Transcript Asia Pacific

See the Disclosure Appendix for the Analyst
Certification and Other Disclosures
China’s Macroeconomic Outlook:
Monetary Tightening
Don Hanna
Asia Pacific Economic and Market Analysis
Shanghai
December 2004
Overheating or Overinvestment?
Growth of consumption, fixed capital formation and GDP (%)
25
%
20
15
10
5
0
1998
1999
2000
2001
Consumption Fixed Capital Formation
2002
GDP
2003
Source: China National Statistics Bureau, CEIC and Citigroup estimates.
2
Economic and Market Analysis (Asia Pacific)
Selective Tightening Policies
Policy Measures Implemented
Tightening Liquidity by
the PBOC
Reserve requirements have been raised three time since September 2003 and
currently the ratios are 8% for weak banks and 7.5% for all others
Window Guidance by
the CBRC
Banks have been advised to slow lending to sectors with risks of bubbles and
inspection groups have been dispatched to check banks’ loan portfolios
Preferential supports to investment projects in areas such as coal, electricity,
oil, transportation and water supply
Control of Land Use by
the State Council
Investigation of irregular conversion of land use and tighter procedure for
approval of new land development projects
Consolidation of
Investment by NDRC
Consolidation through review of investment projects, targeting iron and steel,
cement, office buildings, golf course, large shopping centers, etc
However, projects in the following areas are not affected: agriculture, forestry,
irrigation, ecological development, education and science
Additional Policy Options
Tightening Liquidity
Open market operation or further raising deposit reserve requirement ratios
Interest Rate Hike
China began to raise interest rates to avoid negative real interest rates and
substitute for administrative measures. Inflation could accelerate the plan
Currency Revaluation
Exchange rate policy reform is still driven by fundamental consideration, which
may be delayed due to concerns about uncertainty in the economy
3
Economic and Market Analysis (Asia Pacific)
Tightening Slows Growth of Monetary Variables
Growth money supply M2 and bank loans (% yoy)
30
% YoY
25
20
15
10
5
0
Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar- Sep- Mar97
97
98
98
99
99
00
00
01
01
02
02
03
Money Supply M2 (% YoY)
Sep- Mar- Sep03
04
04
Financial Institution Loans (% YoY)
Source: China National Statistics Bureau, CEIC and Citigroup estimates.
4
Economic and Market Analysis (Asia Pacific)
But Economic Activity Remains Robust
Growth of monthly fixed asset
investment in 2003 and 2004 (% YoY)
60
Growth of monthly retail sales in 2003
and 2004 (% YoY)
% YoY
20
% YoY
50
15
40
10
30
20
5
10
0
0
Jan
Feb
Mar
Apr
May
Jun
2003
Jul
Aug
Sep
Oct
Nov
Jan
Dec
Feb
Mar
Apr
May
Jun
2003
2004
Jul
Aug
Sep
Oct
Nov
Dec
2004
Source: China National Statistics Bureau, CEIC and Citigroup estimates.
5
Economic and Market Analysis (Asia Pacific)
Changing Pattern of Investment Growth
Growth of fixed asset investment by industry (% YoY)
Jan-Feb
Secondary Industry (SI)
79
Mining
5
Manufacturing
78
Electricity, Gas & Water Production and Supply
61
Construction
93
Petroleum, Coking & Nuclear Fuels Processing
26
Communication, Computer & Other Electronic Eq
35
Electric Machinery and Instrument
170
Special Purpose Equipment
143
Electricity & Heating
64
Beverage Manufacturing
53
Textile Industry
152
Transportation Equipment
72
Metal Products
136
Ferrous Metal Mining, Smelting and Pressing
176
Smelting & Pressing of Non Ferrous Metals
36
Residential Building
49
Mar
58
60
72
47
74
151
2
93
38
53
65
71
90
127
65
138
21
Apr
45
30
48
40
63
164
9
96
102
38
11
-2
49
167
59
72
25
May
26
8
23
46
1
124
-3
32
5
48
-3
-2
35
16
31
26
23
June
30
35
24
53
3
156
17
-1
20
59
-1
26
36
28
10
3
22
Jul
46
69
41
52
32
116
101
98
40
54
9
10
59
47
15
13
24
Aug
37
38
34
46
41
119
84
69
59
47
44
35
35
34
22
-7
24
Sep
46
45
47
45
42
100
137
128
14
44
14
24
61
55
373
67
28
Oct
37
54
32
50
7
73
15
62
27
53
58
19
10
67
258
-7
31
Source: China National Statistics Bureau, CEIC and Citigroup estimates.
