Mizuho Securities Asia Ltd
Economics Research
3 Mar 2017
China Economics Weekly (108): 2017
National People’s Congress preview
Jianguang Shen
Mizuho Securities Asia Ltd.
[email protected]
+852 2685 2022
 The National People’s Congress (NPC) is set to begin on 5 March. In the opening
ceremony, Premier Li will deliver the annual government work report that sets the
tone for China’s economic policy in 2017.
Michael Luk
Mizuho Securities Asia Ltd.
[email protected]
+852 2685 2155
 A key feature in the work report is that the policy direction set out in the Central
Economic Work Conference the previous December will be ratified, with
economic stability and financial risk control being the top goals. We expect key
2017 economic growth targets to include around 6.5% YoY growth for GDP, a
3.0% YoY ceiling for inflation, a further increase of the fiscal deficit ceiling to
3.5% of GDP, and contraction of M2 growth to 12.0% YoY, to accommodate
proactive fiscal expansion amid monetary policy tightening.
Weizhou Yang
Mizuho Securities Asia Ltd.
[email protected]
+852 2685 2036
 Other key economic topics to follow in the NPC include an expanded target for
excess capacity consolidation; reinforcement of the drive to ensure a stable
property market; measures aimed at boosting the competitiveness of China’s
industries; the One Belt, One Road initiative; and further integration of Beijing,
Tianjin, and Hebei.
 Another notable feature of the NPC is that it is the last national assembly before
the 19th Communist Party of China (CPC) National Congress in autumn, when
China’s top leaders for the next five years will be announced. Already, new
appointments have been announced in some of the government’s top economic
policy making positions in recent weeks. More announcements are possible in
the coming months, and they may help deepen President Xi’s agenda on China’s
economic structural reforms in the next few years.
 Other reports this week include Strong growth momentum to continue in 1Q and
Financial Secretary reinterprets fiscal conservatism
Fig 1 We expect the GDP target to be lowered to around 6.5% YoY in 2017, from 6.5-7.0% YoY
11
GDP
10
YoY%
9
8
7
6
5
2008
2009
2010
2011
2012
Actual
2013
2014
2015
Target
Source: CEIC, Mizuho research
See important analyst certification and disclosure information beginning on page 21.
2016
2017e
Economics Research
Contents
2017 National People’s Congress preview
3
The NPC to convene on 5 March
Supporting the economy through proactive fiscal policy
Controlling financial risk through monetary tightening
Economic targets similar to last year
Key reform topics to watch in the NPC
th
Setting the stage for the 19 CPC National Congress
Week in review
3
3
4
5
7
9
10
Strong growth momentum to continue in 1Q
Financial Secretary reinterprets fiscal conservatism
Economic monitor
10
12
14
Growth monitor
Weekly price monitor
PBoC monitor
Recent publications
14
16
18
20
Upcoming events
6 Mar
7 Mar
8 Mar
9 Mar
10 Mar
Japan
CH
US
EU
CH
US
JP
CH
EU
US
UK
JP
Jan Trade
Feb Foreign Reserve
Jan Trade
16/4Q GDP (final)
Feb Trade balance
Feb ADP employment change
16/4Q GDP (final)
Feb CPI
ECB Meeting
Feb NFP
Jan Industrial production & manufacturing production
Feb PPI
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2017 National People’s Congress preview
The NPC to convene on 5 March
The 12th National People’s Congress (NPC) will begin on 5 March, two days after the
National Committee of the Chinese People's Political Consultative Conference (commonly
termed “the two sessions”). In the opening ceremony, Premier Li will deliver the annual
government work report that sets the tone for China’s economic policy in the coming year.
A key feature in the work report is that the policy direction set out in the Central Economic
Work Conference in the previous December will be ratified, after extensive discussions by
top policy makers. In the end-2016 Work Conference, policy makers made “seeking progress
while maintaining stability” the key principle. Ensuring economic stability remains the number
one goal, followed by controlling financial risks and structural reforms (see China’s policy
goals for 2017, 21 December 2016).
We discussed extensively in the previous months that the policy emphasis will be on 1)
supporting the economy through proactive fiscal policy and 2) controlling financial risk
through monetary tightening. Together, the policies will seek to ensure steady economic
conditions in the run up to the 19th National Congress of the Communist Party of China
(CPC), which is expected to take place in autumn this year.
Supporting the economy through proactive fiscal policy
One of the key pillars for stable growth in 2017 is likely to come from investment, with the
participation of proactive fiscal spending (see How long will the investment rebound
continue?, 17 February). Indeed, approvals for new fiscal projects have accelerated visibly
since the end of the Chinese New Year holiday, and new investments pledged by provincial
governments have reached CNY45.0t.
