Download economic insight GREATER CHINA Quarterly briefing Q1 2013 china Flies high aBoVe gloBal

economic Insight
Greater China
Quarterly briefing Q1 2013
China flies high above global
economic turbulence
Welcome to ICAEW’s Economic Insight: Greater China, a
quarterly forecast for the region prepared specifically
for the finance profession. Produced by Cebr, ICAEW’s
partner and acknowledged experts in global economic
forecasting, it provides a unique perspective on the
prospects for China over the coming years. In addition
to mainland China, we also focus on the Hong Kong and
Macau Special Administrative Regions.
A hard landing has been avoided thanks to fiscal and
monetary thrust. In fact, the economy is expected to
gain altitude rather than landing on its flatter growth
trajectory. In other words, stimulus measures have been
successful and both China and, by extension, the world
economy have avoided a slump at a sensitive time for
global growth.
Investment is the key policy tool for boosting growth
and it has been deployed successfully in the last quarter
of 2012. Inland provinces are receiving a greater boost
than coastal areas and lower capital stock levels mean
that they can make better use of these resources,
investing profitably rather than building white elephants
or ghost towns. From the consumer side, a general
increase in remuneration and a planned rise in the
minimum wage at the lower end of the pay scale should
further support consumer spending, so far a reliable and
stable source of new domestic demand.
Abroad, things are looking less rosy. The eurozone
has been in recession since the start of last year and
Japan has announced a new monetary policy target
and a public spending boost to stave off a prolonged
recession. Even the US suffered a marginal growth
decline in Q4. A general drop in eurozone periphery
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bond yields and rising stock markets show that financial
markets have taken disappointing OECD GDP figures
in their stride as they anticipate a turning point in
economic prospects. Though this looks far from assured,
China’s trade partners already don’t seem in such bad
shape. The next section explores exports, before we
move on to the impact of trade on the Chinese transport
industry.
Figure 2: Export shares by countries and regions, %
40
35
30
25
20
15
10
Asian integration drives regional
prosperity
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Growth expectations were disappointing in most of the
world over the course of 2012. Chinese exports still rose
by about $150bn, an increase as large as Turkey’s total
foreign sales. But apart from the 2009 financial crisis
drop, the 7.9% increase over 2011 was the weakest since
2001. Figure 1 shows the sources of this increase. The
only fall was recorded for the recession-hit EU, which
imported $22bn less, while sales to Japan stayed largely
flat. NAFTA, the free trade zone comprising the US,
Canada and Mexico, recorded a $34bn rise, mainly due
to US purchases. But the big rise in exports, $99bn, was
to Asia (excluding Japan).
Figure 1: Change in exports, 2012, US$bn
100
80
60
40
20
0
-20
-40
Asia
ex. Japan
NAFTA
Africa
LatAM
ex. Mexico
Rest of
world
Middle
East
Japan
EU
Source: General Administration of Customs of China, IMF
The growth of trade with Asia led to a rise in the
region’s export share from 35% to 37% over 2012. This
proportion has been remarkably stable since 2000, as
Figure 2 shows. Surging consumption in ASEAN, the
emergence of India as an economic superpower, and
resource wealth in central Asia are likely to further boost
this share in coming years. Latin America, Africa and the
Middle East are also playing an increasingly important
role as markets for China. For some time the trade
relationship will mainly be characterised by raw materials
flowing to China and manufactured goods going the
other way.
The rise of Asia, Africa and Latin America has meant that
rich countries are becoming less crucial for China. The
EU, Japan and NAFTA used to account for the majority
of Chinese exports. This share has fallen from 17% in
2000 to 7% in 2012, with a downwards tendency. The
loss of importance of Japan is especially striking. Still
the second-most important market behind the US at
the turn of the millennium, it now only plays a relatively
small role. Trade with emerging markets is displacing the
former stalwarts of the global economy. One side-effect
of a multi-polar world is the growing importance of
currencies other than the dollar, pound, euro and yen.
