anz greater china weekly insight 2 april 2013(1)
TRANSCRIPT
GREATER CHINA ECONOMICS
ANZ RESEARCH
WEEKLY INSIGHT FEATURE NOTE
2 APRIL 2013
INSIDE
Feature Note 2 Data Preview 6 Week in Review 7 China Liquidity Report 8 Momentum Barometer Forecasts 1Important Notice 12
CONTRIBUTORS Li-Gang Liu Chief Economist, Greater China [email protected] Raymond Yeung Senior Economist [email protected] Hao Zhou Economist, China Economics [email protected] Louis Lam Economist, Greater China [email protected]
9 1
HONG KONG REAL ESTATE: HEADING TOWARDS A PERFECT STORM?
• In the past 12 months, Hong Kong’s residential property prices have risen by more than one-fifth despite a series of government tightening measures. While demographic changes and mainland investment have offered new sources of housing demand, low interest rates and tight supply are still the key factors behind the elevated price level.
• We believe Hong Kong’s property sector is a bubble. Our empirical model indicates current average prices are 24% above fair value. A widening gap between the two will likely trigger a fall of real estate prices.
• In our view, the strategy of massive land supply and the commitment to build more affordable housing may risk Hong Kong repeating the disastrous situation that occurred in 1997-2003 as poor and irreversible local policy actions in a changing global environment could exaggerate the pace of market correction. Therefore, we need to consider the new housing strategy very carefully.
DATA PREVIEW
Taiwan: We expect Taiwan's inflation to increase mildly while exports should sustain its moderate growth path over the first two months.
China: We believe inflation will moderate significantly in March after the Chinese New Year.
WEEK IN REVIEW
Taiwan: The central bank held its policy rate unchanged, as widely expected.
China: The official PMI rebounded in March, suggesting that growth momentum has been stabilizing, but headwinds remain.
CHINA MARKET LIQUIDITY REPORT
The PBOC drained liquidity from the open market last week, but market liquidity appeared plentiful even before the end of the quarter, largely due to strong capital inflows.
CHART OF THE WEEK
China’s March official PMI dispelled growth concerns
China - Official PMI
45
47
49
51
53
55
57
59
61
63
Dec09
Mar10
Jun10
Sep10
Dec10
Mar11
Jun11
Sep11
Dec11
Mar12
Jun12
Sep12
Dec12
Mar13
Headline PMI New Orders New Export Orders
Sources: CEIC
Greater China Weekly Insight / 2 Apr 2013 / 2 of 13
FEATURE NOTE
HONG KONG’S REAL ESTATE: HEADING TOWARDS A PERFECT STORM?
Hong Kong’s property prices surpassed the 1997 peak during the second half of 2012. Despite a slew of policy measures, prices have remained elevated without any apparent sign of declining. Historically, an overheating property sector can result in a significant downturn for an economy. Therefore, we need to evaluate the current situation carefully.
IS HONG KONG’S PROPERTY A BUBBLE?
From whatever angle, Hong Kong’s property prices have risen too fast. Even though the economy has only expanded by 1.4%, the residential real estate prices have increased by 23% over the last 12 months. As we stated in our previous analysis (ANZ Greater China Insight 11 October 2011), the appreciation of RMB could be a factor behind Hong Kong’s property bubble. However, RMB has only appreciated by a modest 1.1% against HKD in the last 12 months. The surge in real estate prices in all districts in the past few years suggest that Hong Kong’s property is a bubble.
