Forecast for China. (Annual percentage changes unless specified)

Transcription

1 Country Economic Forecast Highlights August data were notable for a sharp decline in industrial production growth from 8.9% in Q2 to 6.9%. However, other data slowed largely as expected, with fixed investment growth dragged down further by the real estate sector and retail sales hovering around the rate of expansion seen in previous months. Some of the weakness in industrial production may be due to sectors with severe overcapacity reducing their output amid falling prices producer prices have been negative for the past 3 months and policy measures aimed at hindering a further expansion of output in these sectors. While this adjustment is positive in terms of rebalancing the economy, in the short term it will imply lower GDP growth rates. Further pressure on growth is coming from the real estate market. The monthly decline in prices is accelerating, to -1.1% in August from -.2% in May, and sales are now 8.3% lower than a year ago. The PBoC injected RMB 5bn (US$ 81bn) into the banking system this month. The move is aimed at stabilising credit expansion amid a slowdown in shadow bank lending and maintaining adequate liquidity in the system ahead of the end of the financial quarter and national holidays in October. But with demand growth weakening and the balance sheets of the corporate sector under pressure, the effectiveness of these targeted stimulus measures will continue to diminish. The 2.4-on-year fall in imports in August following a 1.6% decline in July provides further evidence of the subdued state of domestic demand. But with exports continuing to expand robustly up 9.4% on the year in August net exports will provide a sizeable positive contribution to growth. We see the economy growing by 7.4% this year, just below the authorities target of 7.5%. In light of the difficulties the authorities are already experiencing in trying to shift s growth model away from investment and towards private spending, we think they will need to lower their growth targets considerably over the coming years. We expect growth to be clearly lower than 7% during Forecast for (Annual percentage changes unless specified) Domestic Demand Private Consumption Fixed Investment Government Consumption Exports of Goods and Services Imports of Goods and Services GDP Manufacturing (value-added) Consumer Prices Current Balance (% of GDP) Government Budget (% of GDP) Current Account ($bn) Total Trade Balance ($bn) Short-Term Interest Rates (%) Exchange Rate (Per US$)

2 Forecast Overview Unexpectedly weak industry in August Annual growth in industrial production slowed sharply to 6.9% in August (from an average of 8.9% in Q2) following a marked drop in the HSBC PMI to 5.2 (from 51.7 in July). While the slowdown may in part be due to sectors with severe overcapacity reducing their output, other indicators suggest that underlying domestic demand is far from dynamic. Electricity production fell for the first time in nearly six years in August and import growth contracted for the second consecutive month. With the real estate sector weakening further and the flash PMI for September having risen to just 5.5, the authorities may struggle to achieve the growth target of 7.5% for this year without considerable additional fiscal and monetary easing. However, the authorities appear to be reluctant to distort further the existing growth model, having refrained from large-scale intervention this year. In net exports will provide a sizeable contribution to growth with subdued domestic demand dampening imports and export growth accelerating on the back of a gradual improvement in the global economy. This should enable the economy to expand by 7.4% this year, further supported by: : GDP and industrial production Industrial production, manufacturing, value added GDP Source: Oxford Economics : Industrial production and PMI 25 Industrial Production (lhs) F'cast level Targeted support from monetary policy the PBoC has again eased funding conditions for banks by injecting RMB 5bn (US$ 81bn) via its standing lending facility, thereby lowering interbank rates further and reducing volatility. Lower funding costs should stimulate credit and money growth and continue supporting overall GDP growth. However, the effectiveness of these targeted stimulus measures is steadily diminishing amid weaker demand and firms struggling with over-indebtedness. Consumption growing as part of rebalancing the authorities continue to pursue their goal of rebalancing the economy towards a greater dependence on consumer spending rather than investment. Substantial real wage growth and high state spending are lifting the living standards of households, feeding through into robust spending. And in the longer term consumer spending should be boosted by substantial financial and social reform such as the liberalisation of deposit rates and an overhaul of the hukou registration system Source: Oxford Economics/Haver Analytics : Retail Sales Values sales HSBC PMI (rhs) 3 month moving average Volume sales Source: Oxford Economics/Haver Analytics

