Transcript China

Equity Research Asia/Pacific
Economics Report
Economics Team
Morgan Stanley does and seeks
to do business with companies
covered in its research reports.
As a result, investors should be
aware that the firm may have a
conflict of interest that could
affect the objectivity of this
report. Investors should
consider this report as only a
single factor in making their
investment decision.
Asia/Pacific Economics
1) Global Cycle Has Peaked
2) China: Secular vs. Cyclical
3) Taiwan: Consumer Economy
4) Korea: Housing Boom
June 2004
Andy Xie (852 2848-5220) [email protected]
1
Please see important disclosures starting on page 82.
Equity Research Asia/Pacific
Economics Report
Economics Team
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
2
Equity Research Asia/Pacific
Economics Report
Economics Team
Global Cycle Has Peaked
June 2004
Andy Xie (852 2848-5220) [email protected]
3
Please see important disclosures starting on page 82.
Equity Research Asia/Pacific
Economics Report
Economics Team
GDP Distribution: Shifting Center
($ bn)
US
Britain
Euro Zone
Japan
India
China
Korea
Taiwan
Hong Kong
Southeast Asia
Indonesia
Malaysia
Philippines
Singapore
Thailand
Asia ex-Japan
1983
3,690
456
1,189
196
308
82
53
29
188
66
28
37
17
40
856
1993
6,800
974
5,775
4,381
250
599
346
228
118
456
158
59
54
58
127
1,997
2003
11,262
1,848
8,275
4,314
540
1,492
605
290
159
615
208
95
80
91
141
3,701
2013E
15,000
2,200
9,000
4,300
1,100
5,000
1,083
472
200
1,096
416
190
120
120
250
8,952
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
4
Equity Research Asia/Pacific
Economics Report
Economics Team
Asian Exports Have Peaked
Exports Have Peaked
Exports (China+
(The Fed cut funds rate
to 3% from 7%)
Taiwan+Korea+Singapore)
(Tech Bubble)
(The Fed Cut interest rate
from 6.5% to 1%)
CRB
Apr-04
Jul-03
Oct-02
Jan-02
Apr-01
(Asian Financial
Crisis)
Jul-00
Oct-99
Jan-99
Apr-98
(The Mexican
Peso Crisis)
Jul-97
Oct-96
Jan-96
Apr-95
Jul-94
Oct-93
Jan-93
2) However, exports peaked in 10
4Q03, in my view. China’s
0
investment slowdown is likely
-10
to deflate intra-regional trade.
The front-loading of exports-20
due to the expected reduction
-30
of the VAT rebate also
exaggerated 4Q03 growth.
(YoY % change, $)
1) Asia experienced the best
50
export performance in 2003 on
(1) strong euro due to low US40
rates, (2) China’s FDI boom,
30
(3) US fiscal stimulus, and (4)
China’s investment boom. 20
(Tech Burst)
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
5
Equity Research Asia/Pacific
Economic Cycles Become Shorter
35
30
25
20
Exports
(China+Taiwan+Korea)
15
10
5
0
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
-5
1977
2) Policy stimulus also shortens cycles,
because part of the stimulus keeps alive
inefficient excesses.
Asian Exports Are Highly Volatile
1975
1) Export cycles appear to have become
shorter. The main factor, in my view, is
that Asia’s exports are becoming bigger
relative to the global economy. Thus,
Asia’s supply is big enough to affect
global cycles. Because Asia is
investment/export-led, it tends to have
boom-bust cycles; the volatility in
global economy also increases.
-10
Export-led Asia Gets Heavier to Carry
14
12
10
8
6
4
Real GDP Growth, YoY%
(China+Korea+Taiwan)
2
2004E
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
0
1982
Economics Team
(YoY % change, $)
Economics Report
Source: CEIC, Morgan Stanley Research
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Equity Research Asia/Pacific
Economics Report
Economics Team
China/US-led Global Restructuring I: Goods
(Industrializing)
China
Capital
Goods
(De-industrializing)
Europe/Japan/Tigers
$450 bn CA
Surplus
Consumer
Goods
Consumer
Goods
Consumer
Goods
Raw
Materials
Capital
Goods
(De-industrialized)
Anglo-Saxons
$600 bn CA
Deficit
Raw
Materials
Raw
Materials
Primary Producers
$150 bn CA
Surplus
(yet to Industrialize)
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Equity Research Asia/Pacific
Economics Report
Economics Team
East Asia’s Supply Side Restructures
1) East Asia’s supply side
restructures around China. All
East Asian economies try to be
complementary to China. Thus,
they avoid competing against
China in the US, the most
competitive market in the world.
The US increasingly buys Chinese
goods to replace those from other
East Asian economies.
2) Other East Asian economies try
to export directly to China to take
advantage of its growth. We expect
China to replace the US as the
biggest market for East Asia within
two years.
21
19
17
East Asia's Exports to China+HK as % of Total Exports
15
13
11
9
East Asia's Imports from China+HK as % of Total Imports
7
5
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: CEIC E = Morgan Stanley Research Estimates
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Equity Research Asia/Pacific
Economics Report
Economics Team
East Asian Growth Depends on China Investment
40
35
Japan
Taiwan
Thailand
Exports to China+Hong Kong
as % of Total Exports
Korea
Singapore
30
20
15
10
5
0
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
2) Japan and Korea stand out in their
dependence on China’s investment
boom, as they are major suppliers of
commodities and capital goods to
China. Their export growth is mostly
due to China.
25
1988
1) China is the focus of international
capital and the main export platform
to western consumer. The resulting
abundant liquidity turns China into a
massive investment machine. Other
Asian economies have become
hooked to this source of demand
25
Japan
Taiwan
Thailand
Imports from China+HK
as % of Total Imports
20
Korea
Singapore
15
10
5
0
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
Andy Xie (852) 2848 5220 [email protected]
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1992
1991
1990
1989
1988
Source: CEIC E = Morgan Stanley Research Estimates
9
Equity Research Asia/Pacific
Economics Report
Economics Team
China/US-led Global Restructuring II: Capital
China
FDI
Europe/Japan…
China’s industrialization
means de-industrialization of
mature economies whose
surplus capital is being
parked in US Treasuries.
FDI
Buy
Treasuries
Buy
Treasuries
US
$500 bn CA
Deficit
Buy
Treasuries
Primary Producers
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Please see important disclosures starting on page 82.
10
Equity Research Asia/Pacific
FDI Fuels China’s Purchase of US Bonds
Economics Report
Economics Team
Oil Price Determines East Asia’s Surplus
1) Global capex migrates to China to take
advantage of low costs. This displaces
China’s own savings, which are used
instead to purchase US bonds.
2) Capex in China is cheaper. Its
migration to China generates savings
surpluses that also go into US bonds.
Trade Balance ($ bn) Brent Crude
US East Asia
($/bbl)
1988-97
-1255
758
18.8
1998
-230
242
12.8
1999
-329
227
18.0
2000
-436
192
28.5
2001
-411
137
24.4
2002
-468
183
25.0
Jan-Oct 02
-379
149
24.7
Jan-Oct 03
-446
160
28.7
Net Purchase of US LT Securities:
China vs. Japan ($ bn)
Net Purchase
China Japan
1988-97
48
209
1998
4
20
1999
17
43
2000
16
52
2001
52
57
2002
59
91
Jan-Oct 02
40
73
Jan-Oct 03
52
131
Trade Surplus
China Japan
69
874
44
108
29
108
24
100
23
54
30
79
25
65
15
70
East Asia: Net Purchases
of LT US Securities ($ bn)
Total
1988-97
1998
1999
2000
2001
2002
Jan-Oct 02
Jan-Oct 03
390
42
74
87
159
199
152
237
US Bonds
Treasury Agency
265
42
28
-2
34
54
39
141
70
10
31
57
79
95
73
71
Corp.
