Transcript RMBbn

Richard Yorke
Deputy Chief Executive, China Business
China Economic Trends
Qu Hongbin
Senior Economist, China
19 April 2005
China’s key policy and economic
trends in 2005
Key points
 Tight credit policy will remain in place
– investment remains overheated and inflationary pressure has not eased
– quantitative controls vs. interest rate hikes
 Market-oriented reforms are the ultimate solution
– land and energy prices must be unshackled
– speed up banking reform to stop credit misallocation
 Hard landing for investment, but not GDP growth
– fixed investment growth to slow from 25% in 3Q04 to less than 10% by 2H05
– consumption growth will act as a buffer for GDP growth
 No change in RMB policy under speculative circumstance
4
Investment has been overheated since late 2002
6
Annual change in urbanisation ratio (percentage point)
ICOR
5
4
 Local governments rushing to convert
farmland into industrial zones, while
promoting property and road projects
 Nearly 4,000 industrial parks and
development zones under construction,
with a planned area of 36,000 sq km,
equal to 1.5 times China’s existing
urban area, or 62 times the size of
Singapore
3
2
1
0
Korea
(197080)
5
Taiwan Malaysia Japan
(1970(1975- (195580)
85)
65)
US
(18901910)
China
(19982003)
 36 airports to be built within a 300-mile
radius of Shanghai
Quantitative tightening is working...
Money supply M1
Bank loans
Money supply M2
% Yr
25
% Yr
25
% Yr
25
Industrial output
% Yr
25
Heavy industry
Light industry
20
20
15
20
15
15
10
10
5
5
0
0
15
10
10
5
5
98
6
20
99
00
01
02
03
04
05
99
00
01
02
03
04
05
…but investment is still too hot...
% Yr
60
% Yr
60
50
50
40
40
30
30
20
20
10
10
0
0
02
03
Total fixed investment
7
04
Steel output
Real estate investment
... And inflationary pressure has not eased
108
2.0
106
1.5
1.0
104
15
% Yr
20
15
10
0.5
102
0.0
100
-0.5
98
10
5
5
0
0
-1.0
96
-1.5
94
-2.0
02
8
Producer output price index
Producer input price index
Consumer price index
% Yr
03
% mom (SA, RHS)
04
05
CPI index ( SA,Dec.02=100)
-5
-5
-10
-10
97
98
99
00
01
02
03
04
05
PBoC will keep sterilising FX reserve expansion
%Yr
RMBbn
1000
50
45
900
40
800
35
700
600
30
500
25
400
20
300
15
200
10
100
Sep-04
Jul-04
May-04
Mar-04
Jan-04
04
FX reserves
Nov-03
03
Base money
Sep-03
02
Jul-03
01
May-03
0
0
Mar-03
hikes in deposit reserve ratio
Jan-03
5
9
PBoC bills outstanding
Rate hikes needed to prevent negative real lending
rate
% Yr
6
%pa
10
% Yr
6
9
5
5
8
7
4
4
3
3
2
2
1
1
6
5
4
3
2
0
0
-1
-1
1
-2
-2
-3
-3
0
98
10
99
00
01
02
03
Central bank's rediscount rate
One year benchmark lending rate
04
98
99
00
CPI
01
02
03
Non-food CPI
04
05
Credit cycle vs. investment cycle
10
0
0
-10
M1
11
Fixed-asset investment
2004
10
2002
20
2000
20
1998
30
1996
30
1994
40
1992
40
1990
50
1988
50
1986
60
1984
60
1982
%Yr
70
1980
%Yr
70
-10
Would a renminbi revaluation help to cool
investment?
Monthly net inflows of short-term capital
US$mn
RMB/ US D
20000
10.0
15000
9.5
10000
9.0
5000
8.5
0
8.0
-5000
-10000
7.5
-15000
7.0
97
98
Short-term capital inflows
12
99
00
01
02
RMB NDF 1yr forward rate
03
04
RMB spot rate
Is the renminbi undervalued?