6
Economic and Market Analysis (Asia Pacific)
Core Inflation Is Set to Rise Quickly
6
Headline inflation likely peaking
%
5
4
3
2
1
0
(1)
(2)
Jan01
Apr
Jul
Oct
Jan02
Apr
Jul
Oct
CPI (% YoY)
Jan03
Apr
Jul
Oct
Jan04
Apr
Jul
Oct
CPI (% MoM)
Non-food CPI should grow further (%)
1.5
% YoY
1.0
0.5
0.0
-0.5
-1.0
-1.5
Jan-02
Apr
Jul
Oct
Jan-03
Apr
Jul
Oct
Jan-04
Apr
Jul
Oct
 While headline and non-food
inflation are still moderate, they
climbed from deflation 2 years ago
 The official rates may still
underestimate inflation pressures
because of price controls
 High 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
0.3-0.5%
 Rapid growth of wages not only
pushes up costs of production but
also strengthens consumer
demand in the markets
Source: China National Statistics Bureau, CEIC and Citigroup estimates.
7
Economic and Market Analysis (Asia Pacific)
Power Shortage Became a Nation-wide Problem
% YoY
20
15
10
5
0
(5)
(10)
86
87
88
89
90
91
GDP
70
92
93
94
95
Energy Consumption
96
97
98
99
00
01
02
Electricity Consumption
% YoY
60
50
40
30
20
10
0
Jan-04
Feb-04
Mar-04
Fixed Asset Investment
Apr-04
May-04
03
 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
liberalization
 Stand-alone generators
significantly reduce the impact of
power shortages, but they at the
same time raise cost of production
and pollute the environment
 Power shortages would not
disappear until 2006E
Jun-04
FAI in Power Industry
Source: National Statistics Bureau, and Chinese Academy of Social Sciences.
8
Economic and Market Analysis (Asia Pacific)
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% yoy
 Underdeveloped labor market –
lack of information, low wages,
poor social welfare benefits and
skill mismatch
 Some employers are already
paying 20-30% more to attractive
workers; and social welfare
contributions could account for 4050% of payrolls
 Implications: hurting corporate
profits, boosting consumption and
adding inflationary pressure
Rising urban unemployment rate (%)
8
%
7
6
5
4
3
2
1
0
1995
1996
NAB Data
1997
1998
CASS Data
1999
2000
2001
2002
2003*
Registerred Unemployment Rate
Source: National Statistics Bureau, and Chinese Academy of
Social Sciences.
9
Economic and Market Analysis (Asia Pacific)
Beginning of Monetary Tightening



On 28 November 2004, PBOC announced changes to its interest rate
policies
Ceiling 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 upward
Base lending and deposit rates were raised, by 27bps for 1-year
loans/deposits
Changing lending rates, August 1996 – Oct 2004 (%)
(with effect from) 23-Aug-96
6 months
9.18
1 year
10.08
1-3 years
10.98
3-5 years
11.7
> 5 years
12.42
23-Oct-97
7.65
8.64
9.36
9.9
10.53
25-Mar-98
7.02
7.92
9
9.72
10.35
1-Jul-98
6.57
6.93
7.11
7.65
8.01
7-Dec-98
6.12
6.39
6.66
7.2
7.56
10-Jun-99
5.58
5.85
5.94
6.03
6.21
25-Feb-02
5.04
5.31
5.49
5.58
5.76
29-Oct-04
5.22
5.58
5.76
5.85
6.12
Source: People’s Bank of China and CEIC.