US
Stocks
41
2
11
20
26
25
16
22
14
-12
5
13
21
23
24
3
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
11
Equity Research Asia/Pacific
Economics Report
Economics Team
US Liquidity Bubble Sustains Globalization
1) The Fed is pumping liquidity
to increase demand, regardless
of consequences.
2) As globalization diverts
demand to other parts of the
global economy, the US has to
pump more liquidity to achieve
the same stimulus effect for
home production (i.e.,
employment). The massive
liquidity creates asset bubbles.
10
9
8
1600
1400
10Y Treasury
1200
7
6
1000
5
800
4
S&P 500
3
2
Disinflationary
Liquidity Boom
1
Equity Flight for
Mania Safety
Liquidity
Rally
Again
0
600
400
200
0
24-Mar-03
26-Aug-02
28-Jan-02
2-Jul-01
4-Dec-00
8-May-00
11-Oct-99
15-Mar-99
17-Aug-98
19-Jan-98
23-Jun-97
25-Nov-96
29-Apr-96
2-Oct-95
6-Mar-95
8-Aug-94
10-Jan-94
14-Jun-93
16-Nov-92
20-Apr-92
23-Sep-91
25-Feb-91
30-Jul-90
1-Jan-90
3) The bubble fools Americans
into spending more than they
earn as they believe in the
appreciation of their wealth.
Fed Is Giving Money Away (weekly average close)
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
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Equity Research Asia/Pacific
US: Too Much Money Causes Bubbles
Economics Report
Economics Team
US liquidity policy amplifies global volatility in both the real
economy and financial markets.
US Money Supply Could Cause A Mini Equity Bubble
(YoY % change)
40
35
25
Volker
Shock
30
25
20
20
MZM (LHA)
NASDAQ
Crash
Fed Funds
Rate (RHA)
S&L
Crisis
15
10
Asian
Crisis
15
10
5
0
-10
Jul-03
Jan-02
Jul-00
Jan-99
Jul-97
Jan-96
Jul-94
Jan-93
Jul-91
Jan-90
Jul-88
Jan-87
Jul-85
Jan-84
Jul-82
Jan-81
Jul-79
Jan-78
Jul-76
Jan-75
-5
5
0
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
13
Equity Research Asia/Pacific
US: Liquidity at All-Time High
Economics Report
Economics Team
US Liquidity at All-Time High Relative to GDP
60
55
50
MZM/GDP (%)
45
40
35
30
25
Dec-02
Sep-01
Jun-00
Mar-99
Dec-97
Sep-96
Jun-95
Mar-94
Dec-92
Sep-91
Jun-90
Mar-89
Dec-87
Sep-86
Jun-85
Mar-84
Dec-82
Sep-81
Jun-80
Mar-79
Dec-77
Sep-76
Jun-75
Mar-74
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
14
Equity Research Asia/Pacific
Economics Report
Economics Team
US: The Fed Sustained Artificial Wealth
The Fed Liquidity Policy Kept Up Paper Wealth
1) Market would have
adjusted household wealth to
the normal 335% of GDP
from 443% in 1999 to squeeze
all the air out of the economy.
The Fed policy, instead,
pushed household wealth to
400% of GDP again to
rekindle the wealth effect.
430
410
Household Net Wealth
390
(% pf GDP)
370
350
330
310
290
Sep-03
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
2) The Fed can start another
bubble economy soon after
the NASDAQ bubble as long
as interest rates are not zero
and foreigners are willing to
fund the US savings gap.
450
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
15
Equity Research Asia/Pacific
Economics Report
Economics Team
US: But, It’s Time to Unwind
Inflation Scare Forces the Fed to Unwind
18
GDP Deflator
16
Fed Funds Rate
14
12
10
8
6
4
2
0
(%)
Mar-04
Jun-01
Sep-98
Dec-95
Mar-93
Jun-90
Sep-87
Dec-84
Mar-82
Jun-79
Sep-76
Dec-73
Mar-71
Jun-68
Sep-65
Dec-62
25
Mar-60
-2
Jun-57
Fed Funds Rate
10Y Treasury Yield
20
15
10
5
0
Apr-04
Jun-01
Aug-98
Oct-95
Dec-92
Feb-90
Apr-87
Jun-84
Aug-81
Oct-78
Dec-75
Feb-73
Apr-70
Jun-67
Aug-64
Oct-61
Dec-58
Feb-56
Apr-53
2) While there are still many
issues with the US economy, the
current interest rate is still too low.
The neutral rate for the Fed funds
rate is about 4.5%. The Fed may
cap the rate at 3.5% to account for
the recovery fragilities.
20
Sep-54
1) The Fed kept interest rate
substantially below normal even
as the economy picks up. Its
excuse is no inflation. But, there
is some inflation that is the echo
from the US asset bubble and
China’s investment bubble. The
bond becomes edgy and demands
rate hike.
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
16
Equity Research Asia/Pacific
What Next?
Economics Report
Economics Team
Bigger bubble
(10Y T at 2%, US housing prices up another
30%, another US demand-led party)
Protectionism
(recession in Europe
and Japan. US low
growth with more
jobs)
US Bubble
(If the US acts alone)
Dollar Crash
(deflation in Europe
and Japan,
stagflation in US,
10Y T at 10%)
US Deflation
(The Fed increases
interest rate to crush
bubble. 10Y T at 1.5%,
US dollar strong,
multiyear recession)
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
17
Equity Research Asia/Pacific
What Next?
Economics Report
Economics Team
Japan
(Decreasing savings rate by allowing
property prices to fall by another 50% to
transfer wealth to young from old)
China
Europe
US Bubble
(Increasing property
prices by decreasing
transaction costs to
boost consumption)
(If the US works with China, Europe
and Japan to create a new order)
(Increasing Rmb by
20% in exchange for
better trade
protection, timetable
for reforming
financial sector to
float currency)
Global Balance
(Bringing China into G-7
and turning it into Big-4
with one seat for Europe)
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
18
Equity Research Asia/Pacific
Economics Report
Economics Team
China:
Secular Growth Opportunity
June 2004
Andy Xie (852 2848-5220) [email protected]
Morgan Stanley does and seeks to do business with companies covered in its research reports. Investors
should consider this report as only a single factor in making their investment decision.
19
Please see important disclosures starting on page 82.
Equity Research Asia/Pacific
Globalization Drives Income
Economics Report
Economics Team
Integrating cheap Chinese
labor into global economy
is the income driver for
China’s development.
1200
800
600
400
(current US dollar)
1000
Per capita
GDP
CAGR= 6.8%
(1978-2003)
CAGR= 14.7%
200
(1978-2003)
0
Per capita
trade
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
20
Equity Research Asia/Pacific
Economics Report
Economics Team
55
50
45
40
35
30
25
20
15
10
Industrialization Drives Urbanization
Export income drives
industrialization, which
underpins urbanization ─ the
primary form of
wealth accumulation.
Industry
(% of GDP)
Urban population
(% of total)
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
21
Equity Research Asia/Pacific
Economics Report
Economics Team
Industrialization With High Productivity
Low base of capital stock
is the primary reason for
rapid productivity growth.
Urbanization:
Trade:
Increasing capital/labor efficiency
Core Is
Industrialization
Technology:
Jobs for Migrants
Raising Productivity
Measuring Productivity
(Ave. Annual % Growth, 1990-2000)
Total
Primary
Service/Indu.
