CHINA China Macro - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/MAC/2017/1/9/6e08ec11... · 09/01/2017...
Transcript of CHINA China Macro - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/MAC/2017/1/9/6e08ec11... · 09/01/2017...
Please refer to page 12 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
CHINA
Inside
A quick review of 2016 2
1. How will the economy evolve? 3
2. How far will the current reflation cycle go? 4
3. What will be the policy stance in 2017? 5
4. What will capital outflows look like? 6
5. What is the outlook for RMB in 2017? 8
6. How about the property and auto sectors? 9
7. What is the reform outlook? 10
8. What are the major risks? 10
Forecast table 11
Chart 1: Breakdown of net FX settlement
Source: CEIC, Macquarie Research, January 2017
Chart 2: Earnings growth could peak in 1H17
Source: CEIC, Macquarie Research, January 2017
Analyst(s) Larry Hu PhD +852 3922 3778 [email protected] Jerry Peng +852 3922 3548 [email protected]
9 January 2017
Macquarie Capital Limited
China Macro 2017 outlook: What could surprise? Politics to define the year: After the US Presidential inauguration, the most
important political event in 2017 is the political transition in China. It’s
unsurprising that China’s policy-makers put stability as the top priority for this
year, so that they could focus on politics. What could surprise is whether and
how the market reassesses China’s growth and reform outlook after the
transition, when the power and the responsibility for China’s top leader could
both reach the highest point in the past forty years.
RMB – Likely the biggest surprise in 2017: The biggest surprise in 2016
came from the commodity market, about which most people felt so negative
12 months ago. The biggest surprise in 2017 might come from the RMB,
about which most people are feeling so negative now. And both surprises
could be triggered by non-market mechanisms: supply controls the former and
capital controls the latter. Note that foreign debt repayment is done and the
drop in FX reserves narrowed to US$320bn in 2016 (2015: US$510bn).
However, large FX leakage still exists in goods and service trade (Chart 1 on
the left). For instance, China had a goods trade surplus of US$1.1tn over the
past two years, but Chinese banks only saw US$0.1tn net FX inflows through
the channel. With tighter regulations aiming to reduce such leakage, the
decline in FX reserves could narrow to around US$200bn in 2017. Given
lower capital outflows, we hold the non-consensus view that the Yuan could
surprise on the strong side in 2017. While the volatility of the USD/CNY will
rise in 2017, our end-2017 forecast is 6.9, i.e. no depreciation from end-2016.
The economy to slow in 2017: Amid the hard landing and deflation fears
early last year, we made the non-consensus call that China would grow at
around 6.7% every quarter in 2016 and corporate earnings growth would rise
thanks to property and reflation. But we also pointed out then that these
cyclical drivers could not be sustained, and growth would slow to 6.5% in
2017. We still maintain these views. The property sector is likely to have a
down-cycle in 2017. GFA property sales could drop 10% after rising 22% in
2016. National home prices could start falling in 2H17. Nonetheless, the two
bright spots in 2017 could be exports and infrastructure FAI.
Liquidity – A year of two halves: Monetary policy has tightened substantially
in the recent months to deleverage the bond market. After all, the last thing
policy makers want to see in 2017 is a market crash. At this moment,
monetary policy, regulation, inflation and the rising yields globally are all
negative to liquidity. That said, monetary policy could shift around mid-year to
support growth. At that time, bond yields could reverse on lower economic
growth and inflation. For the whole year, we expect no change in benchmark
interest rate but two RRR cuts (total 100bp). What could surprise us more
RRR cuts than expected. After all, the current 17% RRR is still way too high.
Inflation and other risks: 12 months ago, the major concern for China was
prolonged deflation but it has shifted to inflation. We think both are overdone.
Our view for 2017 is a modest reflation. CPI inflation could average 2.4% in
2017 vs. 2.0% in 2016. PPI inflation would peak in 1Q17 then trend down
afterward. As such, the current corporate earnings up-cycle, which is driven
by reflation and property, could also peak in 1H17 (Chart 2 on the left). For
inflation, oil price is a major uncertainty to watch. Other than inflation, a black
swan is the US-China relationship under the new governments on both sides,
in various areas such as trade, currency, geopolitics and others.
