Economics China chart book Weakening policy transmission Group Research 9 October 1 Nathan Chow Strategist/Economist Please direct distribution queries to Violet Lee + 71 violetleeyh@dbs.com Charts of the month The authorities have cut the RRR four times this year to encourage lending. Liquidity has been injected to bring down borrowing costs. Rising defaults however keep lending appetite of banks at bay. Smaller companies have difficulties in securing loans even at higher borrowing costs. The weighted average lending rate has risen to.97 in Q 1 from.7 in early 1. After two years of deleveraging, local governments are reluctant to invest in big projects in spite of endorsement by central government. The recent collapse in M1 growth suggests ongoing deterioration of corporate/local government cash flow. Bottomline: policy transmission has weakened; the authorities will have to do much more to arrest the decline in growth momentum, in our view. RRR and interest rates Lending rate (weighted average) SHIBOR 3-M 7 RRR (RHS) 19 3 1 Oct-1 Oct-1 Oct-1 Oct-17 Oct-1 1 17 1 1 M1 and M YOY growth 1 1 1 M1 M 1 1 Aug-1 Feb-17 Aug-17 Feb-1 Aug-1 Refer to important disclosures at the end of this report.
China chart book Weakening policy transmission 9 October 1 High-frequent indicators Retail sales fell to 9. in Aug from 9. in 1H; Auto sales growth entered negative zone for months in a row. Retail sales (YOY) (YOY) 1 1 1 3 3 3 3 3 - - Retail sales - Automobile sales - Online sales (YTD) (RHS) -1 Aug-1 Aug-1 Aug-17 Aug-1 State investment led the fall in FAI amid government moves to clean up irregular infrastructure projects. Fixed asset investment (Ytd) (YOY) Total SOE Private 1 1 1 1 1 Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 Property price surprised on the upside, but floor space sales remained weak. Residential housing growth (YoY) 3 1 1 - Real estate investment -1 Property price -1 Floor space sold Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 Industrial earnings weakened in August alongside slower price gains. PPI vs profits (YOY) 1 - - - PPI (YOY) 3 Industrial enterprises profits (3mma, RHS) - -1 Aug-13 Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 1 1 - Page
China chart book Weakening policy transmission 9 October 1 External sector Trade surplus is set to shrink as exports growth moderated to 9. in Aug 1 from 1.1 in C71. Exports to US rebounded, indicating exporters front loaded the shipments to pre-empt tariffs. Merchandise trade (YOY, Trade balance (RHS) 3mma) Exports (LHS) Imports (LHS) 3 1 USD bn (3mma) 3 1 Export by country (3mma) (YOY) 3 1 ASEAN EU US -1-1 - - Aug-1 Aug-1 Aug-1 Aug-17 Aug-1-1 - Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 Imports from major trading partners all moderated, pointing to weakening domestic demand. Import by country (3mma) (YOY) 3 ASEAN EU US 1-1 - -3 Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 Share of processing trade continued to drop; yet it remained as the major high-tech exports component. Processing trade as of high-tech exports 1 9 7 3 1 1 1 1 1 General Others Assemble Processing Page 3
China chart book Weakening policy transmission 9 October 1 Monetary Consumer inflation is expected accelerate in the months ahead due to pig disease. PPI, headline CPI, and core CPI 3. 1.. 1. 1. PPI (RHS) CPI Core CPI. -1 Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 - - - - PBOC kept borrowing costs on hold on entering Q amid domestic liquidity strains. Interest rates Standing lending facility, 7D. Y government bond yield 7D repo rate (D mov. Avg.) 3. PBoC 7D reverse repo 3. 3. 3. 3..... Oct-1 Apr-17 Oct-17 Apr-1 Oct-1 PBOC has net-injected RMB1bn from the banking system via open market operations in September. Open market operation, SHIBOR RMB bn Funds injected/withdrawn 9 in the week 7 1-M SHIBOR (RHS).1 3.9 3 1-1 -3 3.7 3. 3.3 3.1.9.7 -. 31-May-1 1-Jul-1 19-Aug-1 -Sep-1 Bond yields held stable in Sep; PBOC s accommodative stance will likely keep the borrowing cost low. -year bond yields.... 3. 3.. AAA CGB. Sep-1 Mar-17 Sep-17 Mar-1 Sep-1 Page
China chart book Weakening policy transmission 9 October 1 Capital flows The 17 current account surplus declined due to a rise in imports and further increases in outbound tourism. Current account USD bn 3 1-1 - -3 - Goods Primary income Current account Services Secondary income 7 9 11 13 1 17 The non-reserve financial account posted a surplus of USD19bn in 17, reflecting the effectiveness of capital flow management measures (CFMs). Financial account USD bn - - - - -1, Net Errors and Omissions Other investment Portfolio investment Direct investment Financial account balance (excl. reserve) 7 9 11 13 1 17 The upcoming RRR cut will exert further downward pressure to the CNY exchange rate. Forex reserves fell to a 1-month low in September as the CNY weakened further against the dollar RMB exchange rates 1 1 1 1 9 9 9 9 CFETS RMB Index USD/CNY (inverse, rhs) 9 Sep-1 Sep-1 Sep-1 Sep-17 Sep-1.1..3....7..9 7. Forex reserves USD bn 3,7 3, 3,3 3,1 Monthly changes (rhs) Total amount USD bn 1 1 - -1,9-1 Sep-1 Jun-1 Mar-17 Dec-17 Sep-1 Page
