What to expect next year for China and Hong Kong?

Transcription

1 What to expect next year for China and Hong Kong? January 15, 214 Alicia Garcia-Herrero Chief Economist Emerging Markets BBVA Research

2 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

3 Global Outlook 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 Global GDP growth (%) Source: BBVA Research (f) (f) (f) Advanced economies Emerging economies Global growth 3

4 A recovery with risks diminishing GDP growth (%) Source: BBVA Research and IMF Current forecasts Global recovery continues to on the back of advanced evonomies, with emerging economies now joinging. Upward bias to US projections. Nevertheless, advanced economies are vulnerable to tighter financial conditions. In the eurozone, risks remain from AQR and wrangling over banking union In emerging markets, vulnerability to a less favorable global liquidity outlook must still be monitored W orld US E MU BBVA - EAGLEs 4

5 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

6 China s recovers slowly Fears of a hard landing in 213 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 214 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 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 GDP growth (RHS) NBS PMI (LHS) Industrial production (RHS) 6

7 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 % range on higher wage growth Inflation moderated on easing food prices Source CEIC and BBVA Research % yoy Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Non-food Food CPI Inflation while PPI deflation remains Source: CEIC and BBVA Research % Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Producer Price Index Consumer Price Index 7

8 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 4, 3,5 3, 2,5 2, 1,5 1, 5 % y/y Feb-7 May-7 Aug-7 Nov-7 Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Foreign reserve (LHS) Exports (RHS) Imports (RHS) 8

9 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 Source: Bloomberg and BBVA Research leading to losing external competitiveness Source: BIS and BBVA Research USD/CNY Index 211 Jan = Appreciation Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Jan-1 1 Mar-1 1 May-1 1 Jul-1 1 Sep-1 1 Nov-1 1 Jan-1 2 Mar-1 2 May-1 2 Jul-1 2 Sep-1 2 Nov-1 2 Jan-1 3 Mar-1 3 May-1 3 Jul-1 3 Sep-1 3 Nov-1 3 Trading band Band widening USD/CNY spot REER NEER 9

10 So why worry? Decelerating potential growth Potential growth will decelerate in the coming decade, to 6½% by 22, 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 Declining potential growth Source: BBVA Research 16% 14% 12% 1% 8% 6% 4% 2% % -2% Projection as the contribution of labor and total factor productivity diminish Source: BBVA Research Contribution by factors TFP Capital Labor Potential growth real growth % 5.5% 1.5% 9.8% 9.3% % 5.5%.7% 8.7% 1.5% % 5.2%.3% 9.3% 1.2% % 4.8% -.2% 7.5% TFP Capital Labor Real Growth Potential Growth 1

11 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 GDP growth 11

12 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 % 5 and current account surplus has narrowed Source: CEIC and BBVA Research as % of GDP Private Consumption Investment Q3 12

13 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 213 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 214 Local government debt has risen Source: BBVA Research % of GDP est 2131H est Local Government Financing Vehicle Debt Local Government Agency Debt Bank Restructing Cost Central Government Debt Total debt 13

14 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 Shadow banking activities have risen Source: Wind, CEIC, PBoC and BBVA Research estimates RMB trn leading to an increase in the size of the shadow banking sector in the economy Source: PBoC and BBVA Research % WMPs est Trust Company products Entrust loans (liability side) Private lending (liability side) Bank acceptance (liability side) GDP Bank asset 14

15 Corporate sector debt also a concern As a share of GDP, China s corporate debt is high by international standards High corporate debt may constrain growth and weigh on bank asset quality % China s corporate sector debt as a share of GDP is high by international standards Source: BIS, Haver and BBVA Research Sweden Denmark Hong Kong Switzerland Norway UK Korea Australia China Japan Euro zone US Hungary Canada Singapore Thailand Czech Poland South Africa India Turkey Indonesia Mexico Corporate Household 15

16 Home prices still raising Accelerating housing prices have kept the focus on housing bubbles and affordability The government s tightening measures and home purchasing restriction are expected to remain in place Rising housing prices are a key factor for the authorities reluctance to ease monetary policy Housing prices and transaction volumes rise sharply, led by tier 1 cities Source: CEIC and BBVA Research % yoy % yoy May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Overall Shanghai Trading Value (RHS) Beijing Shenzhen Is the recent rise in China s housing prices reminiscent of international bubbles? Source: NBS and BBVA Research S pain 1 997=1 US 1 997=1 China 2=1 Japan 1 976=1 period T 16