YoY%
Fig 2 Pledged investment by provinces shows strong momentum in 2017
50
45
40
35
30
25
20
15
10
5
0
50
Pledged FAI increase by province in 2017
20
18
16 15 15
13.5 13 13 12 12
11.5 10 10 10 10 10 10 10 10
9
8 7.5
6
Beijing
Jiangsu
Jilin
Hebei
Sichuan
Shaanxi
Chongqing
Tianjin
Gansu
Hainan
Ningxia
Qinghai
Anhui
Henan
Inner Mongolia
Hunan
Guangxi
Jiangxi
Guangdong
Fujian
Yunnan
Guizhou
Tibet
Xinjiang
Source: CEIC, Mizuho research
While infrastructure investment continues to form the basis for these new projects via
railway, highway, and other transportation infrastructure, investments in hi-tech and new
strategic industries such as new energy, new materials, information, and semiconductors are
increasingly on the rise.
In addition, the government is also working to ensure that financing channels for these
projects will expand further. In addition to expanding the budgetary deficit, the government
may also solicit increased private sector participation through the securitization of Publicprivate partnership (PPP) projects, development financing from China Development Bank,
new issuance of local government bonds, and contributions from insurance funding on
infrastructure and livelihood improvement projects.
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Fig 3 The amount of bonds issued by policy banks expanded 29.7% YoY in 2016
Bond issued by policy banks
4.0
3.5
CNY t
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: CEIC, Mizuho research
Fiscal stimulus has already supported China’s economic growth, which ended on a high note
in 4Q (see No surprise in China’s GDP data release, 20 January). It has also led to positive
spill-overs in the manufacturing sector, especially in upstream sectors such as raw materials
and industrial machinery.
Controlling financial risk through monetary tightening
Alongside the continuation of proactive fiscal policy, the change in monetary policy towards a
more tightening stance may represent a prominent feature in the 2017 Work Report. The byproduct of the government stimulus in 2016 was a notable increase in leverage in the credit
market, as total money supply (M2) rose to close to 210% of China’s GDP.
Contrary to the government’s stated policy objective to reduce credit leverage in 2016,
financial risks in China have clearly reached a stage whereby they must be tackled as the
government’s top priority in 2017, in our view (see Further rate hikes confirm tightening
stance, 6 February).
Fig 4 China’s M2/GDP has nearly reached 210%
Money supply
220
210
% of GDP
200
190
180
170
160
150
140
2002
2004
2006
2008
2010
2012
2014
2016
Source: CEIC, Mizuho research
In addition, inflationary pressure in China is building. Contrary to past cycles when food,
especially pork, prices were the drivers of inflation, the current upswing in inflation is
dominated by non-food items, such as fuel and service price increases. We believe resilient
economic growth will help fuel persistent inflationary pressure in 1H17, which also calls for
monetary tightening.
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Fig 5 Non-food inflation has reached the highest level since October 2011
15
12
YoY %
9
6
3
0
Jan-11
Jan-12
Jan-13
Jan-14
CPI
Food
Jan-15
Jan-16
Jan-17
Non-food
Source: CEIC, Mizuho research
This explains the return of the rate hike cycle since January (see Interest rate hike signals
the start of monetary tightening, 24 January), PBoC window guidance to curb loan growth,
and tightened regulation through Macro Prudency Assessment (MPA) to cover not only onbalance sheet activity but also off-balance sheet wealth management products among
financial institutions.
Fig 6 A new rate hike cycle has begun in 2017
Interest rate corridor
8
7
6
%
5
4
3
2
1
0
Feb-14
Aug-14
Feb-15
7-day SLF
Aug-15
7-day repo
Feb-16
Aug-16
Feb-17
Excess reserve interest
Source: Bloomberg, Mizuho research
Nevertheless, we maintain that monetary tightening will be carefully monitored by the PBoC
to avoid creating excessive volatility in the financial markets, which are already in a relatively
vulnerable state (see Liquidity crunches and financial risk in 2017, 6 January).
Economic targets similar to last year
All in, we believe that while the government will likely continue to announce key economic
targets in the upcoming NPC, they will be set to accommodate a stable economic
environment. This includes the GDP growth target, which we believe will be set at around
6.5% YoY in 2017, compared to 6.5-7.0% YoY in 2016. This should be conducive to securing
a stable economic environment without inciting a significant need for credit re-leveraging.
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Fig 7 We expect the GDP target to be lowered to around 6.5% YoY in 2017, from 6.5-7.0% YoY
11
GDP
10
YoY%
9
8
7
6
5
2008
2009
2010
2011
2012
2013
Actual
2014
2015
2016
2017e
Target
Source: CEIC, Mizuho research
Likewise, the M2 growth target will likely be adjusted to 12.0% YoY in 2017, in our view,
down from 13.0% YoY last year, to reflect the need for monetary tightening. Hopefully, this
will again keep China’s inflation safely below the official target, which we expect to stay at
3.0% YoY. In the meantime, fiscal budgetary spending will have to expand further as we
expect the official target to be widened to 3.5% of GDP, from 3.0% of GDP in 2016. This will
allow for at least another CNY372.1b of budgetary spending in 2017.