China chart book Weakening policy transmission 9 October 1 Deleveraging Shadow banking businesses shifted back onto the book; related lending shrank for the th month in a row. Total social financing (new increase) RMB tn 3. Bank loans 3. Bond financing. Off-balance-sheet lending. Others 1. 1... -. -1. Aug-17 Dec-17 Apr-1 Aug-1 Intra-financial claims registered negative growth. Intra-financial claims (YOY) (YOY) 1 7 1 1 3 1 1 - Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 Banks' claims on other financial corp WMP fund balance M (RHS) The gap between aggregate financing and nominal GDP growth narrowed to. percentage point in Q1. GDP and aggregate financing growth (YOY) ppt 1 7 13 1 11 1 9 7 Jun-1 Jun-1 Jun-17 Jun-1 Aggregate financing - nominal GDP (rhs) Nominal GDP Aggregate financing 3 1 Still, the existing large stock of intra-financial sector credit is a persistent risk to financial stability. Large banks' claims on other institutions RMB bn 7, Claims on Non Financial Institution Claims on Other Financial Corporation, Other Depository Corporation,, 3,, 1, Mar-1 Mar-1 Mar-1 Mar-1 Mar-1 Page
China chart book Weakening policy transmission 9 October 1 Rebalancing External rebalancing advanced with national savings falling faster than investment. Investment, saving and current account as percentage of GDP Current account Saving rate 1 Investment 1 Domestic rebalancing continued with ongoing strength in consumption. Contribution to growth ppts 9 7 3 Final Consumption Expenditure Gross Capital Formation 7 9 11 13 1 17 7 9 11 13 1 17 On the supply side, the share of services in GDP continued to rise GDP by production (as percentage of GDP) with labor relocation from agriculture and industry to services. Employment by sector 3 1 9 Secondary Tertiary of total employment Primary Secondary Teritary 7 3 3 3 1 39 7 9 11 13 1 17 7 9 11 13 1 17 Page 7
China chart book Weakening policy transmission 9 October 1 RMB internationalization Offshore RMB deposits have fallen from their 1 peak. RMB deposits and CNY exchange rate RMB bn 1, 1, RMB deposit in Hong Kong RMB deposit in Singapore USD/CNY (RHS) USD/CNY 7...... Jun-1 Jun-1 Jun-1 Jun-17 Jun-1 RMB cross-border transaction continued to rebound in August. RMB cross-border trade settlement RMB bn Trade volume 9 of total China trade (RHS) 7 3 1 Aug-1 Aug-1 Aug-1 Aug-17 Aug-1 3 3 1 1 The Dim Sum market started fading in 1, with a slump in the CNY s exchange rate diminishing its appeal. RMB-denominated bond issuance RMB bn 3 Dim Sum Panda Foreign investors increased their holdings of Chinese sovereign as it offers healthy yields compared with developed market peers. Chinese soverign held by foreign insitutitons and major soverign yields China US CNY bn. UK Eurozone 1. 9 1 1 1 11 1 13 1 1 1 17 1 YTD 3.. 1. 7. Chinese sovereign held by 3-1. foreign institutions (RHS) 1 Sep-1 Sep-1 Sep-1 Sep-17 Sep-1 Page
China chart book Weakening policy transmission 9 October 1 Forecasts on major indicators: GDP CPI inflation 1 17 1f 19f 1 17 1f 19f Growth rate (, YoY).7.9... 1..1. Exchange rate and interest rates forecasts 1Q1 Q1 3Q1 Q1 1Q19 Q19 3Q19 Q19 USD/CNY eop...7.9.9...7 Benchmark lending rate Government bond yields 1Y ().3.3.3.3.3.3.3.3 3Y () 3. 3.3 3.19 3.3 3. 3. 3. 3.7 1Y () 3.7 3. 3.3 3.7 3.7 3. 3. 3.9 1Y-3Y (bps) 19 1 3 3 Page 9
China chart book Weakening policy transmission 9 October 1 Group Research Economics & Strategy Taimur Baig, Ph.D. Chief Economist - G3 & Asia + 7-9 taimurbaig@dbs.com Nathan Chow Strategist - China & Hong Kong + 3-93 nathanchow@dbs.com Masyita Crystallin, Ph.D. Economist Indonesia & Philippines + 9-3 masyita@dbs.com Joanne Goh Regional equity strategist + 7-33 joannegohsc@dbs.com Neel Gopalakrishnan Credit Strategist + 7-7 neelg@dbs.com Eugene Leow Rates Strategist - G3 & Asia + 7- eugeneleow@dbs.com Chris Leung Economist - China & Hong Kong + 3-9 chrisleung@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan + 7- matieying@dbs.com Radhika Rao Economist - Eurozone & India + 7- radhikarao@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam + 7-77 irvinseah@dbs.com Duncan Tan FX & Rates Strategist - ASEAN + 7-1 duncantan@dbs.com Samuel Tse Economist - China & Hong Kong + 3-9 samueltse@dbs.com Philip Wee FX Strategist - G3 & Asia + 7-33 philipwee@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 1 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 19. Tel: -7-. Company Registration No. 193E. Page 1