Market Mover - BNP PARIBAS - Investment Services India

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China: Undertaking Selective Easing• On 25 October, Chinese Premier Wen calledfor a pre-emptive and subtle adjustment tocurrent macro policy.• This policy call was probably in response tothe recent blow-up in the underground bankingsystem, risks building in the shadow bankingsystem, and growth momentum weakening.• However, we do not expect general andoverall easing. Rather, we see selective andtargeted easing in credit loans and taxation.• In our view, the beneficiaries would be publichousing, ordinary housing, businesses providingdaily necessities, small and mini businesses,high-tech, new energy and environmentalprotection.Premier Wen calls for a timely macro policyadjustmentAfter two major economic reviews, the Chinesepremier, Wen Jiabao, made an official policystatement that it is time for China to make a preemptiveand subtle macro policy adjustment in orderto cope with the changed economic situation andtrends. He made this statement on 25 October inTianjin.In addition to Premier Wen's policy statement, theCBRC announced a supplementary guidelineyesterday (26 October) requiring all commercialbanks to improve their financial services to small andmini businesses. The MOC, MOF and PBOC jointlychose one month from next year as “ConsumptionPromoting Month”.Why now?In our view, there are two reasons for the change:• The underground banking system blowing up inWenzhou in the region of Zhejiang, Erdos inInner Mongolia, and Sishui in Jiangsu, and risksin the shadow banking system building up (oneA-share listed company offered total borrowingguarantees at 69 times its net assets). The StateCouncil seems to have agreed that the majorreason for the rapid and chaotic growth inunderground banking was the over-controlledofficial credit lending market. Financialspeculation surging and collapsing not onlydamages manufacturing and increases financialrisks, but also greatly threatens social stability.Table 1: Official Financing Falling(RMB bn)9M 11(% share) (%y/y)Aggregate financing 9800 100.0 -11.41. RMB loans 5680 58.0 -9.52. Forex loans 477 4.9 63.33. Designated loans 1070 10.9 11.84. Trust loans 84.8 0.9 -82.25. Bankers' acceptance 982.5 10.0 -50.06. Corporate bond 839.7 8.6 -14.17. Non-Financial corporateequity 3515 3.6 -3.1Source: PBOC, BNP Paribas70656055504540Chart 1: Economic Confidence Weakening(%)PMI-outputHeadline PMI35Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11Source: PBOC and BNP Paribas• The State Council is worried that growthmomentum, which has been hit, is not strongenough to support the high growth that isnecessary for the 18th Party Congress. There isalso a risk of a sharp slowing and a hard landing.The GDP growth rate remains at 9.1% in Q3, butslowed from 9.5% in Q2 and 9.7% in Q1.Potential recessions in the US, EU and Japan,and rising trade conflicts, would weaken China’sexports greatly. Consumption growth is alsoslowing due to a slowdown in economic growthand income, high inflation, and the withdrawal ofthe consumption promotion policy. Moreimportantly, FAI growth should definitely be on adownward trend because of the slowing ininfrastructure construction, and greater efforts tocontrol property prices.Implications and benefitsFrom Premier Wen's policy statement, we don'texpect a general or overall policy easing immediately,but selective and targeted easing. The easing isexpected in two areas: lending and taxation.Chen Xingdong 27 October 2011Market Mover28www.GlobalMarkets.bnpparibas.com
Restrictive lending conditions could be revisedsomewhat. For instance, the CBRC now allowscommercial banks to exclude loans to small and minibusiness from their calculations of their lending-todeposits(L/D) ratio. The CBRC has also becomemore tolerant of higher non-performing loan ratios forlending to small and mini businesses. With therectification of the problems in the underground andshadow banking systems, deposits should return tothe banking system. It is also possible for the PBOCto allow small and medium-sized banks to offerhigher-than-benchmark interest rates in order toattract more deposits. That would help small andmedium banks lower their L/D ratios or increase theirnew-lending capability. It is also possible for thePBOC to cut RRR for small and medium-sized banks(but we do not see that as likely in the immediatefuture).In our view, the targeted easing would benefit thefollowing six areas:1. Public housing: the Ministry of Urban-RuralConstruction reported to the National People’sCongress two days ago that building has begunfor 98% of the planned ten million units of publichousing, but many of the projects are short offunding;2. Ordinary housing: Premier Wen, for the first timesince the State Council launched a policy tocontrol property prices in April 2010, requiredlocal governments to increase land supply forordinary housing construction. We believe he isworried the growth in property investment couldfall too much;3. Small and mini businesses;4. Investments and businesses that are essentialfor people’s daily life;5. New technology, new energy and environmentalprotection; and6. Exports. Export-oriented companies havesuffered from weakening demand in theinternational market and large cost increases(wages, energy and materials, interest rates, theRMB exchange rate). They are also short offunding due to the difficulty of accessing bankloans.Taxation wise, the premier has called for a structuralcut in taxes. Measures could include:• Increasing the tax threshold, and extending tosmall and mini businesse the halving of thecorporate tax rate until 2015;• Removing the 3% stamp duty from commercialbanks’ lending contracts made with small andmini businesses;• Extending to 2013 the policy that allows lossesincurred on small loans (below RMB 5mn for asingle borrower) to be deducted from profitsbefore tax;• Extending to 2015 the policy that has cut to 3%the operation tax on revenues from insuranceactivities generated by rural financial institutions;The MOF has indicated that the Chinese governmenthas chosen Shanghai as the place to trial VATreform and replace turnover tax with VAT in serviceindustries, in order to lighten service providers’ taxburden and to promote service consumption from thebeginning of 2012.China’s stock market has been ignited by the news.From the point of view that policy matters, it is clearthe stock market is bottoming out. But the degree ofupside would depend on real growth, the differencein investors’ expectations and changes ininternational peers.Chen Xingdong 27 October 2011Market Mover29www.GlobalMarkets.bnpparibas.com
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