TFP
4
4
4
Labor
8.9
4.8
8.1
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
22
Equity Research Asia/Pacific
Economics Report
Economics Team
Prosperity Spreads to Interior Via Investment
Japan
Northeast
Pop = 128 mn
GDP = US$4,190 bn
Exp = US$458 bn
Pop = 107 mn
GDP = US$156 bn
Exp = US$21 bn
West
Pop = 57 mn
GDP = US$59 bn
Exp = US$6 bn
Northern Plain
Pop = 192 mn
GDP = US$159 bn
Exp = US$12bn
Korea
Bohai Basin
Pop = 182 mn
GDP = US$308 bn
Exp = US$58 bn
Mid/Upper Yangtse
Lower Yangtse
Pop = 350 mn
GDP = US$295 bn
Exp = US$14 bn
Pop = 137 mn
GDP = US$337 bn
Exp = US$150 bn
Pop = 48 mn
GDP = US$525 bn
Exp = US$194 bn
Interior development
depends on investment
funded by coastal
export earnings via
bank debt.
Southwest
Guangdong/Fujian
Taiwan
Pop = 141mn
GDP = US$87 bn
Exp = US$5 bn
Pop = 113 mn
GDP = US$226 bn
Exp = US$177 bn
Pop = 22.5 mn
GDP = US$285 bn
Exp = US$144bn
Hong Kong
Pop = 6.8 mn
GDP = US$58 bn
Exp = US$15.6 bn
Source: CEIC, CIA, Morgan Stanley Research. Export, GDP and population are for 2003.
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
23
Equity Research Asia/Pacific
Economics Report
Economics Team
China and Japan: Trading Places
• China is replacing Japan as the
workshop of the world. It has
already exceeded Japan in the
US market. Its total exports will
exceed Japan’s in 2-3 years, in
our view.
US Import Market Share (% of Total)
25
20
Japan
15
10
China/HK
5
0
2001
1999
1997
East Asia: Export Share (% of Total)
60
Japan
50
40
30
20
China/HK
10
0
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
• China is replacing IT as the
dominant factor in driving the
global economy.
1995
1993
1991
1989
1987
• Economics is dictating this
change. China has a massive
amount of cheap labor, a high
savings rate and low wealth.
Trade is the natural path to full
employment and rising wealth.
Source: CEIC.
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
24
Equity Research Asia/Pacific
Economics Report
IT Adoption Fuels Productivity
Economics Team
100
50
10
60
40
20
2006E
2004E
1996
2002
2001
2000
1999
1998
1997
1996
1995
2002
0
0
2000
20
Handset Unit Shipment
80
1998
30
Internet Subscribers
(million)
40
Units in millions
60
250
Million units
100
(million)
200
150
20
Fixed Phone Lines
Installed
50
PC Unit Shipment
15
10
5
0
2005E
2002
1999
1996
1993
2000
1997
1994
1991
1988
1985
1990
0
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
25
Equity Research Asia/Pacific
Dependency on Debt Financing
Economics Report
Economics Team
Low product prices keeps
margins low. Hence,
capex depends on bank
debt
180
160
120
100
80
Bank Credit
(% of GDP)
140
Household Savings
60
40
20
0
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
26
Equity Research Asia/Pacific
Economics Report
Economics Team
Deflationary Model Persists
Households channel high savings,
partly due to low consumption
prices, to state-owned banks that
lend onwards to firms. The state
ownership of the financial system
underpins the equilibrium.
Bank
(High Savings)
(Low Cost Capital)
Household
Business
(Price Discount)
Businesses make high profits during
an investment boom. But, high
profits come from investment and,
hence, are not sustainable.
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
27
Equity Research Asia/Pacific
10% Margin Economy?
Economics Team
45
40
35
30
25
20
15
10
5
0
100
90
80
70
60
50
40
30
20
10
0
Investment
(% of GDP, LHA)
Savings Deposit
(% of GDP, RHA)
Relentless Competition
Passes Productivity Gains
to Consumers
100
80
60
Retail Price Index
40
CPI
20
0
1999
1993
10
20
1987
1Y Lending
Rate
1997
2001
1981
12
1975
25
1969
1963
1957
1951
2002
1997
1992
1987
1982
1977
1972
1967
1962
1957
1952
14
120
(1997=100)
Economics Report
Gross Margin
(% of sales)
15
8
(%)
6
4
10
1Y Deposit
Rate
2
5
0
May-03
Jan-02
Sep-00
May-99
Jan-98
Sep-96
May-95
Jan-94
Sep-92
May-91
Jan-90
Sep-88
0
Computer Telecom
Equipment
TV
Electronic Home
ComponentsAppliance
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
28
Equity Research Asia/Pacific
Economics Report
Economics Team
China Causes Inflation and CRB to Disconnect
1) China causes natural resource prices to
rise but finished product prices to fall, as it
charges less for value added due to its vast
labor surplus.
Euro-Zone, Japan and US Inflation
40
CRB (RHA)
30
10
(YoY % chg.)
Inflation (LHA)
8
20
6
10
Mar-04
Aug-02
Jan-01
Jun-99
Nov-97
Apr-96
Sep-94
Feb-93
Jul-91
Dec-89
May-88
Oct-86
Mar-85
-10
2
-20
0
-30
-2
Asia Pacific Inflation
18
40
(YoY % chg.)
16
30
14
20
12
10
10
8
0
6
4
-10
Inflation (LHA)
2
CRB (RHA)
-20
0
Feb-04
Jul-03
Dec-02
May-02
Oct-01
Mar-01
Aug-00
Jan-00
Jun-99
Nov-98
Apr-98
Sep-97
Feb-97
Jul-96
Dec-95
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
May-95
Oct-94
Mar-94
Aug-93
-2
Jan-93
4) Because China experiences wild
investment cycles, its impact on
redistribution of pricing power also swings.
The short-term price movements in
commodity prices usually reflect China’s
cyclical momentum rather than secular
growth.
Source: CEIC, Morgan Stanley Research
0
Aug-83
3) China essentially redistributes wealth from
those that depend on labor and capital to
those that depend on natural resources or
intangibles.
4
Jan-82
2) China also gives prestige brands and
upstream technologies pricing power, as it is
two decades away from joining the
competition but is raising demand now.
-30
29
Equity Research Asia/Pacific
Economics Report
Economics Team
Wealth and Jobs Determine Deflation
Retail Sales (Average YoY % change)
1) Chinese household wealth has increased
to Rmb17 trillion, from Rmb6 trillion in 1997,
as Chinese have saved aggressively in
response to the disappearance of the state
enterprise-funded social safety net.
1978-88
1988-98
1998-03
2) Household wealth is still substantially
below 300-400% of GDP, the level at which
households feel secure about funding
retirement; reaching that level would remove
a major deflationary force.
3) Overhang of labor surplus, which keeps
wages and consumption low, is another
source of deflation.
4) In a deflationary growth model,
productivity gains go to consumers. Bad
debts tend to persist.
(YoY % chg)
1960s
1970s
1980s
1990s
2000-03
Nominal
17.4
14.6
8.5
Retail
2.0
9.4
16.6
15.2
9.2
Savings
Deposit
1.8
17.5
33.2
24.8
17.3
Real
11.8
8.8
9.2
GDP
3.9
7.5
14.9
17.2
10.5
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
30
Equity Research Asia/Pacific
Labor Quality Rapidly Improving
Economics Report
Economics Team
1600
Post Graduates (LHA)
1400
College Grduates (RHA)
1200
(thousands)
(thousands)
90
80
70
60
50
40
30
20
10
0
1000
800
600
Household
preference for
education is very
high. Return on
education appears
to be negative.
