What to expect next year for China and Hong Kong?

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China Outlook: Growth momentum continues, but with rising fragilities
Hong Kong Outlook: Adapting to a changing environment amidst medium-term challenges

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What to expect next year for China and Hong Kong?

  1. 1. What to expect next year for China and Hong Kong? January 15, 2014 Alicia Garcia-Herrero Chief Economist Emerging Markets – BBVA Research
  2. 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. 3. Global Outlook Global GDP growth (%) • 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 Source: BBVA Research 6 5.2 5 4 4.0 3.6 3.3 2.8 4.0 2.9 3 2 1 0 -1 -0.4 -2 2008 2009 2010 2011 Advanced economies Global growth 2012 2013 (f) 2014 (f) 2015 (f) Emerging economies 3
  4. 4. A recovery with risks diminishing GDP growth (%) Source: BBVA Research and IMF 8 Current forecasts 7 6 5. 0 4. 8 5. 2 5 4 3. 3 3 Nevertheless, advanced economies are vulnerable to tighter financial conditions. In the eurozone, risks remain from AQR and wrangling over banking union 3. 6 2. 9 2. 8 2. 3 1 .6 2 1 .1 1 In emerging markets, vulnerability to a less favorable global liquidity outlook must still be monitored 0 -0. 6 -0. 4 -1 US E MU 201 4 201 3 201 2 201 4 201 3 201 2 201 4 201 3 201 2 201 4 201 3 201 2 -2 W orld Global recovery continues to on the back of advanced evonomies, with emerging economies now joinging. Upward bias to US projections. B B VA E AG LE s 4
  5. 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. 6. China’s recovers slowly • 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 Index % yoy 65 20 18 60 16 14 55 12 50 10 8 45 6 GDP growth (RHS) NBS PMI (LHS) Dec-13 Sep-13 Jun-13 Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 Dec-10 Sep-10 Jun-10 Mar-10 Dec-09 Sep-09 Jun-09 Mar-09 Dec-08 Sep-08 0 Jun-08 35 Mar-08 4 2 Dec-07 40 Industrial production (RHS) 6
  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 Inflation moderated on easing food prices … while PPI deflation remains Source CEIC and BBVA Research Source: CEIC and BBVA Research % % yoy 7 6 5 4 3 2 1 0 -1 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 -2 Non-food Food CPI Inflation 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 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 8 Producer Price Index Consumer Price Index 7
  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 % y/y Foreign reserve (LHS) Exports (RHS) Nov-13 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Nov-11 Feb-12 Aug-11 May-11 -60 Feb-11 0 Nov-10 -40 Aug-10 500 May-10 -20 Feb-10 1,000 Nov-09 0 Aug-09 1,500 May-09 20 Feb-09 2,000 Nov-08 40 Aug-08 2,500 Feb-08 60 May-08 3,000 Nov-07 80 Aug-07 3,500 May-07 100 Feb-07 4,000 Imports (RHS) 8
  9. 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… …leading to losing external competitiveness Source: Bloomberg and BBVA Research Source: BIS and BBVA Research USD/CNY Index 201 1 Jan = 1 00 1 20 6.45 Appreciation 6.40 115 6.35 6.30 110 6.25 6.20 1 05 6.15 1 00 6.10 6.05 Band widening USD/CNY spot Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Jan-12 Mar-12 Trading band Jan-1 1 Mar-1 1 May-1 1 Jul-1 1 S ep-1 1 Nov-1 1 Jan-1 2 Mar-1 2 May-1 2 Jul-1 2 S ep-1 2 Nov-1 2 Jan-1 3 Mar-1 3 May-1 3 Jul-1 3 S ep-1 3 Nov-1 3 95 6.00 REER NE E R 9
  10. 10. So why worry? Decelerating potential growth • 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 … as the contribution of labor and total factor productivity diminish Declining potential growth … Source: BBVA Research Source: BBVA Research 16% Projection 14% 12% Contribution by factors TFP 10% 1981-1990 8% Potential growth real growth Capital Labor 2.9% 5.5% 1.5% 9.8% 9.3% 1991-2000 2.4% 5.5% 0.7% 8.7% 10.5% 6% 2001-2010 3.8% 5.2% 0.3% 9.3% 10.2% 4% 2011-2020 2.8% 4.8% -0.2% 7.5% -- 2% 0% TFP Capital Real Growth 2020 2017 2014 2011 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 -2% Potential Growth Labor 10
  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 % yoy C ons umption Inves tment Net E xports 201 7 201 6 201 5 201 4 201 3 201 2 201 1 201 0 2009 2008 2007 15 13 11 9 7 5 3 1 -1 -3 -5 GDP growth 11
  12. 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 … and current account surplus has narrowed Source: CEIC and BBVA Research as % of GDP % 12 50 10 45 8 40 6 35 4 30 2 Investment 2013 Q3 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2000 2001 Private Consumption 2000 0 25 12
