what to expect next year for china and hong kong?
DESCRIPTION
China Outlook: Growth momentum continues, but with rising fragilities Hong Kong Outlook: Adapting to a changing environment amidst medium-term challengesTRANSCRIPT
What to expect next year for
China and Hong Kong?
Alicia Garcia-Herrero Chief Economist Emerging Markets – BBVA Research
January 15, 2014
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
Global Outlook
Global GDP growth (%) Source: BBVA Research
• 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
3
4.02.8
-0.4
5.2
4.0
3.32.9
3.6
-2
-1
0
1
2
3
4
5
6
2008 2009 2010 2011 2012 2013
(f)
2014
(f)
2015
(f)Advanced economies Emerging economies
Global growth
A recovery with risks diminishing
GDP growth (%) Source: BBVA Research and IMF
Global recovery continues to on the back of advanced evonomies, with emerging
economies now joinging. Upward bias to US projections.
In emerging markets, vulnerability to a less favorable global liquidity outlook must still be
monitored
Nevertheless, advanced economies are vulnerable to tighter financial conditions. In the
eurozone, risks remain from AQR and wrangling over banking union
4
3. 32. 9
3. 6
2. 8
1 . 6
2. 3
-0. 6 -0. 4
1 . 1
5. 0 4. 85. 2
-2
-1
0
1
2
3
4
5
6
7
8
2012
2013
2014
2012
2013
2014
2012
2013
2014
2012
2013
2014
W orld US E MU BBVA -E AGLE s
Current forecasts
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
6 6
• 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
35
40
45
50
55
60
65
Dec
-07
Mar
-08
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
Index
02468101214161820
% yoy
GDP growth (RHS) NBS PMI (LHS) Industrial production (RHS)
China’s recovers slowly
7 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 3.5-4.0% range on higher wage growth
… while PPI deflation remains Source: CEIC and BBVA Research
Inflation moderated on easing food prices Source CEIC and BBVA Research
% yoy
-2-1
01
234
56
78
Jun-
08S
ep-0
8D
ec-0
8M
ar-0
9Ju
n-09
Sep
-09
Dec
-09
Mar
-10
Jun-
10S
ep-1
0D
ec-1
0M
ar-1
1Ju
n-11
Sep
-11
Dec
-11
Mar
-12
Jun-
12S
ep-1
2D
ec-1
2M
ar-1
3Ju
n-13
Sep
-13
Dec
-13
Non-food Food CPI Inflation
-10-8-6-4-202468
1012
Jun-
08S
ep-0
8D
ec-0
8M
ar-0
9Ju
n-09
Sep
-09
Dec
-09
Mar
-10
Jun-
10S
ep-1
0D
ec-1
0M
ar-1
1Ju
n-11
Sep
-11
Dec
-11
Mar
-12
Jun-
12S
ep-1
2D
ec-1
2M
ar-1
3Ju
n-13
Sep
-13
Dec
-13
Producer Price Index Consumer Price Index
%
8 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
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Feb-
07M
ay-0
7A
ug-0
7N
ov-0
7Fe
b-08
May
-08
Aug
-08
Nov
-08
Feb-
09M
ay-0
9A
ug-0
9N
ov-0
9Fe
b-10
May
-10
Aug
-10
Nov
-10
Feb-
11M
ay-1
1A
ug-1
1N
ov-1
1Fe
b-12
May
-12
Aug
-12
Nov
-12
Feb-
13M
ay-1
3A
ug-1
3N
ov-1
3
-60
-40
-20
0
20
40
60
80
100
Foreign reserve (LHS) Exports (RHS) Imports (RHS)
% y/y
9 9
RMB continues to strengthen
The pace of RMB appreciation has resumed… Source: Bloomberg and BBVA Research
• 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
…leading to losing external competitiveness Source: BIS and BBVA Research
USD/CNY
6.00
6.05
6.10
6.15
6.20
6.25
6.30
6.35
6.40
6.45
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep
-12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep
-13
Nov
-13
Jan-
14
Trading band Band widening USD/CNY spot
95
1 00
1 05
1 1 0
1 1 5
1 20
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-
11
Se
p-1
1
No
v-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-
12
Se
p-1
2
No
v-1
2
Jan
-13
Ma
r-1
3
Ma
y-1
3
Jul-
13
Se
p-1
3
No
v-1
3
R E E R NE E R
Index 201 1 Jan = 1 00
Appreciation
10 10