5
As % of GDP
4
3
2
1
0
-1
-2
-3
-4
1990
1991
1992
1993
1994
1995
Trade balance of China/Hong Kong combined
13
1996
1997
1998
1999
2000
China trade balance
2001
2002
2003
Making the market work
Monthly trade flows and FX mkt. turnover
70000
60000
US$mn
Avg. daily FX turnover (2H04)= US$1200mn
50000
What has been done?
– an inter-bank foreign currency spot market (314
members, 4 currencies, daily volume USD500m)
– a few banks able to trade RMB forward contracts with
customers
40000
30000
What needs to be done?
20000
– introduce more bank participants to break the big
four’s oligopoly
10000
– allow currency trading for financial transaction
purposes
0
94 95 96 97 98 99 00 01 02 03 04
– establish a market-maker system
– introduce more trading products, including derivatives
Exports
14
Imports
FX mkt. turnover
Banking reforms are the key to stop credit
misallocation
RMB 1.4 trn NPLs were
transferred from state
banks to AMCs
Progress in NPL sale has been slow (Rmb bn)
Total NPLs acquired in 1999
1400
Amount of asset disposed by Jun 03 424
As % of total assets
30
Proceeds from asset sales
80
Recovery ratio
19%
Next steps?
Joint ventures with foreign investment banks
Selling to foreign investors
First major step in 1999-2000
The banks’ NPL ratio still high
Big four banks
Total loans, Rmb bn
8184
NPL ratio (%)
26
Total amount of NPLs (%)
2135
Another round of massive fiscal
bailing out in 2004
More complicated assets, lower recovery rate
Total banking system
13129
23
3020
Rising bad loan provision from 0.3% to 1% of
total assets
Using 70-80% of net profits to write down NPLs
Without a massive fiscal bail-out,it would
take 10 years for the banks to reduce NPL
ratio to below 15%
The big four to be listed on domestic and foreign markets by 2006
Will this make them real banks?
15
Land and energy prices must be unshackled
6
Annual change in urbanisation ratio (percentage point)
ICOR
5
4
 A market-based pricing mechanism for
land is essential to cure overexpansion in construction.
 Replacing current land leasing policy
with property taxation system can
remove the incentives for local
governments rushing into converting
farmland into industrial/commercial
zones
3
2
1
0
Korea
(197080)
16
Taiwan Malaysia Japan
(1970(1975- (195580)
85)
65)
US
(18901910)
China
(19982003)
 The rigid controls over prices of energy
and transportation must be eased to
cool reckless investment
Only a third of the way to investment cycle trough
% Yr
50
% Yr
50
40
40
policy tightening
policy tightening
policy tightening
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
81
83
85
87
89
Real growth in fixed investment
17
91
93
Forecast
95
97
99
01
Linear (Trend growth)
03
05P
Hiatus needed to work off excess capacity
Fixed investment breakdown by sector
Other
service
sectors
22%
Farming Mining
Manufacturing
1%
3%
15%
US$bn
250
2003 total fixed investment=US$664bn
The main area of
excess
investment
200
150
100
18
Other service
sectors
Real estate
Transportation
Power,gas
and water
Mining
Transportation
11%
0
Manufacturing
Real estate
31%
50
Farming
Power,gas
and water
17%
Consumption growth to hold up well
40
% Yr
% Yr
40
12000
5
5
0
0
Rural household income
Urban household income
19
Fixed investment
2005
10
2004
10
2003
15
2002
15
2001
6000
2000
20
1999
20
1998
8000
1997
25
1996
25
1995
30
1994
30
1993
35
1992
35
-5
RMB bn
10000
4000
2000
0
-5
19
80
19
83
19
86
19
89
19
92
19
Household deposits in banks
95
19
98
20
01
20
04
Household debt
Housing privatisation has a big wealth effect
Housing privatisation: A tale of two families
Beijing: A ministerial-level organisation
Lao Li
Size of apartment
Purchase price paid by Mr Li
Market price
