence of inventory oversupply (see chart 5). At the same time, rapid price rises so far this year suggest that the influence of excess inventory is often overstated. Prices have exhibited the trends predicted by supply dynamics: as growth of sales has outstripped that of completes, prices have risen, and vice versa (see chart 6). Housing inventory measures tend to overestimate the level of unsold floor space, as much of the area officially listed as “started” is yet to actually be built – it has merely received the necessary planning permission. This supply does not therefore influence market dynamics, and sales of these units would furthermore spur construction activity. In addition, up to an estimated 20% of floor space included in starts figures is actually communal space or infrastructure. As such, and assuming that the government does not sharply curtail mortgage access or dramatically raise downpayment requirements, real estate investment is likely to remain relatively buoyant for the remainder of the year. This should at least help cushion the slowdown evident in other areas of the economy. n

Real estate FAI 5. Real estate FAIrebounded reboundedslowly slowlyininfirst firstquarter quarter Monthly residential floor space sold, six months forward

80

40

60

30

40

20

20

10

0

0 -10

Ap

rAu 10 g1 De 0 c1 Ap 0 rAu 11 gDe 11 cAp 11 rAu 12 gDe 12 c1 Ap 2 r-1 Au 3 g1 De 3 cAp 13 rAu 14 g1 De 4 c1 Ap 4 r-1 Au 5 g1 De 5 c1 Ap 5 r-1 Au 6 g16

-20

% YoY (3mma)

% YoY (3mma)

Monthly residential real estate FAI

Sources: Wind, National Bureau of Statistics

Prices responding 6. Prices respondingtotosupply supplysignals signals Difference between YoY growth in floor space sold and completed

Avg. house price in 100 cities 2.0

40

1.5

20

1.0

0

0.5

-20

0.0

-40

-0.5

-60

-1.0

l-1 No 0 v10 M ar -11 Ju l-1 No 1 v1 M 1 ar -12 Ju l-1 No 2 v1 M 2 ar -13 Ju l-1 No 3 v1 M 3 ar -14 Ju l-1 No 4 v1 M 4 ar -15 Ju l-1 No 5 v1 M 5 ar -16

60

Sources: Wind, CREIS, National Bureau of Statistics

% MoM growth

pp (3mma)

Real estate investment is likely to remain relatively buoyant for the remainder of the year

Real estate to remain a lifeline for growth through 2016

Ju

23

Real estate | CHINA


24 METRICS THAT MATTER MACRO

50.8

FTCR China Business Activity Index in June, up from 48.9 in May

CONSUMER

51.1

FTCR China House Buying Sentiment Index in June, up from 49.0 in May

REAL ESTATE

56.7

FTCR China MoM Home Sales Index in June up from 53.0 in May

MONEY AND BANKING

67.2

FTCR China Underground Banking MoM Lending Volume Index in June, up from 62.1 in May

TRADE

49.3

FTCR China Export Outlook Index in June, down from 49.5 in May

LABOUR

52.2

FTCR China Overtime MoM Index in June up from 49.1 in May

JUL 14 2016

Metrics | CHINA CONSUMER Official CPI YoY (%) Official CPI MoM (%) Core CPI YoY (%) Core CPI MoM (%) Food CPI YoY (%) Food CPI MoM (%) Official retail sales of consumer goods* Official retail sales of consumer goods YoY (Real) (%)* Retail sales of consumer goods: urban (%)* Retail sales of consumer goods: rural (%)* Bankcard Consumer Confidence Index Official Consumer Confidence Index FTCR China Discretionary Spending Index FTCR China Future Discretionary Spending Index FTCR China Consumer Credit Index FTCR China Average Cost of Living Change YoY (%) FTCR China Economic Sentiment Index FTCR China Household Income Index FTCR China Household Income Expectations Index FTCR China Household Financial Situation Index FTCR China A-share Buying Sentiment Index FTCR China House Buying Sentiment Index FTCR China Property Investment Sentiment Index FTCR China Jewellery Buying Sentiment Index

Mar-16 2.3 -0.4 1.5 0.0 7.6 -1.8 10.5 9.7 10.4 11.1 81.1 100.0 72.9 70.9 68.7 7.0 51.7 70.7 72.9 53.9 44.4 50.4 44.0 41.2

