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See the Disclosure Appendix for the Analyst
Certification and Other Disclosures
Renminbi Outlook and Implications for Trade
Yiping Huang
Head of Asia Pacific Economic and Market Analysis
Phone: +852-25012735; Email: [email protected]
20 January 2006
Global
Forecasts for Key Assets
U.S.: Federal Funds
Treasuries (Period Average)
Euro Area: US$/€
Euro Repo Rate
10-Yr Bunds (Period Average)
Japan: ¥/US$
Yen Call Money
10-Yr JGB (Period Average)
11-Jan-07
5.25%
4.68
1.30
3.50%
4.02
120
0.27%
1.75
1Q 07E
5.25%
4.60
1.27
3.50%
3.75
118
0.50%
1.90
2Q 07E
5.00%
4.65
1.26
3.50%
3.80
115
0.75%
2.00
3Q 07E
5.00%
4.85
1.25
3.50%
3.85
110
0.75%
2.10
4Q 07E
5.00%
4.90
1.24
3.75%
4.00
108
1.00%
2.10
Sources: National sources and Citigroup estimates
2
Asia
Foreign Reserves and Reserve Diversification
Shares of US Dollar in Central Banks’ Total Foreign
Exchange Reserves (%)
Foreign Exchange Reserves as Shares of
GDP for Asian Economics, 2006 (%)
120
%
80
98.8
100
80
75
73.2
69.7
60
% of Total Allocated Reserves
70
54.1
65
40
36.7
30.3
26.0
18.6
20
60
18.5
11.3
55
1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06
0
CN
HK
IN
ID
KR
MY
PH
SG
TW
TH
Note: We use reserve data at the end of October 2006 and 2006 GDP
estimates
Source: CEIC Data Company Limited, Citigroup Estimates
Industrial
Developing
Source: IMF, Composition of Foreign Exchange Reserves
3
Asia
Real Effective Exchange Rates
Deviation from LT Average Real TradeWeighted FX Rate in 2006(%)
Changes in Real Effective Exchange Rates: USD,
EUR, RMB and Emerging Asian Currencies
20
12
%
10.0
15
13.1
9
10
6
4.8
4.7
5
0.7
0
-0.7
-5
3.0
3
0.2
-1.0
-3.6
2.0
1.1
0
-5.0
-1.4
-2.0-1.9
-3
-10
1.9
1.5
-15
-3.1
-4.0
-4.1
-12.8
-1.8
-2.8
-10.2
-11.8
-1.1-1.4
-4.8
-6
-17.8
-20
-9
-9.9
-25
-24.6
-27.2
-30
-12
2003
KR
IN
EU HK US SG PH TW JP
TH
2004
2005
2006
2007F
ID MY CH
USD
Note: For implied real exchange rate appreciation, a higher index shows
appreciation
Source: Citigroup estimates.
EUR
RMB
Asia Currencies
Source: Citigroup estimates.
4
Asia
Asian Currencies Are Likely to Become More Flexible
Range in December
Versus US$
Euro EUR
Japan YEN
China RMB
Hong Kong HK$
India INR
Indonesia IDR
Malaysia MYR
Philippines PHP
Singapore SGD
South Korea KRW
Taiwan TWD
Thailand THB
Vietnam VND
Source: Citigroup estimates.