Fig 8 Fiscal deficit may be targeted to rise further
Fiscal deficit
0.0
-0.5
%of GDP
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
-4.0
2008
2009
2010
2011
2012
Before adjustment
2013
2014
Actual
2015
2016e
2017e
Ceiling
Source: CEIC, Mizuho research
Fig 9 Key economic targets to be covered in the NPC
Target
2016 official targets
2016 actual
2017 official targets
(Mizuho estimate)
GDP (YoY%)
6.5-7.0
6.7
Around 6.5
CPI (YoY%)
3.0
2.0
3.0
Fiscal deficit (% of GDP)
3.0
--
3.5
13.0
11.3
12.0
M2 (YoY%)
Source: CEIC, Mizuho research
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Key reform topics to watch in the NPC
In the Leading Group for Financial and Economic Affairs on 1 March, President Xi reiterated
the focus on maintaining stable development in the economy, as well as key priorities in
supply-side reform, including the consolidation of excess production capacity at zombie
companies; the establishment of a long-term mechanism to ensure a stable property market;
and the promotion of high-quality and high-value-added industries. Apart from these key
topics, we also expect the NPC to discuss a range of key economic initiatives, such as One
Belt, One Road and the integration of Beijing, Tianjin, and Hebei.
Excess capacity consolidation
After successfully reducing the production capacity for coal and steel in 2016 as planned, the
target in 2017 is set to expand. Based on the NDRC’s comments since January, the plan will
likely increase the targets for both steel and coal capacity elimination, and expand in
industries involved in non-ferrous metals, ships, and cement production.
Fig 10 Excess capacity reduction in 2016
Product (m ton)
Production in 2016
Capacity in end-2015 Capacity reduction
target
Actual capacity
reduction
Coal
3,364
5,700
250
390
Steel
808
1,127
45
65
Source: NDRC, NBS, Mizuho research
Ensuring a stable property market
In the Leading Group meeting, President Xi stated again that ‘Houses are built to be
inhabited, not for speculation’, and the rhetoric will likely be repeated in the Work Report. It
shows the leadership’s resolve to dampen any unreasonable increase in property prices, by
tightening credit access for speculation in the short term, and by introducing a nationwide
property tax in 2018.
Industry competitiveness in ‘Made in China 2025’
Another topic to follow may be the government’s drive to boost the value added in China’s
industries, which is embodied in the ‘Made in China 2025’ strategy. While the government
may encourage new investments in innovative areas, the emphasis will also be on improving
the competitiveness of existing products.
This initiative has pinpointed 10 industries for support, including information technology,
robotics, aerospace equipment, ocean engineering equipment, hi-tech railway equipment,
new energy vehicles, power equipment, new materials, pharmaceuticals, and agricultural
machinery. The government will also improve the legal regulatory framework that is
conducive to market development by lowering entry barriers, supporting small enterprises,
utilizing foreign capital and knowhow, and reducing administrative fees.
One Belt, One Road
The Ministry of Commerce is preparing for a top level forum for the One Belt, One Road
initiative in May. This is the first time such a forum is being held in Beijing since the initiative
was first put forward by President Xi in 2013, and could be an opportunity to extend China’s
leadership in a global economy that is otherwise being marred by rising trade protectionism.
In 2016, China invested USD14.5b in countries included in the One Belt, One Road initiative,
with 56 economic zones established.
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Fig 11 One Belt, One Road initiative accelerated in 2016
Date
Event
Achievement
January 2016
State visit to Czekia
Signed a memorandum with Czech government
on future projects
April 2016
State visit to Australia
Agreed to coordinate with Australia’s Developing
Northern Territory initiative
June 2016
State visit to Serbia, Poland, and
Uzbekistan
Signed more than 10 memorandums involving
trade, hi-tech, culture, and tourism cooperation
June 2016
Summit of the Shanghai Cooperation
Organisation
China, Russia, Mongolia signed economic
corridor plan
September 2016
G20 Hangzhou summit
Advocated “One belt, one road” plan for more
cooperation
November 2016
UN general assembly
Passed resolution to support the “One belt, one
road” initiative and advocated international
support through providing a safe operational
environment
December 2016
Release of “Guidance on strengthening Strengthen coordination of overseas media
the soft power on One Belt, One Road” guidance and provide media support for one belt
one road initiative overseas.
December 2016
Release of “Opinions on strengthening Improve legal and investment environment;
national security”
expand fields open to international investors
January 2017
Release of “Working mechanism for
Promote PPP as a cooperation protocol in
Public-private partnership in One Belt, projects in the partnership countries
One Road”
Source: Mizuho research
Beijing, Tianjin, and Hebei integration
Further breakthroughs are also expected from the integration of Beijing, Tianjin, and Hebei in
2017. According to takeaways from the provincial level congresses in January, the migration
of the seat of the Beijing city government and some SOE headquarters to Tongzhou is set to
take place in March, followed by the integration of the transportation network by year-end. It
is likely that further announcements will be made during the NPC, especially with regards to
environmental protection and smog control.
Fig 12 The seat of Beijing municipal government to move to Tongzhou district in 2017
★City
center
Tongzhou
Source: Wikipedia, Mizuho research
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Setting the stage for the 19th CPC National Congress
Focusing on President Xi as the core leader
Another notable feature of the NPC is that it is the last national assembly before the 19th
CPC National Congress, when China’s top leaders for the next five years will be announced.