17 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 17

18 Hong Kong s GDP growth slowly picking up After a disappointing 212, Hong Kong s growth picked up to 3.1% (est.) in 213 Exports and robust private consumption have been the growth leaders We expect growth to rise further in 214 and 215 (3.7% and 4.% respectively) on sustained growth in China and an improving external environment % Growth momentum picked up modestly Source: CEIC and BBVA Research Consumption Investment Net Exports GDP growth 18

19 Inflation remains high38 The linked exchange rate regime limits Hong Kong s scope for an independent monetary policy, and currency appreciation pressures show up as domestic inflation Headline inflation has remained high (4.3% in 213), driven by food prices and housing costs We expect inflation to moderate somewhat in 214 and 215 (3.7% and 3.5% respectively) as housing prices cool % Inflation remains on the high side Source: CEIC and BBVA Research Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 CPI: Food CPI: Non-Food Headline CPI 19

20 Labor market remains tight As in other Asian economies, Hong Kong s labor market has been tight on strong demand and limited labor supply The strong labor market has helped to increase wage income and boost private consumption However, it has also increased inflationary pressure and resulted in labor shortage in certain sectors Minimum wage has risen to 3HKD/hour from 28HKD/hour as introduced in 211, still below the market level The unemployment rate remains low and stable Source: CEIC and BBVA Research Index: 1992 Sep = % Distribution of job vacancies by sector (213 Q3) Source: Census & Statistic Department and BBVA Research 7.5% 4.9% 13.5% 24.7% % 18.3% 19.9% Sep-4 Sep-5 Sep-6 Sep-7 Real Wage Index Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Unemployment Rate sa (RHS) Sep Import or Export, Wholesale & Retail Trades Social & Personal Services Accommodation & Food Services Professional & Business Services Financing & Insurance Real Estate Others 2

21 Property market has been the focus of policy Property market has cooled over the past year due to macro-prudential measures and expectations of US Fed QE tapering The housing market is a source of vulnerability, and is susceptible to an increase in international interest rates The property market has begun to cool Source: CEIC and BBVA Research Index 1999= % of household income Overall residential Property price index (LHS) Residential property price index for luxury housing (LHS) Private household affordability ratio (RHS) 21

22 Lending boom has moderated Over the past few years lending growth has been fueled by housing mortgage demand and loans to mainland companies More recently, mortgage lending has slowed, while offshore lending remains strong Credit growth remains fast Source: CEIC and BBVA Research Mortgage lending has eased Source: CEIC and BBVA Research HKD bn % % y/y Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 HKD loan-to-deposit ratio (RHS) HKD loan (LHS) HKD Deposit (LHS) Total Loans Loan for other domestic use Loan for use outside HK Outstanding Residential mortgage 22

23 Medium-term challenges in Hong Kong Vulnerability to external shocks Increasing economic reliance on China Income inequality: Gini Coefficient 53.7% in 212 Rising competition from Shanghai s as a financial center (e.g., Shanghai Free Trade Zone) Ageing population and labor shortages Political unrest regarding autonomy and 217 universal suffrage % High Gini Coefficient in Hong Kong Source: CIA and BBVA Research Hong Kong Thailand Brazil Mexico Singapore China US Philippines Korea UK Japan Indonesia Taiwan 23

24 Thank you for your attention! Questions welcome What to expect next year for China and Hong Kong? Alicia Garcia-Herrero

25 Appendix: China: Near-term growth outlook Growth will slow in as the government tackles financial fragilities posed by shadow banking, local government debt, and rising housing prices Downside risks include: sluggish external demand, policy uncertainty, and slowing potential growth Baseline F 214F GDP growth CPI (avg) CNY per USD (eop) Benchmark interest rate (eop)

26 Appendix Hong Kong: Near-term growth outlook Growth will pick up in as 3.1% and 3.7% Downside risks include: sluggish external demand and housing bubbles Baseline F 214F GDP growth CPI (avg) HKD per USD (eop) Benchmark interest rate (eop)