3 Public infrastructure spending as part of efforts to support the economy this year, railway investment has been stepped up. The government has pledged that all cities with a population of more than 2, will be served by a regular rail transport system by 22. In addition, as part of s urban development plan, there are commitments to large increases in public spending on other infrastructure, affordable housing and support for small businesses. Gradual improvement in external demand export volumes are expected to grow at a solid pace. We forecast that world trade weighted by s export shares will grow by 4.5% this year and by 5.8% in 215, compared to 4.4% in 213. Financial risks remain a serious threat Despite these solid drivers of growth, we remain worried by the domestic risks in the economy. s credit-to- GDP ratio now stands at more than 2%, nonperforming loans are rising, and the housing market is fragile. These problems could prove to be very hard to manage. Indeed, the targeted monetary easing of recent months may actually be intensifying the imbalances in the Chinese economy. Off-balance sheet (and therefore opaque) lending still accounts for around one-fifth of new credit, while increased credit availability will facilitate the rolling-over of loans, thereby postponing necessary balance-sheet adjustments and lessening the pressure on companies and banks to take full account of the risks they face. Cautious on medium-term GDP growth In order to tackle these imbalances, the authorities are continuing to amend regulation under their reform agenda on such matters as eventual capital account liberalisation, attracting more private investment in SOEs to improve their efficiency and corporate governance, allowing local governments to finance themselves in part via capital markets to lower their dependence on land sales, as well as deeper structural reform, such as to the hukou system and measuring the performance of government officials. Previously we thought this wave of reform would keep GDP growth above 7% in the medium term. However, we now think that the multiplicity of imbalances in the economy and the threat that they pose to stability is so serious that the authorities will have to continue lowering their growth target. We now forecast that GDP growth will be below 6% by 225; and there are considerable downside risks to this forecast. : Merchandise trade (US$ terms) 8 3 month moving average Exports Imports Source: Oxford Economics/Haver Analytics : Overinvestment in real estate Value of real estate sales Source : Oxford Economics/Haver Analytics Investment in real estate : Expenditure structure of GDP % Investment Private consumption House Prices (rhs) Forecast Source : Oxford Economics

4 Risk Assessment With three episodes of liquidity pressures in s interbank market in the past year, the risks from the banking sector have risen. In addition, the regulator s ability to control the growth in shadow banking has been called into question. While GDP growth remains above 7%, slowing house price inflation and increasing corporate debt are serious causes for concern. It is becoming difficult to see how can bring its rapid credit growth back to more sustainable levels without risking a prolonged impact on growth. Emerging risks A domestic financial crisis non-financial corporate debt levels have risen to over 12% of GDP, higher than even Japan, property prices have started to turn down and the shadow banking sector has grown rapidly, possibly obscuring a higher level of non-performing loans. Although general government debt is low, a further worsening of the situation could lead to s own debt crisis. There are some warning signs to watch out for: unsustainable growth in wealth management products, a sharp fall in property prices, or local governments failing to meet their funding requirements. Social stability corruption remains a significant problem and rising inequality places strains on social stability. With at a critical stage of development, we expect political risks to rise in the near term before easing if financial liberalisation and social spending increase as we expect. Key risk scenarios banking crisis a mishandled liquidity crunch in one of 's shadow banks could cause a crisis of confidence in the banking system. Although the government has scope to help recapitalise the banking sector, it could not prevent a slump in bank lending. The impact of this would be immediate, with investment likely to fall and GDP growth significantly curtailed. There would be serious repercussions for the global economy, with both emerging markets and developed economies vulnerable to trade effects and financial contagion. Capital flows out of EMs capital flight from the emerging markets could return, prompted by domestic vulnerabilities. But is more insulated than other emerging markets by its closed capital account and would be able to use policy to offset some of the effect. Risk index (=no risk, 1=highest risk) World average Sovereign risk Trade credit risk Political risk Regulatory risk GDP growth CPI inflation Current account balance Government balance Government debt External debt Risk warnings Risk scenarios 1 Banking crisis could lead to sharp slowing in growth Inflationary pressures very low; PPI prices still falling Surplus predicted to decline with rising income Government deficit likely to remain around 3% of GDP Contingent liabilities may be hidden in high corporate debt With nearly $4trn in reserves has a large cushion Impact of scenarios on risk index Maximum impact of scenarios on risk index Banking Crisis Eurozone slumps into deflation Russia Ukraine tension escalates Capital flows out of EMs US-led upside Impact of scenarios on GDP growth Baseline Banking Crisis Capital flows out of EMs US-led upside Source : Oxford Economics 4

