gg October 28, 2016 Economic Acumen Commentary by CEBI Research Team Brief Persisting RMB weakness against the USD reflects divergence in monetary policies between the U.S. and other major economies, driving more investment to USD assets. Brexit and upcoming U.S. presidential election, potential U.S. rate hike before year-end and continued liquidity injection by ECB and BOJ have sent the USD soaring and a host of other currencies tumbling. Although bilateral CNY against the USD has been depreciating, RMB remains stable against a basket of global currencies. A wider and bidirectional floating range for RMB will become new normal in coming years. We believe gradual marketization RMB is an ongoing trend with wider range of fluctuation. Our year-end target for USD/CNY is 6.82. Banny Lam Head of Research banny.lam@cebi.com.hk (852)2916-9630 Navigating RMB s New Normal China s transitioning to the new normal" is the country s key economic theme under the 13 th Five-Year Plan. Notably, the process is marked by structural adjustments in the economy and reforms in the exchange rate mechanism. Recent weakness of the RMB has been caused by a slowing global economic momentum; expectation of the U.S rate hike also subject emerging market currencies to strong selling pressure. Divergence in monetary policies between the U.S. and other major economies has driven investment to the USD assets, pushing up the USD against most major currencies around the world. Although the bilateral CNY against the USD demonstrates a depreciating trend, RMB remains largely stable against a basket of global currencies. We expect gradual marketization of RMB to be an ongoing process characterized by a wider range of fluctuation. Our yearend target for USD/CNY is 6.82. Post-Brexit global FX market turbulence and the U.S. presidential election weaken currencies in the emerging market. The Brexit vote, upcoming U.S. presidential election, potential U.S. rate hike before yearend, and continued liquidity injection by ECB and BOJ have sent the USD soaring while a host of other currencies tumbling. Mounting global economic uncertainties undermine investor confidence in emerging market assets, triggering a new round of capital outflow. The weakening of emerging market currencies intensifies in 2H16, reducing the momentum of recovery in the emerging economies. RMB is of no exception, with yearto-date depreciation against the USD accelerated to 4.4% in October from 2.4% in 1H16. We believe turbulence in the FX market will continue in 2016/2017. A wider and bidirectional floating range for RMB will become the new normal in coming years. Greater exchange rate flexibility can help China integrate into the global financial markets. With RMB included in the Special Drawing Right (SDR) benchmark currency basket, the surge of global usage of RMB, and the promotion for RMB trade settlement, FDI, and portfolio investment (QFII, RQFII, QDII) by the Chinese government, we believe the international currency status of RMB will rise in the next few years. To increase efficiency of the financial system, more exchange rate reforms can be expected. Frank Liu Analyst frank.liu@cebi.com.hk (852)2916-9632 1
Fig. 1: USD/CNY and USD/CNH 6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 Fig. 2: CNY trading volume (USD bn) 102.0 100.0 98.0 96.0 94.0 92.0 90.0 CNY CNH Fig. 3: CFETS RMB Index Fig. 4: CFETS RMB Index Weights 101.00 100.00 99.00 98.00 97.00 96.00 95.00 94.00 93.00 92.00 91.00 24.73% 26.40% 6.27% 21.39% 6.55% 14.68% USD/CNY EUR/CNY JPY/CNY HKD/CNY AUD/CNY Others Fig. 5: DXY Index Fig. 6: Offshore RMB deposits in HK (RMB bn) 102.0 100.0 98.0 96.0 94.0 92.0 90.0 1,050.0 1,000.0 950.0 900.0 850.0 800.0 750.0 700.0 650.0 600.0 2