Hong Kong - Property Prices
0
20
40
60
80
100
120
140
1996 1998 2000 2002 2004 2006 2008 2010 2012
Centa-City Leading Index - Raw CCLI - Adjusted for HKDCNY
Hong Kong - Property Price Rebound by Region
0 5,000 10,000 15,000 20,000
Peak/SouthKowloon Tong/Shek Kip
M id-LevelsNorth Point/Quarry Bay
Sai Kung/Tseung Kwan OCauseway Bay/Happy
Tsim Sha Tsui/Yau M a TeiHung Hom/To Kwa WanShau Kei Wan/Chai Wan
Ho M an Tin/ PrinceWest/Sheung Wan/Central
Cheung Sha Wan/ShumTai Po
Tsuen WanAberdeen/Ap Lei Chau
Island/Discovery BayKwun Tong
ShatinNorth
M ongkok/Tai Kok TsuiWanchai
Yuen Long/Tin Shui WaiWong Tai Sin/Diamond Hill
Tuen M un
Price per sq ft, Mar 2009 (HKD)
Increment From Mar 2009 toOct 2012
Sources: Bloomberg, Centaline, ANZ
To assess how significant the overvaluation is, we have constructed an econometric model to estimate the fair value of Hong Kong’s residential property based on a set of variables that have been well established in previous research (see ANZ Greater China Weekly Insight 25 Oct 2011, IMF (2011) and Leung et al (HKMA 2008)). Our estimates are in line with other similar studies in terms of signs and magnitudes of the parameters (see Annex on page 5). Real interest rates, macroeconomic performance (Hang Seng Index as a proxy) and construction costs are statistically significant factors driving Hong Kong’s property prices. Our model calculates that Hong Kong property prices in 2012Q4 are 24% higher fair value suggesting that there is room for a correction.
Hong Kong - Real Property Price IndexActual vs. Fair Values
(Jul 97 = 100, CPI adjusted)
20
30
40
50
60
70
80
90
100
110
120
1994 1997 2000 2003 2006 2009 2012
Actual Fair Value
Hong Kong - Property Price Quarterly Movement by %, 1992Q1-2012Q3
27.3
17.2
8.5 8.310.9
8.8 8.1 7.8
0
5
10
15
20
25
30
Drop16-20%
Drop11-15%
Drop 5-10%
Drop 0-5%
Rise 0-5%
Rise 6-10%
Rise 11-15%
Rise 16-20%
0
5
10
15
20
25
30
No. of Quarters Average Actual-Fair Value Gap, % (RHS)
Sources: CEIC, ANZ Research
Historically, a widening gap between the actual price and fair value increases the risk of a significant price correction. Typical cases are the period of 1997Q4 that ended with a downturn. In fact, between 1992Q2 and 2012Q4, three quarters (1997Q4, 1998Q2, 2008Q4) registered quarterly declines in real property prices of more than 16%. Prior to these declines, we saw a substantial gap between fair value and actual prices. In
Greater China Weekly Insight / 2 Apr 2013 / 3 of 13
FEATURE NOTE
another regression analysis that tracks short-term dynamics, we find that a widening of the gap between actual and fair values would trigger price declines. Therefore, we believe that Hong Kong property prices are now at risk.
WHAT ARE THE CAUSES BEHIND THE ELEVATED PRICES?
Undoubtedly, rising property prices since 2009 are largely driven by the negative real interest rate regime on the back of US monetary easing. At this stage, Hong Kong’s mortgage interest rates are priced at around 2%, and the low interest environment supports a large buy-rent gap for people who will need a property for self-occupancy as the interest portion of the monthly mortgage instalment is significantly below the monthly rental payment. This offers a solid and valid proposition for property buyers.
Hong Kong - Mortgage Interest to Rental Ratio
0
20
40
60
80
100
120
2005 2006 2007 2008 2009 2010 2011 2012Hong Kong Kowloon New Territories
Below 100 means the interest expense for a 50sq m flat with30% down is cheaper than renting the same flat.
Hong Kong - New Property Supply(Units)
0
10,000
20,000
30,000
40,000
50,000
60,000
2001 2003 2005 2007 2009 20110
20
40
60
80
100
120
New Flat Available for sales 15-year Average SalesProperty Price Index (RHS)
Sources: CEIC, Centaline, ANZ
This low interest regime has been further exacerbated by the problem of below-average supply in recent years. On average, there have been 18,419 units of new flats available for sale over the last 15 years. However, there were just 14,000 new flats available for sale in 2012. This is also a level below the average turnover of 19,000 a year. Since 2007, we have seen a shortage in some years alongside the rise of property prices.
Indeed, genuine housing demand needs such as marriage and expansion in family size also put pressures on housing prices. In addition, wealth and economic well-being, plus an appreciating RMB have seen the emergence of this new group of investors in Hong Kong’s property market in the past few years. As China continues to liberalise its capital account and will promote cross border investment, demand from Mainland buyers are also an important factor driving up Hong Kong’s property price.
