Download China Economics 2009: Getting Worse Before Getting Better

MORGAN STANLEY RESEARCH
January 2009
Research
Asia/Pacific
China Economics
2009: Getting Worse Before Getting Better
Morgan Stanley Asia Limited
Qing Wang
Chief Economist – Greater China
[email protected]
+(852)2848-5220
A Six-month Journey From Overheating To Hard Landing
Source: CEIC, Morgan Stanley Research
For important disclosures, refer to the Disclosures
Section, located at the end of this report.
2009 Outlook: Getting Worse Before Getting Better

Recent Developments: On the back of a gradual deceleration in exports, the policy-induced sharp slowdown in real
estate investment growth was exacerbated by a massive destocking, which in turn was triggered by the collapse of
international commodity prices in the aftermath of intensification of global deleveraging.

Macroeconomic Outlook: China’s economic outlook for 2009 will be best characterized as ‘getting worse before
getting better,’ laying the foundation for a firmer recovery in 2010. In 1H09, further growth deceleration is expected
and deflation is a distinct possibility. The effect of massive policy stimulus implemented since October 2008, together
with a tepid recovery in G3 economies, is expected to help the Chinese economy regain some growth momentum in
2H09.

Policy Outlook: The authorities have already made delivering economic growth a top policy priority by adopting a
campaign-style policy execution approach. On the fiscal policy front, the Rmb4tn stimulus package, of which
Rmb1.18tn will be funded out of central government budget, is unlikely to be the first and only stimulus package for
the entire year, in our view. On the monetary policy front, in view of the high risk of deflation, we expect that
benchmark interest rates will be cut aggressively by an additional 135bp over the course of 2009. The rate cuts will
most probably be frontloaded in 1H09, which is necessary because of the need to prevent deflationary expectations
from getting entrenched.

Risk: We construct two alternative scenarios: the bear (featuring 5% GDP growth) and bull (9% GDP growth) cases to
highlight both the downside and upside risks to the 2009 outlook under our base case (7.5% GDP growth). Real
estate investment will be the biggest swing factor between scenarios.

Implications: While public-sector-driven growth will help achieve the headline GDP growth and job creation targets
and thus limit the extreme downside risk of an outright hard landing, it will unlikely be able to deliver nearly as strong
corporate earnings growth as when the same level of headline GDP growth is fueled by buoyant private sector
spending. This would likely be a relatively ‘job-rich’ but ‘profit-deficient’ macroeconomic environment where bonds tend
to be favored over equities. Within the equity space, sectors/companies with high earnings visibility and/or those
exposed to government-supported capex will likely outperform. A deflationary environment generally favors bond
holders (or creditors) over equity investors (or debtors).