1.3067-1.3336
114.92-119.16
7.8089-7.8331
7.7685-7.7797
44.17-45.03
8996-9170
3.531-3.597
49.05-51.5
1.5339-1.5482
915.5-931.2
32.29-32.74
35.195-36.525
16043-16081
3 Months
Forecast Forward
1.2600
118.00
7.6600
7.7700
44.45
9050
3.5100
49.850
1.5250
935.0
32.700
36.000
16030
1.3002
119.11
7.6870
7.7813
44.39
9170
3.4865
48.680
1.5296
935.1
32.446
36.028
16180
6 Months
Forecast Forward
1.2600
115.00
7.5000
7.7600
43.75
9200
3.4800
49.000
1.5100
920.0
31.800
35.700
16020
1.3046
117.72
7.5995
7.7582
44.69
9247
3.4715
48.700
1.5224
933.4
32.156
35.980
16329
12 Months
Forecast Forward
1.2400
108.00
7.3500
7.7570
43.00
9300
3.4500
48.000
1.4800
900.0
31.200
35.500
16000
2008
Forecast
1.3117
115.13
7.4265
7.7203
45.10
9397
3.4440
48.810
1.5084
930.3
31.599
35.875
16593
1.23
104
7.11
7.76
42
9366
3.46
48.38
1.44
900
31
35
16350
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Asia
Asia Leading 2nd Leg Dollar Weakness
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
CNY/USD
Real Effective Exchange Rate (2005=1)
HKD/USD
Real Effective Exchange Rate (2005=1)
INR/USD
Real Effective Exchange Rate (2005=1)
IDR/USD
Real Effective Exchange Rate (2005=1)
KRW/USD
Real Effective Exchange Rate (2005=1)
MYR/USD
Real Effective Exchange Rate (2005=1)
PHP/USD
Real Effective Exchange Rate (2005=1)
SGD/USD
Real Effective Exchange Rate (2005=1)
TWD/USD
Real Effective Exchange Rate (2005=1)
THB/USD
Real Effective Exchange Rate (2005=1)
2005
8.19
1.00
7.78
1.00
44.30
1.00
9,711
1.00
1,024
1.00
3.79
1.00
55.1
1.00
1.66
1.00
32.2
1.00
40.2
1.00
2006E
7.92
1.03
7.77
0.98
45.35
0.99
9,155
1.16
955
1.07
3.68
1.03
51.3
1.13
1.59
1.01
32.5
0.99
38.0
1.08
Note: For implied real exchange rate appreciation, a higher index shows appreciation
Source: Citigroup estimates.
2007E
7.55
1.05
7.76
0.94
43.20
1.04
9,203
1.23
920
1.07
3.57
1.04
49.2
1.19
1.51
1.02
31.7
0.97
36.0
1.13
2008E
7.11
1.11
7.76
0.91
42.00
1.08
9,366
1.22
900
1.07
3.46
1.06
48.4
1.21
1.44
1.03
30.6
0.97
35.0
1.13
2009E
6.75
1.18
7.76
0.88
41.50
1.09
9,467
1.23
890
1.06
3.35
1.07
47.4
1.23
1.37
1.05
30.0
0.96
33.5
1.15
2010E
6.48
1.22
7.75
0.87
41.00
1.11
9,350
1.28
880
1.05
3.25
1.08
46.4
1.24
1.32
1.06
29.4
0.96
31.5
1.19
2011E
6.22
1.27
7.75
0.88
40.50
1.14
9,450
1.31
860
1.06
3.15
1.11
45.5
1.26
1.28
1.07
28.5
0.97
30.5
1.22
6
China
Overdependence of Growth on Investment and Exports
Shares of gross fixed capital formation in GDP: China,
Malaysia, Thailand & Singapore, 1952-2005 (%)
50
%
Rising dependence on external markets
8
GDP
%
USD bn
250
7
40
200
6
5
30
150
4
20
100
3
2
10
50
1
0
1955
1960
1965
1970 1975 1980
China
Singapore
1985 1990 1995 2000
Thailand
Malaysia
0
2005
0
1998
1999
2000
2001
2002
2003
Current Account (% GDP, Left Axis)
Source: China National Statistics Bureau, CEIC Data Company Limited and Citigroup estimates.
2004
2005 2006F 2007F 2008F
Trade Balance (USD bn, Right Axis)
7
China
Balanced Trade Remains a Distant Goal
Trade Balance and Export/Import Growth
Percent
60
Change in the ratio of Exports from Individual Countries to
Global GDP (five-year intervals, percent of global GDP)
US$, bil.
25
45
Percent
1.0
Percent
1.0
China
Germany
Japan
Korea
20
0.8
0.8
15
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
30
10
15
5
0
-15
2000
0
-5
2001
2002
Trade balance (Right Axis)
2003
2004
Exports (Left Axis)
2005
2006
Imports (Left Axis)
Source: Citigroup estimates using data from CEIC Data Company.
-0.2
-0.2
1950-55 1955-60 1960-65 1965-70 1970-75 1975-80 1980-85 1985-90 1990-95 1995-00 2000-05
Source: Citigroup estimates using data from CEIC Data Company.
