2015: HOW FAR IS THE RECOVERY?

Transcription

1 2015: HOW FAR IS THE RECOVERY? CHINA: CARROT AND STICK > Rocky TUNG Economist, Asia Pacific, Coface COFACE COUNTRY RISK CONFERENCE November

2 Broad-based economic slowdown: Our logic ~48% Property Government revenue Investment Infrastructure Commodity demand Economic growth Source: Coface ~36% Consumption Luxury goods Necessity items Asset price volatility Job growth Quality of life COFACE COUNTRY RISK CONFERENCE November

3 Content Macroeconomic environment Sectoral development Property Consumer goods Steel Conclusion COFACE COUNTRY RISK CONFERENCE November

4 Continuation of the slowing trends F 2015F GDP growth (%) CPI (%) M2 (%) Fixed Asset Investment (%) Retail Sales (%) RMBUSD (year-end) Source: CEIC, Coface estimates COFACE COUNTRY RISK CONFERENCE November

5 Policy stance to revolve around 3 key factors Inflation Growth Job creation Source: Coface Policy direction COFACE COUNTRY RISK CONFERENCE November

6 GDP ~7.5%: Falling short Expectation management matters 16% 14% 12% 1 8% 6% 4% 2% F 2015F GDP target Actual GDP growth Source: CEIC, Coface estimates A steady structural shift toward the 7% range Slowing GDP growth in China YoY 15% 14% 13% 12% 11% 1 9% 8% 7% 6% 13.4% 10.2% 7.8% GDP Growth Avg for % COFACE COUNTRY RISK CONFERENCE November

7 CPI 3.5%: A high-ceiling The lack of inflation is increasingly becoming a concern 25% 2 15% 1 5% -5% On the other hand, lower inflation eases wage pressure on businesses CPI CPI (food) PPI 6. Source: CEIC, Coface Average Wage: Urban Non-private Real wage growth COFACE COUNTRY RISK CONFERENCE November

8 New job 10 millionyear: Good for now, but You can t have your cake and eat it too Will the halt of new job creation growth be coming soon? 15% 1 5% -5% 11m m Urban new employment growth (YoY) 4.5% 3.7% 3.5% 12.2m 12.7m 13.1m 1.7% RMB Yr 30,000 25,000 20,000 Income growth continues its downward trend 11.3% 14.1% 12.6% 9.7% 9.3% YoY 16% 14% 12% ,000 10,000 5,000 8% 6% 4% 2% Source: CEIC, Coface YTD disposable income per capita (LHS) Disposable income per capita growth YTD consumption expenditure (LHS) Consumption expenditure growth COFACE COUNTRY RISK CONFERENCE November

9 Expected steps going forward Managing expectation Strengthening economic structure Continuation of structural reform Lower growth target Growth stabilization Targeted stimuli COFACE COUNTRY RISK CONFERENCE November

10 Companies are facing pressure on the cost of financing, despite low policy rate Interbank rate shows that banks are not quite short of cash 14% 12% 1 8% 6% 4% 2% SHIBOR: Overnight SHIBOR: 1 Week SHIBOR: 1 Month Policy rate Source: CEIC, Coface 5.5% % % % 2. Risk premium to become more marketdriven going forward 1.5% Yield spread (Treasury vs. AA-): 1 year Yield spread (Treasury vs. AA-): 5 year COFACE COUNTRY RISK CONFERENCE November

11 But expansion of monetary base is becoming less effective as a tool RMB b 3,000 2,500 2,000 1,500 1, Slowing non-bank financing activities dragged aggregate financing growth Aggregate financing New loan YoY Money supply growth is becoming less-efficient in boosting growth 20 Nominal GDP Money Supply Nominal GD M0 M1 M2 15 Correlation Yr lead year 105% 3Q-lead Q-lead Q-lead Simultaneous % YTD aggregate financing growth (RHS) YTD new loan growth (RHS) Source: CEIC, Coface estimates Nominal GDP growth M1 growth (9M-lead) COFACE COUNTRY RISK CONFERENCE November