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GoodsServiceDirect InvestmentSecuritiesOthers (incl. foreign debt repayment)
US$ bn, 6mma
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Industrial profits
PPI (RHS)
%, yoy %, yoy
f'cast
Macquarie Research China Macro
9 January 2017 2
2017 outlook: What could surprise? In this report, we begin with a quick review of 2016, then discuss eight key questions for the
Chinese economy in 2017.
A quick review of 2016
The past 2016 is a memorable year for all China watchers. The market focus changed rapidly
every few months.
In 1Q16, the markets focused on the risks of hard landing, sharp RMB depreciation and
capital outflows.
In 2Q16, weak dollar eased currency concerns. But with rising credit defaults, the focus
shifted to the most common concern on China: Debt.
In 3Q16, as surging home prices in a dozen of cities caught all eyes, the market focus
switched again to property bubbles.
In 4Q16, RMB depreciation and capital outflows returned to the center of the stage.
As China economists, market interests naturally determine what we write. Our best reports
written in 2016 all aim to address these concerns: capital flows, debt ,property and various
trends at the micro level.
Given the above concerns, along with all the black swans in the US, UK and elsewhere in the
world, one might think the year of 2016 was a terrible one for the Chinese economy and
markets. Not really. The past year turns out to be much better than what the market
consensus expected at the beginning of 2016. At that time, the most popular question was
whether China’s hard landing had already happened, the most popular word was “deflation”
and the most favourite asset class was bonds and the least favourite was commodities. All
these turned upside down later on.
Interestingly, in our 2016 Outlook, we discussed the four surprises from 2015: (1) Resurfaced
hard landing fears; (2) More rate and RRR cuts than expected; (3) Deeper-than-expected
contraction in PPI; (4) Slow transmission from property sales to investment.
The first three reversed in 2016. China’s economy in 2016 was much better than expected,
mainly supported by three things: the Supply-side reform, property up-cycle and
accommodative monetary/fiscal policy. Meanwhile, after 125bp rate cut and 250bp RRR cut
in 2015, only 50bp RRR cut took place in 2016, much fewer than expected. Moreover, the
escape of PPI deflation was much faster than expected. Only the last one, the divergence
between property sales and investment, persisted in 2016. Although new home sales rose 22%
yoy in 2016, property investment only rose 7%.
With that, we will discuss eight key questions for the year ahead.
Fig 1 Annual real GDP growth forecast Fig 2 Quarterly real GDP growth forecast
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Macquarie Research, January 2017
8.5 8.39.1
10.010.1
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Macquarie Research China Macro
9 January 2017 3
1. How will the economy evolve?
For China’s policy-makers, the single most important thing in 2016-17 is the ongoing political
transition, which could change the current political governance structure substantially.
Unsurprisingly, a stable economic backdrop is most desirable. In the Central Economic Work
Conference held last Dec, “stability” is the most frequently mentioned word. Stability has two
implications. The first is growth stability and the second is market stability. The last thing
policy makers want to see in 2017 is the kind of market crash in summer 2015. That’s why
they tightened monetary policy recently to reduce financial risks. But when investors
panicked, they also injected liquidity to prevent another credit crunch from happening.
To be sure, growth stability is not an easy task. The better-than-expected growth in 2016 is
based on +22% property sales and +16% auto sales growth, which are unsustainable. Given
a high base and demand frontloading, for 2017, we expect 10% drop in GFA property sales.
And our auto team forecasts 5% growth in auto sales in 2017. Since mortgage is an important
source of new credit in 2016, the slowdown in property could negatively impact credit growth.
As such, we expect annual GDP growth to slow to 6.5% in 2017 from 6.7% in 2016. More
headwinds would hit the economy in 2Q17, especially from the property side. Overall, the
6.5% growth seems achievable, but the uncertainty after 2017 could be huge under the new
political power structure.
The Chinese economy has had a go-stop pattern since 2012 (see our report, Mini-cycle,
China Style: Lessons from the Near Past, May 2014). It helps generate a less bumpy
deceleration, but also leads to fast debt accumulation and falling investment returns. Such
strategy could not last forever and it could start changing from 2018.
