Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
Chart 1: State-driven investment fueled by loans
% YoY YTD
% YoY
35.0
50.0
45.0
30.0
Medium/Long Term Loans (RHS)
FAI by SOEs
40.0
35.0
25.0
30.0
25.0
20.0
20.0
15.0
15.0
10.0
Latest: Jun 09
5.0
10.0
0.0
Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09
Chart 2: Loan vs Corporate deposits
% YoY
35
30
25
20
15
10
5
Loan
Corporate Deposit
0
Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09
External trade recovering gradually
Unlike the rest of Asia which can count on China's
expansionary fiscal program to help lift exports, China's export
sector may take relatively longer to heal because of its
dependence on the US and EU. Although exports improved
gradually from 2.2% (MoM, sa) in Jun to 3.2% and 3.4% in
Jul and Aug respectively, performance measured in year-onyear
terms is not encouraging. Exports fell 22.2% YoY in Jan-
Aug. In fact, the rate of decline accelerated to 23.4% in Aug
from 22.8% in Jul.
Export of low-priced consumer products such as
handbags/travelling bags only stopped contracting in July,
registering an increase of 4.6% (MoM sa). General apparels
and footwear also edged up by 2.3% and 4.4% respectively
after declining most of the time in the second quarter. The
behavior of this group suggests consumer spending in the rest
of the world has just begun to improve. Policymakers will have
to witness more sustainable growth before considering "exit"
strategies.
With imports likely to improve faster than exports for the
remainder of the year, the trade surplus for 2009 is projected
to shrink to USD223bn from USD295bn in 2008 (accumulative
trade surplus in the first seven months fell 13.6% YoY to
USD108bn). Likewise, the country's current account surplus is
projected to fall to USD280bn in 2009 from USD450bn in
2008. In the first half of the year, the current account surplus
fell 32% YoY to USD130bn from USD191bn in the first half of
2008. As a share of GDP, it fell to 6.3% in 1H09 from 9.7% in
1H08. The data suggest China will unlikely restore the
appreciation bias on its currency anytime soon. The dominant
strategy is to maintain the status quo and keep the CNY stable
in a tight range.
Chart 3: Exports by destination
% YoY, 3mma
70
60
Asia Europe USA
50
40
30
20
10
0
-10
-20
Latest: Aug 09
-30
Jan-95 Aug-96 Mar-98 Oct-99 May-01 Dec-02 Jul-04 Feb-06 Sep-07 Apr-09
Conclusion
China has reached a point where the intensity and pace of
monetary stimulus should be reassessed. However, the present
macroeconomic landscape does not provide enough
justifications for pursuing a full-fledge monetary tightening.
Fiscal policy will work hand in hand with monetary policy.
Deceleration of credit expansion should not derail economic
growth. It will reduce the risk of inflation over the mediumterm
and mitigate growing overcapacity problems in certain
industries. The core part of the infrastructure program will not
be affected because they are mostly supported by medium-tolong
term loans. The economy is projected to advance 8% and
9% respectively in 2009 and 2010.
Private consumption cannot stand entirely on its own feet for
the time being. Although Chinese consumers are debt-free
with those in the services sector still enjoying wage growth, the
fact that they are saving even more than before suggests that
there are other structural restraints at play. Until exports show
a stronger recovery, the role of state-driven investment remains
pivotal. In this regard, we neither expect any hikes on interest
rates nor reserve requirement ratio for the remainder of the
year. The dominant strategy will continue to be
accommodative monetary policies, whilst keeping CNY stable.
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