12 Targeted-stimuli in place (non-exhaustive) Month April May June July September October Measure (Apr 22) PBoC lowered RRR for rural commercial banks (200bps) and lenders with agricultural purposes (50bps) (May 7) The Finance Ministry and State Administration of Taxation said that any company with annual taxable income below RMB would have 5 tax cut (i.e. 2) from 2014 till 2016; two million firms to benefit. Firms with under 100 employees, with revenue limits, will also benefit (June 9) PBoC introduced selective- RRR cut for financial institutions that end to agricultural sector and small & micro firms, as well as finance, financial leasing and auto finance companies (June 13) China to cut VAT (i.e. from 4-6% to 3%) on small firms (June 30) Regulators increased banks lending capacity by altering the way loan-to-deposit ratio (i.e. ceiling at 75%) are measured (July 2425) CBRC said it would continue to extend support to small companies through reducing inverted lending activities; 3 privately-owned banks were approved to be set up (i.e. WeBank in Shenzhen, and 2 others in Wenzhou and Tianjin) (Sept 1619) PBoC has extended RMB500b worth of Standing Lending Facility (SLF) to top 5 banks (Sept 29) Two additional privately-owned banks were approved to be established in Shanghai and Zhejiang (Oct 8) State Council wrote in a document regarding budget reform, which includes aspects of increasing transparency of budget and quota on local government debt issuance (Oct 17) PBoC is said to extend SLF program to 11 banks by about RMB200b Source: State Council, MoF, CBRC, PBoC, CNBC, Bloomberg, Reuters, WSJ, NY times, Sina, Tencent, China Daily, Coface COFACE COUNTRY RISK CONFERENCE November

13 Content Macroeconomic environment Sectoral development Property Consumer goods Steel Conclusion COFACE COUNTRY RISK CONFERENCE November

14 Sectoral Risk Assessment (non-exhaustive) Source: Datastream data, Coface (September 2014) COFACE COUNTRY RISK CONFERENCE November

15 Property Why do we talk about it? A key part of the Chinese government s urbanization plan An important source of government revenue A huge downstream market for other sectors like steel and cement, and thus iron ore, coal and other commodities Source: Coface COFACE COUNTRY RISK CONFERENCE November

16 Lack of alternate source of financing hurts business climate of property sector Deteriorated environment for the property market in Source: CEIC, Coface GFC Real estate climate index GDP slowed for 6 consecutive quarters; withdrawal syndrome; curbing property sales Worries of overdevelopment; lack of other financing sources RECI YoY change 15% 1 5% -5% -1-15% *Source of fund, area of land development, area of building construction, sale price, floor space for sale, etc YoY Property developers faced difficulty in obtaining financingfacilities from other sources Other sources (RHS) Foreign investment (RHS) Real estate investment source of fund -9.1% Self-raised (RHS) Domestic loan (RHS) +11.5% +11.8% RMB m 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 COFACE COUNTRY RISK CONFERENCE November

17 which is reflected in prices and transaction volume YoY 10 8 Pressure on real estate transaction volume and investment Prices are falling in a record number of cities 6 4 No. of cities 70 Newly Constructed Residential Building M Building Sold (RMB m) Residential Building Sold (RMB m) Real estate investment (YTD) Source: CEIC, Coface Decreased (MoM) No Change (MoM) Increased (MoM) COFACE COUNTRY RISK CONFERENCE November

18 but the property market is too important to see no support Property market takes a key position in banks portfolio % 20.9% And land sales represent a key role in government financing % 35% RMB m 16,000, % 19.4% 3 25% 2 14,000,000 12,000,000 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 Source: CEIC, Coface Individual Housing MortgageReal Estate Loan Real Estate Development LoanReal Estate Loan Real Estate LoanTotal RMB Loan (RHS) 18.9% 15% 1 5% Government revenue (RHS) Debt issuance Govt revenue Income from land usage right transfer Govt revenue 10,000,000 8,000,000 6,000,000 COFACE COUNTRY RISK CONFERENCE November

19 Consumer goods Why do we talk about it? Designed to be the new growth driver for the economy Benefited from rising income and new sales channels Hurt by anti-corruption scheme Source: Coface COFACE COUNTRY RISK CONFERENCE November

20 The continuation of deceleration in retail sales growth Retail sales growth continued to decelerate YoY 25% Robust internet sales add uncertainty to the number 2 15% 1 5% Retail sales growth Source: CEIC, Coface Retail sales growth minus CPI RMB b 2,000 1,800 1,600 1,400 1,200 1, YoY Internet Shopping: Business Turnover Internet shopping growth (RHS) COFACE COUNTRY RISK CONFERENCE November

21 Consumptions hurt via anti-corruption regime YoY 同比增長 Demand for necessity items continue to benefit from income growth Source: CEIC, Coface Retail 社會消費品零售總額 sales of 200 largest (200 retail 家最大零售企業 enterprise: food): 食品 Retail 社會消費品零售總額 sales of 200 largest (200 retail 家最大零售企業 enterprise: beverage ): 飲料 Retail 社會消費品零售總額 sales of 200 largest (200 retail 家最大零售企業 enterprise: articles ): 生活用品 for daily use But liquor and other luxury goods are hurt extensively by the anti-corruption scheme 社會消費品零售總額 Retail sales of 200 largest (200 家最大的零售企業 retail enterprise: liquor ): 白酒 COFACE COUNTRY RISK CONFERENCE November