China Economic Indicators 2011 2012 2013 2014 2015 1Q2016 2Q2016 3Q2016 Real GDP 9.3 7.7 7.8 7.3 6.9 6.7 6.7 6.7 PMI Manufacturing (%) PMI Non-Manufacturing (%) 50.3 50.6 51 50.1 49.7 50.2 50.0 50.4 56.3 56.1 54.6 54.1 54.4 53.8 53.7 53.7 Exports (RMB YoY %) 15.2 5.0 6.1 4.9 (1.8) (4.2) 1.2 0.3 Imports (RMB YoY %) 19.5 1.4 5.5 (0.5) (13.2) (8.2) (1.2) 1.9 Trade Balance (RMB/bn) 1007.9 1456.7 1613.8 2348.9 3686.5 810.2 933.9 967.1 Exports (USD YoY %) 20.3 7.9 7.8 6.0 (2.9) (9.6) (4.3) (6.3) Imports (USD YoY %) 24.9 4.2 7.3 0.5 (14.2) (13.5) (6.8) (4.7) Trade Balance (USD/bn) 154.9 231.3 259.0 383.1 593.0 125.7 143.7 146.3 CPI (YoY %) 5.4 2.7 2.6 2.0 1.4 2.1 2.1 1.7 PPI (YoY %) 6.1 (1.7) (1.9) (1.9) (5.2) (4.8) (2.9) (0.8) FAI (YTD/ YOY %) 23.8 20.6 19.6 15.7 10.0 10.7 9.0 8.2 Real Estate Investment (YTD YoY %) 27.9 16.2 19.8 10.5 1.0 6.2 6.1 5.8 Industrial Production (YoY %) 13.9 10 9.7 8.3 6.1 5.8 6.1 6.1 Retail Sales (YoY%) 17.1 14.3 13.1 12 1.07 10.3 10.2 10.5 New Lending (RMB/bn) 7476.7 8203.8 8891.7 9781.3 11719.9 4606.6 2921.1 2632.3 M2 (YoY %) 13.6 13.8 13.6 12.2 13.3 13.4 11.8 11.5 Aggregate Financing (RMB bn) 12828.6 15763.1 17316.9 16457.1 15408.6 6700.1 3105.8 3664.1 Jan Feb Mar Apr May Jun Jul Aug Sep Real GDP - - 6.7 - - 6.7 - - 6.7 PMI Manufacturing (%) 49.4 49.0 50.2 50.1 50.1 50.0 49.9 50.4 50.4 PMI- Non-manufacturing (%) 53.5 52.7 53.8 53.5 53.1 53.7 53.9 53.5 53.7 Exports (RMB YoY %) (6.6) (20.6) 18.7 4.1 1.2 1.3 2.9 5.9 (5.6) Imports (RMB YoY %) (14.4) (8.0) (1.7) (5.7) 5.1 (2.3) (5.7) 10.8 2.2 Trade Balance (RMB/bn) 406.2 209.5 194.6 298.0 324.8 311.2 342.8 346.0 278.4 Export (USD YoY %) (11.4) (25.3) 11.5 (1.8) (4.1) (4.8) (4.4) (2.8) (10.0) Import (USD YoY %) (19.0) (13.8) (7.6) (10.9) (0.4) (8.4) (12.5) 1.5 (1.9) Trade Balance (USD/bn) 63.3 32.6 29.9 45.6 50.0 48.1 52.3 52.0 42.0 CPI (YoY %) 1.8 2.3 2.3 2.3 2.0 1.9 1.8 1.3 1.9 PPI (YoY %) (5.3) (4.9) (4.3) (3.4) (2.8) (2.6) (1.7) (0.8) 0.1 FAI (YTD/ YOY %) - 10.2 10.7 10.5 9.6 9 8.1 8.1 8.2 Real Estate Investment - 3 6.2 7.2 7 6.1 5.3 5.4 5.8 (YTD/ YoY %) Industrial Production (YoY %) - 5.4 6.8 6 6 6.2 6 6.3 6.1 Retail Sales Growth - 10.2 10.5 10.1 10 10.6 10.2 10.6 10.7 New Lending (RMB/bn) 2510.0 726.6 1370.0 555.6 985.5 1380.0 463.6 948.7 1220.0 M2 (YoY %) 14.0 13.3 13.4 12.8 11.8 11.8 10.2 11.4 11.5 Aggregate Financing (RMB bn) 3475.8 831.2 2393.1 780.9 677.0 1647.9 479.1 1469.7 1715.3 3
World Economic/Financial Indicators Global Indices Money market Index Closing P/E WTD Yield (%) WTD chg(%) Price chg(%) U.S. US Fed Fund Rate 0.50 0.00 DJIA 18,169.68 17.23 0.04 US Prime Rate 3.50 0.00 S&P 500 2,133.04 20.05-0.39 US Discount Window 1.00 0.00 NASDAQ 5,215.98 31.18-0.49 ECB Rate (Refinancing) 0.00 0.00 EUR BOJ Policy Rate 0.00 0.00 FTSE 100 6,986.57 60.19-0.57 US Treasury (1 Mth) 0.17-0.06 DAX 10,717.08 20.01 0.15 US Treasury (1 Yr) 0.65 0.01 CAC40S 4,533.57 23.51-0.14 US Treasury (5 Yr) 1.35 0.09 STOXX EUR 600 341.71 26.24-0.75 US Treasury (10 Yr) 1.85 0.10 Asia US Treasury (30 Yr) 2.61 0.11 HSI 23,132.35 12.54-0.74 Japan 1-Yr Gov. Bond -0.30 0.01 HSCEI 9,608.91 8.24-0.34 Japan 10-Yr Gov. Bond -0.05 0.01 CSI300 3,345.70 15.28 0.82 German 1-Yr Gov. Bond -0.69 0.01 SSE Composite 3,112.35 18.10 0.90 German 10-Yr Gov. Bond 0.17 0.17 SZSE Composite 2,068.09 44.64 0.37 China 1-Yr Gov. Bond 2.21 0.05 NIKKEI 225 17,336.42 21.83 0.59 China 5-Yr Gov. Bond 