This may present a window for President Xi, who has been made the ‘core’ of the CPC
Central Committee in the 6th Plenum, to further his agenda on China’s economic structural
reforms.
Fig 13 President Xi may unveil more structural reforms after the 19th CPC National Congress
GDP
16
19th Party
Congress
14
12
YoY%
10
?
8
6
4
2
0
1979
Deng Xiaoping
1984
Jiang Zemin
1989
1994
Hu Jintao
1999
2004
2009
Xi Jinping
2014
2019
Source: CEIC, Mizuho research
Leadership changes already underway to further structural reforms
Preparations are already in progress, in our view. In recent weeks, new appointments have
already been announced for some of the government’s top economic policy making
positions, including:

On 24 February, He Lifeng, a vice chairman of the National Development and Reform
Commission (NDRC), was promoted to the top position. Having worked previously under
President Xi when both were local government officials in Xiamen, he has been in
charge of overseeing the ‘One Belt, One Road’ initiative in the NDRC;

Zhong Shan was appointed Minister of Commerce (promoted from the role of vice
Minister of Commerce) and China’s international trade representative. His expertise in
trade negotiations may be extremely useful as global protectionism is on the rise. He
also held official positions in Zhejiang province when President Xi was governor there in
2002-07;

Also on 24 February, Guo Shuqing was announced as the new head of the China
Banking Regulatory Commission (CBRC). Known previously as a heavy-handed
reformer in the China Security Regulatory Commission (CSRC), he issued 80 major
directives, moved to stop insider trading, and curbed market manipulation; and

On 1 February, former SOE Aluminum Corp. of China President Xiao Yaqing was
appointed Head of the State-owned Assets Supervision and Administration Commission
(SASAC).
The new team are all reformers with strong track records. This reflects the further
strengthening of President Xi in the area of economic policy decision making, which could
help pave the way for further structural reforms after the Congress. Xiao Yaqing, for
example, has spoked publicly on his vision for state-owned enterprise (SOE) reform, with the
emphasis on mixed ownership reform, market-based operating mechanisms, progress in
supply-side reforms, changing the role of SASAC, and the strengthening party leadership in
SOE enterprises. We believe more announcements on local government party leadership
are likely after the National People’s Congress.
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Week in review
Strong growth momentum to continue in 1Q
Improved PMI suggests that economic growth may accelerate
The official manufacturing PMI improved to 51.6 in February, from 51.3 in January. Both new
order sub-indices and export order sub-indices rose, suggesting that domestic and external
demand is recovering. Production activity seems to be accelerating as well; the production
sub-index improved from 53.1 to 53.7. In addition, most other sub-indices increased from last
month, including employment, raw material inventory, imports, etc. Strong PMI and its major
sub-indices suggest that economic growth in February may continue to improve.
By size of enterprise, PMI for big enterprises improved further from 52.7 to 53.5; PMI for
medium-sized enterprises, however, declined from 50.8 in January to 50.5 in February; while
PMI for small enterprises was unchanged at 46.4. As large enterprises showed the most
significant improvements, it could suggest that the current economic recovery is mainly
driven by government projects. Usually, big size SOEs benefit from government projects the
most.
FAI is backed by government projects
We expect China’s FAI to improve in January and February compared with December 2016.
Being consistent with what the PMI data has suggested, we believe strong government
spending and mid-long term loan growth would support infrastructure investment
accelerating in the near term.
China’s FAI data is significantly distorted by Liaoning’s data (see Beyond Liaoning macro
data falsification, 19 January). By excluding Liaoning’s contribution to the national data, we
found that property investment in China has been largely stable and there is moderate
improvement in secondary industry’s investment (capex) in the past few months.
We expect property investment to remain stable: With real interest rates remaining at low
levels, we find that property developers were still active in the land market in January despite
government measures to cool down property purchases (see Risks behind the strong TSF
in January, 24 February). As property developers are not pessimistic about the property
market’s outlook in the near term, we believe property investment may stay at a relative stale
level in January-February.
Capex investment may improve moderately: FAI of secondary industry (after adjustment
for Liaoning’s data) improved slightly in November and December. As PPI had stayed in
negative territory for several years and industrial enterprises’ profit experienced slower
growth and negative growth in the past couple of years, it is not surprising that YoY growth of
FAI in the manufacturing sector continued to decline during this period. At present, when
demand and profits recover, capex investment may begin to stabilize. However, as
overcapacity issues are still a big concern to most entrepreneurs, we do not think such a
recovery would be very strong in 2017.
Infrastructure investment would improve: We believe January-February FAI would
experience a rebound mainly due to government projects. We noted that the National
Development and Reform Commission (NDRC) approved CNY153.9b in infrastructure
projects in January, three times larger than last year. The government also announced
measures to promote Public-Private-Partnership (PPP) projects to boost investment in
December 2016. In addition, the NDRC collaborated with China Development Bank on
providing development financing on 8 February (see How long will the investment
rebound continue?. 17 February).
