Presentation on theme: "China’s Macroeconomic Outlook: Monetary Tightening"— Presentation transcript:
1 China’s Macroeconomic Outlook: Monetary Tightening See the Disclosure Appendix for the AnalystCertification and Other DisclosuresChina’s Macroeconomic Outlook: Monetary TighteningDon HannaAsia Pacific Economic and Market AnalysisShanghaiDecember 2004
2 Overheating or Overinvestment? Growth of consumption, fixed capital formation and GDP (%)Source: China National Statistics Bureau, CEIC and Citigroup estimates.
3 Selective Tightening Policies Policy Measures ImplementedTightening Liquidity by the PBOCReserve requirements have been raised three time since September 2003 and currently the ratios are 8% for weak banks and 7.5% for all othersWindow Guidance by the CBRCBanks have been advised to slow lending to sectors with risks of bubbles and inspection groups have been dispatched to check banks’ loan portfoliosPreferential supports to investment projects in areas such as coal, electricity, oil, transportation and water supplyControl of Land Use by the State CouncilInvestigation of irregular conversion of land use and tighter procedure for approval of new land development projectsConsolidation of Investment by NDRCConsolidation through review of investment projects, targeting iron and steel, cement, office buildings, golf course, large shopping centers, etcHowever, projects in the following areas are not affected: agriculture, forestry, irrigation, ecological development, education and scienceAdditional Policy OptionsTightening LiquidityOpen market operation or further raising deposit reserve requirement ratiosInterest Rate HikeChina began to raise interest rates to avoid negative real interest rates and substitute for administrative measures. Inflation could accelerate the planCurrency RevaluationExchange rate policy reform is still driven by fundamental consideration, which may be delayed due to concerns about uncertainty in the economy
4 Tightening Slows Growth of Monetary Variables Growth money supply M2 and bank loans (% yoy)Source: China National Statistics Bureau, CEIC and Citigroup estimates.
5 But Economic Activity Remains Robust Growth of monthly fixed asset investment in 2003 and 2004 (% YoY)Growth of monthly retail sales in 2003 and 2004 (% YoY)Source: China National Statistics Bureau, CEIC and Citigroup estimates.
6 Changing Pattern of Investment Growth Growth of fixed asset investment by industry (% YoY)Source: China National Statistics Bureau, CEIC and Citigroup estimates.
7 Core Inflation Is Set to Rise Quickly Headline inflation likely peakingWhile headline and non-food inflation are still moderate, they climbed from deflation 2 years agoThe official rates may still underestimate inflation pressures because of price controlsHigh input prices is likely to push inflation higher. Earlier analyses suggest that (1) 1% increase in raw material prices leads to 0.3% rise in CPI with time lags; (2) $10/barrel rise in oil prices pushes up CPI by %Rapid growth of wages not only pushes up costs of production but also strengthens consumer demand in the marketsNon-food CPI should grow further (%)Source: China National Statistics Bureau, CEIC and Citigroup estimates.
8 Power Shortage Became a Nation-wide Problem 24 out of 31 provinces experience rationing of electricity consumption. Total shortage can be 3-6% of expected demand and net impact on GDP could be 0.3%The government introduced new schemes to ease the shortages, including increasing investment, usage management and price liberalizationStand-alone generators significantly reduce the impact of power shortages, but they at the same time raise cost of production and pollute the environmentPower shortages would not disappear until 2006ESource: National Statistics Bureau, and Chinese Academy of Social Sciences.
9 Shortage of Migrant Labor in Coastal China Is labor supply unlimited?Number of migrant laborers reached 98mn in November-2003 and has been growing by 5% yoyUnderdeveloped labor market – lack of information, low wages, poor social welfare benefits and skill mismatchSome employers are already paying 20-30% more to attractive workers; and social welfare contributions could account for 40-50% of payrollsImplications: hurting corporate profits, boosting consumption and adding inflationary pressureRising urban unemployment rate (%)Source: National Statistics Bureau, and Chinese Academy of Social Sciences.
