Economic Reports on China

[Tony_onrock]

Economic

Indicators

Lending (Oct)

October's new lending came in at RMB253bn, significantly below the market consensus of RMB350bn and last month's RMB516bn. We knew that lending by big banks was slow, but it is surprising that smaller banks are also reporting lower figures. It reflects the impact of tightening capital requirement and/or weaker-than-expected loan demand from the corporate sector. Ytd urban FAI growth slowed to 33.1% yoy (from 33.3% in Jan-Sep), same as our prediction but

lower than consensus of 33.5%. This implies that monthly FAI growth fell to 31% yoy in October, down from the 35% in September and the recent peak of 39% in May. The RMB amount of new project starts also posted slower growth of 66% yoy in October, down from the

average of 80% yoy in the past four months. Overall, these data points are slightly negative for banks, construction materials, construction services, and construction machinery.

 

Retail Sales (Oct)

Retail sales growth is the brighter spot. Its October reading accelerated further to 16.1% yoy from 15.5% in September, and exceeded market expectation of 15.7%. Earlier last month, the

Ministry of Commerce reported that daily retail sales were up 18% yoy during the National Day Holidays. We think it partly reflects improved consumer confidence as labor markets are tightening especially in export-related sectors. At the product level, the retail items that saw

acceleration in growth include foods, electronic appliances, and cosmetics.

 

Export (Oct)

Export growth is in line with consensus. Exports fell 13.8% yoy in Oct, improving from the 15% yoy drop in Sept. We expect another 15-20ppt increase in yoy export growth in the next two months, on strong sequential recovery (driven by a front-loaded US recovery) as well as an extremely favorable base effect. Imports fell by a larger-than-expected 6.4% yoy in October, resulting in a larger trade surplus of USD24bn. The rise in trade surplus, together with a sharp

recovery of exports and growing international political pressure, will lead to a resumption of RMB appreciation from Q2 next year, in our view.

 

IP (Oct)

IP growth accelerated to 16.1% yoy in Oct, up from 13.9% in September, but the improvement is mainly explained by the base effect.

 

Inflation (Oct)

Inflation --both CPI and PPI -- continues to show an narrowing of yoy decline, although the pace of improvement is slightly slower than consensus expectations. CPI fell 0.5% yoy in Oct,

0.3ppt less than in Sept. PPI fell 5.8% yoy, up 1.2ppts from Sept. On a mom basis, the major increases in CPI are seen in apparel (up 0.8%), and housing (up 0.4%). Going forward, we think

Nov CPI inflation will turn positive and December CPI will likely be in the range of 0.5-1% yoy. In October, food prices declined partly on seasonal factors. But in the coming months, the continued increase in housing prices, oil price adjustments (e.g., the administered oil prices

were lifted by 8% just a few days ago), and worsening weather conditions in coming weeks will pose upward pressures on inflation.

[Tony_onrock]

Analytical

Perspective

 

Macro Policy Outlook

On policy outlook, government officials and policy advisors have been in the past weeks seriously looking into the strategy for exit from expansionary policy. We think a likely roadmapfor the next six months or so should look like the following:

 

1) The most likely near-term policy option is to raise the reserve requirement ratio (RRR) on banks. We think this may take place within the next 2-3 months. The main drivers for action include the surge in monthly FX reserve accumulation (to USD61bn in Sept) and the need for less costly instruments (such as the RRR hike) to soak up liquidity. When the RRR hike is implemented, it may have a short-term negative impact on market sentiment especially on banks, properties and construction materials, although the real impact will be muted as the

RRR is simply a cheaper alternative to PBOC bills for liquidity management purposes.

 

2) By the end of the year, a key message from the fiscal authority will likely be that next year's fiscal deficit will be no more than this year. This implies that next year's govt expenditure growth will be much slower than this year as the deficit will be capped at RMB950bn. We

expect next year's revenue growth to be around 15% and that means overall expenditure growth will be about 13%. As social spending should be the priority, we think the government's capex growth next year will be no more than 20%, down from close to 80% this year. This suggests that China's fiscal policy will not be a reason to be bullish on construction materials and machinery for next year.

 

3) The RMB will likely resume its appreciation vs the USD from Q2 next year. We think three arguments will convince the government to do so: by Q2 China's yoy export growth will likely exceed 15%; global political pressure will intensify as the RMB has already depreciated

10-30% against many currencies over the past seven months; imported inflation will become a worry. RMB appreciation is most positive for airlines and is, on a long-term basis, supportive of market sentiment for asset plays such as properties.

 

4) The use of interest rate instruments remains the most contentious debate, as the hawkish views argue that the central bank should hike rates pre-emptively, while the opposing camp are concerned about hot money inflows if China raises rates earlier than the US. While

the outlook for interest rate changes is less certain than other policies mentioned above, our central scenario remains that the PBOC will likely begin its rate hike cycle from Q2 next year. A key beneficiary of rate hikes is insurance, while the victims will include property and, to

the extent the rate hike will be asymmetric, banks.

 

5) We do not expect major tightening policies specifically targeting the real estate sector in the near future. So far the consensus view within key government agencies seems to be that the recent rally in property prices in some large cities remain regional specific, and are not

yet posing a systemic risk to the macro economy or the banking system. And the government would like to see real evidence that the export sector has fully recovered (we think it will be in Q2 next year) before formally withdrawing stimulus from the property sector. Given these views, major changes to real estate policies are unlikely in the near-term (e.g., next 2-3 months). Specifically, we think the recent market talk that regulators will abolish the 30% mortgage rate discount (to the benchmark rate) for first home buyers before year-end is very speculative in nature.