Other supportive evidence for our argument includes surging heavy truck sales and
excavator sales in January, 37.5% YoY growth in fiscal spending in January (December 2016
was -13.8% YoY), strong raw material imports (see A strong start for China trade in 2017
10 February), and historical high mid-long term loan growth in January (see Rising inflation
and total social financing justify modest monetary tightening,15 February)
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Retail sales growth to moderate
We anticipate that YoY growth in retail sales would decline to 10.6% in January-February,
from 10.9% in December. We believe the slowdown in auto sales could be the key reason;
however, higher growth for petroleum products may partially offset the impact.
According to the China Auto Industry Association, YoY growth in auto sales in January was
only 0.2%, 9.3% lower than last month. While Chinese New Year might lead to some
distortions, we believe the expiration of tax rebates can play an important role. On the other
hand, rising crude oil prices can increase the cost of petroleum products. As such, sales
growth acceleration for petroleum products may partially offset the negative impact caused
by slower auto sales.
Both exports and imports would continue to improve
Better global demand can improve China’s exports. In the US, non-farm payrolls in January
significantly exceeded market expectations; in the Euro area, flash manufacturing PMI for
February reached a 70-month high. We expect China’s export growth denominated in USD
to reach 20% YoY. Of course, the low base effect of February 2016 played an important role
here.
With relative strong domestic demand and rising commodity prices, we believe China’s
import growth in USD in February would reach 25% YoY. The relatively low base effect and
the distortion of the Chinese New Year is also a key factor as to why this figure grows so
much.
VAI to rebound due to both low base effects and better demand
We expect VAI in January-February 2017 to rebound to 6.7% YoY, from 6.0% YoY in
December 2016. Though retail sales might decline slightly due to weak auto sales, both
investment demand and export demand look strong. Strong final demand would boost
production activity in the industrial sector.
Moreover, VAI YoY growth in January and February 2016 were 5.9% and 4.9%, respectively,
with the low base effect last year also contributing to the significant improvement in VAI YoY
growth as well.
Inflation declined significantly, largely due to the Chinese New Year
High-frequency data suggests that MoM CPI would increase only very moderately, mainly
due to declines in vegetable prices. The Ministry of Commerce data suggests that vegetable
prices decreased by 11.1% in the first three weeks of February, after the Chinese New Year;
consequently, we estimate that CPI food prices declined by 1.1% MoM. Give strong service
and energy cost increases, we expect CPI non-food prices to increase by 0.7% MoM, and
think CPI could increase by 0.3% MoM (and 1.3% YoY) in February 2017.
We note that price increases for global commodity prices have moderated in February. The
average CRB index increased to 433.7 points in February from 431.0 points in January. That
suggests that YoY growth in the CRB index declined from 14.0% for January to 12.7% for
February. However, historical data suggest that when the CRB index experiences a turning
point, PPI will still take a few months to reach its turning point. We anticipate PPI YoY growth
reaching 7.5% in February.
However, if global commodity prices are not going to increase significantly in the following
months, we believe PPI YoY growth may reach its peak in March or April.
Policy shift to reform and risk prevention in the pipeline
In a meeting of the Central Leading Group of Financial and Economic Affairs on 28 February,
President Xi Jinping suggested that the government would adopt ‘assure stability and make
progress’ as the major strategy in 2017. As growth is less of a concern to government
leaders, we note that President Xi gives reform and risk prevention higher priority.
According to Xinhua News Agency, President Xi discussed four major issues:

Advance capacity consolidation. President Xi required government to ‘address’ Zombie
firms with strong resolution. At the same time, training programs and employment
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programs, as well as social insurance programs must be designed to ensure that the
workers affected can maintain basic living standards.

Prevent financial risk. President Xi suggested that the government would coordinate with
financial regulators more effectively, improve macro prudency regulation, and prevent
systemic risk.

Stabilize the property market. According to President Xi, the government will further
research long-term mechanisms that could stabilize the property market.

Boost the manufacturing sector.
We believe monetary policy in China would turn tighter in a moderate way to manage the
asset bubble and contain inflationary pressure. This is the main reason we expect a decline
in bank loans and total social financing in February. We will watch for details on financial
regulatory reforms and other reforms.
Financial Secretary reinterprets fiscal conservatism
Solid expansion in 4Q16 on stronger external demand
Hong Kong’s GDP growth ended on a high note in 4Q2016 at 3.1%YoY, on the back of
resilient domestic consumption spending and recovering export momentum. As a result, fullyear GDP rose by 1.9%YoY in 2016, beating both the government and our forecasts,
although it remains lower than 2.4%YoY growth in 2015.
Domestic demand remained resilient with a strong housing market
Domestic demand continued to be robust in 4Q, as personal consumption expenditure rose
by 3.2%YoY in 4Q. By products in the domestic market, it was boosted by non-durable sales,
food and services, while the sales of durable goods fell further. In our view, this continues to
reflect the contribution from a strong housing market in 4Q through positive wealth effect, as
housing prices have broadly returned in December 2016 to a level comparable to the
previous peak at August 2015. Despite the correction in home prices at the beginning of the
year, prices rose by 7.7%YoY in 2016.