Hence, households
are subsidizing
human capital
formation.
400
200
0
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
31
Equity Research Asia/Pacific
But Wages Will Remain Low For Years
Economics Report
Economics Team
170
130
110
($/month, 1984 US Price)
150
Output/Non-Rural Labor
CAGR=2.2%
Non-rural labor output is
rising at only 2.2% per
annum in constant US,
half as much as TFP, i.e.,
consumers capture half of
China’s productivity gain.
90
70
50
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
32
Equity Research Asia/Pacific
Economics Report
Economics Team
When Can China Say ‘No’ to Price Reduction?
60
Non-Rural Employment
50
(% of labor force)
55
When non-rural
employment reaches 80%
of labor force, China can
capture its productivity
gain in wages. That is
about 15 years away.
45
40
35
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
33
Equity Research Asia/Pacific
Economics Report
Economics Team
When China Abandons Cheap Labor Strategy
4500
GDP Takes Off When Currency Appreciates
(Constant Dollar GDP Index)
4000
3500
3000
2500
2000
1500
Japan's GDP
(1985 $, 1955=100)
Taiwan's GDP
(1961 $, 1961=100)
Korea's GDP
(1970 $. 1970=100)
1000
China's GDP
500
(1981 $, 1981=100)
0
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
34
Equity Research Asia/Pacific
The Next US$10 Trillion Economy
Economics Report
Economics Team
16,000
By 2020 China's GDP Would Be As Large As US Is
Now
12,000
10,000
8,000
6,000
(billions of 2002 dollar)
14,000
WTO
Scenario
Aggressive
Restructuring
Business
as usual
4,000
2,000
-
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
E = Morgan Stanley Research Estimates, Source: CEIC , Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
35
Equity Research Asia/Pacific
Economics Report
Economics Team
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
36
Equity Research Asia/Pacific
Economics Report
Economics Team
China:
A Hard or Soft Landing?
June 2004
Andy Xie (852 2848-5220) [email protected]
37
Please see important disclosures starting on page 82.
Equity Research Asia/Pacific
Energy Consumption Shows 5Y Cycles
Economics Report
Economics Team
18
16
14
12
10
China: Electricity Consumption
(YoY % change, kwh bn)
20
Total
Industry
Other
8
6
4
2
0
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
38
Equity Research Asia/Pacific
Economics Report
Economics Team
Export
Capital Inflow Supercharged This Cycle
(2003)
K Inflow
$162bn
$113bn ▲
Banks
GDP ▲$220bn
est.
Credit ▲$120bn est. Credit system functions on
collateral-based lending.
Property
Property and cars have
Credit ▲$175bn est.
emerged as the main assets for
lubricating the credit system,
attracting capital inflow. Low
Fed funds rate served to push
Capacity
capital into China.
Expansion
Credit ▲$40bn est.
Cars
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
39
Equity Research Asia/Pacific
Cars Accounted for 10% of Growth in 2003
Economics Report
Economics Team
140
Car Production
(YoY % change of quarterly volume)..
120
100
80
60
Car Sales
40
Production
Sales
(thousand)
225
258
316
287
389
380
487
475
507
509
569
575
621
625
710
731
1,068
1,058
2,012
2,040
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Passenger car sales
appear to have peaked
out. The rapid sales
increase in the past two
years was due to the
introduction of auto
financing.
20
0
Dec-03
Mar-03
Jun-02
Sep-01
Dec-00
Mar-00
Jun-99
Sep-98
Dec-97
Mar-97
Jun-96
Sep-95
Dec-94
Mar-94
-20
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
40
Equity Research Asia/Pacific
Economics Report
Economics Team
Property Accounted for 20% of Growth in 2003
Real Estate Investment
(YoY % change, Yuan)
50
40
30
20
Total
Residential
10
0
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
Dec-97
Jun-97
Dec-96
-10
Other fixed
investment
accounted for about
one third of growth
last year. Such
investment was
largely tied to
suppliers to property
and car industries.
-20
-30
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
41
Equity Research Asia/Pacific
Economics Report
Economics Team
Electricity Is the Main Growth Bottleneck
(YoY % change)
..
1) China’s electricity demand grew
Brownouts Have Become Widespread
by 14.3% in 2003 and 13.3% in 25
2002 but averaged 7.8% over the
Electricity Production
preceding ten years. The current 20
Industrial Production
electricity supply is 10% above
trend.
15
Apr-04
Nov-02
Jun-01
Jan-00
Aug-98
Mar-97
Oct-95
May-94
Dec-92
Jul-91
Feb-90
Sep-88
Apr-87
2) Brownouts have become
widespread. The government
10
approved more power projects in
early 2003 to address the issue. 5
But the extra capacity will not
come online before 2006.
0
Capacity additions in 2004 will
accommodate only 7-8% growth in-5
electricity supply.
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
42
Equity Research Asia/Pacific
What Happened?
Economics Report
Economics Team
16
(%)
14
China: 5Y Deposit Rate
US: 5Y Treasury Yield
12
When the US bond
yield dropped
below China’s,
money began to
flood into China,
triggering an
investment bubble.
10
China in Inflation
8
6
4
China in Deflation
2
0
Apr-04
Nov-02
Jun-01
Jan-00
Aug-98
Mar-97
Oct-95
May-94
Dec-92
Jul-91
Feb-90
Sep-88
Apr-87
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
43
Equity Research Asia/Pacific
Gauging Excess
Economics Report
Economics Team
Fixed Investment/(Consumption+Export)
(%)
70
(Extrapolation of 1Q)
60
50
40
1990's Ave=42.7%
1980's Ave=35.1%
30
(Excess=1/3
of 03 FI)
If 1Q04 trend
continues, 2004 would
create FI excess equal
to 150% of 2001-03 FI
excess.
20
10
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
44
Equity Research Asia/Pacific
A Hard or Soft Landing?
Economics Report
Economics Team
40
30
20
China: Fixed Investment
(YoY % change, current $)
50
Current
trajectory
Stop
new
projects
now
10
0
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
-10
-20
-30
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
45
Equity Research Asia/Pacific
Credit Tightening Has Backfired
1) Property investment rose 42% in
1Q04 from last year, compared to
26% in 2003; overall fixed
investment accelerated to 43%
from 26.7%.
35
30
25
20
15
10
Domestic Credit: Monetary Survey
Domestic Credit: Banking Survey
5
Financial Institutions: Loans
0
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
Sep-99
Mar-99
Sep-98
Mar-98
Sep-97
Mar-97
Sep-96
Mar-96
Sep-95
Mar-95
Sep-94
Mar-94
2) Mild tightening measures caused
local governments, commodity
businesses and property
developers to rush out investment
projects before the central
government took stronger
measures.
40
(YoY % change) .
Economics Team
600
(million Square Meters) .
Economics Report
500
3) Such behavior has made
tougher government measures a
self-fulfilling outcome.
400
4) The political wind has shifted,
and local government officials are
now incentivized to curb
investment.
100
300
200
New Property Sales
New Starts
Sold
0
2003
2002
2001
2000
1999
1998
1997
1996
1995
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
46
Equity Research Asia/Pacific
Economics Report
Economics Team
Property Is A Quantity Phenomenon
1) China needs to build a great
quantity of property to urbanize.
But the quantity growth is limited
by purchasing power. Price is
already ten times annual income in
most major cities.
2) Rapid volume increase will likely
cause price decline, triggering
another wave of bad debts. Thus,
I believe that the sales will slow to
10-15%, from 25%, starting from
this year. That means that the
starts last year were 100 million
square meters too much.
3) Price declines in 2004 may be
inevitable. Hot markets like
Shanghai and Beijing are quite
vulnerable.