Hong Kong - Birth, Death, Marriage, Divorce(per 1000 persons)
0
2
4
6
8
10
12
14
1992 1994 1996 1998 2000 2002 2004 2006 2008 20100
1
2
3
4
5
6
7
8
Death Rate Birth Rate 1st Marriage (RHS) Divorce (RHS)
Hong Kong: Estimated Mainlanders' Property Purchase in the Luxury Sector (>HK$12m)
0
5
10
15
20
25
30
35
2007H1 2008H1 2009H1 2010H1 2011H1
Mainlanders' Transaction as % of total % of transaction value
Sources: CEIC, ANZ
DIFFERENCE FROM THE 1997 BUBBLE: NEW GOVERNMENT POLICY
Over the past 12 months, the government and Hong Kong Monetary Authority (HKMA) have repeatedly heightened the intensity of their demand-side and supply-side measures:
Stamp duties: In October 2012, the Government raised Special Stamp Duties (SSD) by another 5 ppts and introduced a new Buyer’s Stamp Duty (BSD) of 15% on non-permanent Hong Kong residents (see ANZ Greater China Weekly Insight 6 Nov 2012 for our analysis). In February 2013, it raised the stamp duty. For properties buyers who already own property, the stamp duty for property under HKD2m became 1.5% of the transaction
Greater China Weekly Insight / 2 Apr 2013 / 4 of 13
FEATURE NOTE
value, compared with HKD100 previously. For all other properties, the rates of stamp duty was doubled, to as high as 8.5%. The government also amended the law on stamp duty, so that it also applied to hotels, commercial properties, car parks and the like, in addition to residential properties.
Mortgage tightening: The HKMA has raised the stress test level for mortgage applications by 300bps for the interest rate increase assumption. In addition, a risk weighting floor of 15% for all residential mortgages is required in computing the capital requirement. Mortgages for car park and commercial properties were also tightened.
Land supply: In the Policy Address, CY Leung said more land would be rezoned for housing and new areas opened up for development, with 67,000 private units expected to come on to the market over the next 3 to 4 years. A target of some 100,000 subsidised public housing units would be built in the five years from 2018, in addition to the 75,000 already planned for the coming five years.
On 28 February 2013, the government announced it will sell 46 residential sites (of which 28 are new sites), expecting to provide about 13,600 flats, nine commercial/business sites which could provide approximately 330,00m2 gross floor area, and one hotel site which could provide 300 hotel rooms. More importantly, the Government has decided to abolish the Application Mechanism from 2013-14 and resume regular land sales. Combining the supply from other sources such as MTR Corporation Ltd (MTRCL) and the Urban Development Authority, total supply of flats could reach 25,800 in FY2013-14.
Housing Land Supply in 2013-14
Government Land Sale Programme 13,600
West Rail property development : Long Ping Station (South) and Yuen Long Station 2,600
MTRCL property development : Tseung Kwan O Area 86 Package 4 and Tin Shui Wai Light Rail Terminus
3,100
Projects of Urban Renewal Authority 1,800
Projects subject to lease modification/land exchange (average of 2003-2012) 3,500
Private redevelopment projects not subject to lease modification/land exchange (average of 2003-2012)
1,200
Total 25,800
Source: Hong Kong Government
POLICY IMPACTS WILL BE REVEALED IN YEARS AHEAD
The policy impact of the recent policy measures has been very limited. As we have stated in our previous analysis (ANZ Greater China Insight 6 Nov 2012), high SSD will eventually pass-through to Hong Kong’s property prices. The experience of SSD in Nov 2010 suggests that the tax will reduce supply of the market in the short term as sellers will demand for a higher compensation during the lock-in period. The decline in supply should then support higher property prices. When the lock-in period expired (ie November 2011), both buyers and sellers resumed transactions. Basic economics suggests that using a tax to contain rising prices will be counterproductive as the tax will involve deadweight loss.
Furthermore, the introduction of BSD will force some non-HKID holders to switch from buying to renting. A welcome boost to rental yields will encourage investment-savvy permanent residents to enter the market and rent the flats to non-permanent residents, offsetting the policy impact and defeating the purpose of controlling demand. As a result, property prices will continue to rise.
Special concerns are the government land supply policy and the commitment to build more affordable housing. While many of the recent tightening measures such as macro-prudential policies are new to Hong Kong, the massive increase in land and apartment supply has been regarded as a major reason for the prolonged declining in property prices in the crisis of the 1997-2003 period. With the US economy recovering at a faster pace than expected, we believe the low mortgage rate regime may end earlier. A wrong timing of over-supply may risk Hong Kong suffering a ‘perfect storm’ that will potentially result in a significant impact on local real estate and on the overall domestic economy. The government needs to consider its housing strategy very carefully.
