Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
China: Fine-tuning (Chris Leung, chrisleung@dbs.com, extracted from “Economics – Markets – Strategy, 4Q09” dated
17 September 2009)
• The availability of new credit for the remainder of
the year will probably equate to around one-third of
the CNY7.3trn made in the first half of 2009.
Growth should remain intact as new loans in 1H09
were equivalent to 25% of GDP. It will take time for
this to filter into the economy. We have upgraded
our GDP forecast for 2009 and 2010 to 8% and 9%
• Heavy reliance on credit expansion to drive fixed
asset investment, and hence, GDP growth has
yielded almost instantaneous results. The worry is
that this has created overcapacity. Fine-tuning the
pace and intensity of new credit creation should be
expected
• Such a move should not be read as a prelude to a
full-fledged tightening because overcapacity also
reflects weak external demand. Although the US
economy is on the mend, policymakers will want to
see a stronger export recovery before making
significant policy changes
• Retail sales show widening asymmetries amongst
provinces. GDP growth of inner provinces is clearly
higher than in coastal provinces due to less exports
dependence
• Near-term monetary tightening seems unlikely.
Higher rates could jeopardize long-term fiscal
projects. We do not expect increases in interest
rates or in the reserve requirement ratio for the
remainder of the year.
• The CNY should remain stable and trade in a tight
range in 4Q09
Credit growth deceleration is unlikely to derail growth
momentum
Seeing that rampant lending growth has helped restore market
confidence and reinstate stability in the region, it is not difficult
to understand why investors' are concerned about possible
credit growth deceleration in the near future. By the second
quarter of this year, the real economy has rebounded strongly
to 7.9% YoY from the trough of 6.1% in the first quarter.
Growth was primarily driven by fixed asset investments, which
has contributed to 87.4% of GDP growth in the first half of
the year (Chart 1). China's investment frenzy has also lifted
demand for imports from the rest of Asia. Unrestrained credit
expansion may produce instantaneous results, but the flip side
is it can create long-term damages to the economy.
Numerous think-tanks have repeatedly warned about
inflationary risks that may come with a lax credit policy.
However, many have chosen to brush aside inflation concerns
amid a still falling CPI, and focus on the problems of
overcapacity. Rapid credit expansion has artificially driven up
the supply of products such as steel, cement and coal. Steel
prices, for instance, plunged 8.6% MoM in August in response
to the staggering increase in supply.
Either way, there is a need to fine tune the pace and intensity
of credit expansion before problems run deeper. However,
investors should not be too worried about this development.
There is a wealth of economic literature in China which shows
that credit growth will not create more real output in the longrun.
Similarly, deceleration of credit growth will not take
substantial tolls on economic growth. The most recent
empirical evidence was the episode in 2004-05 where loan
growth fell from 24% YoY in Aug03 to a low of 12.4% in
May05. Fixed asset investment growth only fell slightly to
26.8% in 2004 from 27.7% in 2003. Yet, real GDP growth
rose slightly from 10.0% in 2003 to 10.1% in 2004 and
10.4% in 2005.
Chinese authorities will probably focus on curbing short-term
loans with tenor of less than a year. The availability of shortterm
loans at low interest rates encourages individuals and
corporate to take speculative risks in both the equity and
property markets. The sharp 28% YoY jump in corporate
deposits alongside 27% fall in SOE's profit in the first half of
the year imply that the surge of funds at corporate accounts
most likely originated from bank credit.
We are confident the authority will not slow down medium-tolong
term loans (tenors ranging from 3yrs-5yrs) too much as
52% of outstanding loans in the state banking sector were
used for financing long-term fiscal projects. Sudden withdrawal
of credit support will jeopardize the progress of these projects
and create enormous amounts of economic wastage. In fact,
projects like railway constructions will not start to yield
economic value-added until they are completed and fully
functional.
Page 24
“This report has been re-printed with permission from DBS Group Research
(Regional Equity Strategy) of DBS Bank Limited” disclosures on page 37 of this report