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Rest of the World
Asia ex. Japan
Japan
EU
NAFTA
Source: General Administration of Customs of China, IMF
Renminbi rising
China sped past Japan and Germany in terms of national
output, but its currency is only starting to feature as
an important global currency. The main reason is the
closed capital account in China that limits the ability
of foreigners to use the renminbi for investment
in mainland securities. The opening of renminbidenominated bank accounts for retail customers, which
saw strong growth in Hong Kong but are also available
in other countries, was due to the expectation of further
exchange rate appreciation against the dollar that would
have compensated savers for the low interest rates
offered. The shrinking of China’s trade surplus has put a
stop to the yuan’s rise though, making it less attractive
to park cash in the currency.
That leaves the purchase of goods and services as the
main use of China’s currency for outsiders. In this area, it
has quickly been gaining ground as Figure 3 illustrates.
Starting from nearly nothing in early 2010, by Q2
2012 the volume of trade conducted in yuan rose to
CNY671bn over three months. A slowdown was evident
between Q2 and Q4 2011, but that is likely to have been
a temporary setback. Of course, Chinese exports are
rising overall so that part of the renminbi settlement
growth could be attributed to that increase. However,
Figure 3 shows that the use of renminbi has grown faster
than trade in general as the share of trades settled in the
currency has gone up dramatically. From a negligible
0.4% in early 2010, this had risen to 10.8% by the
second half of last year.
The flipside of the figures presented here is that 89.2%
of trade is still conducted in other currencies. To
achieve its objective of promoting the renminbi as an
international investors’ currency, much more needs
to be done. An opening of Chinese capital markets,
already happening at a cautious pace, will increasingly
result in the creation of products that make the yuan an
attractive investment choice. However, given the slow
pace of liberalisation, the renminbi will be unable to
catch up with currencies such as the yen over the next
five years.
economic insight – Gre ater Chin a
Q1 2 013
Figure 3: Trade settlement in renminbi
12.0
800
10.5
700
9.0
600
7.5
500
6.0
400
4.5
300
3.0
200
1.5
100
0
0
Q1
Q2
Q3
2010
Q4
Q1
Q2
Q3
Q4
2011
Share of trade
Q1
Q2
2012
Billion CNY
Source: People’s Bank of China, General Administration of Customs of China, Macrobond
Transport volumes overtake economic
growth
Rising trade is of great financial importance, but its
physical aspect is equally important. National output
nearly tripled between 2000 and 2012. That astonishing
feat has been accompanied by a huge increase in the
volume of goods transported around the country.
Shown in Figure 4, we can see that the tonnage of goods
has gone up by even more than GDP, namely 240%
compared with 197% for output. To restate this, over
three times as much material is being transported around
China compared with the start of the 2000s. Note that a
given item might be transported by more than one mode
of transport, resulting in some double counting.
The modes of transport that have allowed this boom in
transportation give a clue to the make-up of the goods
transported. For one, air freight remains a marginal part
in terms of volume, contributing just 5m tons to the 47bn
total. The bulk is transported by road, making up 68% of
the volume. China’s ports are the second-biggest mode of
transport, shipping 6bn tons. Railways and canals are also very
important, making up 8% and 10% of the total respectively.
Since 2000, there have been some shifts in the transport
shares, even though the overall picture is relatively
unchanged. Most notably, the mode share of ports has
risen by five percentage points over the period. Foreign
trade accounts for a fairly steady 41% of this, rising at the
same rate as domestic sea shipping. Canal transport has
risen slightly, gaining one percentage point. The rise in
waterborne transport suggests that bulk goods are taking
up a rising part of transport volumes because it is slow
but cheap.
Figure 4: Transport of goods, million tons
50,000
45,000
40,000
35,000
Canal
30,000
25,000
Road
20,000
Port
15,000
10,000
Air
5,000
0
Rail
2000
2012
Source: National Bureau of Statistics of China
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The value of each ton offers an additional perspective.
A crude calculation of dividing the volume of transport
by the value of foreign and domestic trade shows that
the value per ton is actually quite low. In 2012 it stood at
CNY1,116 per ton, probably lowered by double counting
of items going from, say, ships to trucks. Rather than the
level, it’s more instructive to consider the changes over
time. Data is available between 2004 and 2011, displayed
in Figure 5.