Greater China Weekly Insight / 2 Apr 2013 / 5 of 13
FEATURE NOTE
ANNEX: Econometric Models on Hong Kong Property Prices
Beta
(t-stat)
ANZ Model IMF HKMA (Leung et al. 2009)
Real Interest Rate -2.285
(-2.983)
-1.600
(-2.331)
-3.087
(-2.335)
Income Level:
ANZ: Hang Seng Index (real)
IMF/HKMA: Real GDP per capita
0.7245
(3.276)
1.492
(6.510)
0.714
(1.871)
Construction cost:
ANZ: Material costs
IMF: Building tender price
HKMA: Residential investment deflator
0.5263
(3.2154)
0.479
(7.336)
0.023
(8.751)
Supply side:
ANZ: New flat completion
IMF: Land supply (5Q lag)
HKMA: Land supply (2Q lag)
-0.1592
(-1.2608)
-0.800
(-7.336)
-27.138
(-3.048)
Adjusted R-squared 0.966 0.856
Sample period 1992Q1-2012Q4 1997Q3-2011Q2 1986-2007
Source: ANZ, IMF, HKMA
Note: The co-integration model is estimated by dynamic ordinary least square method with heteroskedasticity-autocorrelation consistent (HAC) standard errors. Variables are expressed in natural log terms, except for real interest rate. The leads and lags of the dynamic terms are not shown in the table.
Li-Gang Liu, Raymond Yeung
Greater China Weekly Insight / 2 Apr 2013 / 6 of 13
DATA PREVIEW
TAIWAN MARCH INFLATION AND TRADE (8 APRIL)
ANZ Market Last CPI, y/y 2.20% 1.75% 2.97% WPI, y/y -2.51% - -2.2% Exports, y/y 3.01% 3.0% -15.8% Imports, y/y 4.58% 4.4% -8.5% Trade Balance, USD bn USD2.09bn USD2.19bn USD0.92bn Source: ANZ, Bloomberg
We expect Taiwan's inflation to increase mildly (2.2% y/y) on an increasing energy price, compared to the average CPI of 2.1% over the first two months. As the electricity rate was raised last June, the first half of 2013 will continue to see a low base effect from energy costs. However, as food price rises have been subsiding, near-term inflationary pressure remains modest.
On the trade side, the recent exporter survey indicates a positive outlook in March, suggesting that Taiwan's exports can sustain the moderate growth achieved during the first two months (January-February combined: 2% y/y). An improving US economy and Chinese demand should continue to support Taiwan's trade, although we have seen a sharp contraction of export orders from Japan that may offset some of the growth momentum.
Raymond Yeung
CHINA MARCH INFLATION (9 APRIL)
ANZ Market Last CPI, y/y 2.4% 2.5% 3.2% PPI, y/y -2.1% -1.9% -1.6% Source: ANZ, Bloomberg
We expect China’s inflation to moderate significantly in March after a surge in February inflation amid the Chinese New Year. We forecast March CPI to have risen 2.4% y/y, down from 3.2% in the prior month. The PPI inflation should decline further to -2.1% in March, versus -1.6% previously, reflecting weak commodity prices after the Chinese New Year. While inflation could ease sharply in March, we hold our view that the overall inflation momentum is still on the rise and is likely to reach 4% in early Q3.