22 Other barriers of a breakthrough in retail sales 2% 1% -1% -2% -3% -4% -5% -6% -7% Consumers are less-eager to spend with positive interest rate YoY 25% 2 15% 1 5% Widening gap between urban and rural households may be a barrier RMB 20,000 15,000 10,000 5,000 0 Saving deposit rate minus CPI Source: CEIC, Coface estimates 1-year time-deposit rate minus CPI Difference between urban and rural per capita income (RHS) Cash income per capita for rural household Disposable income per capita for urban households COFACE COUNTRY RISK CONFERENCE November

23 Steel Why do we talk about it? A barometer for the other sectors in China (property, construction, shipping, automobile, electronics, etc.) A traditionally important industry that is facing tremendous pressure provides indication of government policy direction Arguably a price-setter for the regional market Source: Coface COFACE COUNTRY RISK CONFERENCE November

24 Major sources of steel demand see weakened growth and the trend is set to continue Approximated end-demand of crude steel in China Automobiles & shipbuilding, 9% Power & coal, 3% Others, 11% Machineries & appliances, 23% Property, 28% Infrastructure, 26% 2013 steel demand (estimates) Property Infrastructure Machineries & appliances Automobiles & shipbuilding Power & coal Others Source: Coface estimates COFACE COUNTRY RISK CONFERENCE November

25 Subpar utilization of steel production facilities continues to hurt earning abilities Utilization of production capacities remains south of 8 level Steel mills financials have improved, albeit slightly E 2014E Utilization: Crude Steel Utilization: Steel Product Source: CEIC, CUSTEEL, Coface estimates % % % % % % Total net profit total sales DebtEquity ratio (RHS) COFACE COUNTRY RISK CONFERENCE November

26 Crude steel = Coke (from coking coal) + iron ore + scrap steel '000 tons 120, ,000 High iron ore inventory is depressing prices Already depressed coal prices have limited downside unless we will see a collapse of the industry 80,000 60,000 40,000 20,000 0 Source: CEIC, Coface Iron ore inventory at Ports RMBt k tons 710 8, ,000 7, , ,500 6, , ,000 4, , , Coal Inventory: Port: Qinhuangdao 5800 Calorie: Datong High-quality 5500 Calorie: Shanxi High-quality 5000 Calorie: Shanxi Common 4500 Calorie: Common COFACE COUNTRY RISK CONFERENCE November

27 Content Macroeconomic environment Sectoral development Property Consumer goods Steel Conclusion COFACE COUNTRY RISK CONFERENCE November

28 Coface s Payment Survey : Most Concerning Factors in Most concerning factors in % 50. Multiple answers % 2 Chinese economic slowdown Source: Coface (February) 16.3% global economic slowdown rising labour costs tightening monetary policy and access to credit 8.8% RMB appreciation 3.3% others Companies concern most on Chinese economic slowdown and tightening monetary policy and access to credit. COFACE COUNTRY RISK CONFERENCE November

29 Expectation of near-term development Policy stance Liquidity Property market Retail sales Steel Reform to continue at a managed pace Continuation of targetedstimulus approach as a stabilizer for growth Growth target to moderate in 2015 More active open market operations to manage liquidity Stricter regulations on shadow-banking facilitators Further assistance extended to SMEs and micro firms Demand to stay at low level Price pressure remains as inventory awaits to be digested Less-strict policy stance expected to be used as a stimulus for the market, but effectiveness is unclear Slower demand growth for necessity items with moderated income growth Anti-corruption scheme to have lesser effect on consumption as a result of baseeffect Rising competition for sales outlets with bricks and mortar Accelerated dismantling of outdated production capacity Medium-sized steel mills to face liquidity pressure Profitability to remain at depressed level Low valueadded traders to be out of business Source: Coface COFACE COUNTRY RISK CONFERENCE November

30 Conclusion Average growth rate of 7.2% in ; continuation of targeted-stimuli approach Dismantling outdated capacity; continuation of anti-corruption scheme; liquidity management Continued growth stabilization Effective policy execution Sustainable development Ongoing structural reform Effective investment and well-planned urbanization; reduction in pollution Become less reliant on fiscal & monetary stimuli; RMB internationalization Source: Coface COFACE COUNTRY RISK CONFERENCE November