After a gradual increase that saw the value per ton rise
by about 44% between 2004 and 2008, a sudden drop
occurred during the financial crisis. Since then we can
again see a gradual increase, though the 2009 level has
not yet been reached again, despite inflation chipping
away at the yuan’s value. The interpretation is that
external trade slumped during the financial crisis, but this
was compensated by massive domestic fiscal stimulus
and loose credit conditions that resulted in heavy capital
investment. To build all the fixed assets, a large increase in
raw materials such as coal and iron ore was needed. These
have a low value per ton and depressed the value per ton.
Looking ahead, a fast rise in the value of goods per ton
is likely due to the rebalancing of China’s economy from
investment to consumption. Investment in infrastructure
and buildings is likely to grow less rapidly, implying a
lower share of raw materials in overall trade. Secondly,
Chinese consumers are getting richer, buying both a
bigger number of, and more expensive, products. Lastly,
China’s move up the industrial value chain eg, from
making socks to iPods, means that the value of exports is
rising fast.
Figure 5: Value of transported goods, CNY per ton
1200
1050
900
750
600
450
300
150
0
2004
2005
2006
2007
2008
2009
2010
2011
Source: National Bureau of Statistics of China
People are travelling more and more
A similar analysis of passenger transport reveals that
people’s habits have changed alongside the evolving
economy. The number of kilometres travelled has gone up
by a similar amount to that of goods volumes as it nearly
tripled between 2000 and 2012 (see Figure 6). That is
more remarkable than the volume of goods transported
because the number of people in China has gone up by
only 7% over the period (whereas the economy tripled,
roughly in line with trade).
Economic growth has thus prompted much more travel
per person. In 2000, people travelled an average 923
kilometres, last year that had risen to 2,468 kilometres.
That increase can partly be explained by more business
travel, but it also serves as evidence of increasing mobility
in a time of growing prosperity. Looking at modes of
economic insight – Gre ater Chin a
Q1 2 013
transport, 55% of distance travelled is on the road, a share
unchanged since 2000. Boats account for a negligible and
declining part of the passenger traffic.
Interestingly, trains are taking up a larger share of
passenger transport now compared with 2000 – from 9%
to 15% – whereas travel by plane, which still makes up
30%, has lost six percentage points in market share. The
unprecedented investment in China’s highs-speed railways
will see the country construct more lines than currently
exist anywhere else. Despite its size, China may thus be
one of the few countries that see railways becoming a
more important transport choice over the coming years.
Figure 6: Passenger travel, million kilometres
4
3.5
3
2.5
2
Road
1.5
Air
1
Rail
0.5
Canal
0
2000
2012
Source: National Bureau of Statistics of China
Flatter growth trajectory ahead
The expansion in the mainland’s economic activity, shown
in tangible form by the growth of passenger and goods
transport, continues relentlessly. The development of the
world’s most populous nations has had profound effects
on the region. Looking at the constituents of the People’s
Republic, we now turn to the economic prospects of
Hong Kong, Macau and the mainland in more detail.
A smooth leadership transition and the success of fiscal
and monetary stimulus have calmed investors’ nerves.
However, it remains to be seen whether there is sufficient
momentum in the private sector to keep expanding once
government-mandated support dries up. Rising wages
are putting pressure on corporate profits, a development
spurred by the raising of China’s minimum wage.
Although healthy for the investment-heavy economy, it
means that companies may soon choose to invest less.
Therefore it’s likely that the current growth acceleration
will only be temporary and that the economy of mainland
China will slow in the second half of the year. Overall, an
output expansion of 7.9% is expected for 2013.
A complete phasing out of stimulus measures is unlikely if
the economy cools, but unless there is a sharp downturn,
government spending should only expand moderately
next year. Balancing the deceleration of private sector
investment, global trade should pick up next year and
lead to a rise in exports that supports growth of 7.4% in
2014. Further ahead, a shrinking working age population,
rising inflation that will require tighter monetary policy
and a deteriorating trade balance should conspire to push
growth prospects down. In this light, 2015 promises a
further fall in the annual growth rate to about 7.1%.
Even though its large neighbour is slowing down, the
outlook for Hong Kong remains largely unchanged
as even a lower growth rate will still see fantastic rises
in mainland output, especially in the interior of the
country. Hong Kong will continue to benefit, providing
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logistics, know-how and business and financial services.