Li-Gang Liu, Hao Zhou
GREATER CHINA ECONOMIC DATA CALENDAR
DATE COUNTRY DATA/EVENT PERIOD MARKET LAST TIME
(HK/SG) 02 Apr Hong Kong Retail Sales - Value (y/y) Feb 17.7% 10.5% 16:30
02 Apr Hong Kong Retail Sales - Volume (y/y) Feb 14.7% 10.4% 16:30
03 Apr China Non-manufacturing PMI Mar -- 54.5 9:00
03 Apr China HSBC Services PMI Mar -- 52.1 9:45
03 Apr Hong Kong PMI Mar -- 51.2 10:30
03 Apr Taiwan Foreign Reserves Mar -- USD404.08bn 16:20
08 Apr Taiwan CPI (y/y) Mar 1.80% 2.97% 8:30
08 Apr Taiwan WPI (y/y) Mar -- -2.20% 8:30
08 Apr Taiwan Trade Balance Mar USD2.12bn USD0.92B 16:00
08 Apr Taiwan Exports (y/y) Mar 2.9% -15.8% 16:00
08 Apr Taiwan Imports (y/y) Mar 4.3% -8.5% 16:00
08 Apr Hong Kong Foreign Reserves Mar -- USD304.8bn
09 Apr China CPI (y/y) Mar 2.5% 3.2% 9:30
09 Apr China Producer Price Index (y/y) Mar -1.9% -1.6% 9:30
10 Apr China Trade Balance Mar USD15.30bn USD15.25bn 10:00
10 Apr China Exports (y/y) Mar 10.0% 21.8% 10:00
10 Apr China Imports (y/y) Mar 4.4% -15.2% 10:00
Source: Bloomberg
Greater China Weekly Insight / 2 Apr 2013 / 7 of 13
WEEK IN REVIEW
TAIWAN KEEPS RATE ON HOLD AS EXPECTED
Please refer to ANZ Quick Reaction - Taiwan Keeps Rate On Hold As Expected, published on 28 March 2013 for more details.
• Taiwan’s central bank (CBC) held its policy rate at 1.875% today as widely expected.
• CBC deems the current policy rate level and M2 growth target (2.5-6.5%) appropriate for maintaining price and financial stability as well as supporting growth.
• Our view remains that as growth momentum and inflationary pressure accelerate in 2013Q3, we expect a rate hike in December 2013 at the earliest.
• The CBC believes that mortgage tightening measures it had earlier launched are effective.
Raymond Yeung
CHINA’S MARCH OFFICIAL PMI DISPELLED GROWTH CONCERNS
Please refer to ANZ Quick Reaction - China's March Official PMI Dispelled Growth, published on 1 April 2013 for more details.
• The official Purchasing Manager’s Index (PMI) rebounded in March, after a weak PMI reading in February owing to the Chinese New Year effect. While the rebound of sub-indices appears broad-based, it is still much lower than the average gain seen in past years. Meanwhile, average Q1 PMI is very close to the level in Q4 and only slightly higher than the benchmark level of 50, suggesting that the growth momentum has been stabilizing, but headwinds remain.
• The weak PMI numbers, plus the lower-than-expected trade statistics in neighbouring economies (ie. Taiwan and Korea), indicate that China’s March activity and trade data (to be released mid-April) could surprise the market on the downside.
• We maintain our forecast that China’s economy will grow 8.1% y/y in Q1, supported by fast investment growth and a rebounding property market. However, consumption appears to have been worse than we expected, largely owing to falling government consumption. It appears that the efforts by the new government to crack down on corruption and to moderate official extravaganza may have started to dampen retail sales.
Li-Gang Liu, Hao Zhou
WEEK IN REVIEW
DATE COUNTRY DATA/EVENT PERIOD CONSENSUS ACTUAL PREV 26 Mar Hong Kong Exports (y/y) Feb 4.4% -16.9% 17.6%
26 Mar Hong Kong Imports (y/y) Feb -2.5% -18.3% 23.9%
26 Mar Hong Kong Trade Balance Feb -HKD36.2bn -HKD34.0bn -HKD27.5bn
27 Mar Taiwan Coincident Index (m/m) Feb -- 0.3% 0.6%
27 Mar Taiwan Leading Index (m/m) Feb -- 1.1% 1.3%
28 Mar China Industrial Profits YTD (y/y) Feb -- 17.2% 5.3%
28 Mar Hong Kong Government Monthly Budget Feb -- -HKD6.2bn HKD41.9bn
28 Mar Taiwan Benchmark Interest Rate Mar-28 1.875% 1.875% 1.875%
28 Mar Hong Kong Money Supply M1 (y/y) Feb -- 13.6% 20.2%
28 Mar Hong Kong Money Supply M2 (y/y) Feb -- 8.5% 14.1%
28 Mar Hong Kong Money Supply M3 (y/y) Feb -- 8.5% 14.1%
01 Apr China Leading Index Feb -- 100.23 100.50
01 Apr China Official Manufacturing PMI Mar 51.2 50.9 50.1
01 Apr China HSBC Manufacturing PMI Mar 51.6 51.6 50.4
01 Apr Taiwan HSBC Manufacturing PMI Mar -- 51.2 50.2
Source: Bloomberg
Greater China Weekly Insight / 2 Apr 2013 / 8 of 13
CHINA ONSHORE MARKET LIQUIDITY REPORT