• Potential growth will decelerate in the coming decade, to 6½% 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
Declining potential growth … Source: BBVA Research
So why worry? Decelerating potential growth
Contribution by factors TFP Capital Labor
Potential growth
real growth
1981-1990 2.9% 5.5% 1.5% 9.8% 9.3%
1991-2000 2.4% 5.5% 0.7% 8.7% 10.5%
2001-2010 3.8% 5.2% 0.3% 9.3% 10.2%
2011-2020 2.8% 4.8% -0.2% 7.5% --
… as the contribution of labor and total factor productivity diminish Source: BBVA Research
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
TFP Capital Labor
Real Growth Potential Growth
Projection
11 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
-5-3-113579
1 11 31 5
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
C ons umption Inves tment Net E xports GDP growth
% yoy
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
… and current account surplus has narrowed Source: CEIC and BBVA Research
Rebalancing toward domestic consumption remains disappointingly slow Source CEIC and BBVA Research as % of GDP
0
2
4
6
8
10
12
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
2013
Q3
%
25
30
35
40
45
50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Private Consumption Investment
• 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
Local government debt to weigh on bank profits
13
% of GDP
0
10
20
30
40
50
60
70
80
2010 2012 est 20131H est
Local Government Financing Vehicle DebtLocal Government Agency DebtBank Restructing CostCentral Government DebtTotal debt
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
…leading to an increase in the size of the shadow banking sector in the economy Source: PBoC and BBVA Research
%
0
10
20
30
40
50
60
2010
2011
2012
GDP Bank asset
RMB trn
0
5
10
15
20
25
30
35
40
2010
2011
2012
2013
est
WMPs Trust Company productsEntrust loans (liability side) Bank acceptance (liability side)Private lending (liability side)
14
• 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
Corporate sector debt also a concern
%
0
50
100
150
200
250
300
Swed
enDe
nmar
kHo
ng K
ong
Switz
erlan
dNo
rway UK
Kore
aAu
strali
aCh
inaJa
pan
Euro
zone US
Hung
ary
Cana
daSi
ngap
ore
Thail
and
Czec
hPo
land
South
Afric
aInd
iaTu
rkey
Indon
esia
Mexic
o
Corporate Household15
16 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
Is the recent rise in China’s housing prices reminiscent of international bubbles? Source: NBS and BBVA Research
-20
-15
-10
-5
0
5
10
15
20
25
May
-08
Aug
-08
Nov
-08
Feb-
09M
ay-0
9A
ug-0
9N
ov-0
9Fe
b-10
May
-10
Aug
-10
Nov
-10
Feb-
11M
ay-1
1A
ug-1
1N
ov-1
1Fe
b-12
May
-12
Aug
-12
Nov
-12
Feb-
13M
ay-1
3A
ug-1
3N
ov-1
3
-160
-120
-80
-40
0
40
80
120
160
200
Overall BeijingShanghai ShenzhenTrading Value (RHS)
% yoy % yoy
50
75
1 00
1 25
1 50
1 75
200
225
250
275
300
0 8 1 6 24 32 40 48 56 64 72 80 88 96
S pain 1 997=1 00 US 1 997=1 00
China 2000=1 00 Japan 1 976=1 00
period T
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
Growth momentum picked up modestly Source: CEIC and BBVA Research
Hong Kong’s GDP growth slowly picking up
18
• After a disappointing 2012, Hong Kong’s growth picked up to 3.1% (est.) in 2013
• Exports and robust private consumption have been the growth leaders
• We expect growth to rise further in 2014 and 2015 (3.7% and 4.0% respectively) on sustained growth
in China and an improving external environment
%
-2-1
012
345
67
2010
2011
2012
2013
2014
Consumption Investment Net Exports GDP growth
%
-2
0
2
4
6
8
10
Feb-
10
May
-10
Aug
-10
Nov
-10
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
