What to expect next year for China and Hong Kong?

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China Outlook: Growth momentum continues, but with rising fragilities Hong Kong Outlook: Adapting to a changing environment amidst medium-term challenges

Transcript of What to expect next year for China and Hong Kong?

  • What to expect next year for China and Hong Kong? January 15, 2014 Alicia Garcia-Herrero Chief Economist Emerging Markets BBVA Research
  • Outline 1. Global Outlook: Recovery proceeds with downside risks gradually diminishing 2. China Outlook: Growth momentum continues, but with rising fragilities 3. Hong Kong Outlook: Adapting to a changing environment amidst medium-term challenges 2
  • Global Outlook Global GDP growth (%) Our current outlook incorporates an improvement in global growth as emerging markets join the ongoing pickup in advanced economies. Risks are still biased to the downside but have declined in recent months: the eurozone has begun to recover US fiscal wrangling appears to be over QE tapering has been well received by the markets, and vulnerable countries are preparing Source: BBVA Research 6 5.2 5 4 4.0 3.6 3.3 2.8 4.0 2.9 3 2 1 0 -1 -0.4 -2 2008 2009 2010 2011 Advanced economies Global growth 2012 2013 (f) 2014 (f) 2015 (f) Emerging economies 3
  • A recovery with risks diminishing GDP growth (%) Source: BBVA Research and IMF 8 Current forecasts 7 6 5. 0 4. 8 5. 2 5 4 3. 3 3 Nevertheless, advanced economies are vulnerable to tighter financial conditions. In the eurozone, risks remain from AQR and wrangling over banking union 3. 6 2. 9 2. 8 2. 3 1 .6 2 1 .1 1 In emerging markets, vulnerability to a less favorable global liquidity outlook must still be monitored 0 -0. 6 -0. 4 -1 US E MU 201 4 201 3 201 2 201 4 201 3 201 2 201 4 201 3 201 2 201 4 201 3 201 2 -2 W orld Global recovery continues to on the back of advanced evonomies, with emerging economies now joinging. Upward bias to US projections. B B VA E AG LE s 4
  • Outline 1. Global Outlook: Recovery proceeds with downside risks gradually diminishing 2. China Outlook: Growth momentum continues, but with rising fragilities 3. Hong Kong Outlook: Adapting to a changing environment amidst medium-term challenges 5
  • Chinas recovers slowly Fears of a hard landing in 2013 did not materialize: Q3 GDP rose to 7.8% y/y, and momentum continues Growth has picked up due to improved policy clarity, mini stimulus measures, and improving external demand. Still, caution is in order on the growth outlook for 2014 given headwinds from financial fragilities: growth momentum appears to have slowed somewhat in December GDP growth bottomed out in Q2 Source CEIC and BBVA Research Index % yoy 65 20 18 60 16 14 55 12 50 10 8 45 6 GDP growth (RHS) NBS PMI (LHS) Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 Mar-09 Dec-08 Sep-08 0 Jun-08 35 Mar-08 4 2 Dec-07 40 Industrial production (RHS) 6
  • Inflation not really a problem Inflation remains contained, falling to 2.5% y/y in December on easing food prices, below the 3.5% target PPI deflation has been eased further to -1.4% y/y Medium-term inflation is likely to be in the 3.5-4.0% range on higher wage growth Inflation moderated on easing food prices while PPI deflation remains Source CEIC and BBVA Research Source: CEIC and BBVA Research % % yoy 7 6 5 4 3 2 1 0 -1 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 -2 Non-food Food CPI Inflation Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 8 Producer Price Index Consumer Price Index 7
  • The external environment supportive Exports are improving on stronger demand from the US and EU The trade surplus remains substantial, and reserves picked up in the third quarter Export growth has stabilized and reserves are still rising Source: CEIC and BBVA Research USD trn % y/y Foreign reserve (LHS) Exports (RHS) Nov-13 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Nov-11 Feb-12 Aug-11 May-11 -60 Feb-11 0 Nov-10 -40 Aug-10 500 May-10 -20 Feb-10 1,000 Nov-09 0 Aug-09 1,500 May-09 20 Feb-09 2,000 Nov-08 40 Aug-08 2,500 Feb-08 60 May-08 3,000 Nov-07 80 Aug-07 3,500 May-07 100 Feb-07 4,000 Imports (RHS) 8