  13. 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 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 % of GDP 80 70 60 50 40 30 20 10 0 2010 2012 est Local Government Financing Vehicle Debt Local Government Agency Debt Bank Restructing Cost Central Government Debt Total debt 20131H est 13
  14. 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 …leading to an increase in the size of the shadow banking sector in the economy Shadow banking activities have risen… Source: Wind, CEIC, PBoC and BBVA Research estimates Source: PBoC and BBVA Research RMB trn % 40 60 35 30 50 25 40 20 15 30 10 20 0 Trust Company products Bank acceptance (liability side) 2012 2013 est 10 2011 WMPs Entrust loans (liability side) Private lending (liability side) 2012 2011 2010 0 2010 5 14 GDP Bank asset
  15. 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 300 250 200 150 100 50 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 0 Corporate Hous ehold 15
  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 Is the recent rise in China’s housing prices reminiscent of international bubbles? Source: CEIC and BBVA Research Source: NBS and BBVA Research % yoy % yoy 25 200 300 20 160 275 15 120 250 10 80 225 5 40 200 0 0 -40 -10 -80 -15 -120 -20 -160 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 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 -5 Overall Shanghai Trading Value (RHS) Beijing Shenzhen 1 75 1 50 1 25 1 00 75 50 0 8 1 6 24 32 40 48 56 64 72 80 88 96 period T S pain 1 997=1 00 US 1 997=1 00 China 2000=1 00 Japan 1 976=1 00 16
  17. 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. 18. Hong Kong’s GDP growth slowly picking up • 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 Growth momentum picked up modestly Source: CEIC and BBVA Research % 7 6 5 4 3 2 1 0 -1 Consumption Investment Net Exports 2014 2013 2012 2011 2010 -2 GDP growth 18
  19. 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 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 % Inflation remains on the high side Source: CEIC and BBVA Research 10 8 6 4 2 0 CPI: Food CPI: Non-Food Nov-13 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 May-11 Feb-11 Nov-10 Aug-10 May-10 Feb-10 -2 Headline CPI 19
  20. 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 30HKD/hour from 28HKD/hour as introduced in 2011, still below the market level The unemployment rate remains low and stable Distribution of job vacancies by sector Source: CEIC and BBVA Research (2013 Q3) Source: Census & Statistic Department and BBVA Research Index: 1992 Sep = 100 % 13.5% 8 130 7 125 24.7% 4.9% 7.5% 6 5 120 4 115 3 2 110 1 Real Wage Index Unemployment Rate sa (RHS) Sep-13 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 Sep-06 Sep-05 0 Sep-04 105 11.2% 19.9% 18.3% Import or Export, Wholesale & Retail Trades Social & Personal Services Accommodation & Food Services Professional & Business Services Financing & Insurance Real Estate Others 20
  21. 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=100 % of household income 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 120 110 100 90 80 70 60 50 40 30 20 10 1996 260 240 220 200 180 160 140 120 100 80 60 40 Overall residential Property price index (LHS) Residential property price index for luxury housing (LHS) Private household affordability ratio (RHS) 21
  22. 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 Mortgage lending has eased Credit growth remains fast Source: CEIC and BBVA Research HKD loan-to-deposit ratio (RHS) HKD loan (LHS) HKD Deposit (LHS) 10 Total Loans Loan for other domestic use Loan for use outside HK Outstanding Residential mortgage Nov-13 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Feb-12 0 Nov-11 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 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 2200 20 Aug-11 2700 30 May-11 3200 40 Feb-11 3700 50 Nov-10 4200 60 Aug-10 90 88 86 84 82 80 78 76 74 72 70 68 4700 % y/y May-10 % HKD bn Feb-10 Source: CEIC and BBVA Research 22
  23. 23. Medium-term challenges in Hong Kong 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 % 60 50 40 30 20 10 Taiwan Indonesia Japan UK Korea Philippines US China Singapore Mexico Brazil Thailand 0 Hong Kong • • • • • • 23
  24. 24. Thank you for your attention! Questions welcome What to expect next year for China and Hong Kong? Alicia Garcia-Herrero alicia.garcia-herrero@bbva.com.hk
  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 25
  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 26

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