Inflation remains on the high side Source: CEIC and BBVA Research
Inflation remains high38
19
• 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 2013), driven by food prices and housing costs
• We expect inflation to moderate somewhat in 2014 and 2015 (3.7% and 3.5% respectively) as housing
prices cool
20 20
Labor market remains tight
The unemployment rate remains low and stable Source: CEIC and BBVA Research
Distribution of job vacancies by sector (2013 Q3) Source: Census & Statistic Department and BBVA Research
13.5%
4.9%
7.5%
11.2%
18.3%
19.9%
24.7%
Import or Export, Wholesale & Retail TradesSocial & Personal ServicesAccommodation & Food ServicesProfessional & Business ServicesFinancing & InsuranceReal EstateOthers
Index: 1992 Sep = 100
105
110
115
120
125
130
Sep
-04
Sep
-05
Sep
-06
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
0
1
2
3
4
5
6
7
8
Real Wage Index Unemployment Rate sa (RHS)
%
• 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 30HKD/hour from 28HKD/hour as introduced in 2011, still below the market level
The property market has begun to cool Source: CEIC and BBVA Research
Property market has been the focus of policy
21
406080
100120140160180200220240260
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
102030405060708090100110120
Overall residential Property price index (LHS)Residential property price index for luxury housing (LHS)Private household affordability ratio (RHS)
Index 1999=100 % of household income
• 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
Credit growth remains fast Source: CEIC and BBVA Research
Lending boom has moderated
22
• 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
2200
2700
3200
3700
4200
4700
Feb-
08M
ay-0
8A
ug-0
8N
ov-0
8Fe
b-09
May
-09
Aug
-09
Nov
-09
Feb-
10M
ay-1
0A
ug-1
0N
ov-1
0Fe
b-11
May
-11
Aug
-11
Nov
-11
Feb-
12M
ay-1
2A
ug-1
2N
ov-1
2Fe
b-13
May
-13
Aug
-13
Nov
-13
687072747678808284868890
HKD loan-to-deposit ratio (RHS)HKD loan (LHS)HKD Deposit (LHS)
HKD bn %
Mortgage lending has eased Source: CEIC and BBVA Research
% y/y
0
10
20
30
40
50
60
Feb-
10
May
-10
Aug
-10
Nov
-10
Feb-
11
May
-11
Aug
-11
Nov
-11
Feb-
12
May
-12
Aug
-12
Nov
-12
Feb-
13
May
-13
Aug
-13
Nov
-13
Total LoansLoan for other domestic useLoan for use outside HKOutstanding Residential mortgage
Medium-term challenges in Hong Kong
23
• Vulnerability to external shocks
• Increasing economic reliance on China
• Income inequality: Gini Coefficient 53.7% in 2012
• 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 2017 universal suffrage
High Gini Coefficient in Hong Kong Source: CIA and BBVA Research
%
0
10
20
30
40
50
60
Hon
g K
ong
Thai
land
Bra
zil
Mex
ico
Sin
gapo
re
Chi
na US
Phi
lippi
nes
Kor
ea UK
Japa
n
Indo
nesi
a
Taiw
an
What to expect next year for
China and Hong Kong?
Alicia Garcia-Herrero [email protected]
Thank you for your attention! Questions welcome
25 25
Appendix: China: Near-term growth outlook • Growth will slow in 2013-14 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
2010 2011 2012 2013F 2014F
GDP growth 10.4 9.3 7.8 7.7 7.6
CPI (avg) 3.3 5.4 2.6 2.6 3.3
CNY per USD (eop) 6.62 6.30 6.23 6.05 5.90
Benchmark interest rate (eop) 5.81 6.56 6.00 6.00 6.00
26 26
Appendix Hong Kong: Near-term growth outlook
• Growth will pick up in 2013-14 as 3.1% and 3.7%
• Downside risks include: sluggish external demand and housing bubbles
Baseline
2010 2011 2012 2013F 2014F
GDP growth 6.8 4.9 1.5 3.1 3.7
CPI (avg) 2.4 5.3 4.1 4.3 3.8
HKD per USD (eop) 7.77 7.77 7.75 7.75 7.75
Benchmark interest rate (eop) 0.50 0.50 0.50 0.50 0.50