Apr-16 May-16 Jun-16 2.3 2.0 1.9 -0.2 -0.5 -0.1 1.5 1.6 1.6 0.2 0.1 0.1 7.4 5.9 4.6 -1.4 -2.7 -1.4 10.1 10.0 – 9.3 9.7 – 10.0 9.9 – 10.9 10.7 – 80.6 79.4 79.6 101.0 – – 75.6 74.0 73.0 74.6 71.6 71.3 70.6 68.7 69.9 7.4 6.4 6.1 56.7 54.1 53.1 72.8 69.4 68.7 72.9 70.6 69.4 56.5 55.2 54.4 44.2 40.8 42.7 48.7 49.0 51.1 43.6 42.9 44.7 42.9 41.4 40.3

INVESTMENT (YoY %, YTD) Fixed-asset investment* – State-owned and holding enterprises* – Central government projects* – Local government projects* – Domestic enterprises* – Hong Kong-, Macau- and Taiwan-invested enterprises* – Foreign-invested enterprises* – Individual businesses* – Primary industry* – Secondary industry* – Secondary industry: Mining* – Secondary industry: Manufacturing* – Secondary industry: Construction* – Tertiary industry* Foreign direct investment

Feb-16 10.2 20.2 -4.4 10.9 10.2 14.7 6.0 20.6 34.3 7.9 -29.5 7.5 6.8 11.1 0.2

Mar-16 Apr-16 May-16 10.7 10.5 9.6 23.3 23.7 23.3 2.8 10.0 10.4 11.1 10.5 9.6 10.4 10.2 9.3 24.0 22.7 21.1 11.3 12.4 12.7 3.9 -1.5 – 25.5 21.7 20.6 7.3 7.3 5.8 -18.1 -15.3 -16.4 6.4 6.0 4.6 6.0 5.0 1.2 12.6 12.4 11.9 4.5 4.8 –

*Combined data for Jan-16 and Feb-16

TRANSPORTATION (YoY %, YTD) Freight traffic – Air – Highway – Railway – Waterway Passenger traffic – Air – Highway – Railway – Waterway

Mar-16 2.2 4.0 3.1 -9.0 1.6 -1.9 10.7 -4.3 13.3 1.0

Apr-16 May-16 Jun-16 2.5 2.7 – 3.9 3.3 – 3.7 4.1 4.4 -7.9 -7.7 – 1.4 1.1 1.3 -2.0 -2.5 – 10.8 10.5 – -4.6 -5.0 -5.3 13.3 12.1 – 0.1 -0.7 -0.6


JUL 14 2016

25

Metrics | CHINA MANUFACTURING AND INDUSTRIAL OUTPUT

Mar-16 Apr-16 May-16 Jun-16

CFLP PMI

50.2 50.1 50.1 50.0

CFLP PMI Manufacturing Production

52.3

52.2

52.3

52.5

CFLP PMI Manufacturing New Order

51.4

51.0

50.7

50.5

CFLP PMI Manufacturing New Export Order

50.2

50.1

50.0

49.6

CFLP PMI Manufacturing Backlog Order

45.7

44.8

45.1

45.0

CFLP PMI Manufacturing Finished Goods Inventory

46.0

45.5

46.8

46.5

CFLP PMI Manufacturing Purchases

52.6

51.0

51.2

50.5

CFLP PMI Manufacturing Import

50.1

49.5

49.6

49.1

CFLP PMI Manufacturing Purchasing Price Index

55.3

57.6

55.3

51.3

CFLP PMI Manufacturing Raw Material Inventory

48.2

47.4

47.6

47.0

CFLP PMI Manufacturing Employment

48.1

47.8

48.2

47.9

CFLP PMI Manufacturing Suppliers’ Delivery Time

51.3

50.1

50.4

50.7

Caixin/Markit PMI

49.7

49.4

49.2

48.6

Industrial value-added output YoY (%)*

6.8

6.0

6.0

– State-owned and holding enterprises YoY (%)*

3.2

-0.1

-0.5

– –

– Collective ownership enterprises YoY (%)*

0.2

1.6

3.3

– Shareholding cooperative enterprises YoY (%)*

11.4

6.9

-0.4

– Shareholding enterprises YoY (%)*

7.6

7.1

7.2

– Foreign-invested enterprises YoY (%)*

4.8

2.6

3.1

PPI YoY (%)

-4.3

-3.4

-2.8

-2.6

PPI MoM (%)