Net gain in wealth
Net gain in wealth / family income
Source: HSBC
20
Xian: A state-owned manufacturing enterprise
Division chief
120 sq m
RMB1,400 / sq m
RMB7,000 / sq m
RMB672,000
13x
Xiao Fang
Size of apartment
Purchasing price paid by Mr Wang
Market price
Net gain in wealth
Net gain in wealth / family income
Engineer
60 sq m
RMB500 / sq m
RMB3,000 / sq m
RMB150,000
7x
Fiscal spending targeted at stimulating consumption
rather than construction
7
%
Fiscal spending on education as % of GDP
2004 household survey: key motivations for saving
Children's
education
6
5
4
Retirement
3
Home purchase
2
1
Unpredictable
events
0
China
21
Asian
average
India
Thailand Malaysia OECD
average
0%
10%
20%
30%
40%
GDP growth to slow from over 10% y-o-y in 1H04
to 7% by 2005/6
% Year
2001
2002
2003
2004e
2005f
2006f
Consumer Spending
6.2
6.2
6.5
7.0
6.4
6.5
Gov't Consumption
11.5
12.0
5.0
4.0
-4.5
2.5
Fixed Investment
12.2
15.0
20.4
20.0
12.0
8.0
Stockbuilding (% GDP)
-1.4
-1.2
0.1
0.0
-0.1
-0.1
Exports
7.5
18.0
32.0
32.0
14.0
5.0
Imports
8.8
19.0
36.0
31.0
11.0
5.0
GDP
7.3
8.0
9.3
9.0
7.0
7.0
Industrial Production
9.9
12.6
12.8
12.0
7.6
7.3
10.1
8.8
9.1
13.1
12.0
10.5
Consumer Prices
0.7
-0.8
1.2
3.9
3.0
2.0
Current Acc. (% GDP)
1.5
2.2
3.3
2.5
1.8
1.4
Budget Bal. (% GDP)
-2.7
-3.0
-2.9
-2.5
-1.8
-1.8
CNY/USD
8.3
8.3
8.3
8.3
8.3
8.3
1-Yr time deposit (%)
7.1
10.1
14.3
8.7
9.0
8.5
1 Yr Lending (%)
5.9
5.3
5.3
5.4
5.8
5.8
Retail Sales
22
How important is China?
Year 2003 exports
Philippines
Taiwan
Hong Kong
Korea
Indonesia
Thailand
Singapore
Malaysia
Japan
Japan (Calcuated in JPY term)
23
to China to China & HK
% of total exports
6.0%
14.5%
14.9%
34.5%
42.6%
-18.1%
25.7%
6.2%
8.2%
7.1%
12.5%
7.0%
17.0%
6.1%
12.0%
12.2%
18.5%
12.2%
18.5%
to China to China & HK
Share of increase in total exports
101.6%
205.6%
84.5%
66.1%
64.2%
-36.2%
50.6%
23.1%
21.6%
18.5%
24.0%
17.2%
32.8%
10.0%
17.1%
32.5%
40.7%
67.9%
79.3%
A slowing China means softer commodity prices
% Yr(3mma)
% Yr(3mma)
21
30
18
20
15
10
12
0
9
-10
6
Mar-95
-20
Mar-98
CH: industrial production (LHS)
24
Mar-01
CRB index (RHS)
Mar-04
China’s New Industrialization
Key points
 Relocation of global manufacturing business into China
– market reforms, WTO deal and globalization
– domestic market and cheap resources
 Expansion of industrial base creates city jobs
– cluster of industries
– service sectors
 Each year 10m people will migrate from their villages to cities
– additional demand ranging from food to housing
 Fixing the financial system crucial to sustain growth
26
Foreigner investors remain bullish on China
1. China
2. US
3. UK
4. Germany
5. France
10. Australia
12. Japan
15. India
18. Hong Kong
20. Thailand
21. Korea
22. Singapore
24. Taiwan
0.0
27
0.5
1.99
1.89
1.51
1.50
1.29
1.16
1.12
1.05
0.95
0.93
Low confidence
High confidence
0.91
0.89
Values calculated on a 0 to 3 scale
0.85
1.0
1.5
2.0
2.5
3.0
Foreign-invested enterprises account for 75% of the
increase in China’s market share
6%
5%
4%
3%
2%
1%
0%
93
94
95
96
97
China's total share
28
98
FIE's share
99
00
01
Domestic firm's share
02
03
Over 150m surplus rural labour queuing for city jobs
60
%
50
40
30
20
10
0
Primary industry
Secondary Industry
Share in GDP
29
Share in employment
Tertiary industry
Rural-urban income gap
RMB
Urban area per capita income
Rural area per capita income
12000
10000
8000
6000
4000
2000
0
91
30
92
93
94
95
96
97
98
99
00
01
02
03
Plenty supply of skillful labour
16.0
1.8
14.0
1.6
1.4
1.2
10.0
1
8.0
0.8
6.0
0.6
4.0
0.4
2.0
0.2
0.0
0
94
95
96
97
98
99
Number of rolled university student
31
00
01
02
03
Number of universities
04
(000')
Mn person
12.0
Is the NPL situation beyond redemption?