5 Long-Term Prospects Potential growth to slow to 6.5% or less Growth is set to slow over the coming decade as the economy has to wean itself of high levels of debt and declining returns to investment given the credit-fuelled investment boom of recent years. Hence, the capital stock will make a much lower contribution to growth and productivity will slow as the economy becomes more consumer-oriented, shifting towards the service sector. The decline of the working age population from 216 will be offset by increases in participation and continued urbanisation, supporting the effective labour supply. Overall, the pace of productivity growth will slow but still be strong by international standards, helped by: A shift to higher value-added sectors is expected to consolidate its dominance in global ICT production. But it is losing its competitive edge in labourintensive sectors, leading investors to look to other countries in Asia for low-cost manufacturing. Continued financial sector reforms the central bank is looking into retail deposit insurance and a bankruptcy resolution scheme for banks as precursors to lifting the ceiling on deposit rates. Such a move, along with opening up the capital account, should help to boost financial wealth in and give households more ways to save for their retirement, boosting consumption in the long run. : Contributions to GDP Domestic demand GDP Net exports F'cast Source: Oxford Economics Potential GDP and Its Components Average Percentage Growth Potential GDP* Labour Supply.6.5 Capital Stock Total Factor Productivity *ln(potential GDP)=.65*ln(Employment at NAIRU) +.35*ln(Capital Stock)+ln(Total Factor Productivity) Long-Term Forecast for (Average annual percentage change unless otherwise stated) GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (vs US$) General Government Balance (% of GDP) Short-term Interest Rates (%) Working Population Labour Supply Participation Ratio Labour Productivity

6 Background Economic development has transformed itself from a minor economy with little trade with the outside world in the 197s and early 198s to the world s largest exporter and second largest oil consumer, helped by structural reforms and entry to the WTO in 21. Only the US has a larger economy (US$16.8 trillion in 213 compared with US$9.2 trillion according to IMF estimates in early April ), and the gap between the two countries is even smaller on a PPP basis, which raises s GDP to US$13.4 trillion. But with its population of 1.3bn, is still a relatively poor country with an estimated GDP per capita on a PPP basis of US$9,844 in 213, marginally lower than Thailand, so there is still huge potential to develop the consumer market. Income disparities have grown as urbanisation has boosted prospects in the cities, although even in Beijing and Shanghai average salaries are still well below rates in South Korea or Hong Kong. GDP growth has been remarkably strong and stable over the period of s transformation, with the pace only dropping significantly below 8-1% during the difficult reforms of state-owned enterprises in the early 199s and then during the Asian crisis, when growth slowed to 6-8%. Stable growth was achieved during the Asian crisis through a surge in government-led investment, and the same approach was later used to counteract the 28-9 global financial crisis. High investment levels in are supported by elevated household savings, which are estimated to be around 25-3% of average incomes. In part this reflects the need for precautionary savings in the face of low public spending on health, education and pensions, and the loss of iron rice bowl jobs for life. To raise consumption rates, the government has focused recent policies on boosting rural incomes and higher spending on health, including projects to provide basic medical insurance for at least 9% of the population. The government is also worried about rising inequality and has laid out a policy to increase the minimum wage to 4% of the urban average by 215. Financial sector reform to provide a greater range of savings instruments for household and corporates, together with the extension of land rights to rural areas so that land can be used as collateral, should also support the development of s consumer market. Structure of the economy On the expenditure side, the economy is dominated by investment, which accounts for around 45% of GDP (in nominal terms). This reflects the rapid industrialisation of the economy, which has also led to an expansion of the urban population and a construction boom around 5% of Chinese now live in urban areas, compared with 36% in 2. Much of the investment has been undertaken by State Owned Enterprises (SOEs), which contribute around a third of total investment. In 211, agriculture (including fishing) accounted for just 8% of GDP (gross value added), and construction a further 7% (up from just over 5% in the early 2s). The contribution from manufacturing also increased to 34%, compared with 31% in 2. The remaining 51% of GDP came from services, mining and utilities. The overall value of industrial production in 211 was CNY14.8 trillion at 25 prices. Within this, the largest sectors were iron & steel (7.3%), utilities (over 6%) and food (4.8%). By 216 industrial production will total CNY21.5 trillion (at 25 prices), rising to almost CNY3 trillion by 221. The largest sectors in 221 will be iron & steel (6.6%), utilities (6.5%) and telecommunication equipment (5%). Balance of payments and structure of trade is a very open economy with just over a quarter of GDP exported. Exports are dominated by manufactured goods, particularly ICT equipment, industrial machinery, clothing and other textiles. Although the country is achieving strong growth in higher-value exports such as ICT equipment, the share of value added is relatively low 6