Exports to the mainland picked up amid China government stimulus
External demand was characterized by a visible rebound in 2H 2016 after a slow start in
1Q2016. The exports of merchandize expanded by 5.1%YoY in 4Q, the strongest in three
years. It was mostly triggered by exports to the mainland, amid rebounding machinery
demand that comes from government stimulus, and the sharp increase in transhipments to
Taiwan from the mainland as direct trade between the mainland and Taiwan dropped by
8.4%YoY in 2016 (see Robust housing market keeps sentiment buoyant 13 November
2016).
Tourism sector recovery will be moderate
Exports of services also turned positive at 1.4%YoY in 4Q16, up from a 2.4%YoY decline in
3Q16. The break down shows that the improvement came mainly from transportation,
through the rebound in merchandize trade, while financial and business services also
rebounded. The tourism sector, on the other hand, continued to decline by 4.7%YoY in 4Q
16.
Despite a rebound in mainland tourist arrivals in December 2016, this is partly on the back of
favourable base effect from last year. With the departure of big spending tourists to newer
destinations and tightened capital controls, the average spending of mainland tourists per
capita continued to shrink by around 5% in 2016, according to the Hong Kong Tourism
Board. We expect the recovery of the tourism sector to be mild at best in 2017.
Financial Secretary advocates proactive approach to public finances
Paving the way for proactive fiscal infrastructure spending
Also released on 22 February, CY Leung government’s last budget speech for financial year
2017/2018 was also the first by Financial Secretary Mopo Chan, who replaced John Tsang
after Tsang’s resignation in mid-December 2016 to enter the race for the position of the next
Chief Executive. Within his short tenure, however, Mopo Chan is able to leave his mark in
Hong Kong’s public finances.
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In the Budget, he urged his successors to take a more proactive interpretation towards
maintaining a balanced budget as required by the Basic Law. Chan went on to note that the
Budget only needs to be balanced over a reasonable period of time while the government
should consider “the source and nature of the surplus, alongside the prevailing economic
situation and external environment”. Depending on who his successor is, we believe it may
open the window for more effective use of Hong Kong’s massive fiscal surplus.
The Budget intends to spend HKD86.8b on infrastructure in FY2017/18, up 9.9%YoY from
FY2016/17, against a 5.3%YoY increase in total government expenditure. It is also notably
higher than a benchmark set previously by John Tsang for around HKD70b spending per
year (see Limited policy options as recession approaches 25 May 2016). It reflects that the
role of public infrastructure spending may pick up as a support for economic growth.
Continuing the annual sweetener concessions and subsidies
Other than that, Chan’s Budget has largely followed the direction of his predecessor, with
one-off concessions and subsidies that are expected to lift Hong Kong’s 2017 GDP growth
by 1.1%, the same as last year. He also launched five recurrent tax cut measures that
include widening the marginal bands for salaries tax, raising the disabled dependent
deduction, sibling deduction, self-education and home loan interest deduction from salaries
tax, which will also ease the burden of tax payers.
Government’s GDP forecast may be too optimistic
Financial Secretary Mopo Chan was very upbeat on the 2017 GDP forecast. Compared with
2016 when Financial Secretary John Tsang cautioned that Hong Kong’s outlook is “far from
promising” (see FY16/17 HK budget: Chilling impacts of a slower Chinese economy and Fed
rate hike 22 February 2016), he expects a much more positive situation in 2017 with 2-3%
GDP growth, due to the further build-up of external demand amid the recovering global
economic condition.
In our view, however, while Hong Kong may benefit from further stabilizing measures from
the mainland, much remains uncertain with regards to trade relations between China and the
US, and whether Hong Kong can regain its role as a transhipment centre remains unclear
(see The case for stable growth outlook in 2017 18 January).
Hong Kong’s economy has been stable in 2016 mainly due to buoyant asset markets. With
the possibility of more frequent interest rate hikes in the US, repatriation of US corporate
profits through tax holidays (see Asset market uncertainty to rise from Trump presidency 28
November 2016), and China’s tightened capital controls, it remains unclear whether
domestic economic conditions will hold up well in 2017. As such, we maintain that increasing
public investment spending could be reasonable and necessary.
13
Economics Research
Economic monitor
Growth monitor
Property sales increased WoW during 19-26 February: 30-city weekly residential property
sales by area increased from of 30.37b square metres (12-19 February) to 36.60b square
metres (19-26 February). However, it remains impacted by Chinese New Year distortion, with
YoY sales decreasing 24.5%. We believe the tightening policy for the residential property
market is taking effect, and we look for YoY growth to remain in negative territory in the
coming months.
Daily coal consumption maintains its upward momentum. Steel production during 30 January
to 10 February increased 10% compared with the same period last year, although again it is
still under the effect from the shift in the dates of Chinese New Year. The China
Containerized Freight Index (CCFI) declined from 845.43 on 17 February to 815.46 on 24
February, while the Baltic Dry Index (BDI) picked up slightly.