10
Economic and Market Analysis (Asia Pacific)
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 China
Exchange Rate relative to PPP (US=100)
90
90
1995
1955
1975
1995
70
70
1980
50
50
1960
Korea 1960-1995
Taiwan 1955-1995
China 1980-2002
Japan 1950-1975
1950
30
30
2002
10
10
0
10
20
30
40
50
60
70
80
GDP per capita, percent of U.S.
Source: 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 .
11
Economic and Market Analysis (Asia Pacific)
Asia Pacific
Asia’s Growth Is Linked to One Another More Than the US
Business Cycle Concordance Based on GDP Growth Cycles
Last 10 Years (1Q93-1Q03)
HK
HK
ID
KR
MY
PH
SG
TW
TH
US
JP
ID
KR
***
**
MY
***
**
***
PH
***
***
**
***
SG
**
*
**
**
*
TW
***
*
***
***
**
**
TH
**
**
***
**
*
US
JP
**
**
*
**
**
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
12
Economic and Market Analysis (Asia Pacific)
Strong intra-regional trade linkages
China and Intra-regional share in Asia Total Trade
100%
90%
80%
34.5
45.5
46.1
46.6
48.2
46.4
44.7
44.9
42.7
40.7
70%
60%
50%
18.0
17.4
16.2
14.9
40%
30%
20%
10%
13.3
14.1
14.8
13.8
27.4
26.7
13.2
27.7
13.1
28.4
27.4
25.9
26.3
26.4
25.5
26.6
11.2
11.5
12.1
13.0
12.9
13.1
14.6
16.4
19.0
18.8
1995
1996
1997
1998
1999
2000
2001
2002
2003
JanJul 04
0%
China
Asia-Pac ex China
Japan
Rest of the World
Source: CEIC, Citigroup estimates.
13
Economic and Market Analysis (Asia Pacific)
Asia Pacific
Long-term Asia FX forecasts show appreciation
Nominal Exchange Rate and Implied Real Exchange Rate Appreciation
CN
HK
IN
ID
KR
MY
PH
SG
TW
TH
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
lc vs. USD
Implied Appreciation
2002
8.28
1.00
7.80
1.00
48.40
1.00
9,313
1.00
1,255
1.00
3.80
1.00
51.60
1.00
1.79
1.00
34.55
1.00
42.96
1.00
2003
8.28
0.95
7.80
0.93
47.20
1.01
8,466
1.15
1,195
1.03
3.80
0.97
54.50
0.93
1.75
0.97
34.60
0.96
41.50
0.99
2004
8.28
0.92
7.78
0.87
45.90
0.99
8,892
1.11
1,160
1.05
3.80
0.92
56.00
0.84
1.70
0.98
33.80
0.93
40.58
0.96
2005
8.07
0.94
7.80
0.82
46.00
1.00
8,942
1.11
1,120
1.09
3.77
0.89
57.40
0.77
1.64
1.00
33.12
0.93
39.21
0.98
2006
7.67
1.00
7.80
0.79
45.08
1.03
8,827
1.14
1,050
1.14
3.68
0.89
56.83
0.80
1.57
1.06
31.47
0.97
38.43
0.98
2007
7.21
1.06
7.80
0.77
44.18
1.07
8,832
1.16
1,000
1.19
3.50
0.97
55.69
0.85
1.52
1.10
29.74
1.05
37.66
1.01
2008
6.70
1.15
7.80
0.75
42.85
1.12
9,025
1.16
950
1.24
3.32
1.05
54.02
0.92
1.48
1.12
28.25
1.11
36.53
1.06
Source: Citigroup estimates
14
Economic and Market Analysis (Asia Pacific)
Asia Pacific
Asian Macro Forecast: Hurt by Oil
(% change)
GDP Forecasts
2004
2005
Citigroup Market Median
Citigroup Market Median
2006
Citigroup
Asia-Pacific
7.2
7.1
6.3
6.2
6.4
China
India
9.4
6.0
9.2
5.9
8.5
7.0
8.0
6.6
8.0
7.0
Asian NIEs
Hong Kong
Singapore
South Korea
Taiwan
5.6
7.7
8.3
4.6
5.8
5.7
7.4
8.3
4.8
5.8
3.8
4.5
4.5
3.3
4.1
4.2
4.5
4.4
4.1
4.2
4.7
5.0
4.5
5.0
4.0
SEA-5