The tailwinds in 2017 include exports and infrastructure investment. Real exports would
improve thanks to better global demand. Along with higher price, the headline export growth
could pick up to 3% in 2017 (-6% in 2016). However, trade policies under the new US
president could be an uncertainty.
More importantly, infrastructure investment could accelerate to over 20% in 2017 (17% in
2016), funded by various sources such as fiscal money, government bonds, commercial
banks, policy banks, the central bank (PSL) and Public–private partnership (PPP). Out of the
RMB18tn infrastructure investment, 5-10%, or RMB1.8tn, could be supported by PPP.
Fig 3 Property sales could fall 10% in 2017 Fig 4 Auto sales growth could slow to 5%
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Macquarie Research, January 2017
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Macquarie Research China Macro
9 January 2017 4
2. How far will the current reflation cycle go?
The biggest delta in 2016 is the PPI reflation, which changed from -5.2% in 2015 to -1.4% in
2016. To be sure, it’s mostly driven by commodity prices, as about 30% of the swing came
from steel and 10% from coal. Meanwhile, CPI inflation is relatively stable, rising from 1.4% in
2015 to 2.0% in 2016. The transmission from PPI to CPI is very limited. The rise of CPI is
much more driven by surging vegetable prices than commodity prices.
The price reflation in 2016 has benefited profit growth (see our strategy report: Inflation
Nation). Earnings growth for A-share non-financial companies jumped from -15% in 2015 to
+50% in 3Q16. Upstream sectors such as coal and steel are the main beneficiaries of the
commodity price recovery. As a result, cyclical/value outperformed growth in the stock market
last year.
Given the low base, PPI inflation is likely to creep up further in the next few months, reaching
5% in Jan/Feb. Going into 2Q17, however, PPI inflation could trend down due to higher base
and lower commodity prices. The spectacular commodity price rally we’ve seen last year is
not likely to repeat, especially given the upcoming property down-cycle. Meanwhile, the
supply controls would be eased as well to preventing prices from rising too fast.
Factoring in a modest pull back in commodity prices, we forecast PPI inflation to ease from
5% in 1Q17 to 0% in 4Q17, with an annual average of +2.6% for 2017 (2016: -1.4%). As
such, we expect industrial earnings growth to peak in 1H17.
Meanwhile, CPI inflation could edge up to 2.4% in 2017 from 2.0% in 2016. Due to the
different timing of the Chinese New Year holidays, CPI inflation could surpass 2.5% in Jan
and markets might feel uneasy about it. However, it could fall back afterward but rise again in
2H17. Overall, the year of 2017 is still a year of healthy reflation with higher annual inflation
rate than 2016.
Fig 5 CPI and PPI trajectory Fig 6 Earnings growth rebounded in 2016
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Wind, Macquarie Research, January 2017
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Macquarie Research China Macro
9 January 2017 5
3. What will be the policy stance in 2017?
We expect monetary policy to remain neutral in 1H17 but ease again in 2H17. Like 2016,
policy makers would continue to keep the benchmark 1-year deposit rate on hold.
China started the current rate cutting cycle from Nov 2014. In the six cuts over the next 11
months, the benchmark 1-yr deposit rate was lowered from 3.0% to 1.5%. However, the
PBoC has stopped cutting interest rate since Oct 2015. Even if the economy was under
strong headwinds at the beginning of 2016, policy makers still refrained from cutting rates.
We believe there are probably four reasons for that.
First, policy makers are concerned that rate cuts could be too strong as an easing signal,
which could exacerbate financial risks.
Second, the RMB has been under strong depreciation pressure since Aug 2015. More rate
cuts could worsen the situation.
Third, after the interest rate liberalization finished in Oct 2015, the PBoC now relies more
on interbank rates such as 7-day repo rate to signal monetary policy direction.
Fourth, both economic growth and inflation has picked up since 2H16.
For RRR, we expect two RRR cuts with 100bp in total in 2H17. The current RRR cutting cycle
started from Feb 2015. In the next twelve months, it’s cut by 300bp, from 20% to 17%. The
PBoC has also stopped cutting RRR since Feb 2016.