New Property Sales (% of GDP)
1995
1996
1997
1998
1999
2000
2001
2002
2003
Nationwide
1.6
2.0
2.1
2.7
3.2
4.0
4.7
5.3
6.6
Beijing Shanghai Guangdong
10.7
14.1
19.0
21.4
25.3
25.0
8.3
8.4
10.2
13.4
14.9
19.5
4.9
5.7
6.2
6.9
6.2
6.5
Residential Property Price
1998
1999
2000
2001
2002
2003
(US$ per square meter)
Nationwide Beijing Shanghai Guangdong
582
316
354
578
327
347
238
550
381
342
260
570
427
388
262
539
482
371
277
547
557
369
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
47
Equity Research Asia/Pacific
Economics Report
Economics Team
300
250
China: The Commodity Linkage
China: Imports of Minerals/Metals
Unit Price Index
Volume Index
Unit import price of
minerals/metals rose by
57% and volume by
81% from 1Q02-1Q04 as
investment bubble
exaggerated demand.
200
150
100
50
0
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
Sep-99
Mar-99
Sep-98
Mar-98
Sep-97
Mar-97
Sep-96
Mar-96
Sep-95
Mar-95
Sep-94
Mar-94
Sep-93
Mar-93
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
48
Equity Research Asia/Pacific
China: Steel Consumption Could Call
Economics Report
Economics Team
35
(YoY % change)
Electricity
Steel Consumption
IP
30
25
20
15
10
5
0
Apr-04
Nov-02
Jun-01
Jan-00
Aug-98
Mar-97
Oct-95
May-94
Dec-92
Jul-91
Feb-90
Sep-88
-10
Apr-87
-5
-15
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
49
Equity Research Asia/Pacific
Economics Team
Commodity Prices Could Decline in 2004
• Commodity prices have skyrocketed with
China’s investment boom – in particular, the
property boom, which has driven demand
for commodities such as nickel for stainless
steel, aluminum.
• China accounts for over half of the
demand increase in most commodities. As
its property sector slows, China’s imports of
such commodities will also soften; such
imports could grow by less than half as
much in 2004 compared to 2003.
120
100
80
60
40
20
1993
1998
2001
2002
2003
32.9
0.6
0.2
0.6
1.0
52.0
1.2
1.2
0.7
1.6
92.4
1.7
2.3
1.1
3.4
111.5
2.1
2.1
1.2
4.6
148.2
2.9
2.7
1.8
5.6
33.5
0.3
0.6
12.4
0.6
1.8
17.2
0.9
5.0
24.5
1.1
5.3
37.2
1.4
5.8
15.7
17.4
26.8
21.6
60.2
21.4
69.4
20.4
91.1
28.2
89
114
225
132
103
197
165
113
143
2.3
218
210
145
180
2.7
230
219
150
219
3.6
258
242
164
Copper
Nickel
CRB Index
0
Nov-03
Aug-02
May-01
Feb-00
Nov-98
Aug-97
May-96
Feb-95
Nov-93
Aug-92
-40
May-91
-20
Feb-90
• Intermediate commodities suffer more
than natural resources; China has built
capacity for intermediate production during
the investment boom, which will crush
processing margins during the investment
downturn.
(ton mn)
Mineral Imports
Iron Ore
Manganese
Copper Ore
Chromium Ore
Aluminium Oxide
Metal Imports
Steel
Aluminium
Copper incl. scrap
Oil Imports
Crude
Refined products
Domestic Production
Steel
Aluminium
Iron Ore
Crude Oil
Refined products
(YoY % change, $/ton)
Economics Report
-60
-80
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
50
Equity Research Asia/Pacific
Economics Report
Economics Team
Inflation Isn’t A Problem
Raw Material Costs Push Inflation
20
15
10
5
0
2003
2001
1999
1997
1995
1993
1991
1989
1987
-5
-10
Interest Rates Will Remain Stable
14
12
10
1Y Working
Capital Base Rate
8
6
1Y Deposit
Rate
4
2
0
Sep-03
Sep-02
Sep-01
Sep-00
Sep-99
Sep-98
Sep-97
Sep-96
Sep-95
Sep-94
Sep-93
Sep-92
Sep-91
Sep-90
Sep-89
Sep-88
3) As many interior cities have low income
and spend a high proportion of income on
food, the government cannot tolerate higher
prices. CPI is likely to be tame in 2004.
CPI
RPI
PPI
25
1985
2) Rising grain prices also bumped CPI last
year. But it was due to a poor harvest and
low inventory. The government probably
tolerated the price increase by not releasing
reserves into the market to redistribute
income from the urban to the rural sector.
The inflation reflected income redistribution
rather than too much income.
30
(YoY % change) .
1) China does not have wage-led inflation but
has bottleneck-induced inflation at times.
PPI rose sharply with commodity prices as
China’s property boom increased demand
dramatically. China’s raw material imports
increased by over 40% in volume last year.
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
51
Equity Research Asia/Pacific
Economics Report
Economics Team
‘Overheating’ Is Over Investment, Not Inflation
Raw Material Costs Push Inflation
30
(YoY % change) .
40
20
10
0
2003
2001
1999
1997
1995
1993
1991
1989
1987
-10
1985
3) Because China’s investment is such a big
part of global demand, global commodity prices
become more sensitive to China’s investment
cycle.
50
Financial Institutions: Loans
1983
2) Investment drives raw material demand. That
is why the investment cycle leads the inflation
cycle.
Fixed Investment
60
1981
1) ‘Overheating’ is a misnomer applied to
China. Usually, the term refers to inflation
caused by rising wages due to labor shortages.
Because (1) China has ‘unlimited’ labor supply
except for some pockets of expertise at times,
which can be de-bottlenecked via learning, and
(2) China has a competitive goods market, only
raw material costs can cause inflation.
70
-20
And Investment Is The Cause
30
70
CPI (LHA)
25
60
RPI (LHA)
50
Fixed Investment (RHA)
20
40
15
30
10
20
10
5
0
0
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
-5
-10
-20
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
52
Equity Research Asia/Pacific
Economics Report
Economics Team
China: Consumer Could Be In Play
250
Household
Savings
Deposit / GDP
2001
1998
Savings
Deposit
1.8
17.5
33.2
24.8
17.3
1995
1992
1989
1986
Retail
2.0
9.4
16.6
15.2
9.2
1983
1980
1977
1974
1971
(YoY % chg)
1960s
1970s
1980s
1990s
2000-03
1968
1965
1962
1959
1956
3) Chinese household wealth has roughly
doubled in the past five years but
consumption has increased by 56%.
Total household wealth is about 140% of
2003 GDP.
Building Up Wealth Ahead of Consumption
Household Savings
Deposit / Retail Sales
1953
2) The government has cushioned the
50
blow by transferring public housing units
to tenants at one-third to one-fourth of
0
market prices. That increased household
wealth by 10% of GDP.
(%)
1) China’s government has been taking
away state-sponsored economic security 200
without giving households the wealth to
150
handle the extra risks. Chinese
households have been saving more to
100
cope with more economic insecurity.
GDP
3.9
7.5
14.9
17.2
10.5
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
53
Equity Research Asia/Pacific
Economics Report
Economics Team
China: Less Deflationary Consumption
Retail Sales (Average YoY % change)
1) Retail sales vary little in real price, as
Chinese investment is supply-driven and
production must be priced to go. The
dismantling of SoE social safety net
decreased consumption preference, which
forced businesses to cut prices.
3) The tripling of household wealth in five
years should make consumption less
deflationary and, hence, lead to a better
pricing environment.