Qing Wang, (852)2848-5220, [email protected]
2
The Four-Seasons Framework: Where Did We Get It Wrong Or Right for 2008?
China’s Policy Stance: Muddling Through
Autumn:
Summer:
Imported Soft Landing
Overheating
No
Global
Synchronized
Downturn
Global
Synchronized
Downturn
Winter:
Spring:
Outright
Hard Landing
Policy-induced Soft Landing
China’s Policy Stance: Aggressive Tightening
Source: Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
3
Made in the US: A Six-month Journey From Overheating To Hard Landing
Crisis
Management
by US Fed
Liquidity Injection
Super-loose Monetary Policy
Sub-prime
Crisis
Sharp Rise
in
Commodit
y Prices
Low Interest Rates
Weak US Dollar
Still Robust
Real Economic
Activity
Lehman’s Bankruptcy
Disruption of
Trade Financing
Inflationary Pressures
on the RoW
Slowdown in Real
Economic Activity
Macroeconomic
Policy Tightening by
the RoW
Inventory Buildup
Intensification
of Financial
Deleveraging
Sharp Fall
in
Commodity
prices
De-stocking of
Industrial Materials
Collapse
in
Industrial Production
Disinflation
Deflation
Qing Wang, (852)2848-5220, [email protected]
4
Unscathed by the Global Financial Crisis…
6000
Leading EM Countries 5Y US$ CDS
(Dec 5, 2008)
5000
 High FX Reserves (US$1.9 trillion)
 Low Government Debt (25% of GDP)
4000
 Low Household Debt (11% of GDP)
 Low External Debt (11% of GDP)
3000
 Low Loan-deposits Ratio (65%)
2000
1000
Argentina
Pakistan
Ukraine
Venezuela
Russia
Indonesia
Romania
Vietnam
Bulgaria
Philippines
Turkey
*India
South Africa
Hungary
Korea
Colombia
Brazil
Peru
Thailand
Mexico
Malaysia
Egypt
Poland
Chile
China
Czech
Israel
Qatar
0
Source: Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
5
…Reflecting Balance Sheet Strength
120
120
Household Debt, % of GDP
Government Debt, % of GDP
100
100
80
80
60
60
40
40
20
20
US
Au
st
ra
lia
**
*
UK
UK
Th
ai
la
nd
In
di
a
-F
Y
Ph
ilip *
pi
ne
Si
s
ng
ap
or
e
US
Ho
ng
Ko
Au
ng
st
ra
lia
**
*
In
do
ne
sia
Ta
iw
an
Ch
in
a
Ko
re
a
M
al
ay
sia
Ph
ilip
pi
ne
s
In
do
ne
sia
Ch
in
In
a
di
a
-F
Y*
Th
ai
l
Ho an d
ng
Ko
ng
Ta
iw
an
M
al
ay
sia
Si
ng
ap
or
e*
*
Ko
re
a
0
0
160
120
Mortgage Debt, % of GDP
External Debt, % of GDP
140
100
120
80
100
80
60
60
40
40
20
20
0
0
es
a
di
na and rea ysi a wan ong ore
n
e
hi
l
p
In
pi
K
n
C
Ko ala Tai
ai
p
o
ga
d
ili
ng
Th
M
in
n
h
o
I
S
P
H
*indicates data for India as of Financial Year 2008;
** data as of Mar-07; ***data as of Jun-07
sia
*
UK ia**
l
rt a
s
Au
US
a
in
Ch
ia
nd
Y*
-F
I
ia
es
an
nd
sia
es
in
la
iw
ay
ai
pp
on
al
i
Ta
h
l
d
i
T
M
In
Ph
a
re
Ko
US
*
**
lia
ra
st
u
A
UK
Sources: CEIC, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
6
Imported Soft Landing?
50
50
(%YoY, 3mma)
15
60
Exports (%yoy, 3mma)
50
45
OECD leading indicator (%yoy, 6m lead, rhs)
10
40
Exports: Ordinary Trade (3-quarter lead)
Fixed Assets Investment in Mft sector
45
40
40
5
30
35
35
30
30
25
25
20
20
15
15
10
10
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
May-06
-10
0
Jan-06
10
Sep-05
-5
May-05
20
Jan-05
0
Source: CEIC, Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
7
Homemade Hard Landing?