In our view, the best policy is to cut RRR 4-5 times a year, as the current 17% RRR is still
quite distortionary. As we commented in Feb 2015, “China should cut RRR at least 20 times
(50bp each) in the next five years”. The PBoC did cut RRR very aggressively in 2015.
However, they changed strategy in 2016 mainly because the PBoC views RRR as another
easing signal which is too high-profile.
Instead of cutting RRR more, the PBoC has chosen to lend to banks directly through reverse
repo, MLF and PSL. The three added up to only RMB729bn in 2015, but jumped to RMB5.5tn
in 2016. One surprise in 2017 is the PBoC could cut RRR more than twice amid an economic
slowdown.
In sum, liquidity could be tight in 1H17 as monetary policy, regulation, inflation and the rising
yields globally are all negative. But it could ease again on stabilized inflation and decelerated
economic growth.
Fig 7 Benchmark interest rate and RRR Fig 8 China vs. US 10y Treasury yields
Source: CEIC, Macquarie Research, January 2017 Source: Wind, Macquarie Research, January 2017
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7China 10y treasury yield
US 10y treasury yield (RHS)
% %
Macquarie Research China Macro
9 January 2017 6
4. What will capital outflows look like?
At the beginning of 2016, investors were deeply concerned about capital outflows. In Jan
alone, the headline FX reserves slumped around US$100bn. Investors worried that a rapid
drop of FX reserves could lead to a sizable depreciation of the RMB. It turns out that in 2016,
China’s FX reserves dropped by US$320bn, much less than the fall of US$513bn in 2015. It’s
even better than our forecast of US$400bn in 2016 outlook.
Why? In a thematic report written in April 2016, we find that hot money outflows had largely
finished by end-2015. Indeed, from 2Q16, capital outflows from foreigners have turned to
inflows again (Fig 9). Meanwhile, China’s foreign debt started rising from 2Q16 as well (Fig
10), implying that the repayment of foreign debt is largely done. Now the key is the outflows
from domestic residents.
The FX settlement data by China banks (Fig 11) shows that currently the biggest deficit in FX
comes from the service trade. In the first 11 months of 2016, it amounted to US$274bn. When
individuals use the annual US$50k quota for stated reasons such as education or tourism,
such transactions are recorded under the service trade. In view of that, recently the PBoC has
significantly tightened the grip on households in converting Yuan into US$. Goods trade is
another big issue (Fig 12). China had goods trade surplus of US$1.1tn in goods trade, only
US$129bn, or 12% is converted into RMB!
What it tells us is simple. Under a strong depreciation expectation, exporters are reluctant to
sell dollars they have earned, but importers are keen to buy dollars.
The task for the PBoC in 2017 is clear. In Fig 11, they need to push the red line and the black
line up. It’s not an easy task though, given the strong depreciation expectation now. One way
is to strengthen the RMB by intervening the FX market. But it might cost FX reserves. Another
solution is to tighten capital controls and that’s what they are doing now.
In some sense, it’s very similar to the supply controls last year in the commodity market. To
be sure, both are non-market mechanisms and maybe distortionary. But the key question is
whether it works or not. Our view is that capital controls are far from perfect and much harder
to enforce than supply side reform to the commodity market, but it could still work to some
extent. Overall, we expect the drop in FX reserves to narrow further to US$200bn in 2017 (Fig
13-14).
Fig 9 Capital outflows driven by domestic residents Fig 10 Foreign debt repayment has done
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Macquarie Research, January 2017
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Macquarie Research China Macro
9 January 2017 7
Fig 11 Breakdown of net FX settlement Fig 12 Goods trade balance vs. net FX settlement
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Macquarie Research, December 2016
Fig 13 Less decline in FX reserves in 2016 Fig 14 Changes in FX settlement and FX reserves
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Macquarie Research, January 2017
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Change in FX reserves
Net FX settlement
US$ bn, 6mma
Macquarie Research China Macro
9 January 2017 8
5. What is the outlook for RMB in 2017?
Under the current regime, the RMB exchange rate is determined by two things: supply and
demand in the onshore CNY market and the strength of US dollar. The section above
discussed capital flows and we believe the supply-demand imbalances in the CNY market
would be lower in 2017. However, the strength of US$ is hard to forecast and beyond our
capacity as China economists.