Building Up Wealth Ahead of Consumption
200
150
Household
Savings
Deposit / GDP
Household Savings
Deposit / Retail Sales
100
50
0
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
4) However, capex discipline is also needed
to improving pricing power.
Real
11.8
8.8
9.2
250
(%)
2) Deflation in the past five years has
constituted a massive wealth redistribution
from government, businesses to the
people. But, the wealth distribution may
not be all real, as NPLs accumulate in
banks.
1978-88
1988-98
1998-03
Nominal
17.4
14.6
8.5
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
54
Equity Research Asia/Pacific
Economics Report
Economics Team
China: Consumption Could Outperform
90
1) Consumption has underperformed capex
and exports continuously in the past two
decades, as households increase savings
rates to cope with declining economic
security. Consumption to GDP ratio may hit
an all-time low of 56% in 2003.
80
2) However, savings behavior may have
absorbed most of the recent reform shocks.
There are virtually no more shocks to come.
Thus, consumption behavior could become
normal in future.
10
3) It is quite possible that consumption could
outperform capex for two years. It is even
possible that consumption might outperform
exports in the foreseeable future.
40
Consumption
60
50
40
(% of GDP)
70
Gross
Capital
Formation
30
Export
20
0
(YoY% Chg)
2002
1997
1992
1987
1982
1977
1972
1967
1962
60
1957
1952
80
Savings Deposit
Retail Sales
20
0
-20
-40
2002
1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
55
Equity Research Asia/Pacific
Economics Report
Economics Team
China: Room to Stimulate Consumption
250
(million)
100
50
B&W TV
0
2002E
2000
1998
1996
1994
1992
1990
1988
100
1986
1984
Handset Unit Shipment
80
60
40
20
2006E
2004E
2002
2000
1998
0
1996
4) 30 million households could afford cars
priced under $5,000. China could invest in
transport networks and urban infrastructure
to tap this demand.
Color TV
1982
3) If China creates its own 3G standard, it
could boost economy by 10% over 5 years.
150
1980
2) 50 million households could afford a TV
under $1,000. If China sets up a local
standard, it would keep production at home
and stimulate the economy.
TV Ownership
200
Units in millions
1) China could promote local standards for
digital TV and 3G mobile technology to
stimulate domestic demand, if protectionism
limits export growth.
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
56
Equity Research Asia/Pacific
Economics Report
Economics Team
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
57
Equity Research Asia/Pacific
Economics Report
Economics Team
Taiwan:
Consumer Economy
June 2004
Andy Xie (852 2848-5220) [email protected]
58
Please see important disclosures starting on page 82.
Equity Research Asia/Pacific
Taiwan: Hollowing Out
Economics Report
Economics Team
35
Taiwan: Gross Fixed Capital Formation
30
(% of GDP)
25
Moving Up
Value Chain
Rapid Gain in
Competitiveness
20
Hollowing Out
Suffering from
Currency Appreciation
15
What
Next?
Too Poor to Invest
10
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
59
Equity Research Asia/Pacific
Taiwan: No New Source of Competitiveness
Economics Report
Economics Team
50
Taiwan: Per Capita Income
40
35
30
25
20
(% of US Per Capita Income)
45
Losing
Competitiveness
Rapid Gain in
Competitiveness
15
10
Taiwan has not found a
new source of
competitiveness since IT
outsourcing
Simple Capital
Accumulation
5
0
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
60
Equity Research Asia/Pacific
Taiwan: What Next?
Economics Report
Economics Team
Consumer Economy:
Offshore profits fund
imports
(The current path)
Current: IT OEM
hollowing out
New competitive
Industry:
investment/export
-led growth again
1) Stable living standard
2) Waiting for China to catch
up in living standards
3) Reaching Western living
standards with China
1) Rising living standards
2) Closing income gap with
the West
3) Maintaining living standard
premium over China
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
61
Equity Research Asia/Pacific
Taiwan: Deflation Takes Hold
1) Taiwan is a mature economy and has entered
a period of slow growth.
Jun-03
Mar-01
Dec-98
Sep-96
Jun-94
Mar-92
Dec-89
-2
-4
…Because Capex Goes to China
35
30
Taiwan: Fixed
Capital Formation
25
20
15
10
2003E
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
Real GDP
10.8
8.1
9.6
7.3
6.7
3.4
0
1964
Nominal GDP
15.1
19.6
11.2
10.5
9.3
3.2
2
1961
(annual % chg.)
1962-72
1972-82
1982-87
1987-92
1992-97
1997-2002
4
Sep-87
Taiwan: Low Growth Is Here to Stay
CPI
GDP Deflator
6
Jun-85
3) The only way out of deflation is either to
reduce the savings rate or increase household
capital demand. Both require home prices to be
much lower than where they are. The political
implications of lower property prices keep Asian
countries in deflation
8
Mar-83
2) Deflation has taken hold, because capex has
gone to China, while savings rate remains high.
The surplus savings keep the currency strong,
which brings deflation.
Taiwan: Deflation Sets In
(% of GDP)
Economics Team
(YoY % change)
Economics Report
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
62
Equity Research Asia/Pacific
Taiwan: Can Loan Growth Revive?
Economics Report
Economics Team
1) Loan demand is not responding to interest
rates or liquidity. Demand from corporate
sector is low as capex is shifted to China.
2) Demand from household sector is low as
land prices are falling.
10
8
6
4
Loan Rate
2
Deposit Rate
0
Jul-03
Oct-02
Jan-02
Apr-01
Jul-00
Oct-99
Jan-99
Apr-98
Jul-97
…Because Loan Growth Is Low
105
50
100
40
95
30
Loan (YoY % chg.)
CA (% of loan)
20
Taiwan
90
85
Oct-96
4) Yet property prices are still too high for
savings and credit demand to be in balance.
Jan-96
Apr-95
Jul-94
3) Loan demand could revive a bit if land
prices stop falling. This is a possible case in
the short term.
Taiwan: Interest Rates Are Low
10
Taipei
Land Price
0
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
Dec-02
Mar-02
Jun-01
Sep-00
Dec-99
Mar-99
Jun-98
Sep-97
Dec-96
Mar-96
Jun-95
-20
1968
75
1965
-10
1962
80
-30
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
63
Equity Research Asia/Pacific
Economics Report
Economics Team
Taiwan: China Profits Pressure NTD to Appreciate
1) Capex weakness doesn’t correspond with
capital outflow, even though production share
in China has gone up (half of IT production is
in China now).
2) It appears that Taiwan’s production in
China is so profitable that its capex there is
funded from profits.
Taiwan: Capital Outflow Has Stopped
Current
Account
Balance
Forex
Reserv. Inc.
1982-86
54.9
68.2
1987-92
53.5
5.6
1993-98
37.0
1.2
1998-2002
64.3
78.2
($ bn)
30
(% of total)
3) The profitability of Taiwan’s businesses in
2003
28.6
45.0
China is putting a lot of pressure on the
But Production Share In China Has Increased
Taiwan dollar to appreciate. But weak capex
40
is already causing deflation. A stronger
currency would worsen deflation.
Export Share to China/HK
35
25
20
2003E
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
64
Equity Research Asia/Pacific
Economics Report
Economics Team
Korea:
Housing Boom
June 2004
Andy Xie (852 2848-5220) [email protected]
65
Please see important disclosures starting on page 82.
Equity Research Asia/Pacific
Economics Report
Economics Team
Korea: Bottoming Out Slowly
1) Retail sales appear to be
bottoming out. The impact of the
credit bubble unwinding appears to
be fully absorbed in current
consumption.
2) Consumption will likely recover
slowly. Household debt is still too
high. Households cannot increase
consumption quickly by borrowing.