China - PBoC Weekly Open Market Operations(RMB bn)
-1,000-800-600-400-200
0200400600800
1,000
10Sep
24Sep
08Oct
22Oct
05Nov
19Nov
03Dec
17Dec
31Dec
14Jan
28Jan
11Feb
25Feb
11Mar
25Mar
CB Bill Matured Repo Matured Reverse RepoCB Bill Repo Rev. Repo MaturedNet
Liquidity Injection
Liquidity Withdrawal
China - Reverse Repo Operations (RMB bn)
-1,000
-800
-600
-400
-200
0200
400
600
800
1,000
03Sep
17Sep
01Oct
15Oct
29Oct
12Nov
26Nov
10Dec
24Dec
07Jan
21Jan
04Feb
18Feb
04Mar
18Mar
Reverse Repo Rev. Repo MaturedCumulative Net Injection
Liquidity Injection
Liquidity Withdrawal
China - 7-day Repo Rate
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
China - Government Bond Yields
2.0
2.5
3.0
3.5
4.0
4.5
Jul11
Sep11
Nov11
Jan12
Mar12
May12
Jul12
Sep12
Nov12
Jan13
Mar13
1-year 3-year 7-year
Sources: Bloomberg, CEIC, ANZ
NO LIQUIDITY SQUEEZING BEFORE THE QUARTER-END
The People’s Bank of China (PBOC) conducted RMB52bn 28-day repos, and drained about RMB57bn liquidity from the open market for the whole week. The market liquidity appeared very plentiful even before the end of the quarter, largely due to strong capital inflows.
STATE BANKS ACCELERATED LOAN EXTENSION LAST WEEK
China’s big four banks’ new loans accelerated in the week ended 24 March. According to earlier reports, the big four banks extended RMB144bn of new loans in the first 17 days on March. As of 24 March, the amount has risen by RMB83.8bn to RMB227.8bn, suggesting that the loans are accelerating.
CHINA TIGHTENS REGULATIONS ON (WMPS)
• The China Banking Regulatory Commission (CBRC) said last week that banks must clearly link wealth management products (WMPs) with specific assets. The notice also said that banks must disclose who will ultimately use the funds and for what purpose, and that each product must be audited.
• CBRC’s statement also said that outside of the formal bond market, no more than 35% of a bank's total issued WMPs can be invested in non-standard debt (not traded in the inter-bank and exchange markets), including loans, banker’s acceptance draft, accounts receivables and letter of credit.
• At a news conference last week, ICBC President Yang Kaisheng said that the portion of ICBC’s outstanding WMPs invested in such a way might be slightly in excess of the CBRC's requirements.
We believe that this new regulation was rumoured for the last week. Banks typically pool funds raised by wealth-management products and sometimes invest the money in poorly disclosed assets or projects, leading to a lack of clarity about the underlying assets. In addition, many banks issue short-tenor WMPs on a roll-over basis, while the assets are long-term, which has created a maturity mismatch problem. Under the new requirements, the regulator will require banks to clearly link WMPs with specific assets.
The co-operation between commercial banks and the securities firms has emerged after the CBRC tightened the co-operation between banks and trust companies. In this model, commercial banks normally transfer the off-balance sheet assets to securities firms to escape from regulation, while the securities firms get liquidity from the banks. The new regulation will tighten this kind of shadow-banking activity.
Li-Gang Liu, Hao Zhou
Greater China Weekly Insight / 2 Apr 2013 / 9 of 13
MOMENTUM BAROMETER
WEEKLY MOMENTUM
• Activity momentum is mixed in the region. China’s industrial profits growth grew steadily in the first two months of 2013. However, Ningbo Port container throughput data softened in March. In Hong Kong, trade figures in February disappointed.
• The CNY continued to modestly appreciate against the USD. IRS curve flattened slightly as the central bank drained liquidity from the market. In the offshore market, Hong Kong’s RMB deposits reached another record high in February.
REAL ACTIVITY MOMENTUM
China’s industrial profits continue to grow
China’s industrial profit in the first two months of 2013 increased 17.2% y/y, a tick lower than 17.3% in December, indicating that the recovery in the industrial sector has extended into the January and February. Industrial sales rose 13.1% y/y over the two month period.