  • RMB continues to strengthen Capital inflows and a weak US dollar have led to a faster pace of RMB appreciation of late Will there be another widening of the band? The RMB is still undervalued, and is likely to appreciate by 2-3% per year against the USD in nominal terms The pace of RMB appreciation has resumed leading to losing external competitiveness Source: Bloomberg and BBVA Research Source: BIS and BBVA Research USD/CNY Index 201 1 Jan = 1 00 1 20 6.45 Appreciation 6.40 115 6.35 6.30 110 6.25 6.20 1 05 6.15 1 00 6.10 6.05 Band widening USD/CNY spot Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Jan-12 Mar-12 Trading band Jan-1 1 Mar-1 1 May-1 1 Jul-1 1 S ep-1 1 Nov-1 1 Jan-1 2 Mar-1 2 May-1 2 Jul-1 2 S ep-1 2 Nov-1 2 Jan-1 3 Mar-1 3 May-1 3 Jul-1 3 S ep-1 3 Nov-1 3 95 6.00 REER NE E R 9
  • So why worry? Decelerating potential growth Potential growth will decelerate in the coming decade, to 6% by 2020, from +8% at present The decline is due to lower TFP, decelerating investment, and stagnant labor force growth These estimates are a good scenario, based on continued progress in economic reforms and rebalancing as the contribution of labor and total factor productivity diminish Declining potential growth Source: BBVA Research Source: BBVA Research 16% Projection 14% 12% Contribution by factors TFP 10% 1981-1990 8% Potential growth real growth Capital Labor 2.9% 5.5% 1.5% 9.8% 9.3% 1991-2000 2.4% 5.5% 0.7% 8.7% 10.5% 6% 2001-2010 3.8% 5.2% 0.3% 9.3% 10.2% 4% 2011-2020 2.8% 4.8% -0.2% 7.5% -- 2% 0% TFP Capital Real Growth 2020 2017 2014 2011 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 -2% Potential Growth Labor 10
  • The end of a growth model An unhealthy mix of growth at present, too heavily weighted toward investment Sustaining growth in the medium-term will require slower investment growth and faster private consumption Policies: facilitating urbanization and growth of household income, improvements in social safety net, market reforms , boost to consumer finance, currency appreciation Third Plenum outline for reforms encouraging but many questions on implementation and contradictions Rebalancing will take time Source: CEIC and BBVA Research estimates % yoy C ons umption Inves tment Net E xports 201 7 201 6 201 5 201 4 201 3 201 2 201 1 201 0 2009 2008 2007 15 13 11 9 7 5 3 1 -1 -3 -5 GDP growth 11
  • No evidence of rebalancing so far Rebalancing has hardly begun, but if you look hard enough, there are some signs Narrowing current account balance, stabilizing consumption and investment, growing services sector Rebalancing toward domestic consumption remains disappointingly slow Source CEIC and BBVA Research and current account surplus has narrowed Source: CEIC and BBVA Research as % of GDP % 12 50 10 45 8 40 6 35 4 30 2 Investment 2013 Q3 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2000 2001 Private Consumption 2000 0 25 12
  • Local government debt to weigh on bank profits The latest audit of local government debt shows an increase to RMB 17.9 trillion at end-June 2013 A clean-up of local government debt may require central government funds, and bank write-offs Dealing with the local government debt problem is a priority for 2014 Local government debt has risen Source: BBVA Research % of GDP 80 70 60 50 40 30 20 10 0 2010 2012 est Local Government Financing Vehicle Debt Local Government Agency Debt Bank Restructing Cost Central Government Debt Total debt 20131H est 13
  • Shadow banking also poses risks to banks The size has grown rapidly in recent years as banks circumvent tightening regulations The involvement of banks in shadow banking activities could eventually impact their balance sheets leading to an increase in the size of the shadow banking sector in the economy Shadow banking activities have risen Source: Wind, CEIC, PBoC and BBVA Research estimates Source: PBoC and BBVA Research RMB trn % 40 60 35 30 50 25 40 20 15 30 10 20 0 Trust Company products Bank acceptance (liability side) 2012 2013 est 10 2011 WMPs Entrust loans (liability side) Private lending (liability side) 2012 2011 2010 0 2010 5 14 GDP Bank asset
  • Corporate sector debt also a concern As a share of GDP, Chinas corporate debt is high by international standards High corporate debt may constrain growth and weigh on bank asset quality Chinas corporate sector debt as a share of GDP is high by international standard