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a weekly chronicle of the Chinese economy

Phat dragon

• Auto sales have had a mixed beginning to the year. After a robust January, Phat Dragon’s seasonally adjusted sales estimates have decelerated in both February and March, pushing the 3mma of year-ended growth down to a paltry 8%. The average growth rate through 2009 and 2010, which includes some negatives from the early months of 2009, was 41%. Domestic production trends are not dramatically out of line with sales though, indicating that any inventory build will not be spectacular. Indeed, domestic output is up 7% as of March, suggesting quite nimble decision making across the fragmented industry. Imports are another question entirely of course. Imports were up 45% as of March. While some foreign suppliers have reasonable claims to grow market share from a low base, it is not plausible to think that overall imports can maintain this high altitude path if the overall market were to remain subdued. 2011 is looking like a consolidation year for autos amid the multi decade trend of structural uplift - and Phat Dragon wonders what the world’s major producers have got pencilled into their sales plans?

• Recent data on US housing turnover have shown an unusually high proportion of all cash (about a third) and distressed (40%, not mutually exclusive of cash) sales. Anecdotal reports out of California indicate a heightened amount of Chinese interest in local property, mainly in the $US1-2 million range: and the buyers almost without exception pay cash. Phat Dragon’s take? If what one hears over scotch and Cubans is to be believed, everybody with means is doing it - and not just in the US market either. Jones is not a common name on the Mainland, but the pursuit of bragging rights is universal.

• Checking in on real estate, the Mainland’s two largest developers, Vanke and Evergrande, have reported respectable, if slowing earnings growth of late. Both firms have been able to pursue a successful strategy of targeting new markets away from the Tier 1 cities, where policy restrictions are less severe. 95% of Evergrande’s new projects are in 2nd or 3rd Tier cities, while Vanke’s strength in Tier 3 locales is well known. It is the smaller developers focussed solely on the investor market in Tier 1, reliant on bank loans and sales revenue for finance, who are set to take the brunt of any slowdown in the housing space. As if to emphasize its separation from these firms, Evergrande has pursued an offshore bond raising. It has $US1.3 billion set to mature in 2015. Phat Dragon’s forecasts imply one fifth of that obligation will be paid off outright by currency appreciation.

• World Intellectual Property Organisation data indicates that country of origin global patent filings rose 5.5% in 2010. Chinese filings rose 55.6%, to reach 7.5% of the total, leapfrogging Korea to grab fourth place overall. The US remains #1 ahead of Japan and Germany. Here is a stunning, perhaps shocking comparison for those keen to pigeonhole China: it contributed 28% of world GDP growth in 2010 and 51% of the growth in patent filings. Foreigners relocating R&D facilities to the Mainland with local JV partners ready to leverage the ‘imported’ innovation are driving this trend. Phat Dragon, who filed on four continents last year, said the following on Dec 15: “Note to firms everywhere: don’t get complacent about competitive advantages over Chinese firms based on technology gaps”.

28 April 2011

Westpac Institutional Banking Group – Economic Research – economics@westpac.com.au – www.westpac.com.au

Contributions to global patent filings growth

-8 -6 -4 -2 0 2 4 6 8 10

-8 -6 -4 -2 0 2 4 6 8

10

2007 2008 2009 2010

ppt cont. ppt cont.

ROW China Korea Germany Japan USA

Sources: WIPO, Westpac. Contribution to full year growth.

Housing sales by region

-50 -25 0 25 50 75 100 125 150 175 200

-50 -25

0 25 50 75

100 125 150 175 200

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

%yr %yr

Centre East West

Sources: CEIC, Westpac Economics.

Auto sales, imports and production

-100

-50

0

50

100

150

200

250

300

-50

-25

0

25

50

75

100

125

150

Jan-05 Jan-07 Jan-09 Jan-11

%yr %yr

Sales (lhs) Domestic output (lhs) Imports (rhs)

Sources: CEIC, Westpac Economics. Imports averaged 4½% of sales in 2010.

• Stats of the week: The average value of cars imported by China in 2009 was $US35k, versus an average value of $US7k for Chinese car exports* *(thanks Markus).