According to the National Bureau of Statistics (NBS), within the 41 industries, 30 reported increases in profits, 8 reported declines, 2 turned to profits after losses, while 1 saw a smaller loss.
China - Industrial Profits(y/y)
-10
-5
0
5
10
15
20
25
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
China’s Ningbo Port throughput data softened
Container throughput growth at Ningbo Port slowed to 5.3% y/y in March, compared with 9.4% in February and 11.5% in January, according to the company.
The sluggish port throughput growth suggests that China’s March trade data (due on 10 April) may surprise on the downside.
China - Ningbo Port Container Throughput(y/y)
-5
0
5
10
15
20
25
Jan 12
Feb12
Mar12
Apr 12
May12
Jun 12
Jul 12
Aug12
Sep12
Oct 12
Nov12
Dec12
Jan 13
Feb13
Mar13
Container Throughput, y/y
Hong Kong’s February trade disappointed
Exports fell 16.9% y/y in February, compared with a 17.6% gain in January and market consensus of a 4.4% increase. Imports also dropped 18.3%, from a 23.9% increase, and much worse than market expectation of -2.5%.
While the weak data in February mainly reflects the distortions caused by the timing of the Chinese New Year, the degree of decline was much more severe than expected. It is also inconsistent with the strong print from China’s February trade data.
Hong Kong - Trade Developments
-50
-40
-30
-20
-10
0
10
20
30
40
50
Aug10
Nov10
Feb11
May11
Aug11
Nov11
Feb12
May12
Aug12
Nov12
Feb13
Trade Balance, HKD bn Exports, y/y Imports, y/y
Sources: CEIC, Bloomberg, ANZ
Greater China Weekly Insight / 2 Apr 2013 / 10 of 13
MOMENTUM BAROMETER
MARKET MOMENTUM
CNY continued to appreciate modestly
The CNY spot rate strengthened modestly against the USD in March as the People’s Bank of China (PBOC) continued to set a lower fixing. The spot rate remains near the bottom of the +/-1% trading band.
Meanwhile, the spread between the onshore CNY and offshore CNH spot rates has narrowed to within 50bps at the time of writing.
USD/CNY
6.20
6.25
6.30
6.35
6.40
6.45
Feb12
Apr12
Jun12
Aug12
Oct12
Dec12
Feb13
Apr13
Spot Trading band Fixing China’s IRS curve flattened slightly as the PBOC continued to drain liquidity from the open market
China’s 1-year interest rate swap against the 7-day repo rate rose after the Chinese New Year, as the PBOC started to drain liquidity via repo operations. Meanwhile, the 5-year IRS remained relatively stable. As a result, the IRS curve has flattened.
As the central bank continues to drain liquidity from the market, short term interest rates may rise, and as a result, the IRS curve may flatten further.
China - IRS 1s5s Spread (bps)
-20
-10
0
10
20
30
40
50
60
70
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Hong Kong’s RMB deposits grew for fifth consecutive month
Hong Kong’s RMB deposits increased 4.4% to a record high RMB651.7bn in February. Due to the CNY holidays, RMB cross-border trade settlement declined by RMB46.8bn to RMB221.7bn.