50
40
30
Export
Retail
20
10
0
Oct-03
Nov-02
Dec-01
Jan-01
Feb-00
Mar-99
Apr-98
May-97
Jun-96
Jul-95
Aug-94
Sep-93
Oct-92
Nov-91
Dec-90
-10
Jan-90
3) Exports are still resilient. Japan
appears to be recovering. The US
is growing fast again. China is still
strong.
Economic Cycle Is Turning Up Slowly
(YoY % change)
-20
-30
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
66
Equity Research Asia/Pacific
Economics Report
Economics Team
Korea: Capex May Be Migrating to China
Capex Will Likely Remain Weak (YoY % change)
80
Construction
60
40
20
0
Sep-02
Jun-01
Mar-00
Dec-98
Sep-97
Jun-96
Mar-95
Dec-93
Sep-92
Jun-91
Mar-90
Dec-88
Sep-87
-20
Jun-86
-40
-60
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
FDI Deficit Widens (YoY % change)
(US$ bn)
2) Construction is still strong due to
a robust housing market and
government infrastructure projects.
This sector should remain strong
for the foreseeable future.
Facility
Mar-85
1) Facility investment appears to be
weaker than usual. It appears that
Korean companies are stepping up
capex in China to improve
competitiveness and consolidate
their market positions in China.
Inward Direct
Investment
Outward Direct
Investment
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
67
Equity Research Asia/Pacific
Economics Report
Economics Team
Korea: Exports May Not Mean Income
Capex Will Likely Remain Weak (YoY % change)
2) The decoupling between IP and
exports is similar to what has
occurred in Taiwan in the past five
years.
50
IP
40
30
(YoY % change)
1) The recent strong exports may
reflect components following
migrated factories rather than
rising demand or competitiveness.
Export
($)
20
10
0
Jan-04
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
May-99
Sep-98
Jan-98
May-97
Sep-96
Jan-96
May-95
Sep-94
Jan-94
May-93
Sep-92
Jan-92
May-91
Sep-90
Jan-90
-10
-20
-30
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
68
Equity Research Asia/Pacific
Economics Team
Currency Is Key to Slowing Factory Outflow
• The government is likely to
institute more policies to keep
factories in Korea, e.g.,
increasing depreciation
allowance.
130
120
110
100
90
80
70
Terms of Trade (LHA)
60
Won Value (RHA)
50
150
140
130
120
110
100
90
80
70
60
Oct-03
Jul-02
Apr-01
Jan-00
Oct-98
Jul-97
Apr-96
Jan-95
Oct-93
Jul-92
Apr-91
Jan-90
Oct-88
Jul-87
Apr-86
Jan-85
Oct-83
Jul-82
Apr-81
• But, the key problem is high
wages and an inflexible labor
market. Without addressing
both, Korea can slow but not
reverse the migration of factories
to China.
Manufacturing Withers with Deflation
(Won value vs. $, adjusted for CPI gap, 1999=100)
• The government appears to be
determined to hold down the
currency value in order to slow
the outflow of factories to China.
Korea tries to manage its
currency in lines with its terms of
trade.
(Terms of Trade, 1999=100)
Economics Report
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
69
Equity Research Asia/Pacific
Economics Report
Economics Team
De-industrialization Is Source of Deflation
1) Inflation continues to fall despite
labor strikes and a high oil price. If
China slows and commodity prices
decline, the inflation rate will likely
continue to decline.
Inflation May Continue to Decline in Recovery (%)
15
PPI
10
CPI
Oct-03
Nov-02
PPI
Dec-01
Jan-01
Feb-00
Mar-99
Apr-98
May-97
Jun-96
Jul-95
Aug-94
Sep-93
Oct-92
Nov-91
Dec-90
3) Bank of Korea is quite aggressive in
weakening the won against the yen to
keep deflation at bay. However, the
trade surplus is rising rapidly as a
result.
0
Jan-90
2) Deflation risk remains significant
even as an economic recovery is
under way. Because the recovery is
likely to be quite mild, the demand
pickup may not be sufficient to offset
the deflationary forces: (1) declining
export prices and (2) too much debt.
5
-5
Weak Currency Policy Keeps Deflation at Bay
2100
Krw/$
1900
Krw/100Yen
1700
1500
1300
1100
900
700
12/2/03
6/2/03
12/2/02
6/2/02
12/2/01
6/2/01
12/2/00
6/2/00
12/2/99
6/2/99
12/2/98
6/2/98
12/2/97
6/2/97
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
70
Equity Research Asia/Pacific
Economics Report
Economics Team
Bond Market Anticipates Slow Growth
500
Yield Gap Between Korea
and US Treasuries
450
One Year
400
350
300
150
100
50
0
(basis points)
200
(YoY % change)
12/4/2003
7/25/2003
3/15/2003
11/3/2002
6/24/2002
2/12/2002
10/3/2001
5/24/2001
1/12/2001
9/2/2000
4/23/2000
30
12/13/1999
40
8/3/1999
50
Five Year
3/24/1999
2) The Bank of Korea has been
targeting property prices, which
have outperformed the CPI.
Monetary conditions are, therefore,
too tight for the real economy.
250
11/12/1998
1) The yield curve is still quite flat,
which suggests that the bond
market predicts little economic
acceleration. This is consistent
with our view.
Seoul Property Market
Price Index
Rent Index
20
10
0
Jul-03
Jan-02
Jul-00
Jan-99
Jul-97
Jan-96
Jul-94
Jan-93
Jul-91
Jan-90
Jul-88
-20
Jan-87
-10
-30
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
71
Equity Research Asia/Pacific
Housing Sector Should Support Growth
Economics Report
Economics Team
Construction Sector
140
100
80
60
40
20
Value Added
(annual % change, current price)
120
Order: Housing
Order: Non-Housing
0
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
-20
-40
-60
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
72
Equity Research Asia/Pacific
Because Real Interest Rate Is Low
Economics Report
Economics Team
Real Interest Rate Reaches 10Y Low
(%)
12
10
(1-2Y Deposit rate - Inflation)
8
6
4
2
0
Jan-04
Jul-02
Jan-01
Jul-99
Jan-98
Jul-96
Jan-95
Jul-93
Jan-92
Jul-90
Jan-89
Jul-87
Jan-86
Jul-84
Jan-83
Jul-81
-2
-4
-6
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
73
Equity Research Asia/Pacific
As Capex Demand Is Weak
Economics Report
Economics Team
18
16
(% of GDP)
Business Demands Less Capital
Korea: Facility Investment
14
12
10
8
6
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
74
Equity Research Asia/Pacific
Economics Report
Economics Team
Due to Lack of New Competitive Industries
45
Manufacturing
(% of GDP)
35
30
Taiwan
Korea
25
20
15
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
50
45
40
35
30
25
20
Per Capita Income
Taiwan
Korea
15
10
5
0
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
3) The political paralysis means that
finding new competitiveness is a
distant dream. The housing sector
is stepping forward to absorb the
surplus capital.
1964
1961
2) Korea’s relative gain in living
standards appears to be stalling. It
could reinvest its capital in
improving living standard, i.e.,
accepting a lower growth rate, or
fund the development of new
competitive industries.
40
(% of US Per Capita Income)
1) Together with other Tiger
economies, Korea is losing
competitiveness in traditional
manufacturing. But, it has not
found enough new competitive
industries to invest its savings.
