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Where Is Inflation Expectation Heading To? —— Outlook on US and China’s Economic Growth
Sunny Liu
May. 25th, 2009
www.sw108.com
申万研究 2
1. US: Where is Inflation Expectation Heading To?
2. China: Can ‘Central Pick-up’ Be China’s New Engine of Long-term Growth?
MAIN CONTENTS
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申万研究 3
1.1 US: Business Cycle Stepping into Inflation Expectation Stage
Deflation Stage:
Demand↓
Price↓
Profit↓
Supply↓Demand↑
Price↓
Profit↓
Supply↓
Demand↑
Price↑
Profit↑
Supply↑
Inventory↑
Inventory↓
Eco
no
mic D
ow
ntu
rn
Trough
Peak Peak
Reco
very
Pro
sperity
Deflation → Price Recovery →Inflation Expectation
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申万研究 4
1.2 Where Is Inflation Expectation Coming From?
A: Monetary Expansion → Liquidity Pressure
Source: FED;SWS Research
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申万研究 5
Source from: FED; SWS Research
Short-term Liquidity Facilities Play Major Part of Monetary Expansion
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申万研究 6
B: Recovery Expectation
- 6
- 4
- 2
0
2
4
6
8
10
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09E
3Q09E
2010E
%
US GDP Growth Rate Forecast
Source: IMF; SWS Research
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申万研究 7
C: Investors Risk-Taking Appetite Rising
Yields of Treasury Up and Down during the Crisis
0
1
2
3
4
5
6
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
USGG2YR I NDEX USGG10YR I NDEX
Source: Bloomberg; SWS Research
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申万研究 8
TROUGHBANK
Lending Frozen
POLICIES
TARP\QE\etc.Credit Frozen
Low Investment
Underwater Housing-equity
High Unemployment
Bank Regulation towards ‘Shadow Banking Activity’
Risk Management
New Loss Increase
Low Lending
Housing Market Up
Unemployment Ease
Investment Up
Loss Reduce
Lending Increase
Peak
DE
FL
AT
IO
NP
RIC
E
RE
CO
VE
RY
INF
LA
TIO
N
EX
PE
CT
AT
ION
INF
LA
TI
ON
Growth-focusing Policies
Alerting to Inflation
1.3 Recovery Pushes Excessive Liquidity Leakage
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申万研究 9
Concerns: Excessive Liquidity Might Drive Up Inflation
Mo
netary E
xpan
sio
n
Eco
no
mic
Do
wn
turn
Cre
dit F
rozen
Fisc
al E
xpan
sion
Real Economy
Capital Market
Commodity
Excessive Liquidity
Insufficient Demand & Low
Level InvestmentNO
Lower Yields
NO
Current Price
Attractive
Possible
High Inflation
Increased Demand, Price Go Up
RentalMaterials
Etc.