0.5

0.7

0.5

-0.2

42.0

43.7

41.2

42.0 38.0

FTCR China MoM Freight Volume Index FTCR China YoY Freight Volume Index

37.6

41.5

40.0

FTCR China Freight Outlook Index

50.5

50.7

47.8

51.7

FTCR China MoM Freight Rate Index

41.0

48.3

45.3

49.0

FTCR China MoM Freight Cost Index

52.2

50.2

58.1

61.0

FTCR China YoY Freight Cost Index

48.8

44.4

52.9

54.6

FTCR China MoM Freight Profit Index

42.2

47.3

41.7

44.4

FTCR China YoY Freight Profit Index

42.7

44.4

40.2

43.7

TRADE Export YoY (%) Import YoY (%) Export YoY SA (%) Import YoY SA (%) Import and export YoY SA (%) Trade balance ($bn) FTCR China MoM Export Index FTCR China YoY Export Index FTCR China MoM Export Order Index FTCR China Export Outlook Index FTCR China MoM Export Profit Index FTCR China YoY Export Profit Index FTCR China MoM Export Price Index FTCR China YoY Export Price Index FTCR China MoM Export Cost Index FTCR China YoY Export Cost Index

Mar-16 Apr-16 May-16 Jun-16 11.5 -1.8 -4.1 -4.8 -7.6 -10.9 -0.4 -8.4 -6.3 0.2 -6.2 -3.1 -13.9 -7.3 -4.7 -3.1 -9.9 -3 -5.7 -5.2 29.9 45.6 50 48.1 44.2 50.2 54.7 57.1 37.1 44.8 55.8 45.8 42.4 47.6 43.9 59.1 55.2

35 46.6 56.4 42.6 38.7 42.6 42.3 57.1 56.4

29.4 41.1 49.5 43.6 39.9 45.4 40.2 54.6 51.8

28.3 43.6 49.3 47.3 39.6 47.9 47.3 55.8 54.6


JUL 14 2016

26

Metrics | CHINA MACRO Quarterly GDP YoY (%)

Q215 Q315 Q415 Q116 7.0

6.9

6.8

6.7

ELECTRICITY (YoY %, YTD)

Feb-16 Mar-16 Apr-16 May-16

Electricity consumption*

2.0

3.2

2.9

2.7

– Primary*

6.7

7.8

9.1

9.6

– Secondary*

-2.1

0.2

0.2

0.4

– Secondary: Industry*

-2.0

0.2

0.2

0.4

– Secondary: Light industry*

-0.8

4.3

3.6

3.4

– Secondary: Heavy industry*

-2.3

-0.6

-0.5

-0.2

– Tertiary*

11.9

11.0

10.0

9.6

– Residential*

11.8

10.8

9.5

8.2

*Combined data for Jan-16 and Feb-16

LABOUR

Mar-16 Apr-16 May-16 Jun-16

FTCR China Overtime MoM Index

50.9

48.3

49.1

52.2

FTCR China Construction Overtime MoM Index

54.4

52.1

53.6

51.0 53.6

FTCR China Manufacturing Overtime MoM Index

51.0

44.6

46.7

FTCR China Service Overtime MoM Index

47.4

48.4

47.1

52.1

FTCR China Labour Demand MoM Index

59.7

60.3

61.7

61.6

FTCR China Construction Labour Demand MoM Index

57.1

67.0

64.6

57.7

FTCR China Manufacturing Labour Demand MoM Index

60.4

56.4

61.5

69.6

FTCR China Service Labour Demand MoM Index

61.2

57.9

59.2

57.4

FTCR China Labour Demand YoY Index

50.7

49.7

49.0

48.3

FTCR China Construction Labour Demand YoY Index

46.7

50.0

47.9

54.6

FTCR China Manufacturing Labour Demand YoY Index

51.0

44.1

47.3

37.6

FTCR China Service Labour Demand YoY Index

54.1

55.3

51.5

52.6

MONEY AND BANKING FTCR China Underground Banking MoM Lending Volume Index FTCR China Underground Banking YoY Lending Volume Index FTCR China Underground Banking Lending Rate Index FTCR China Underground Banking Bad Debt Index Required reserve ratio (large banks) (%) Benchmark 1-year lending rate (%) Benchmark 1-year deposit rate (%) New total social financing (Rmb bn) New total social financing YoY (%) – Local currency loans – Foreign currency loans – Entrusted loans – Trust loans – Bankers’ acceptance bills – Net corporate bond financing – Non-financial enterprise equity financing

