International | Nov 27 2013
– Chinese reforms a slow process
– Most see moderation in growth in 2014
– Hard landing fears again unfounded
– Credit squeeze nevertheless worrying
By Greg Peel
The recently held third plenum of the Chinese Communist Party Central Committee was seen initially as a bit of a fizzer by those expecting specific detail on planned reforms rather than vague statements. However, a follow-up article from the People’s Bank of China on deeper reforms did have the market looking towards faster liberalisation of the renminbi and Chinese interest rates. BA-Merrill Lynch nevertheless remains unconvinced.
The PBoC article contains little in the way of new information, Merrills contends, despite being a lot more informative about reform ideas and strategies. Nor was any timetable offered, nor even a hint about imminent policy changes. Merrills’ Asia strategy analysts caution against being too optimistic about the pace of Chinese reform.
Citi at least sees a better chance of gradual reforms going ahead in the wake of the third plenum. But experience has suggested reforms can come at an initial cost. Early in 2013 the market was comfortable to assume the pace of Chinese GDP growth would recover under the new regime but indeed the opposite was suddenly true due to the arguably clumsily handled clamp-down on shadow banking, the ultimate effect being a short-term credit squeeze which had the rest of the world in minor panic mode.
China has since recovered and the world has breathed easier once more, but as Beijing begins to implement the new third plenum reform agenda Citi expects a loss of output in the shorter term before those reforms realise their value over time.
Citi expects China’s 2013 GDP growth rate will come in at around 7.6%, but is forecasting a deceleration to 7.3% for 2014. In order to leave room for reforms, Beijing may set a target of 7.0% growth, Citi suggests.
Such a target would imply slower growth for better quality, Citi believes. Fixed asset investment growth may slow to 18% from 20% this year, given tighter credit rules, while consumption is likely to remain stable. A recovering global economy would help to reduce downside risk and there is upside to growth if Beijing instead settles on a 7.5% target. But this would make reforms more costly in the future, the analysts warn.
The September quarter saw a welcomed burst of GDP strength to take China’s year on year growth to 7.8% but Macquarie suspects a slowing pace in the December quarter will bring the 2013 rate down to 7.6%, in line with Citi’s forecast. Inflation should register 2.7%. In 2014, Macquarie is forecasting 7.5% growth and 3.5% inflation. The analysts also suggest Beijing will drop its target to 7.0%.
Macquarie sees moderation in December quarter growth continuing into the March quarter, at which point year on year growth could bottom out at 7.0%. The September quarter should again see a pick-up, the analysts suggest, on a new round of inventory restocking, a recovery in developed market economies, and a more expansionary policy stance. A drop to 7.0% will likely elicit the China “hard landing” calls yet again, warns Macquarie, but the analysts expect Beijing to once more muddle through.
While the market will welcome reforms aimed at aligning Chinese financial markets more closely with the West, such reforms also ease control away from Beijing and into market hands, Macquarie warns. The years ahead may thus be more turbulent.
The Merrills analysts, who are a little sceptical about reform enthusiasm as noted above, forecast a 7.7% growth rate for China by end-2013 falling to 7.6% in 2014. To summarise, Citi expects 2014 GDP growth of 7.3%, Macquarie 7.5% and Merrills 7.6%. Then there’s UBS.
UBS expects the key variables for Chinese growth in 2014 will continue to be exports, property development and, most importantly, the credit cycle. Oh, and “reforms, too, may have some impact”.
UBS expects G3 (US, Germany, Japan) growth to gain traction next year boosting China’s net export growth. Domestic demand should stay relatively stable. The analysts anticipate Beijing will lower its 2014 growth forecast from 2013’s 7.5% to somewhere between 7.0 and 7.5%. The PBoC will try to manage a “tight balance” of interbank liquidity conditions by keeping money market rates elevated but credit conditions relatively stable, UBS suggests.
UBS agrees 2013 growth will likely come in at 7.6%, but in contrast to those expecting a more moderate 2014, UBS is forecasting 7.8% growth.
Perhaps the hard landing “scare” will return faster than Macquarie anticipates. China’s short-term interest rate, Shibor, is once again on the rise, as is China’s ten-year bond yield. An unusual increase in tax collection and fiscal deposits, the PBoC’s liquidity tightening campaign and the government’s signals of tighter credit control all seem to be key factors behind Shibor’s jump, UBS contends. Higher bond yields are a result of a significant increase in new bond issuance and Chinese banks’ increasing appetite for higher yielding non-standard credit products rather than government or traditional corporate bonds.
UBS is nevertheless not concerned, suggesting these recent movements do not imply a more pronounced credit slowdown than the analysts are already forecasting in 2014. But it is clear, Citi warns, that the banks’ creation of “de-facto” interest rate liberalisation through such shadow banking investment is making monetary policy management more difficult.
Merrills warns that the last time Chinese ten-year bond yields rose suddenly, China’s stock markets fared rather poorly thereafter. Under “normal” circumstances, a rise in long bond yields coincides with a rising stock market given increased demand for credit implies a stronger economy. But this increase is due more to Beijing’s desire to slow down unbridled credit growth, especially in the shadow banking sector, irrespective of a fragile economic recovery.
Thus if GDP growth starts to disappoint, warns Merrills, we may see stock markets suffering selling pressure. Such policy tightening could impact more quickly than the reform program can offset, leading to higher insolvency risk in the Chinese corporate sector.
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