In any case, the pressure for 1Q17 could be high, as the new US$50k FX conversion quota
becomes available. But things could improve in 2H17. Our USD/CNY quarter-end forecasts
for 1Q-4Q17 are 7.15, 7.05, 6.95 and 6.90.
In other words, while the market consensus is expecting 5-10% depreciation by end-2017
(7.3-7.6), we expect the USD/CNY to end 2017 at 6.9, i.e. no depreciation vs. end-2016. The
forecast is based on two considerations. First, the supply-demand imbalance in the FX
market would narrow further. Second, the strength of the US$ is similar to last year.
We see the chance for a one-off devaluation is small. In the Central Economic Work
Conference in Dec, policy makers set stability as the priority for policy. As such, they will most
likely maintain the current currency policy framework.
That said, they might create higher two-way volatility for the RMB. In 2016, when the dollar
index dropped from 100 to 93 in 1H, the USD/CNY remained quite stable. But when the dollar
strengthened back to above 100, the RMB weakened against the dollar. This kind of
asymmetric depreciation would surely worsen the expectation and the PBoC might not want
to repeat it again.
Since the fixing reform in Aug 2015, China has been mired in a self-strengthened vicious
cycle of depreciation expectation, capital outflows and actual depreciation. To be sure, we
never worry about a Balance-of-Payment crisis, given the size of FX reserves and capital
controls. But it’s still a highly uncomfortable situation. With lingering capital outflows pressure,
capital controls are increasingly tightened and the RMB internationalization has retreated.
At this moment, the PBoC is keeping a tight grip on capital flows to improve the supply-
demand imbalances in the FX market. The hope is that as the imbalances narrow, the RMB
could stabilize. Other than capital controls, another important thing is to dampen the
depreciation expectation, through better communication and unexpected market intervention.
It’s another front China’s policy-makers should consider.
Fig 15 RMB has had an almost one-way depreciation against US$ since Aug 15
Fig 16 RMB weakened against a basket of currency in 1H16 but stabilized in 2H16
Source: Wind, Macquarie Research, January 2017
*Staff estimate using the currency basket published by CFETS.
Source: Wind, Macquarie Research, January 2017
6.00
6.10
6.20
6.30
6.40
6.50
6.60
6.70
6.80
6.90
7.00
May-1
4
Ju
l-14
Sep
-14
No
v-1
4
Ja
n-1
5
Mar-
15
May-1
5
Ju
l-15
Sep
-15
No
v-1
5
Ja
n-1
6
Mar-
16
May-1
6
Ju
l-16
Sep
-16
No
v-1
6
Ja
n-1
7
Fixing Spot
USD/CNY
90
92
94
96
98
100
102
104
106
De
c-1
4
Feb
-15
Apr-
15
Ju
n-1
5
Aug
-15
Oct-
15
De
c-1
5
Feb
-16
Apr-
16
Ju
n-1
6
Aug
-16
Oct-
16
De
c-1
6CFETS RMB index*
Dec 14 = 100
95Weaken
Macquarie Research China Macro
9 January 2017 9
6. How about the property and auto sectors?
The property sector is heavily influenced by government policies. All previous down-cycles
were driven by government policies, especially credit tightening and property curbs. For
instance, the year of 2013 was the year of property up-cycle. After the government tightened
policy, 2014 became a year of down-cycle. Then policy eased, 2015 was a year of recovery
and 2016 was a year of strong up-cycle.
Unsurprisingly, rapid home prices increases forced the government to tighten again. Last Oct,
20+ cities tightened property policies. Also given the demand frontloading, 2017 would be a
year of property down-cycle again.
Put into numbers, GFA new home sales, new starts and property investment were up 24%,
8% and 7% in 2016, while their growth for 2017 could be -10%, -5% and 2%, respectively.
We expect the slowdown in property investment is more moderate than new home sales.
China’s property market has become an extremely polarized one and a few high-tier cities
vastly outperformed the rest of the country in this cycle. As a result, most developers only
want to enter these cities, so the pick-up of investment growth is much more moderate
compared with sales. As such, the slowdown of investment in 2017 could also be less
dramatic.