Mar-16 Apr-16 May-16 Jun-16 74.3 78.3 62.1 67.2 67.2 71.2 65.3 81.7 48.6 54.2 50.8 56.7 46.2 48.2 48.4 49.1 17.0 17.0 17.0 17.0 4.4 4.4 4.4 4.4 1.5 1.5 1.5 1.5 2,404.0 751.0 659.9 – 93.8 -28.9 -46.6 – 1,317.6 564.2 937.4 – 0.6 -70.6 -52.4 – 166.0 169.4 156.6 – 73.2 26.9 12.1 – 17.3 -277.8 -506.6 – 719.0 209.6 -39.7 – 56.2 95.1 107.3 –


JUL 14 2016

27

Metrics | CHINA MONEY AND BANKING (cont.) New bank loans (Rmb bn) New bank loans YoY (%) – Short-term and bill financing – Medium- and long-term – Household – Household short-term – Household long-term – Non-financial institution and other – Non-financial institution and other short-term – Non-financial institution and other bill financing – Non-financial institution and other medium- and long-term New bank deposits (Rmb bn) New bank deposits YoY (%) – Household savings M0 (Rmb bn) M0 YoY (%) M1 (Rmb bn) M1 YoY (%) M2 (Rmb bn) M2 YoY (%) Foreign reserves ($bn)

Mar-16 Apr-16 May-16 Jun-16 1,370.0 555.6 985.5 – 16.1 -21.5 9.4 – 346.1 139.9 192.1 – 947.5 385.0 710.6 – 639.0 421.7 575.9 – 206.3 -6.4 47.8 – 439.7 428.0 528.1 – 669.3 141.5 359.7 – 88.0 -92.5 -12.1 – 51.8 238.8 156.4 – 507.8 -43.0 182.5 – 2,520.0 832.3 1,830.0 – -1.6 -4.5 -43.3 – 580.6 -929.6 54.3 – 6,465.1 6,440.3 6,280.0 – 4.4 6.0 6.3 – 41,158.1 41,350.5 42,430.0 – 22.1 22.9 23.7 – 144,619.8 144,521.0 146,170.0 – 13.4 12.8 11.8 – 3,212.6 3,219.7 3,191.7 3,205.2

COMMODITIES (TONNES, m) Iron ore imports Coal imports Crude oil imports Unwrought copper and copper products imports Refinery crude throughput Crude steel output Refined copper production Primary aluminium production Traders’ finished steel inventories in major cities Shanghai Futures Exchange copper inventories Iron ore inventories at ports Coal inventory at Qinhuangdao port

Mar-16 Apr-16 May-16 Jun-16 85.8 83.9 86.8 – 19.7 18.8 19 – 32.6 32.6 32.2 – 0.57 0.45 0.43 – 44.9 44.8 44.2 – 70.7 69.4 70.5 – 0.7 0.7 0.7 – 2.6 2.6 2.7 – 17-Jun 24-Jun 1-Jul 8-Jul 897.42 884.16 872.88 848.16 0.166105 0.155235 0.161894 0.16213 98.4 99.2 101.1 102.1 3.6 3.4 3.3 3.3

REAL ESTATE Real estate investment (YoY %, YTD) Real estate residential building investment (YoY %, YTD) Real estate land purchase by developers (YoY %, YTD) Real estate floor space newly started (YoY %, YTD) Real estate floor space under construction (YoY %, YTD) Real estate floor space completed (YoY %, YTD) FTCR China MoM Home Sales Index FTCR China MoM New Home Supply Index FTCR China MoM Home Price Index FTCR China MoM Home Sales Outlook Index FTCR China MoM Sales Inquiries Index FTCR China MoM Home Price Outlook Index

Mar-16 Apr-16 May-16 Jun-16 6.2 7.2 7.0 – 4.6 6.4 6.8 – -11.7 -6.5 -5.9 – 19.2 21.4 18.3 – 5.8 5.8 5.6 – 17.7 20.1 20.4 – 78.2 56.9 53.0 56.7 67.9 58.5 54.4 55.2 74.6 72.5 68.7 65.6 70.9 62.2 61.3 57.9 79.5 62.3 56.6 55.1 72.5 65.0 64.6 62.4

China report July 2016  
China report July 2016  
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