 

Overall, we think the big macro and policy picture should remain net positive for the market in the next 3-5 months, as companies benefit from rising pricing power but are not yet subject to excessive policy tightening. However, the macro environment will likely become

more challenging from Q2 next year, when risks such as yoy GDP deceleration (to occur in Q2), asymmetric rate hike, price control, and fear of US second dip will intensify.

[Tony_onrock]

China ¨C Job watch 02:30 GMT 09 December 2009

The employment situation among rural migrant labourers has improved markedly since Q2 Central and western China led the labour-market recovery; the east is catching up The tightening labour market and higher wages in 2010 will support consumption growth

The employment situation among China¡®s rural migrant labour force seems to have improved significantly as a result of the government¡¯s huge stimulus package. According to reports from China¡¯s National Bureau of Statistics (NBS), the unemployment rate for rural migrants fell sharply from around 15% at end-Q1-2009 to less than 3% at end-Q2. Data from urban job centres tells a similar story. Labour demand, measured by the number of jobs listed, rose by 14.2% y/y in Q3-2009, the first growth after four consecutive quarters of decline. As construction activity continues to pick up (see OTG, 19 November 2009, ¡®Watching cement dry¡¯), the labour market will tighten and wages will likely rise in real terms in 2010. This will provide important support to consumption. A U-turn in the rural migrant labour market Rural migrant labour was hit hard in Q4-2008 with the outbreak of the crisis. According to an NBS report released in March 2009, 70mn (50% of the total 140mn rural migrant labourers) returned home in January 2009 before Chinese New Year. Of those, 62.4% left the eastern region, where the economy was worst affected. Only 56mn (80% of those who returned home) returned to the cities after the holiday. The NBS report suggested that 11mn of the 56mn returnees had failed to find jobs by end-Q1-2009, implying an unemployment rate of 19.6% among the returnees. However, the report did not say how many of the rural migrant workers who stayed in cities over the holiday lost their jobs. We believe the number is likely to be low, since the high cost of living in cities probably means most migrants who lost their jobs would have returned home. Here is a simple calculation. We use the official registered urban unemployment rate (4.3% in Q1-2009) as an approximation of the unemployment rate among rural migrant workers who stayed in cities. This suggests that 3mn rural migrant workers, out of the 70mn who stayed in cities over the holiday, were jobless at end-Q1-2009. Combining this with the number of unemployed rural migrant workers among those who returned home over the holiday (11mn out of 56mn), this implies an unemployment rate for all migrant labourers of about 11% at end-Q1. In some badly affected areas, the rate would have been higher. For example, in Guangdong province, around 1.5mn out of some 10mn rural migrants were unable to find jobs at end-Q1, according to one news report, implying an unemployment rate of 15%.

The employment situation for migrants improved markedly in Q2 as the government¡¯s huge stimulus package kicked in. According to an NBS report released in September, less than 3% of all rural migrants were unable to find jobs by end-Q2, implying that the unemployment rate had fallen by more than 70% since end-Q1 (when it was around 11%). Moreover, among the unemployed migrants, 29% said that they had voluntarily quit because they thought their wages were too low, and another 50% said they had just come to the cities or expected to be only temporarily unemployed. Sceptics may question the sharp improvement in such a short period, and there may indeed be some problems with the official data.

[Tony_onrock]

However, evidence on the ground (e.g., increasing news reports of labour shortages in Wenzhou and Dongguan, key coastal manufacturing hubs) do seem to support the view that the employment situation for rural migrant labourers has turned the corner and improved markedly in Q2. The labour market continued to improve in Q3. The average monthly income of rural migrant workers increased to CNY 1,444 (USD 212) from CNY 1,404 (USD 206) in Q2, according to the NBS¡¯ Q3 Rural Migrant Labour Market Survey, released in November. As a result, more rural labourers went to work in cities. The number of rural migrant labourers, according to the NBS, increased from 140mn at end-2008 to 152mn at end-Q3-2009. Central and western regions catch up An important development in recent months has been that rural migrant incomes in central and western China have risen faster than those in the east. These regions, which are less developed and where wages are lower, are now catching up. According to the NBS, their average incomes rose by 3.2% q/q in central China and 4.3% q/q in western China, compared with a 2.8% increase in the east. As a result, the income gap between eastern China and other regions (based on the average of the central and western regions) narrowed from more than 20% in 2008 to around 5% at end-Q3 2009. As a result, central and western China have become more attractive places to work. During the first nine months of 2009, the share of migrant labourers working in the central region rose to 14.5% from 13%, and in the west to 18.9% from 15%. During the same period, the percentage of migrant labourers working in eastern China fell to 66.2% from 71%. Labour demand growth turned positive in cities in Q3 Reports from the Labour Market Monitoring Centre (LMMC), which is run by the Ministry of Human Resources and Social Security (MOHRSS) and oversees the collection of job-market information at the local level, also shed some light on what is happening. According to data collected by the LMMC in about 100 major Chinese cities (which account for around 55% of China¡¯s urban working population), the number of jobs listed at city job centres rose by 14.2% y/y in Q3-2009, the first increase after four consecutive quarters of decline, as shown in Chart 1. The job market has also become increasingly tight. Chart 2 shows that there were 94 open jobs for every 100 applicants in Q3, up considerably from a low of 85 in Q4-2008, the worst period during the latest economic crisis.