China’s total public debt
2003
Treasury bonds outstanding (RMBbn)
1,930
Special financial bonds (RMBbn)
1,001
Total explicit government debt (RMBbn)
2,931
– as % of GDP
28.6%
Unrecoverable NPLs of state banks (RMBbn)
2,277
Pension shortfalls (RMBbn)
5,000
Total public debt (RMBbn)
10,000
– as % of GDP
Source: PBoC, HSBC
32
90%
Selling state assets is a key financing option
Stylized government balance sheet at end-2003
Liabilities & net worth
(RMBbn)
Assets
(RMBbn)
Domestic bonds outstanding
2,931
Market cap. of listed SOEs (A, B, H shares)
4,537
Unrecoverable NPLs of state banks
2,277
Net assets of 172,000 unlisted SOEs
3,600
Non-funded pension debt
5,000
Other public physical assets
4,618
External debt outstanding
1,607
Land and subsoil reserves
N/A
Net worth
>0
Foreign reserve assets
3,345
Sources: HSBC, Ministry of Finance, PBoC
33
Real restructuring holds the key
 Corporatisation of state banks
– limit direct intervention by government
 Commerialistion of state banks
– make profit the primary motive
– appoint professional rather than political managers
– introduce performance-based salaries
 Introduction of competition
– smaller, non-state banks are more efficient
34
Foreign JVs are a short-cut to strengthen banks
 Foreign JVs instrumental in upgrading China’s manufacturing sector
– spillover effect of technology and management
 This should also apply to knowledge-intensive finance industry
– foreign stake limit in banks is raised from 10% to 25%
– removing hurdles to enable foreign financial service providers to tap China market
 WTO-led expansion of foreign banks
35
Appendix 1: China’s main trading partners
China's main trade partners (as % of China's total in 2003)
Country/region
US
Euroland
Japan
Hong Kong
Korea
Taiwan
UK
Singapore
Austria
Malaysia
36
Export share
USD
EUR
JPY
HKD
KRW
TWD
GBP
SGD
AUD
MYR
25.5
20.5
15.0
5.2
4.6
2.5
2.5
2.4
1.7
1.4
Import share
8.4
13.0
18.4
1.2
10.6
12.3
0.9
2.5
1.8
3.4
Total trade share
17.2
16.9
16.7
3.3
7.5
7.2
1.7
2.5
1.7
2.4
Appendix 2: 45% investment-GDP ratio unsustainable
%
50
China's fixed investment-GDP ratio
%
35
45
30
40
25
Fixed investment-GDP ratio
20
35
15
30
10
25
5
20
0
15
80
37
82 84 86 88
90 92 94 96
98 00 02
Thailand
(1976-96)
Korea
(1976-96)
Japan
US
UK
(1950-70) (1890-1910) (1820-40)
Appendix 3: Manufacturing job losses happening in
China too
Index
Index
Employ ment in manufacturing
105
105
100
100
95
95
90
90
85
85
80
80
94
95
96
US
97
98
UK
Source: HSBC, Thomson Financial Datastream
38
99
00
Germany
01
02
China
03
04
Appendix 4: A renminbi cure for global economic
imbalance?