60
%YoY
50
50
40
40
30
30
20
20
Nov-08
Jul-08
Sep-08
Mar-08
May-08
Jan09
Jan-08
Jul08
Nov-07
Jan08
Sep-07
Jul07
Jul-07
Jan07
Mar-07
Jul06
May-07
Jan06
Jan-07
Jul05
Jul-05
Jan05
Sep-05
Jul04
May-05
Jan04
Jan-05
-30
Mar-05
-20
Floor Space Sold (%YoY, 3mma)
Nov-06
Floor Space Started (%YoY, 3mma)
-20
Jul-06
-10
Sep-06
Steel production
Non-real estate investment
Real Estate Investment
Electricity usage
-10
May-06
0
Jan-06
0
Mar-06
10
Nov-05
10
Source: CEIC, Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
8
A Perfect Storm for Deflation: Demand Shocks
24
10
M2 (%YoY, 10-month lead)
22
CPI (%YoY, rhs)
20
60
11
Exports (%YoY)
8
6
50
CPI (%YoY, rhs)
40
9
7
30
18
5
4
20
3
16
2
10
0
0
1
14
-1
-10
12
-2
-20
10
-4
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Aftermath of
the Asian crisis
Aftermath of the
internet bubble
-30
-3
-5
97 98 99 00 01 02 03 04 05 06 07 08
Source: CEIC, Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
9
A Perfect Storm for Deflation: Supply Shocks
12
550
PPI
%YoY
10
KR-CRB Spot Commodity
Index
8
450
4
Non-food CPI (rhs)
3
6
2
4
350
1
2
0
0
-2
250
-1
-4
-6
40
CRB Index: Raw Industrials
(%YoY, 6-month lead, rhs)
40
CPI - Food: Grain
CPI - Food: Meat
30
Jan-09
Apr-08
Jul-07
Oct-06
Jan-06
Apr-05
Jul-04
Oct-03
Jan-03
Apr-02
Jul-01
Oct-00
Jan-00
Apr-99
Jul-98
Oct-97
Jan-97
Jul-08
-10
Jan-08
-40
Jul-07
-12
Jan-07
-30
Jul-06
-9
0
Jan-06
-20
Jul-05
-6
10
Jan-05
-10
Jul-04
-3
20
Jan-04
0
Jul-03
0
Jan-03
10
Jul-02
3
30
Jan-02
20
Jul-01
6
Jan-01
9
50
%YoY
50
PPI (%yoy)
12
8/10/2009
9/26/2008
5/9/2006
7/20/2007
3/2/2005
10/8/2002
12/17/2003
7/30/2001
5/19/2000
3/12/1999
12/31/1997
8/17/1995
10/23/1996
4/5/1993
6/10/1994
1/28/1992
11/19/1990
7/7/1988
9/13/1989
4/30/1987
2/21/1986
12/13/1984
8/2/1982
10/7/1983
5/26/1981
15
-2
Oct-08
Apr-08
Oct-07
Apr-07
Oct-06
Apr-06
Oct-05
Apr-05
Oct-04
Apr-04
Oct-03
Apr-03
Oct-02
Apr-02
Oct-01
Apr-01
Oct-00
Apr-00
Oct-99
Apr-99
Oct-98
Apr-98
Oct-97
Apr-97
Oct-96
150
Source: CEIC, Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
10
Fiscal Policy Response Is the Key
100
50
100
150
Exports (%yoy, 3mma)
Exports (%yoy, 3mma)
FAI growth (%YoY, 3mma, rhs)
80
Govt. Capex (%yoy, 3mma, rhs)
40
80
Internet bubble burst
Internet bubble burst
110
Asia financial crsis
60
130
Asia financial crisis
30
90
60
70
40
20
50
40
30
20
10
20
10
-10
0
0
0
-30
Jul-06
Oct-05
Jan-05
Apr-04
Jul-03
Oct-02
Jan-02
Apr-01
Jul-00
Oct-99
Jan-99
Apr-98
Jul-97
-50
Oct-96
-20
Jan-96
-10
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
-20
Source: CEIC, Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
11
Macroeconomic Forecasts
2007
GDP
Consumption
Investment
Mining
Manufacturing
Real estate
Infrastructure
Other
Net exports *
11.9
8.8
11.1
12.8
17.0
18.5
6.8
4.5
2.4
2008E
2009E
2010E
14
Growth rate (%)
9.4
7.5
8.5
7.8
10.3
8.7
13.0
12.0
14.0
5.0
13.5
-6.0
9.2
38.0
4.0
1.5
0.9
0.0
8.5
8.2
9.5
12.0
10.0
10.0
15.0
4.0
0.5
10
Exports (US$ terms)
Imports (US$ terms)
Trade Balance, US$ bn
% of GDP
CPI
13
10
Proj.