8
Model Simulation of 3% Renminbi Appreciation
Citigroup basecase scenario
GDP Growth (% yoy)
Total Consumption (% yoy)
Fixed Capital Investment (% yoy)
Exports (% yoy)
Imports (% yoy)
Trade Balance (US$ bn)
Current Account Balance (% GDP)
Foreign Exchange Reserves (US$ bn)
Fiscal Balance (% GDP)
Industrial Production (% yoy)
CPI (% yoy)
7.60
8.30
8.30
12.80
13.00
34.0
1.80
330.0
-2.80
11.60
0.50
Scenario
assuming 3%
Yuan
appreciation
7.24
8.26
8.06
12.16
13.2
31.4
1.6
326.5
-2.92
11.3
0.4
Difference
-0.36
-0.04
-0.24
-0.64
0.2
-2.6
-0.2
-3.5
-0.12
-0.3
-0.1
Source: Citigroup estimation using the Oxford Macroeconomic Model.
9
Currency Appreciation Accelerated Since September
Market expectation in the beginning
of the year and actual appreciation in
2006
%
4.5
4.18
4.0
Jan-99
7.7
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
30,000
25,000
7.8
3.5
3.24
20,000
7.9
3.0
15,000
2.46
2.5
8
10,000
2.0
8.1
5,000
1.38
1.5
8.2
0.92
1.0
0.5
Appreciation is mainly driven by surging
trade surplus
0.55
0
0.66
8.3
-5,000
8.4
-10,000
0.12
0.0
1 mo
3 mo
6 mo
Spot Forward
12 mo
CNY/USD
Trade Surplus
US$ mn
Source: CEIC Data Company Limited.
10
Currency Appreciation Has Limited Impact on Exports
US$ mn
Exports to the US took off After
China’s gained access to WTO
No evidence of profit squeeze yet
% YTD
7.6 60
20,000
18,000
7.7
16,000
7.8
14,000
7.9
12,000
10,000
8
8,000
8.1
6,000
40
30
20
8.2
4,000
8.3
2,000
0
Jan-99
50
8.4
Jan-00
Jan-01
Jan-02
Exports to the US
Jan-03
Jan-04
Jan-05
Imports from the US
CNY/USD
Jan-06
10
0
Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06
State-Owned Enterprises
Private Enterprises
Overall Industrial Profits
Source: CEIC Data Company Limited.
11
Trade Surplus Boosted Excess Liquidity Problem
The correlation between monthly
money growth and trade surplus was
as high as 0.289
Rmb bn
Greater China Exchange Rate Forecasts
2005
Rmb bn
900
250
800
200
700
2006F
2007F
2008F
2009F
2010F
2011F
6
28
6.5
29
7
30
7.5
31
8
32
8.5
33
150
600
500
100
400
50
300
200
0
100
-50
0
-100
Jan-04
Jul-04
Jan-05
Jul-05
M2 (left axis)
Jan-06
Trade Surplus
Jul-06
-100
CNY/USD
HKD/USD
NTD/USD (right axis)
Source: CEIC Data Company Limited, and Citigroup estimates.
12
Nominal CNY/USD vs. REER (CTERI)
Jan-99
0.9
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
1.1
0.95
1.05
1
1
1.05
0.95
1.1
0.9
Nominal CNY/USD
REER
Source: CEIC Data Company Limited, and Citigroup estimates.
13
China
Beginning of Faster Yuan Appreciation?
Expectation of appreciation in 12 months by the nondeliverable forward market
8
%
Accumulation of FX Reserves and Increases in Trade
Surplus and FDI
35
USD bn
30
6
25
4
20
2
15
0
10
-2
5
-4
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
0
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Net Increase in FX Reserves
Source: Reuters, Citigroup
Apr-06
Jul-06
Oct-06
Trade Surplus Plus FDI
Source: CEIC Data Company Limited and Citigroup estimates
14
Disclosure Appendix
ANALYST CERTIFICATION
I, Yiping Huang, economist and the author of this report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the
subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views in this report.
Other Disclosures
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
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as principal, securities recommended in this report. CGMI may have a position in securities or options of any issuer recommended in this report. An employee of CGMI may be a director of
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offered, or sold by CGMI : (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or other obligations of any insured depository institution (including Citibank);
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15