Similar to the property market, the automobile sector staged a decent rebound in 2016, with
passenger vehicle sales growth (in volumes) improving from 7% in 2015 to ~16% in 2016.
Other than the purchase tax cut (from 10% to 5% for small engine vehicles) in Sep 2015, the
most important driver is the pick-up of property sales. The last time auto sales grew at
double-digits was in 2013, and it also coincided with the previous property up-cycle. Property
sales lead auto sales, probably because people tend to buy a car after buying an apartment.
Looking into 2017, we expect the auto sector growth to moderate due to a high base, reduced
tax incentive and a property down-cycle. The tax incentive will be extended into 2017, but the
rate will be raised to 7.5% from 5%. Our auto team forecasts passenger vehicle sales to slow
to 4.5% in 2017. The weaker auto sales will also translate into slower auto production, putting
downward pressure on industrial production growth.
Fig 17 Property sales leading property investment Fig 18 Auto sales growth is set to slow down in 2017
Source: CEIC, Macquarie Research, January 2017 Source: CEIC, Macquarie Research, January 2017
-30
-10
10
30
50
70
-5
0
5
10
15
20
25
30
35
40
Sep
-07
Mar-
08
Sep
-08
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Sep
-16
Property investment Property sales (RHS)%, yoy %, yoy
-20
-10
0
10
20
30
40
50
60
-5
0
5
10
15
20
25
30
35
May-1
0
No
v-1
0
May-1
1
No
v-1
1
May-1
2
No
v-1
2
May-1
3
No
v-1
3
May-1
4
No
v-1
4
May-1
5
No
v-1
5
May-1
6
No
v-1
6
Auto sales
Property sales (RHS)
% yoy, 3mma
% yoy, 3mma
Macquarie Research China Macro
9 January 2017 10
7. What is the reform outlook?
The most important reform in 2016 was of course the supply side reform, which has led to a
strong rally in commodity prices. It will continue in 2017. That said, given the rising PPI
especially in 1Q17, supply controls could be eased to reduce the cost pressure for the down-
stream industries (see the report on supply side reform from our commodity team).
Regarding other reforms, hard reforms might take a back seat amid the power transition.
Back in 2013, during the heady period after the 3rd Plenum, we commented the four major
economic reforms: “In our view, fiscal and financial reforms would gain traction after the third
Plenum, while a breakthrough in land and SOE reform will wait until the 2nd 5-year term for
the new government.”
It’s because “SOE and land reforms could lead to strong push-backs from China’s most
powerful vested interests, while financial and fiscal reforms could be more technical and the
confrontation with vested interests could be much less direct.” (link)
In the past three years, we do see limited progress in SOE and land reforms, but quite
aggressive movements in the financial area including the interest rate liberalization and RMB
internationalization. In the fiscal area, the local government debt swap and the VAT (value
added tax) reform are also quite impressive.
However, it has become clear that financial and fiscal reforms could not go too far without
SOE and land reforms. Since the priority in 2017 is the power transition, we don’t expect big
progress in reforms in 2017. But the uncertainties from 2018 and beyond are high. After that,
both the power and the responsibility for China’s top leader will reach the new high in the past
forty years. Markets would start reassessing China’s growth and reform outlook from later
2017.
8. What are the major risks?
We see lots of uncertainties after the power transition. But for 2017, the visibility is relatively
high. The recent Politburo meeting set stability as the priority. To be sure, as the economy
would slow down, the fear of hard landing and property bubble burst would rise again. In the
three thematic reports on capital flows, debt and property written in 2016, we discussed why
these factors are not likely to cause a systemic crisis in 2016-17.
In our view, the biggest risk over the next couple of years comes from how the new
governments in the US and China will recalibrate the relationship between these two
countries, in the areas of trade, currency, geopolitics and others.
For 2017 alone, inflation is something to watch. Our baseline is a modest reflation. CPI
inflation could average 2.4% in 2017 vs. 2.0% in 2016. PPI inflation would peak in 1Q17 then
trend down afterward. But inflation is always tricky to forecast.
Lastly, if the inflation rate and the US yields continue to trend up, the bond market would be
under more pressure. While we don’t doubt that policy makers would do their best to prevent
another credit crunch from happening, it’s still a risk to watch.