Indonesia
Malaysia
Philippines
Thailand
Vietnam
5.8
4.8
7.0
6.0
6.2
7.3
5.5
4.7
7.1
5.2
6.1
7.2
5.1
5.0
5.0
4.3
5.7
7.1
5.0
4.9
5.3
4.2
5.6
7.0
5.3
5.5
5.5
4.5
5.2
7.5
Source: Consensus Economics, Citigroup estimates
15
Economic and Market Analysis (Asia Pacific)
Tightening Did Not Solve the Fundamental Problem
GDP growth and total factor productivity growth as a share of GDP growth (% YoY, %)
16
60
14
50
12
40
10
8
30
6
20
4
10
2
0
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
GDP Growth (%, LHS)
TFP Contribution (%, RHS)
Source: National Statistics Bureau, CEIC and Citigroup estimates.
16
Economic and Market Analysis (Asia Pacific)
Capital Is Too Cheap!
Costs of capital and potential returns to capital in China (%)
Average Return to Capital for Listed
Companies
Informal Financing Lending Rate
Private Sector Actual Borrowing Cost
from Banks
1-Year Working Capital Loan Rate
5-Year Government Bond Yield
Nominal GDP Growth (Potential)
Nominal GDP Growth (2Q04)
0
2
4
6
8
10
12
14
% 16
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.
17
Economic and Market Analysis (Asia Pacific)
Rebound of Nonperforming Loans
The government is accelerating its banking reforms. But are these sufficient?
30
%
26.5
25
23.0
20.4
20
17.8
15.7
15.6
15
13.3
13.4
10
5
0
End-2002
End-2003
Jun-04
Total
Sep-04
SOCBs
Source: China Banking Regulatory Commission and Citigroup estimates.
18
Economic and Market Analysis (Asia Pacific)
Asian Trade Reorienting Through China
Share in Total US Imports
100%
90%
80%
62.4 60.7
59.8 59.1
59.1 59.7
62.1 62.3
62.6 63.4
64.5 65.8
64.7 65.4
65.3
30%
16.4 16.7
17.1 17.0
17.1 17.6
16.9 16.5
16.2 15.8
15.4 14.1
14.0 13.2
12.8
20%
3.1
6.5
7.8
8.2
10.8 12.1
13.0
10.5
8.9
70%
60%
50%
40%
10%
3.9
18.1 18.7
4.8
5.4
18.3 18.5
5.8
6.1
18.0 16.6
7.2
14.5 14.0
8.0
13.4 12.8
9.0
12.0 11.1
9.4
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 JanSep
04
Japan
China
Asia ex China
Rest of the World
Source: CEIC, Citigroup
19
Economic and Market Analysis (Asia Pacific)
Asia Pacific
Pattern of Tech Dependence Shifting
Electronic Exports (% of Total Exports)
Electronic Exports (% of GDP)
60
80
70
50
60
40
50
40
30
30
20
20
10
10
0
0
China
Hong Kong Korea
Malaysia Philippines Singapore Taiwan
Thailand
China
Hong Kong
Korea
1999
Jan-Sep '99 Jan-Sep '04
Malaysia Philippines Singapore
Taiwan
Thailand
2003
Sources: Citigroup calculations based on data provided by CEIC
20
Economic and Market Analysis (Asia Pacific)
China’s Regional Structure Likely to Remain Diversified


Domestic economic structure/costs will be diversified
Cost advantages over some Asian economies are already quite limited
GDP per Capita (US$)
4500
4000
3500
3000
2500
2000
1500
1000
500
21
Guizhou
Vietnam
India
Shaanxi
Sichuan
Anhui
Jiangxi
Chongqing
Henan
Hunan
Indonesia
Inner Mongolia
Source: Citigroup, China Statistical Yearbook and CEIC.