BondStock
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申万研究 10
A: Household BS Deleveraging→Slow Consumption Recovery
1.3.1 Slow Recovery In US Economy
1
6
11
16
21
Mar-80
Mar-82
Mar-84
Mar-86
Mar-88
Mar-90
Mar-92
Mar-94
Mar-96
Mar-98
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
%
/总负债 总资产 /住宅按揭 总资产 /消费信贷 总资产
Residential Mortgages Push Up Household Liability Level
Source: FED; Bloomberg; SWS Research
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申万研究 11
B: Financial Sector BS Deleveraging→Slow Financing Environment Recovery
source: Bloomberg; SWS Research
Business credit tighten
-30-20-10
010203040506070
2Q90
2Q91
2Q92
2Q93
2Q94
2Q95
2Q96
2Q97
2Q98
2Q99
2Q00
2Q01
2Q02
2Q03
2Q04
2Q05
2Q06
2Q07
2Q08
百分点
-4
-2
0
2
4
6
8
10%
大中型银行 小银行 GDP季环比增速(右轴)
-20
-10
0
10
20
30
40
50
60
70
80
1Q96
4Q96
3Q97
2Q98
1Q99
4Q99
3Q00
2Q01
1Q02
4Q02
3Q03
2Q04
1Q05
4Q05
3Q06
2Q07
1Q08
百分点
0
1
2
3
4
5
6%
收紧信用卡透支条件的银行净占比收紧其他消费贷款条件的银行净占比PCE年同比(右轴)
Consumption credit tighten
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申万研究 12
• Demographic Bonus No Longer Supports Over-borrowing Growth Pattern
• Over Last Half Century, Average GDP Growth Rate is 3.2%; Future Potential Growth Rate Expected Around 2.5%
Household Financial Burden Rise Substantially
40
45
50
55
60
65
70
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
%
C: Long-term Growth by Over-borrowing Not Sustainable
10
11
12
13
14
15
Mar
-80
Sep-
81
Mar
-83
Sep-
84
Mar
-86
Sep-
87
Mar
-89
Sep-
90
Mar
-92
Sep-
93
Mar
-95
Sep-
96
Mar
-98
Sep-
99
Mar
-01
Sep-
02
Mar
-04
Sep-
05
Mar
-07
%
Household Repayments on Debt Already Rising
source: Bloomberg; SWS Research
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申万研究 13
1.3.2 Liquidity Eventually Leaves Capital Market Without Profits Support
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Mar- 80 Mar- 86 Mar- 92 Mar- 980
2000
4000
6000
8000
10000
12000
NI KKI E I NDEX J apan Corporate Current Profi ts Bi l l i on J PY( )
Source: Bloomberg; SWS Research
Stock Market Shrink as Profit Down
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申万研究 14
1.3.3 Commodity Market Attracts Liquidity
Source: Bloomberg; SWS Research
Oil Price Up With Inflation Expectation Shows
40
65
90
115
140
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
BRUNT BRUNT (Dec 09) WTI WTI (Dec 09)
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申万研究 15
Source: Bloomberg; SWS Research
Q: Is Inflation Expectation Leading to Stagflation?
- 505
10
152025
CPI YOY I ndex PPI YOY I ndex
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
- 4
- 2
0
2
4
6
8
GDPAANN% I ndex( r i ght scal e)
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申万研究 16
A1: Liquidity Leakage May Not as much as Expectated
• Inflation-alert Monetary Policy Maker: Long-term Inflation Target at 2%;Majority of Excessive Liquidity Facilities are Short-term
• Shadow Banking System (ABS|SIF|ARPS|ORS|CRS): Traditionally No Regulation; Investment Bank Activities
• Hedge Funds: 30% Loss during Crisis
• Investment Banks: Gone with Wind
Source: Fed; SWS Research
Total Assets(Ti l l i on USD)
02468
1012
US BankSystem
Top 5 BHC ShadowBanks
Hedge Fund Top 5I nvestment
Bank
Liquidity Leakage Through Financial Markets
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申万研究 17
A2: Liquidity Alone Cannot Explain Inflation
Selected Models for Inflation Indicator
Source: SWS
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申万研究 18
-202468
101214161820
Jan-
67
Jan-
70
Jan-
73
Jan-
76
Jan-
79
Jan-
82
Jan-
85
Jan-
88
Jan-
91
Jan-
94
Jan-
97
Jan-
00
Jan-
03
Jan-
06
Jan-
09
5060708090100
M2% YOY I ndex CPI YOY I ndexPPI YOY I ndex CAPI TAL UTI LI ZATI ON
Source: Bloomberg; SWS
Capital Utilization Still Far Lower than Historical Average
Morosani Model Predicts Little Chance for Inflation
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申万研究 19
Conclusions:
• Inflation Expectation Stage May see Throughout 2H 2009
• Early As Q3 2009 May Be The Peak of Inflation Expectation
• Little Probability shows High-Inflation Rather Than Price Recovery
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申万研究 20
1. US: Where is Inflation Expectation Heading To?
2. China: Can ‘Central Pick-up’ Be China’s New Engine of Long-term Growth?
MAIN CONTENTS
www.sw108.com
申万研究 21
Market Power Dragging Down Growth
2.1 GDI* Makes Growth Shinning During the World Recession
EXPORT DECLINES
- 15
- 10
- 5
0
5
10
15
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
- 20. 0
- 10. 0
0. 0
10. 0
20. 0
30. 0
40. 0
WORLD GDP YOY% WORLD TRADE VOLUMN YOY%
CHI NA EXPORT% RI GHT HAND( )
80859095
100
CONSUMER CONFI DENCE I NDI EX CONSUMER SATI SFACTI ON I NDEX
CONSUMER EXPECTATI ON I NDEX
CONSUMER SENTIMENT INDEX
Source: CEIC;SWS Research * Government Direct Investment
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申万研究 22
Policies Refocusing on Investment-lead Growth 2H 2008:
Fiscal Expansion: Fiscal Deficit of ¥ 950 billion(2.9% of GDP); ¥ 4 trillion government direct investment; Rejuvenation plans of 10 major industries
Monetary Expansion: Credit Injection ¥ 7-8 trillion
02468
101214
FI NAL PRODUCT BUSI NESS I NVESTMENT NET EXPORT
Contribution of three Elements Towards Growth
Source: NBS; SWS Research
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申万研究 23
Source: NBS; SWS Research
56789
1011121314
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
GDPqoq GDPannual
GROWTH FORECAST
Government-lead Investment Pushes V-shape Growth During Crisis in 2009
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申万研究 24
Source: Bloomberg; SWS Research
Over-sea Economies Only Gradually Bottom-up
2.2 World Slow Recovery → Trade Recovery But Only Partially
- 15. 0
- 10. 0
- 5. 0
0. 0
5. 0
10. 0
2007 2008F 2009F 2010F
WORLD GROWTH US
EU J APAN
OECD WORLD TRADE GROWTH
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申万研究 25
Growth-focusing Expansion→Resource Reallocation
• Effectiveness→Developing Area
• Regional Developmental Balancing→Developing Area
Past Experiences Show Positive Impacts On Regional Development by Central Government-lead Investment
• In 1999, Western Expansion
• In 2003, North-Eastern Rejuvenation
• In 2004, Central Pick-up
‘Central’ Benefits The Most During The Government-lead Investment
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申万研究 26
Source: NBS; SWS
0
5
10
15
20
25
30
351997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
四川安徽辽宁河北江苏
Middle Rising Substantially
Top 10 Provinces in Investment Growth
Past Experiences Show Positive Impacts On Regional Development by Government-lead Investment
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009.2
SICHUANSHANDONG BEIJING ZHEJIANG
SHANDONG
SHANDONG LIAONING MONGOLIA JIANGXI ANHUI JIANGXI YUNNAN
SHANNXIGUANGDONG
HELONGJIANG GUIZHOU JIANGSU JIANGSU MONGOLIA LIAONING LIAONING HENAN LIAONING SICHUAN
CHONGQING HEBEI GUANGDONG JIANGXI JIANGXI MONGOLIA HENAN HENAN JILIN FUJIAN JILIN HEBEI
FUJIAN ZHEJIANG XINJIANGCHONGQING MONGOLIA JIANGXI HEBEI
SHANDONG TIANJIN JILIN TIANJIN JIANGXI
YUNNAN HUNAN JILIN BEIJINGCHONGQING HENAN HUNAN JILIN HENAN LIAONINGHENAN SHANNXI
HUNAN JILIN LIAONING SHANXI ZHEJIANG ANHUI ANHUI HEBEI ANHUI SHANNXI ANHUI ANHUIGUANGDONG SHANNXI SHANGHAI SHANNXI SHANXI ZHEJIANG