10 Beginning of Monetary Tightening On 28 November 2004, PBOC announced changes to its interest rate policiesCeiling for lending rates were removed for commercial banks (with the only exception of rural credit cooperatives) and deposit rates were allowed to float downward, but not upwardBase lending and deposit rates were raised, by 27bps for 1-year loans/depositsChanging lending rates, August 1996 – Oct 2004 (%)Source: People’s Bank of China and CEIC.
11 CNY May Appreciate At Least 25% in the Next 10 Years GDP per capita and exchange rates relative to purchasing power parity at five-year intervals: Japan; Taiwan; Korea; and China103050709020406080GDP per capita, percent of U.S.Exchange Rate relative to PPP (US=100)KoreaTaiwanChinaJapan1950197519551995196019802002Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.1, Center for International Comparisons at the University of Pennsylvania (CICUP), October 2002.; and IMF, April 2003 WEO Database .
12 Asia’s Growth Is Linked to One Another More Than the US Asia PacificAsia’s Growth Is Linked to One Another More Than the USBusiness Cycle Concordance Based on GDP Growth CyclesLast 10 Years (1Q93-1Q03)Note: * Significant at the 10% level; ** Significant at the 5% level; *** Significant at the 1% level Source: Citigroup calculations based on John McDermott and Alasdair Scott, “Concordance in Business Cycles” IMF Working Paper No. 00/37 (Washington DC: International Monetary Fund) 2000
13 Strong intra-regional trade linkages China and Intra-regional share in Asia Total TradeSource: CEIC, Citigroup estimates.
14 Long-term Asia FX forecasts show appreciation Asia PacificLong-term Asia FX forecasts show appreciationNominal Exchange Rate and Implied Real Exchange Rate AppreciationSource: Citigroup estimates
15 Asian Macro Forecast: Hurt by Oil Asia PacificAsian Macro Forecast: Hurt by OilUpdate as neededSource: Consensus Economics, Citigroup estimates
16 Tightening Did Not Solve the Fundamental Problem GDP growth and total factor productivity growth as a share of GDP growth (% YoY, %)Source: National Statistics Bureau, CEIC and Citigroup estimates.
17 Costs of capital and potential returns to capital in China (%) Capital Is Too Cheap!Costs of capital and potential returns to capital in China (%)Note: Borrowing costs for private companies are from survey by PBOC officials Xie Ping and Lu Lei and average return to capital of listed companies is from Citigroup.Source: Citigroup estimates.
18 Rebound of Nonperforming Loans The government is accelerating its banking reforms. But are these sufficient?Source: China Banking Regulatory Commission and Citigroup estimates.
19 Asian Trade Reorienting Through China Share in Total US ImportsSource: CEIC, Citigroup
20 Pattern of Tech Dependence Shifting Asia PacificPattern of Tech Dependence ShiftingSources: Citigroup calculations based on data provided by CEIC
21 China’s Regional Structure Likely to Remain Diversified Domestic economic structure/costs will be diversifiedCost advantages over some Asian economies are already quite limitedGDP per Capita (US$)Source: Citigroup, China Statistical Yearbook and CEIC.
22 Education Still an Opportunity Educational Attainment of Population 25+, 2000Add VNSource: Barro & Lee
23 Governance May Be a Key to Growth Governance Indicator (Aggregate)Note: Governance indicators are oriented so that higher values correspond to better outcomes, on an aggregate scale from –15 to 15. Aggregate include voice and accountability, political stability, government effectiveness, rule of law, regulatory quality and control of corruption indicators. Source: D. Kaufmann A. Kraay, and M. Mastruzzi (2003) • World Bank Policy Research Working Paper 3106
24 China – Macroeconomic Forecasts Source: China National Statistics Bureau, CEIC and Citigroup estimates.
25 Disclosure Appendix ANALYST CERTIFICATION I, Yiping Huang, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.