 China accounts for 25% of the overall US trade deficit, and the ratio
remained stable
 A 10% revaluation in the RMB would weaken real exchange rate of USD by
1% and cut the US trade deficit US$10bn
 China runs a big trade deficit with Asian countries
39
Appendix 5: China’s bilateral surplus bigger with the
US but now has deficit with Asia
$ mn
60,000
$ mn
60,000
50,000
50,000
40,000
40,000
30,000
30,000
20,000
20,000
10,000
10,000
0
0
-10,000
-10,000
-20,000
-20,000
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Chinese trade balance w ith US
Source: HSBC, Thomson Financial Datastream
40
Chinese trade balance w ith Asia
Appendix 6: The dollar's trade weighted index: the
Fed's measure
Country
Eurozone
Canada
Japan
Mexico
China
United Kingdom
Taiwan
Korea
Singapore
Hong Kong SAR
Malaysia
Brazil
Switzerland
Thailand
Weight (out of 100)
18.5
16.5
11.1
11.0
9.8
5.2
3.0
3.9
2.2
2.0
2.3
1.9
1.4
1.4
Country
Philippines
Australia
Indonesia
India
Israel
Saudi Arabia
Russia
Sweden
Argentina
Venezuela
Chile
Colombia
Total
Weight (out of 100)
1.2
1.3
1.0
1.1
1.0
0.6
0.7
1.1
0.4
0.4
0.5
0.4
100.0
Source: Federal Reserve. Weights are for the broad index of the foreign exchange value of the dollar and were last updated on 16
December 2003. The weights reflect a mixture of export and import patterns.
41
Appendix 7: Global impact of investment slowdown in
China
China's share of global commodity consumption
% of global consumption
% of increase in global consumption
7.8
40
Steel (1H04)
25.0
57
Copper (2003)
19.7
96
Aluminum (2003)
18.9
48
Platinum (2003)
18.5
173
Crude oil (1H04)
42
Appendix 8: Asian real effective exchange rates
REER
RMB
HKD
INR
IDR
KRW
MYR
PHP
SGD
TWD
THB
Jan-90
100
100
100
100
100
100
100
100
100
100
Jan-95
72.9
142.5
71.7
95.8
94.6
98.4
114.8
116.9
92.0
99.0
Jan-96
79.4
144.1
65.8
101.2
97.5
99.5
117.5
117.4
88.3
104.1
Jan-97
84.7
149.1
75.7
103.4
93.5
105.3
123.4
119.2
89.7
107.2
Jan-98
101.6
173.7
79.6
36.1
58.9
73.1
96.3
127.9
86.3
67.1
Jan-99
88.6
160.7
75.5
60.0
78.1
80.1
106.1
112.5
81.3
89.5
Jan-00
87.7
151.0
78.8
70.3
81.6
80.3
102.1
112.6
85.0
87.0
Jan-01
93.4
151.5
76.6
61.4
78.4
85.6
90.2
115.3
85.9
80.0
Jan-02
97.0
150.5
79.9
67.5
80.7
90.5
96.7
110.5
82.0
82.8
Jan-03
88.9
139.6
73.6
77.6
86.1
84.1
87.3
109.6
77.0
79.5
Jan-04
85.2
130.2
73.4
78.9
81.7
78.7
81.0
106.4
73.4
81.3
Nov-04
81.8
127.5
74.7
74.1
89.0
77.8
82.3
107.4
73.9
78.7
43
Appendix 9: China’s three-tier banking system
Breakdown of financial institution assets (June 2004)
Other financial institutions
14%
Foreign banks
2%
Municipal banks
5%
Rural credit cooperatives
10%
Regional banks
15%
44
Big four state banks
54%
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Hongkong and Shanghai Banking Corporation Limited. (May 2004)
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