12
8
11
6
10
4
9
2
8
0
13
25.6
19.0
3.0
9.0
20.7
27.0
4.2
12.0
262
236
228
211
8.0
5.6
4.7
3.7
4.8
6.5
1.5
3.0
Contribution to growth (percentage points)
11.6
9.2
7.5
8.5
4.3
4.2
3.8
4.0
4.9
4.1
3.6
4.0
0.3
0.3
0.3
0.3
2.2
1.8
0.6
1.3
1.4
1.0
-0.5
0.8
0.5
0.5
3.0
1.2
0.5
0.5
0.2
0.5
2.4
0.9
0.0
0.5
9.5
12
9
11
8.5
8
7.5
7
10
9
8
6.5
7
6
5.5
6
5
5
1
G3 GDP
(YoY%, rhs)
7
-2
6
-4
2Q 10
1Q 10
4Q 09
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
2Q 08
1Q 08
4Q 07
3Q 07
2Q 07
1Q 07
4Q 06
3Q 06
2Q 06
1Q 06
GDP
Consumption
Investment
Mining
Manufacturing
Real estate
Infrastructure
Other
Net exports
* Contribution to growth
12
China GDP
(YoY%)
Source: CEIC, Bloomberg, Morgan Stanley Research.
E = Morgan Stanley Research estimates
Qing Wang, (852)2848-5220, [email protected]
12
Renminbi: The Last EM Currency Standing?
8.2
15%
98
Appreciation Against US dollar in 2008 (as of November)
USD/CNY
CNY NEER (Jul 22, 2005 =100, rhs)
5%
7.8
102
-5%
106
-15%
7.4
110
-25%
7.0
-35%
114
Appreciation
-45%
China
Hong Kong
118
Nov-08
Aug-08
May-08
Feb-08
Nov-07
Aug-07
May-07
Feb-07
Nov-06
Aug-06
May-06
15%
Feb-06
122
Nov-05
6.2
Aug-05
Thailand
Singapore
Argentina
Malaysia
Czech
Russia
Poland
Philippines
Hungary
Mexico
India
Indonesia
Brazil
Chile
Korea
6.6
NEER Appreciation in 2008 (as of November)
10%
5%
Decline of MSCI Indices Since Aug 2008
(as of Dec 8, 2008)
-70%
0%
-5%
-60%
-10%
-50%
-15%
-40%
-20%
-25%
-30%
-30%
-20%
China (A-share)
Japan
SP 500
Philippines
MSCI China
Malaysia
MSCI Europe
Mexico
Thailand
Chile
Taiwan
India
Singapore
Czech
Korea
Poland
Brazil
Indonesia
Hungary
Argentina
China
Hong Kong
Argentina
Czech
Taiwan
Thailand
Russia
Malaysia
Poland
Hungary
India
Philippines
Indonesia
Mexico
Brazil
Chile
Korea
Russia
-35%
Sources: BIS, CEIC, Bloomberg, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
13
Identify the Inflection Point: Indicators Warrant Close Monitoring
30
80
200
Sept.'08
ST FX Loans (US$bn)
Enterprise Deposits (%YoY)
70
180
Exports (US$bn)
Jul'08
25
Imports (US$bn)
60
160
140
50
20
120
40
100
15
30
80
20
60
10
60
50
Jan-09
May-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
Jan-05
May-05
Sep-04
May-04
Jan-04
Sep-03
20
May-03
Jul-08
0
Jan-09
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jan-05
Jul-04
Jul-03
Jan-04
Jan-03
Jul-02
Jul-01
Jan-02
Jul-00
Jan-01
Jul-99
Jan-00
40
28
%YoY
Jan-99
5
10
3.0
Loan growth
26
40
%YoY
%MoM (rhs)
24
30
22
20
20
10
18
0
16
2.5
2.0
1.5
14
-10
Floor space
Started
Sold (6-month lead)
10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
0.0
Jul-05
6
Jan-05
Jan09
Jul-04
Jul08
Jan-04
Jan08
Jul-03
Jul07
Jul-02
Jan07
Jan-03
Jul06
Jan-02
Jan06
Jul-01
Jul05
Jan-01
Jan05
Jul-00
Jul04
Jul-99
-40
Jan04
0.5
8
Jan-00
-30
1.0
12
Jan-99
-20
Source: CEIC, Morgan Stanley Research
Qing Wang, (852)2848-5220, [email protected]
14
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H4360P
Qing Wang, (852)2848-5220, [email protected]
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Hong Kong
Tel: +852 2848 5200
© 2008 Morgan Stanley
Qing Wang, (852)2848-5220, [email protected]
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