2.49 0.06 KOSPI 2,024.12 18.16-0.81 China 10-Yr Gov. Bond 2.72 0.05 TWSE 9,299.55 17.01-0.19 1-mth LIBOR 0.53 0.01 S&P/ASX 200 5,295.55 23.70-2.69 3-mth LIBOR 0.89 0.01 MSCI Index O/N SHIBOR 2.25 0.05 MSCI WORLD 1,694.66 21.93-0.55 1-mth SHIBOR 2.74 0.02 MSCI DEVELOPED 411.83 20.98-0.59 O/N HIBOR 0.12 0.04 MSCI EMERGING 905.31 15.64-0.88 3-mth HIBOR 0.62 0.03 MSCI US 2,031.86 20.63-0.40 O/N CNH HIBOR 2.02 0.22 MSCI UK 2,032.58 62.57-0.63 1-mth CNH HIBOR 3.60 0.09 MSCI France 128.70 21.49-0.02 MSCI Germany 136.48 24.28 0.00 MSCI China 62.60 14.11-1.29 Corporate Bonds (Moody s) MSCI Hong Kong 13,151.52 15.27-0.21 Aaa 3.52 0.05 MSCI Japan 829.74 17.65 0.74 Baa 4.39 0.01 * As of 27/10/2016 closing price Global Commodities Money market Unit Price WTD chg(%) Spot Rate WTD chg(%) Energy Euro/USD 1.09-0.46 NYMEX WTI USD/bbl 49.72-1.41 GBP/USD 1.23-0.01 ICE Brent Oil USD/bbl 50.47-1.77 AUD/USD 0.76-0.69 NYMEX NatGas USD/MMBtu 2.76-12.00 USD/CAD 1.34 1.60 Basic Metals USD/JPY 104.70 0.96 LME Alum.Cash USD/MT 1,696.00 5.62 USD/KRW 1,141.93 1.29 CMX Cop.Active USD/lb. 216.35 3.22 USD/CHF 0.99 0.34 LME Steel Cash USD/MT 312.50 0.00 USD/CNY Midpoint 6.77 0.63 LME Lead Cash USD/MT 2,032.75 1.50 USD/CNY 6.78 0.57 Precious Metals USD/CNY NDF CMX Gold USD/KRW 1,270.03 0.00 12-mth spot pr. 6.96 0.71 Gold Futures USD/KRW 1,269.50 0.16 USD/CNH 6.79 0.73 CMX Silverbn USD/KRW 17.69 0.29 USD/HKD 7.76-0.03 NYMEX Platinum USD/T. oz 967.80 2.87 CNY/HKD 1.14-0.62 Agri, Products CNH/HKD 1.14-0.77 CBOT Corn USD/bu 357.50 1.85 USD/TWD 31.63 0.34 CBOT Wheat USD/bu 414.50-0.60 USD/SGD 1.39 0.30 NYB-ICE Sugar USD/lb. 22.59-0.13 USD/THB 35.08 0.23 CBOT Soybeans USD/bu. 1,025.00 4.09 USD/INR 66.87 0.09 All data sources: Bloomberg, CEBI, NBS 4
Disclosures Analyst Certification We, LAM Chiu Kei, Banny and LIU, Frank, being the persons primarily responsible for the content of this research report, in whole or in part, hereby certify that all of the views expressed in this report accurately reflect our personal view about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. We and/or our associates have no financial interests in relation to any listed company (ies) covered in this report, and we and/or our associates do not serve as officer(s) of any listed company (ies) covered in this report. Disclaimer This report is for our clients only and is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expresses or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. CEB International Capital Corporation Limited is under no obligation to update or keep current the information contained herein. CEB International Capital Corporation Limited relies on information barriers to control the flow of information contained in one or more areas within CEB International Capital Corporation Limited, into other areas, units, groups or affiliates of CEB International Capital Corporation Limited. The compensation of the analyst who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of CEB International Capital Corporation Limited as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither CEB International Capital Corporation Limited nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. Additional information will be made available upon request. Copyright 2016 CEB International Capital Corporation Limited No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of CEB International Capital Corporation Limited. Office address: CEB International Capital Corporation Limited, 22/F AIA Central, 1 Connaught Road Central, Hong Kong. Tel: (852) 2916 9600 5