Hong Kong - RMB Deposits and Cross-Border Trade Settlement
0
100
200
300
400
500
600
700
Jun09
Oct09
Feb10
Jun10
Oct10
Feb11
Jun11
Oct11
Feb12
Jun12
Oct12
Feb13
0
2
4
6
8
10
12
Deposit, RMBbn
Trade settlement amount, RMBbn
RMB as % of Total Deposits (RHS)
Sources: CEIC, Bloomberg, ANZ
Greater China Weekly Insight / 2 Apr 2013 / 11 of 13
FORECASTS
y/y, unless otherwise notedSep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 2013
Real GDP China 9.2 8.9 8.1 7.6 7.4 7.9 8.1 8.1 Taiwan 3.53 1.21 0.59 -0.12 0.73 3.72 2.94 3.60 Hong Kong 4.4 3.0 0.7 1.1 1.4 2.5 3.8 3.7
Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13Consumer Price Index China 2.0 1.9 1.7 2.0 2.5 2.0 3.2* 2.4 Taiwan 3.43 2.96 2.34 1.59 1.61 1.13 2.97* 2.02 Hong Kong 3.8 3.8 3.8 3.8 3.8 3.0 4.4* 3.5Producer Price Index China -3.5 -3.6 -2.8 -2.2 -1.9 -1.6 -1.6* -Unemployment Rate, % Taiwan 4.27 4.28 4.28 4.24 4.21 4.20 4.16* 4.14 Hong Kong 3.2 3.3 3.4 3.4 3.3 3.4 3.4* 3.2Exports China 2.7 10.0 11.6 2.9 14.8 25.2 21.8* 7.1 Taiwan -4.0 10.3 -1.9 0.8 8.9 21.6 -15.8* 6.7 Hong Kong 0.6 15.2 -2.8 10.5 14.4 17.6 -16.9* 16.2Imports China -2.6 2.3 2.4 0.0 6.0 28.8 -15.2* 1.5 Taiwan -7.9 1.2 -1.8 0.1 1.6 22.4 -8.5* 8.3 Hong Kong 0.9 14.9 3.3 9.0 11.9 23.9 -18.3* 12.0Trade Balance China, USD bn 26.7 27.7 32.0 19.6 31.6 29.1 15.3* 14.7 Taiwan, USD bn 3.43 4.1 3.3 3.4 4.1 0.5 0.9* 2.2 Hong Kong, HKD bn -36.0 -45.2 -42.7 -44.1 -48.0 -27.5 -34.0* -38.0PMI and Export Orders China Manufacturing PMI 49.2 49.8 50.2 50.6 50.6 50.4 50.1* 50.9* Taiwan Export Orders -1.53 1.91 3.16 11.12 8.51 17.95 -14.47* 1.86Industrial Production China 8.9 9.2 9.6 10.1 10.3 - 9.9* 9.8 Taiwan 1.39 2.97 4.83 5.71 2.05 19.05 -11.45* 1.02Electricity Production China 2.7 1.5 6.4 7.9 7.6 - 3.4* -Retail Sales China 13.2 14.2 14.5 14.9 15.2 - 12.3* 12.6 Taiwan (Commercial Sales) -1.19 -1.50 -0.68 1.66 1.49 7.80 -6.00* 1.48 Hong Kong 4.6 9.5 3.9 9.5 9.1 10.5 14.9 6.1M1 Growth China 4.5 7.3 6.1 5.5 6.5 15.3 9.5* - Taiwan (M1 B) 2.73 3.3 3.6 3.7 4.9 4.0 5.66* - Hong Kong 8.7 10.3 13.1 15.3 15.9 20.2 13.6* -M2 Growth China 13.5 14.8 14.1 13.9 13.8 15.9 15.2* - Taiwan 3.69 4.0 3.3 3.3 3.7 3.0 3.53* - Hong Kong 8.6 11.0 10.0 11.0 12.1 14.1 8.5* -
2006 2007 2008 2009 2010 2011 2012Current Account, % of GDP China 8.5 10.1 9.3 4.9 4.0 2.8 2.6* Taiwan 7.0 8.9 6.9 11.4 9.3 8.9 10.5* Hong Kong 12.1 12.3 13.7 8.6 5.5 5.3 9.3Foreign Reserves, USD bn China 1,066 1,528 1,946 2,399 2,847 3,181 3312* Taiwan 266 270 292 348 382 386 403* Hong Kong 133 153 183 256 269 285 317*Government Fiscal Surplus/Deficit, % of GDP China -1.0 0.2 -0.8 -2.8 -2.5 -1.8 -1.5 Taiwan 0.1 0.3 -0.5 -3.5 -2.3 -1.9 -2.6 Hong Kong (FY ending in March) 3.9 7.5 0.1 1.6 4.2 3.8 3.2
Forecasts1 Apr-13 Jun-13 Sep-13 Dec-13 Mar-14
Foreign Exchange Rate USD/CNY 6.208 6.20 6.15 6.10 6.05 USD/TWD 29.879 - - - - USD/HKD 7.764 - - - -Policy Interest Rate China PBOC 1-year Ledning Rate 6.00 6.00 6.25 6.25 6.50 Taiwan CBC Discount Rate 1.875 1.875 1.875 2.000 2.125 Hong Kong Base Rate 0.50 0.50 0.50 0.50 0.50Shaded cells and column refer to forecast; *Indicates actual released data or YTDSources: CEIC, Bloomberg, ANZ Research
Forecasts
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