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
75
Equity Research Asia/Pacific
Construction Can Still Support Investment
Economics Report
Economics Team
45
Gross Fixed
Capita Formation
35
30
Korea
(% of GDP)
40
25
20
Taiwan
15
10
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
76
Equity Research Asia/Pacific
Economics Report
Economics Team
Local Investors Buy Bonds
Separate Markets:
1) While KOSPI is pricing in
recovery in the global economy
and, hence, the Korean economy,
the bond market continues to lower
inflation expectations and,
probably, the growth outlook. The
tight monetary conditions drive
declining inflation expectations.
11
1100
10
1000
9
900
KOSPI (RHA)
8
800
7
700
6
600
5
500
5Y T Bond
Yied (%, LHA)
4
400
14-Nov-03
1-Aug-03
18-Apr-03
9-Jan-03
26-Sep-02
14-Jun-02
4-Mar-02
15-Nov-01
3-Aug-01
24-Apr-01
9-Jan-01
22-Sep-00
9-Jun-00
23-Feb-00
10-Nov-99
2-Aug-99
22-Apr-99
2) The current bond yield implies a
forecast 5% nominal GDP growth
rate. This is too low for Korea.
The nominal growth rate should be
about 6.5% with inflation at 2-2.5%
and the real growth rate at 4-4.5%.
The current monetary conditions
may be pushing Korea into a
deflationary equilibrium.
Foreign Liquidity Dominates Equity
Local Liquidity Dominates Bonds
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
77
Equity Research Asia/Pacific
Economics Report
Economics Team
Competitiveness Problem Is Here To Stay
• Korea has stabilized its export
price over the past three years,
as rising competitiveness in IT
consumer products and
automobiles has offset declining
competitiveness in other
industries. Is this a sustainable
phenomenon?
14
33
13
31
12
29
27
11
25
10
23
9
21
8
19
Dollar Export Price (LHA)
Manufacturing Emloyment (% of tota, RHA)l)
7
17
6
15
Jan-03
May-01
Sep-99
Jan-98
May-96
Sep-94
Jan-93
May-91
Sep-89
Jan-88
May-86
Sep-84
Jan-83
May-81
• The key is how rapidly China will
increase its competitiveness,
which would inevitably lead to a
price decline. China is investing
heavily in IT and automobiles.
Prices in these two industries will
likely decline, in my view.
Manufacturing Withers with Deflation
Source: CEIC, Morgan Stanley Research
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
78
Equity Research Asia/Pacific
Economics Report
Economics Team
Internationalization Can Boost Competitiveness
• Korea is discussing measures to sustain
competitiveness. Proposed ideas include
– North Asian Hub
– Special Economic Zones
• Targeting may not be the best answer.
Improving incentives could work much better for
Korea. In particular, we suggest,
– Simplifying and reducing tax rates
– Encouraging foreign ownership in
the service sector
– Internationalizing Korean
consumption
Better Manufacturing
Improving
Factory
Efficiency
Current
Relying on design and
IP for value creation
R&D
Competing against
Hong Kong &
Singapore
Service
• Korea must improve efficiency in all areas
to sustain its living standard, with the rise
of China. Becoming more global is the
most important response, in our view.
Andy Xie (852) 2848 5220 [email protected]
Please see important disclosures starting on page 82.
79
Equity Research Asia/Pacific
Economics Report
Economics Team
Asia/Pacific: Economic Forecast Summary (1)
Real GDP Growth (YoY %)
NJA
China
Hong Kong
Taiwan
Korea
SE Asia
Indonesia
Malaysia
Philippines
Singapore
Thailand
CPI Inflation (%, Period Average)
NJA
China
Hong Kong
Taiwan
Korea
SE Asia
Indonesia
Malaysia
Philippines
Singapore
Thailand
2001
2002
2003
2004E
2005E
4.1
7.3
0.5
-2.2
3.8
1.6
3.5
0.3
3.0
-1.9
2.1
6.0
8.0
1.9
3.6
7.0
4.0
3.7
4.1
4.4
2.2
5.4
6.3
9.1
3.2
3.2
3.1
4.5
4.1
5.2
4.5
1.1
6.7
6.6
7.8
5.2
5.6
4.9
5.6
4.5
5.7
4.5
6.4
7.3
5.8
7.5
3.4
3.6
4.3
4.7
4.5
4.8
4.0
3.5
6.0
2.2
0.7
-1.6
0.0
4.1
4.9
11.5
1.4
6.1
1.0
1.7
1.4
-0.8
-3.0
-0.2
2.8
4.5
11.9
1.8
3.1
-0.4
0.6
2.0
1.2
-2.6
-0.3
3.5
3.2
6.6
1.1
3.0
0.5
1.8
2.7
2.5
-1.0
0.5
3.0
3.4
6.4
1.6
3.5
1.1
2.0
2.3
2.0
-0.5
0.8
2.0
3.2
6.4
1.6
3.5
1.0
1.6
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
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80
Equity Research Asia/Pacific
Economics Report
Economics Team
Asia/Pacific: Economic Forecast Summary (2)
Current Account (as % GDP )
NJA
China
Hong Kong
Taiwan
Korea
SE Asia
Indonesia
Malaysia
Philippines
Singapore
Thailand
Exchange Rate (Per US$, Period End)
China
Hong Kong
Taiwan
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
2001
2002
2003
2004E
2005E
2.9
1.5
6.1
6.4
1.9
7.5
4.9
8.3
1.8
18.8
5.4
4.0
2.8
8.6
9.1
1.0
8.3
4.3
8.5
5.6
21.2
6.0
4.6
3.3
11.1
10.0
2.0
9.7
3.8
12.9
4.2
30.9
5.6
2.7
-0.4
10.1
9.0
1.6
8.9
2.9
14.0
4.5
26.5
5.3
2.7
0.5
9.1
8.5
1.0
8.8
2.2
14.5
3.8
26.6
5.6
8.28
7.80
35.0
1326
10400
3.80
51.4
1.85
43.9
8.28
7.80
34.8
1186
8940
3.80
53.3
1.74
43.2
8.28
7.80
34.0
1,193
8,418
3.80
55.0
1.70
39.6
8.28
7.76
32.5
1,120
8,800
3.80
57.5
1.68
38.8
8.22
7.80
31.5
1,080
9,200
3.80
59.0
1.61
38.5
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
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Equity Research Asia/Pacific
Economics Report
Economics Team
Important Disclosures
Important US Regulatory Disclosures on Subject Companies
The information and opinions in this report were prepared or are disseminated by Morgan Stanley Dean Witter Asia Limited and/or Morgan Stanley Dean
Witter Asia (Singapore) Pte. and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd and/or Morgan Stanley & Co. International Limited, Taipei Branch
and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean Witter Australia Limited (A.B.N. 67 003 734 576, a licensed
dealer, which accepts responsibility for its contents), and/or JM Morgan Stanley Securities Private Limited and their affiliates (collectively, "Morgan
Stanley").
The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based
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revenues.
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Equity Research Asia/Pacific
Ratings Distribution and Definitions
Disclaimers
Economics Report
Economics Team
Global Stock Ratings Distribution
(as of May 31, 2004)
Coverage Universe
Stock Rating Category
Count
Overweight
Equal-weight
Underweight
Total
631
787
353
1,771
Investment Banking Clients (IBC)
% of
Total
36%
44%
20%
Count
266
282
102
650
% of
Total IBC
% of Rating
Category
41%
43%
16%
42%
36%
28%
Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely
corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the
equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's
existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
ANALYST STOCK RATINGS
Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a
risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe,
on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a
risk-adjusted basis, over the next 12-18 months.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative
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not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy;
OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.
ANALYST INDUSTRY VIEWS
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next 12-18 months.
In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next
12-18 months.
Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next
12-18 months.
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Economics Team
Other Disclosures
Other Important Disclosures
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