Fig 14 Housing sales
30 cities: sales of commodity houses
900
10 thousand square meters
800
700
600
500
400
300
200
100
0
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Source: Wind, Mizuho research
Fig 15 Electricity use: coal consumption and steel production
Daily coal consumption of 6 electricity producers
Daily Steel production: key enterprises
190
10 thousand ton/day
10 thousand tons
100
80
60
40
20
Feb-14
Feb-15
Feb-16
180
170
160
150
Feb-14
Feb-17
Source: Wind, Mizuho research
14
Feb-15
Feb-16
Feb-17
Economics Research
Fig 16 Shipping
BDI
China container freight index (CCFI)
1,200
2,000
1,500
1,000
1,000
800
500
0
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
600
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Source: CEIC, Mizuho research
Both coal inventory at Qinhuangdao Port and coal inventories at electricity producers
rebounded moderately.
Fig 17 Coal inventories
1,000
Coal inventory: Qinhuangdao Port
(10 thousand tons)
Coal inventory:6 major electricity producer
(10 thousand tons)
1,500
1,400
800
1,300
600
1,200
1,100
400
1,000
200
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
900
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Source: CEIC, Mizuho research
Fig 18 Steel inventory
Steel inventory of major cities: deformed steel bars
(10,000 tons)
Steel inventory of major cities: cold rolling
(10,000 tons)
1,200
1,100
1,000
900
800
700
600
500
400
300
200
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Source: CEIC, Mizuho research
15
180
160
140
120
100
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Economics Research
Weekly price monitor
Overall food prices declined moderately over 17-24 February: Eggs were the largest
declining component, with prices down 1.14% WoW. Fruit, meat, and poultry prices also
declined compared with the previous week, while vegetables, seafood, oil, and provision
prices rose slightly. We think the CPI growth rate will slow down to 1.3% YoY in February,
from 2.5% YoY in January.
Fig 19 Ministry of Commerce: change in food prices (weekly)
Agriculture product price index
2.0
1.0
WoW %
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
Overal
Provision
Feb-3-2017
Oil
Meat
Feb-10-2017
Poultry
Eggs Vegetables Seafood
Feb-17-2017
Fruit
Feb-24-2017
Source: Wind, Mizuho research
Iron ore prices and steel billet prices were both largely unchanged compared with the
previous week. Copper prices and aluminium prices picked up moderately.
Crude oil prices declined slightly and coal prices were largely stable. We look for
February PPI (YoY) to increase further partly due to the low-base effect.
Fig 20 Iron ore and steel prices
China's iron ore price index:CIOPI
April 1994 =100
500
Steel billet price (yuan/ton)
4,000
3,500
400
3,000
300
200
2,500
2,000
1,500
100
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 1,000
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
China Iron Price index
Imported
Domestic
Source: Wind, Mizuho research
16
Economics Research
Fig 21 Non-ferrous metals and coal prices
Spot prices (yuan/ton)
60,000
Thermal coal price (5500 kcal) yuan/ton
16,000
700
14,000
600
50,000
12,000
500
40,000
10,000
400
30,000
Feb-14
Feb-15
Copper
Feb-16
8,000
Feb-17
300
Feb-14
Aluminum (RHS)
Feb-15
Feb-16
Feb-17
Source: Wind, Mizuho research
Fig 22 Oil and chemical material prices
Brent oil: spot price
PTA price
8,000
110
80
Yuan/ton
USD/barrel
7,000
50
6,000
5,000
4,000
Feb-14
20
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Source: Wind, Mizuho research
17
Feb-15
Feb-16
Feb-17
Economics Research
PBoC monitor
During the week of 27 February-3 March, the PBoC injected CNY150b via reverse repo, and
withdrew CNY430b. As a result, the PBoC net withdrew CNY 280b through OMO this week.
Fig 23 Open-market operations
OMO: Net injection (yuan 100m)
9,000
7,000
5,000
3,000
1,000
-1,000
-3,000
-5,000
-7,000
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
Source: CEIC, Mizuho research
Both the overnight repo rate and the 7-day repo rate moved in a ‘V’ shape, down first
and then rebound. We believe the PBoC will tighten monetary policy to slow down credit
expansion, manage the asset bubble, and defend the RMB exchange rate.
The overnight Shibor rate declined slightly, while the 7-day Shibor rate and the 3month Shibor rate continued to increase further. We believe the market is still concerned
that liquidity conditions could turn tighter over the medium term, with rising inflation and
tighter liquidity conditions globally.
Fig 24 Repo and SHIBOR rates
Shibor rates
Repo rates
5.0
6
4.5
5
4.0
3.5
4
3.0
3
2.5
2
2.0
1
1.5
1.0
Feb-15
Aug-15
Feb-16
Overnight
Aug-16
0
Feb-15
Feb-17
7 days
Aug-15
Overnight
Feb-16
1 week
Aug-16
Feb-17
3M
Source: Wind, Mizuho research
1-year government bond yields were largely flat from last week and 10-year
government bonds yields rose somewhat. We believe it is still too early to argue that
bond yields have reached their peak.