7 because overseas manufacturers use cheaper Chinese labour to assemble imported components it is estimated that domestic value added in Chinese exports is around 7% (falling to 5% for hi-tech exports) which compares unfavourably with 87% for Japanese exports. The main markets for Chinese exports are the EU and US, which each account for just under 2% of merchandise exports (the actual figure is probably slightly higher as 14% of Chinese exports go to Hong Kong, mainly for re-export elsewhere). Strong export growth over the past two decades has been helped by reforms such as the unification of the currency rates and liberalisation of the current account in the early 199s. The current account surplus widened to around 1% of GDP in 27, leading to concerns that the currency was severely undervalued. In 25, began a gradual appreciation of the renminbi against the US dollar but this was suspended at the end of 28 when the global financial crisis hit. In March 21, the governor of the People s Bank of referred to recent exchange rate stability as a special policy during a special period. However, the authorities concerns about domestic overheating and the ability to pursue an effective monetary policy were always likely to prompt a return to the policy of gradual appreciation, and the central bank signalled this in June 21. The exchange rate has gradually risen since then. The current account surplus now stands at around 2% of GDP and the exchange rate no longer appears to be significantly undervalued. During nearly 2 years of current account surpluses, has accumulated almost US$4 trillion of foreign exchange reserves, equivalent to more than 2 months import cover. It is now the largest holder of US Treasuries and has acquired substantial influence on global capital markets. Increasingly is looking to diversify its reserve holdings via the Investment Corp, its sovereign wealth fund. Policy The government s economic policy is defined by five-year economic plans. The 12th plan, which runs from 212 to 217, sets the objective of addressing rising inequality and creating an environment for more sustainable growth by prioritising more equitable wealth distribution, increased domestic consumption and improved social infrastructure and social safety nets. This is intended to be the first step in a longer-term rebalancing from investment- and exportled growth towards consumption. The authorities also want to close the gap between rural and urban incomes and have set targets for affordable housing and improvements in health and education services. The next five-year plan will be announced in 215; it is expected to continue the rebalancing through financial sector reform and policies to encourage domestic entrepreneurship, as well as furthering reforms of the health, education and social security. The authorities use monetary policy to manage inflation risks and asset prices (such as the threat of property sector overheating in ). There has typically been less focus on adjusting policy interest rates than in other economies, with adjustments to banks minimum reserve requirements used to control credit growth. Chinese authorities also employ more direct means to achieve their objectives by setting lending targets for banks, which are easier to achieve when around 6% of lending is made by state-controlled banks. Politics experienced a smooth transition of leadership with Mr Xi taking over as President in March 213, having already assumed the roles of leader of the Communist Party and Chairman of the Military. New members of the Politburo Standing Committee were also appointed in November 212. The Committee can be described as fairly conservative in nature and appears to be firmly in support of Mr Xi. The leadership change does not suggest a shift in the direction of economic policy and we will have to wait until the next five-year plan to see how the authorities will rebalance the economy and reform key areas such as the financial sector. In the short term, policy is focused on tackling corruption among public officials, which has created the perception among the population that officials live lavishly while the masses toil. 7

8 Data & Forecasts Industrial CPI Food RPI Exports Imports Trade Retail value Prices US$ % US$ % balance sales added (US$ mn) Aug Sep Oct Nov Dec Key Indicators: Percentage changes on a year earlier unless otherwise stated Jan Feb Mar Apr May Jun Jul Aug Loans RMB Exchange Exchange Exchange Share Reserves Imports rate Loans rate rate rate price Cover % Yuan/ avg. Yuan/$ avg. Yuan/1Yen Shanghai A US$ Bn Aug Sep Oct Nov Dec Financial Indicators: Percentage changes on a year earlier unless otherwise stated Jan Feb Mar Apr May Jun Jul Aug

