Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
Our economist is confident that the Chinese authorities will not
slow down medium-to-long 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 such as railway
construction will not start to yield economic value-added until
they are completed and fully functional. As such, our
economist does not expect as increase in interest rates nor
reserve requirement ratio for the remainder of the year. The
CNY should also remain stable and trade in a tight range in
4Q09.
China M1 and M2 growth
%
30
25
20
15
10
5
0
Jan-00
Jan-01
Source: CEIC
Jan-02
Jan-03
Jan-04
M1
Jan-05
Jan-06
Retail consumption growth remains stable
Jan-07
M2
Jan-08
Jan-09
Retail sales growth has been relatively stable at around 15%
YoY in the past few months despite a series of favourable
policies, eg subsidizing home appliance purchases for rural
areas.
Chinese consumers are still saving despite economic and wage
growths. Saving deposits are still advancing at an average rate
of 29% YoY in the first seven months of this year, up
significantly from 11.3% YoY in the same period last year.
Such strong saving bias amidst a low interest rate environment
suggests that it is difficult to rely solely on private consumption
to propel economic growth in the short-run.
China retail sales
RMB bn %
1,200
25
1,000
800
600
400
200
0
Jan-07
Source: CEIC,
Apr-07
Jul-07
Oct-07
Jan-08
China Retail Sales
Hong Kong quick turnaround
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Yoy % growth
While a low-interest rate environment may be instrumental in
driving a quick economic turnaround, the strong inflow of
liquidity from mainland China as a partial result of its lax credit
policy may play an even bigger role. Downward price
adjustment in the current downturn has been the mildest
amongst other major crisis in the past decade
In the near-term, both the Fed and the PBOC are likely to
refrain from raising interest rates, not until they see sustainable
domestic-demand recovery. Under the growth assumptions of
10% (QoQ, saar) and 5% (QoQ, saar) in 3Q09 and 4Q09
respectively, projection of real GDP growth for 2009 has been
revised upward by our economist to -2.4% YoY from the
previous forecast of -6.5% YoY. It is expected to continue to
grow at 5.5% YoY in 2010.
Jul-09
Material earnings upgrade based on mid-cycle outlook
Our analysts have upgraded the earnings of various sectors
based on mid-cycle outlook, which is consistent with our
regional strategist’s outlook. Within the HS Index, the biggest
upward adjustment came from Banking and Property sectors
while Commodity, Banking and Consumer sectors were
upgraded the most among the HSCEI constituents.
20
15
10
5
0
Page 68