The bill-finance rate declined this week. Risk premiums for low-grade bonds rose again.
18
Economics Research
Fig 25 Government bond yields and the bill finance rate
Bill finance rate (6 Month)
Government bond yields
5.0
6.5
4.5
6.0
5.5
4.0
5.0
3.5
4.5
3.0
4.0
2.5
3.5
3.0
2.0
2.5
1.5
2.0
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Feb-14
1Y
3Y
Aug-14
Feb-15
Aug-15
Feb-16
Aug-16
Feb-17
10Y
Source: Wind, Mizuho research
Fig 26 Term spread and risk premium in the bond market
Risk premium (3Y A corporate bond - government
bond)
Term spread (government bond yield 10Y - 1Y)
2.5
7.5
2.0
7.0
1.5
1.0
6.5
0.5
6.0
0.0
Feb-14 Aug-14
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Feb-15 Aug-15
Feb-16 Aug-16
Feb-17
Source: Wind, Mizuho research
Both onshore and offshore RMB rates depreciated against the USD moderately, but still
within the CNY6.85-6.90/USD range. We believe the PBoC will likely try to maintain a
relatively stable exchange rate in 1H17.
Fig 27 RMB exchange rate
120
6.9
115
30 Jun 2014=100
7.0
CNY/USD
6.8
6.7
6.6
6.5
6.4
Feb-16
110
105
100
95
90
May-16
Aug-16
CNY
Nov-16
85
Jul-14
Feb-17
Jan-15
Jul-15
Jan-16
CFETS Trade-weighted Index
CNH
Source: Wind, Mizuho research
19
Jul-16
Jan-17
RMB/USD
Economics Research
Recent publications
Title(click on title to go to full report)
Date
Strong growth momentum to continue in 1Q
1-Mar
HK Economics Roundup (13): Financial Secretary reinterprets fiscal conservatism
27-Feb
China Economics Weekly: How long will the investment rebound continue?
17-Feb
A steadier RMB exchange rate in 2017
16-Feb
What is China's Trump card in a trade war?
15-Feb
Rising inflation and total social financing justify modest monetary tightening
15-Feb
A strong start for China trade in 2017
10-Feb
Small drop in forex reserves not a concern
7-Feb
Further rate hikes confirm tightening stance
6-Feb
Growth momentum continues in early 2017
1-Feb
China Economics Weekly: Counting the cost of a potential trade war (IV)
27-Jan
Interest rate hike signals the start of monetary tightening
24-Jan
No surprise in China's GDP data release
20-Jan
China Economics Weekly: Prioritizing SOE reform in 2017
20-Jan
Beyond Liaoning macro data falsification
19-Jan
HK Economics Roundup: No surprise from CY Leung's last policy address
19-Jan
The case for stable growth outlook in 2017
18-Jan
China Economics Weekly: Monetary policy outlook: objectives and dilemma
13-Jan
Trade war threat overshadows China's export outlook
13-Jan
Credit boom in the real economy amid a generally tightening monetary environment
12-Jan
Comparing two episodes of CNH liquidity squeeze to defend RMB
11-Jan
Surging PPI adds to inflation concerns
10-Jan
China Economics Weekly: Liquidity crunches and financial risk in 2017
6-Jan
Capital controls trigger liquidity squeeze in offshore RMB market
6 Jan
China to end 2016 on a high note
4-Jan
Sell-off in the bond market
21-Dec
China's policy goals for 2017
21-Dec
China Economics Weekly: Regulatory battle in China's insurance and securities sectors
16-Dec
A gradual pace of monetary tightening
14-Dec
November data confirms steady expansion
13-Dec
Rising inflation adds pressure for monetary tightening
9-Dec
China Economics Weekly: Counting the cost of a potential trade war (III)
9-Dec
Sustainability of export recovery is highly uncertain
8-Dec
China's monetary policy dilemma under a strong US dollar
6-Dec
China Economics Weekly: Counting the cost of a potential trade war (II)
2-Dec
Chinese growth momentum remains steady
1-Dec
HK Economics Roundup: Asset market uncertainty to rise from Trump presidency
28-Nov
China Economics Weekly: Counting the cost of a potential trade war (I)
25-Nov
Update on our RMB depreciation forecast
23-Nov
China Economics Weekly: Inflation risk in 2017
18-Nov
Why a Trump victory could be an opportunity rather than a risk for China
17-Nov
Economy remains steady while policy tightening begins
14-Nov
HK Economics Roundup: Robust housing market keeps sentiment buoyant
13-Nov
Monetary policy tightening has begun
12-Nov
China Economics Weekly: MPA and monetary policy tightening
12-Nov
More signs of rising inflationary pressure
9-Nov
External trade remains a challenge in China
8-Nov
China Economics Weekly: Takeaways from the Singapore Roadshow
4-Nov
Surging PMI to trigger policy tightening
1-Nov
Three reasons for RMB weakening trend
1-Nov
China Economics Weekly: Five new challenges for China's economy
28-Oct
RMB to weaken further amid rising appetite for the US dollar
25-Oct
20
Economics Research
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