.
Macquarie Research China Macro
9 January 2017 11
Fig 19 China economic forecasts
Macquarie China Economic forecasts
Unit 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2015 2016 2017 2018
Growth
GDP YoY, % 6.7 6.7 6.7 6.7 6.6 6.5 6.5 6.5 6.9 6.7 6.5 6.0
GDP QoQ,% 1.2 1.9 1.8 1.6 1.1 1.9 1.8 1.6 -- -- -- --
Inflation
CPI YoY, % 2.1 2.1 1.7 2.2 2.3 2.3 2.4 2.5 1.4 2.0 2.4 2.6
PPI YoY, % -4.8 -2.9 -0.8 3.0 4.9 3.2 2.2 0.0 -5.2 -1.4 2.6 1.0
Activities
Industrial production YoY, % 5.8 6.1 6.1 -- -- -- -- -- 6.1 6.0 5.8 --
Retail sales YoY, % 10.3 10.2 10.5 -- -- -- -- -- 10.7 10.4 10.6 --
Fixed asset investment (ytd) YoY, % 10.7 8.2 7.0 -- -- -- -- -- 10.0 8.2 8.5 --
Manufacturing YoY, % 6.4 1.8 2.8 -- -- -- -- -- 8.1 3.6 5.0 --
Property YoY, % 8.2 6.6 5.2 -- -- -- -- -- 2.5 6.5 2.0 --
Infrastructure YoY, % 19.2 20.8 14.6 -- -- -- -- -- 17.3 17.2 20.0 --
Trade
Exports YoY, % -9.3 -4.3 -6.7 -- -- -- -- -- -2.6 -6.0 3.0 --
Imports YoY, % -13.3 -6.7 -4.7 -- -- -- -- -- -14.4 -6.0 6.0 --
Trade balance US$ bn 126 143 144 -- -- -- -- -- 602 550 530 --
Monetary
M2 (period-end) YoY, % 13.4 11.8 11.5 -- -- -- -- -- 13.3 11.2 11.5 --
1-yr deposit rate (period-end) % 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
RRR (period-end) % 17.0 17.0 17.0 17.0 17.0 17.0 16.5 16.0 17.5 17.0 16.0 16.0
Exchange rate (spot, period end) USDCNY
6.47 6.66 6.67 6.95 7.15 7.05 6.95 6.90 6.49 6.95 6.90 6.70
Note: Numbers in bold are forecast values.
Source: CEIC, Wind, Macquarie Research, January 2017
Macquarie Research China Macro
9 January 2017 12
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 September 2016
AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients)
Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients)
Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients)
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Wei Li (China, Hong Kong) (852) 3922 5494
Property
Tuck Yin Soong (Asia, Singapore) (65) 6601 0838
David Ng (China, Hong Kong) (852) 3922 1291
Raymond Liu (China, Hong Kong) (852) 3922 3629
Wilson Ho (China) (852) 3922 3248
William Montgomery (Japan) (813) 3512 7864
Corinne Jian (Taiwan) (8862) 2734 7522
Abhishek Bhandari (India) (9122) 6720 4088
Aiman Mohamad (Malaysia) (603) 2059 8986
Kervin Sisayan (Philippines) (632) 857 0893
Patti Tomaitrichitr (Thailand) (662) 694 7727
Resources / Metals and Mining
Polina Diyachkina (Asia, Japan) (813) 3512 7886
Coria Chow (China) (852) 3922 1181
Anna Park (Korea) (822) 3705 8669
Sumangal Nevatia (India) (9122) 6720 4093
Technology
Damian Thong (Asia, Japan) (813) 3512 7877
George Chang (Japan) (813) 3512 7854
Daniel Kim (Korea) (822) 3705 8641
Allen Chang (Greater China) (852) 3922 1136
Jeffrey Ohlweiler (Greater China) (8862) 2734 7512
Patrick Liao (Greater China) (8862) 2734 7515
Louis Cheng (Greater China) (8862) 2734 7526
Kaylin Tsai (Greater China) (8862) 2734 7523
Telecoms
Nathan Ramler (Asia, Japan) (813) 3512 7875