Philippines
Xinjiang
Hubei
Shandong
Liaoning
Fujian
Jiangsu
Guangdong
Thailand
Zhejiang
Tianjin
Beijing
Malaysia
Shanghai
0
Economic and Market Analysis (Asia Pacific)
Education Still an Opportunity
Educational Attainment of Population 25+, 2000
35
Years, % of Population
30
25
20
15
10
5
0
CN
HK
IN
ID
Average year of schooling
KR
MY
PH
SG
TW
TH
JP
US
Percentage of population completed tertiary education
Source: Barro & Lee
22
Economic and Market Analysis (Asia Pacific)
Governance May Be a Key to Growth
Governance Indicator (Aggregate)
China
Hong Kong
India
Indonesia
Korea (South)
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
2002 Estimates
Aggregate
Average
Score
Percentile Rank
-2.11
43.2
7.30
82.5
-0.95
47.9
-5.16
22.9
3.80
71.4
2.66
65.2
-1.32
45.5
10.36
91.7
5.34
77.7
1.64
61.0
-3.24
37.2
1996 Estimates
Aggregate
Average
Score
Percentile Rank
-1.42
46.8
7.09
82.1
-0.87
47.5
-1.94
42.3
3.17
73.0
3.66
76.9
0.08
55.1
9.72
92.9
5.15
81.1
1.08
61.0
-2.67
36.5
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
23
Economic and Market Analysis (Asia Pacific)
China – Macroeconomic Forecasts
1998
1999
2000
2001
2002
2003
2004E
2005E
2006E
Real
Real GDP (% yoy)
Domestic demand (% yoy)
Real Consumption: Private (% yoy)
Real Gross Fixed Capital Formation (% yoy)
GDP (USD bn)
GDP per capita (USD)
Industrial output (% yoy)
7.8
8.6
6.8
10.0
954
729
8.8
7.1
8.5
8.0
7.1
999
791
8.9
8.0
9.7
8.7
9.6
1,079
856
11.4
7.3
9.0
6.3
12.4
1,192
924
9.9
8.0
10.0
6.5
14.3
1,287
989
12.6
9.3
11.9
6.4
20.8
1,463
1,110
17.0
9.4
11.1
7.0
17.0
1,694
1,214
16.5
8.5
9.2
7.2
12.0
1,981
1,410
12.0
8.0
8.1
7.7
9.0
2,336
1,573
8.5
External Sector
Exports (% yoy, US$)
Imports (% yoy, US$)
Trade balance (US$ bn)
Current acount (% of GDP)
International Reserves ex. Gold (US$ bn)
Import cover (months)
Currency/USD (period average)
0.6
-1.5
43.6
3.1
149
10.8
8.28
6.0
18.2
29.2
1.6
158
10.0
8.28
27.8
35.8
24.1
1.9
168
8.1
8.28
6.8
8.2
22.6
1.5
216
9.5
8.28
22.4
21.2
30.4
2.8
291
10.7
8.28
34.6
39.8
25.5
3.1
403
11.8
8.28
35.0
40.0
13.7
1.2
550
11.3
8.28
25.0
30.0
-11.7
-0.2
610
10.9
8.11
16.0
22.0
-58.7
-1.5
680
0.0
7.71
Other
6M lending rate (period average)
Consumer prices (average, % yoy)
Fiscal balance (% of GDP)
6.4
-0.8
-1.2
5.9
-1.4
-2.1
5.9
0.4
-2.8
5.9
0.7
-2.6
5.3
-0.8
-3.0
5.3
1.2
-2.5
5.6
4.2
-2.0
6.6
5.0
-1.5
7.6
4.0
-2.5
Source: China National Statistics Bureau, CEIC and Citigroup estimates.
24
Economic and Market Analysis (Asia Pacific)
Disclosure Appendix
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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
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Economic and Market Analysis (Asia Pacific)