9 CHINA TABLE 1 SUMMARY ITEMS Annual Percentage Changes, Unless Otherwise Specified C O N S U M E R S T O T A L F IN A L T O T A L G R O S S IN D U S T R IA L T O T A L A V E R A G E W H O L E C O M P E T IT - C O N S U M E R R E T A IL E X P E N D - E X P E N D IT U R E F IX E D D O M E S T IC P R O D U C T IO N E M P L O Y M E N T E A R N IN G S E C O N O M Y IV E N E S S P R IC E P R IC E IT U R E IN V E S T M E N T P R O D U C T (G R O S S ) P R O D U C T IV IT Y (2 8 = 1 ) IN D E X IN D E X (C ) (T F E ) (IF ) (G D P ) (IP V A ) (E T ) (E R ) (G D P /E T ) (W C R ) (C P I) (R P I) Y E A R S B E G IN N IN G Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV COPYRIGHT (C), OXFORD ECONOMICS CHINA TABLE 2 SUMMARY TABLE T R A D E C U R R E N T C U R R E N T G O V T. G O V T. S H O R T T E R M S P R E A D O V E R R E A L E Q U IL IB R IU M D O L L A R B A L A N C E A C C O U N T A C C O U N T F IN A N C IA L F IN A N C IA L IN T E R E S T U S S H O R T IN T E R E S T E X C H A N G E R A T E E X C H A N G E (U S $ B N ) (U S $ B N ) (% O F G D P ) D E F IC IT D E F IC IT R A T E T E R M R A T E R A T E P E R U S R A T E (Y U A N B N ) (% O F G D P ) (% ) D O L L A R (B V I$ / (B C U $ / (B C U $ *1 (- G B ) (- G B *1 (R S H ) (R S H - R S H U S ) (N o t e 2 ) (R X E Q U IL ) (R X D ) Y E A R S B E G IN N IN G Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Note 2 : REAL INTEREST RATES = Nominal interest rate (RWL or RSV) - % change in CPI COPYRIGHT (C), OXFORD ECONOMICS 9

10 Long-Term Forecast for Annual percentage changes unless otherwise specified GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (per $) General Government Balance (% of GDP) Short-term Interest Rates (%) Working Population Labour Supply Participation Ratio (%) Labour productivity Employment Output gap (% of potential GDP)

11 Key Facts Politics Head of state: President XI Jinping Head of government: Premier LI Keqiang Political system: Communist state Date of next presidential election: 223 Date of next legislative election: 218 Currency: Yuan (CNY) also called Renminbi (RMB) Long-term economic & social development * GDP per capita (US$) Inflation (%) Population (mn) Urban population (% of total) Life expectancy (years) Source : Oxford Economics & World Bank Structure of GDP by output * 213 or latest 211 available year Agriculture 1.% Source : CIA Factbook Industry 46.6% Location : Eastern Asia, bordering the East Sea, Korea Bay, Services 43.3% Yellow Sea and South Sea, between North Korea and Vietnam Source : World Bank (CIA Factbook) Long-term sovereign credit ratings & outlook Corruption perceptions index 213 Foreign currency Local currency Score Fitch A+ (Stable) A+ (Stable) Developed economies (average) 74.5 Moody's Aa3 (Stable) Aa3 (Stable) Emerging economies (average) 37.3 S&P AA- (Stable) AA- (Stable) 4. Emerging Asia 34.7 Structural economic indicators * Current account (US$ billion) Trade balance (US$ billion) FDI (US$ billion) Debt service (US$ billion) Debt service (% of exports) External debt (% of GDP) Oil production ( bpd) Oil consumption ( bpd) Source : Oxford Economics / World Bank / EIA Destination of goods' exports (212) United States 17.2% European Union (27) 16.3% Hong Kong, 15.8% Japan 7.4% Korea, Republic of 4.3% Source : WTO Source: Transparency International Scoring system 1 = highly clean, = highly corrupt Source : WTO Composition of goods & services exports, 212 Manufactures 86.% Other goods exports.1% Transportation 1.7% Fuels and mining products 2.5% Travel 2.2% Other commercial services 4.5% Agricultural products 3.% 11