Danny Chu (Greater China) (852) 3922 4762
Soyun Shin (Korea) (822) 3705 8659
Prem Jearajasingam (ASEAN) (603) 2059 8989
Kervin Sisayan (Philippines) (632) 857 0893
Transport & Infrastructure
Janet Lewis (Asia) (852) 3922 5417
Corinne Jian (Taiwan) (8862) 2734 7522
Azita Nazrene (ASEAN) (603) 2059 8980
Utilities & Renewables
Patrick Dai (China) (8621) 2412 9082
Candice Chen (China) (8621) 2412 9087
Alan Hon (Hong Kong) (852) 3922 3589
Inderjeetsingh Bhatia (India) (9122) 6720 4087
Prem Jearajasingam (Malaysia) (603) 2059 8989
Karisa Magpayo (Philippines) (632) 857 0899
Commodities
Colin Hamilton (Global) (44 20) 3037 4061
Ian Roper (65) 6601 0698
Jim Lennon (44 20) 3037 4271
Lynn Zhao (8621) 2412 9035
Matthew Turner (44 20) 3037 4340
Economics
Peter Eadon-Clarke (Global) (813) 3512 7850
Larry Hu (China, Hong Kong) (852) 3922 3778
Tanvee Gupta Jain (India) (9122) 6720 4355
Quantitative / CPG
Gurvinder Brar (Global) (44 20) 3037 4036
Woei Chan (Asia) (852) 3922 1421
Danny Deng (Asia) (852) 3922 4646
Per Gullberg (Asia) (852) 3922 1478
Strategy/Country
Viktor Shvets (Asia, Global) (852) 3922 3883
Chetan Seth (Asia) (852) 3922 4769
David Ng (China, Hong Kong) (852) 3922 1291
Erwin Sanft (China, Hong Kong) (852) 3922 1516
Peter Eadon-Clarke (Japan) (813) 3512 7850
Chan Hwang (Korea) (822) 3705 8643
Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512
Inderjeetsingh Bhatia (India) (9122) 6720 4087
Jayden Vantarakis (Indonesia) (6221) 2598 8310
Anand Pathmakanthan (Malaysia) (603) 2059 8833
Gilbert Lopez (Philippines) (632) 857 0892
Conrad Werner (Singapore) (65) 6601 0182
Alastair Macdonald (Thailand) (662) 694 7753
Find our research at Macquarie: www.macquarieresearch.com/ideas/ Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access
Asia Sales Regional Heads of Sales
Miki Edelman (Global) (1 212) 231 6121
Jeff Evans (Boston) (1 617) 598 2508
Jeffrey Shiu (China, Hong Kong) (852) 3922 2061
Sandeep Bhatia (India) (9122) 6720 4101
Thomas Renz (Geneva) (41 22) 818 7712
Riaz Hyder (Indonesia) (6221) 2598 8486
Nick Cant (Japan) (65) 6601 0210
John Jay Lee (Korea) (822) 3705 9988
Nik Hadi (Malaysia) (603) 2059 8888
Eric Roles (New York) (1 212) 231 2559
Gino C Rojas (Philippines) (632) 857 0861
Regional Heads of Sales cont’d
Paul Colaco (San Francisco) (1 415) 762 5003
Amelia Mehta (Singapore) (65) 6601 0211
Angus Kent (Thailand) (662) 694 7601
Ben Musgrave (UK/Europe) (44 20) 3037 4882
Christina Lee (UK/Europe) (44 20) 3037 4873
Sales Trading
Adam Zaki (Asia) (852) 3922 2002
Stanley Dunda (Indonesia) (6221) 515 1555
Sales Trading cont’d
Suhaida Samsudin (Malaysia) (603) 2059 8888
Michael Santos (Philippines) (632) 857 0813
Chris Reale (New York) (1 212) 231 2555
Marc Rosa (New York) (1 212) 231 2555
Justin Morrison (Singapore) (65) 6601 0288
Daniel Clarke (Taiwan) (8862) 2734 7580
Brendan Rake (Thailand) (662) 694 7707
Mike Keen (UK/Europe) (44 20) 3037 4905
This publication was disseminated on 09 January 2017 at 08:30 UTC.