One drawback is that the special administrative region is
becoming a victim of its own success in some areas. That
is most evident in the property market where prices have
shot up 115% since a financial crisis trough in December
2008. As in first-tier mainland cities, this is increasingly
putting property ownership beyond many citizens, with
political tensions likely to increase. The associated rise
in rents of 62% since March 2009 is a more immediate
concern, possibly pushing up inflation amid near-full
employment.
Given these concerns, stagnant government spending and
falling net exports, growth in 2013 of only about 2.8%
is expected. 2014 should see a pick-up in exports and
associated industries as well as a larger rise in consumer
spending. For the year as a whole an increase in GDP
growth to 4.0% is forecast. Combined with a slowing
of the mainland, the constraints on the labour force and
living space already evident are projected to raise inflation
and keep a lid on growth in coming years. For 2015,
growth of 3.7% is expected.
Macau faces similar constraints. The region will need
significant immigration to keep up its momentum,
although for the next years heavy investment in the
gaming and tourism industry are expected to ensure a
strong performance, albeit a bit less so than during recent
years. For 2013, investment is expected to drive growth
of 12.4%. A slowing of investment may be on the cards
though, as falling profits and a sterner mood of the new
administration may weigh on gaming tourism and reduce
the incentive to build new capacity. As a result, growth
next year of 10.2% is forecast. 2015 is projected to see
another deceleration to about 9.5%, though this still
represents remarkable growth. A major risk is that Macau
remains at the mercy of Chinese travel regulations, with
an adverse change potentially knocking down output.
Figure 7: Greater China GDP growth forecasts
%
14
12
10
8
6
4
2
0
Mainland
Hong Kong
2013
2014
Macau
2015
Source: Cebr
Souring loans may come to haunt China’s
banking system
It may be less eye-catching than the growth performance
of the past three decades, but Greater China is expected
to do very well by an absolute standard. In fact, the mere
ability to keep up steady growth would be an extraordinary
achievement that, reliant on further economic and
institutional reform. As countries industrialise and the
structure of the economy changes, that change requires
new supporting institutions including regulation, capital
markets and the education system.
economic insight – Gre ater Chin a
Q1 2 013
It is a well-worn argument that China over-invests. There
is a strong case for this even though the capital stock is
still low in many regions and especially in the interior ones
that are seeing the highest growth rates. Rising output
and urbanisation suggest that much of the infrastructure,
buildings and machines will ultimately be put to good
use. If China keeps growing it can deal with some amount
of wasteful investment.
Figure 8: Non-performing loans
A more immediate problem is that investment is mainly
financed by bank loans. Those loans need to be paid back
from cash flows generated by the investments. Whether a
project is a bit premature or generally inefficient doesn’t
matter in the short term, the loan still becomes ‘nonperforming’. Banks set aside capital to cover for bad
loans, but if those rise above the expected level then the
bank needs to allocate more funds to cover the hole in its
balance sheet. It can do this by either calling in loans or
reducing lending, resulting in credit constraints for new
investment. In other words, uneconomical investment
in the past can cause a drop in future investment via the
banking system.
-20
Figure 8 suggests that China may be entering a period
where this becomes a problem. Loan losses are increasing
compared with a year ago even though their share of total
loans has declined and remains exceptionally low. In 2005
and 2008, the central government reacted to mounting
loan losses by buying bad debt from banks via special
funds, resulting in a drop in the share of non-performing
loans in total lending.
40
30
20
10
0
-10
-30
-40
2005
2006
2007
2008
CNY value, annual growth rate
2009
2010
2011
2012
Share of total loans
Source: China Banking Regulatory Commission
That way the cost of bad lending is socialised, a
necessary step given that banks’ lending decisions follow
government guidelines. Reports of large-scale roll-over
of local government debt stemming from financial crisis
spending – many loans have a maturity of about three
years – suggest that the last round of stimulus hasn’t been
digested even as the current one is taking place. The rise
in bad loans is a risk to the health of China’s economy.
The government may have to step in soon to avert a
credit crunch.
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economic insight – Gre ater Chin a
Q1 2 013
For enquiries or additional information, please contact:
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© ICAEW 2013 MKTPLN12087 02/13