SHANDONG YUNNAN HEBEI HUNAN HEBEI LIAONING
SHANXI GANSU SHANXI HUNAN ANHUI SHANXI GUANGXI GUANGXI SHANNXI HEBEI SHANNXI GUIZHOU
Sichuan
Anhui
Liaoning
Hebei
Jiangsu
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申万研究 27
Developing North-Eastern & Central Beaten The National Level
Developed South-eastern Left Far Behind
Source from: SWS Research *data for Shanghai and Zhejiang are for 2008
Fixed Capital Investment Plan In 2009
TARGETED INVESTMENT LEVEL
1HEILONGJIANG 35.02JIANGXI 30.03SICHUAN 30.04LIAONING 30.05SHANNXI 30.06JILIN 28.07HUNAN 25.08GUANGXI 25.09NINGXIA 25.0
10MONGOLIA 25.011TIANJIN 25.012XINJIANG 25.013SHANXI 24.014SHANDONG 20.015HENAN 20.016ANHUI 20.017HUBEI 20.018YUNNAN 20.019GANSU 20.020CHONGQING 18.021HEBEI 18.022JIANGSU 17.023GUANGDONG 16.024GUIZHOU 16.025FUJIAN 15.026QINGHAI 15.027BEIJING 15.028TIBET 15.029HAINAN 12.030ZHEJIANG 10.031SHANGHAI 6.0
NATIONAL AVERAGE 20.0
0
5
10
15
20
25
30
35
40
HEILONGJIANGJIANGXISICHUANLIAONINGSHANNXIJILINHUNANGUANGXININGXIAMONGOLIA TIANJINXINJIANGSHANXISHANDONGHENANANHUIHUBEIYUNNANGANSUCHONGQINGHEBEIJIANGSUGUANGDONGGUIZHOUFUJIANQINGHAIBEIJINGTIBETHAINANZHEJIANGSHANGHAI
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申万研究 28
Central Beaten the National Average ← Government Favoring Policies Developed South-Eastern Declined Below the National Average ← Real
Estate Adjustment; International Trade Deterioration
Source from: NBS; SWS Research *Central Government Invest indicates the share each province from the total ¥ 100billion central government direct investment
Latest Evidence Supports Central Pick-up
SELECTED 2009 JAN/FEB FIXED CAPITAL INVESTMENT GROWTH
INVESTMENT
GROWTH% %%CHAN
GECENTRAL GOV.
INv INVESTMENT
GROWTH% %%CHAN
HECENTRAL GOV.
INv
YUNNAN 80.2 3.1 1.00 56 GUANGXI 22.3 2.7 -0.10 31
SICHUAN 45 6.8 0.80 62
SHANDONG 17.5 7.9 -0.60 34
HEBEI 59.1 2.5 0.50 JIANGSU 20.9 14.4 -0.70 30
JIANGXI 44.8 2.7 0.40 36 FUJIAN 8.9 4.4 -0.80 21
SHANNXI 63.2 2.0 0.40 40 ZHEJIANG 10.6 6.1 -0.90 16
ANHUI 36.4 6.3 0.40 45SHANGHA
I 0.9 4.6 -1.20LIAONIN
G 48 2.1 0.30 36GUANGD
ONG 10.6 8.1 -1.20 15
GUIZHOU 70.7 1.4 0.30 48 BEIJING -20.6 2.3 -1.30
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申万研究 29
Q: Can Central Pick-up Be The New Engine For Growth?
2009 2010 2015 2020 2030
Central
East
Infrastructure Investment
Industrial Relocation :Labor Intensive
Industrial Relocation : Capital Intensive
Urbanization In Central Areas: Real Estate, Industrial Engineering
Service+Finance+R&D
Consumptions In Central Areas
Path of Industrial Relocation
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申万研究 30
Undertakings of the AnalystSunny Ying LiuI am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein.
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Information Disclosure:
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The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.sw108.com). The clients may ask for follow-up explanations if they so wish.
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申万研究 31
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申万研究 32
Shanghai SWS Research & Consulting Co., Ltd.Ying Liu (Sunny) liuying@sw108.com
申万研究 • 拓展您的价值SYWG Research • CHINA Value Revealed
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