China: the rise and rise (and rise) of the RMB
24 Feb 2017
Economics
China: the rise and rise (and rise) of
the RMB
DBS Group Research
24 February 2017
• Too many Americans have a myopic view of the RMB – they measure its
value against the US dollar alone. This is a mistake
• The RMB has appreciated by 41% in trade-weighted terms since 2005.
In real (inflation-adjusted) terms, it has appreciated by 48%
• That’s a lot of appreciation. And it’s likely to continue in spite of capital
outflows and reserve losses
• To stabilize reserves, the capital account is being tightened. That
should surprise no one. Stability has always been paramount in China
• The appreciation of the RMB owes mainly to faster GDP and income
growth than in the West. China continues to grow 3 times faster than
the developed world. The RMB will continue to trend north accordingly
If there’s one thing Trump and a few too many congressmen continue to get wrong
about China, it’s that Beijing pursues a weak currency policy. The opposite is true.
For 20 years China has allowed and sometimes actively pursued a policy of currency
appreciation. This is likely to continue. The Americans’ difficulty in seeing this stems
from a self-centered view of the world – in this case that the value of the RMB (or any
currency) should be measured against the US dollar alone.
Alas, the US isn’t the center of the world it once was. The only way to correctly
gauge the value of a currency today is against a basket of trading partner currencies. Virtually every undergraduate student of economics since the collapse of
Bretton Woods in 1971 has learned this. And virtually every central bank in the
Chinese yuan vs trading partners
Jan05=100, increase = appreciation, BIS effec FX rate
160
150
148
SDR
bump
140
141
130
120
110
Real
100
Nominal
90
05
06
07
08
09
10
11
12
13
14
15
16
17
David Carbon • (65) 6878-9548 • [email protected]
Refer to important disclosures at the end of this report.
1
China: the rise and rise (and rise) of the RMB
Basket policies make
good sense – like diversifying a portfolio
24 Feb 2017
world that watches its currency does so with this basket framework in mind. It’s
good policy. If the dollar goes to the moon, you don’t destroy your export sector
by chasing it. If the euro goes to the floor, you don’t destroy your inflation record
by chasing that currency either. You ‘swim down the middle‘ – and in so doing you
stand the best chance of maintaining the balance between growth and inflation
that you originally aimed for. Toward that end, the IMF, BIS and many individual
central banks calculate and track basket, or ‘effective’ exchange rate indices.
Like in many developing economies, China’s currency has appreciated dramatically
over the past 30 years. Why does this happen? When low income countries develop, wages and incomes rise – not just in absolute terms but relative to those in
advanced countries. This convergence can be reflected in higher wages per se or in
stronger currencies – both allow emerging consumers to buy more in global markets for the same hour of work. Typically, a combination of both higher wages and
stronger currencies is seen, and it’s not uncommon for emerging market currencies
to appreciate in real (inflation adjusted) terms by 1%-2% per year as their incomes
rise. Take the yen for example. In 1960, 100 yen would buy 28 US cents. Today it
buys nearly a dollar. A Singapore dollar bought 33 US cents in 1960; today it buys
more than twice that. These examples are in bilateral terms vs the dollar (and
they’re not adjusted for inflation) but the idea is clear.
China’s currency appreciation has been no less dramatic. According to the BIS, the
trade-weighted RMB has strengthened by 2 percent per year since 1994. In ‘real’
(inflation-adjusted) terms, it has appreciated by 2.6% per year.
RMB appreciation has been even faster since 2005. Over the past dozen years, the
trade-weighted RMB has risen by 3% per year, or 41% in total (chart on page 1). In
real terms, it’s appreciated by 3.4% per year, or by 48% in total. By any measure,
that’s compelling appreciation.
The SDR hump
There have been a few squiggles, of course, as the chart on page 1 shows. The most
recent one – and the one that’s had a lot of people up in arms – is highlighted in red
and labelled “SDR hump”. What’s that all about?
The trade-weighted
RMB has appreciated
by 41% since 2005.
That’s a lot of appreciation. And it’s
likely to continue
Status mostly. In mid-2014, when oil prices began their 70% plunge, the world’s
three major currencies – the dollar, euro and yen – embarked on one of their biggest divergences in decades. The dollar took off for the moon. The euro and the
yen sank to the floor. Between June-14 and early-2015, the euro and yen both fell
by 22%-23% against the greenback.
What did Asia’s currencies do? Just what you would have wanted them to do: they
swam down the middle, falling against the dollar but rising against the euro and
yen. On average, against this simple ‘tri-currency’ basket of dollars, euros and yen,
Asia’s currencies ran flat as a pancake, and they remain squarely in the middle today
[1].
At least that’s what most Asian currencies did. The Hong Kong dollar couldn’t because it was (and remains) pegged to the US dollar. If the latter took 12 steps north,
the former did too, in real time.
But China’s RMB ran step-for-step with the dollar too. Why? Good question, that
‘why?’. The trade-weighted RMB had already appreciated by 30% in 9 years when
the dollar shot to the moon in mid-2014. Why on earth would Beijing want to
chase it there? For one reason and one reason only: officials wanted the RMB to be
included in the IMF’s Special Drawing Right (SDR) – the iconic currency basket that
would symbolize the RMB’s arrival on the global stage. China wanted the RMB in
the same club as the dollar, euro, yen and pound.
2
China: the rise and rise (and rise) of the RMB
24 Feb 2017
Chinese yuan vs tri-ccy basket of USD, EUR, JPY
Jan13=100, incr= appr'n, month avg, last point is 19Feb17 (3d avg)
120
China chased the dollar and the SDR for
a year. It wasn’t elegant. It might have
been a mistake. But
it’s over. The RMB
is back on trend and
moving north again
Informal approval: July15
Formal approval: Nov15
116
112
108
SDR vanity
appreciation
CNY
106
104
100
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Depreciation? Seriously?
The trouble was, the IMF decision to include the RMB was a year away. Which
meant, for the next 12 months, the Chinese would have to be good global citizens.
For the next 12 months, the RMB would have to track the dollar. And so it did (chart
above).
All the way up until August 2015, when the 2% ‘devaluation’ that rocked the world,
well, rocked the world. Exactly why the 2% move in the RMB in Aug-15 caused so
much commotion remains one of those funny but trivial mysteries. First of all, 2%
isn’t a depreciation; it’s nothing. The euro moves 2% against the dollar twenty
times a year. The yen does too. And both had just dropped 23% against the dollar,
ten times the move in the RMB.
Second, the trade-weighted RMB had already appreciated by 30% over the 9 years
up to mid-2014. Now, by August 2015, it had appreciated another 15%. Did no one
think this sort of global citizenship might be a little excessive? A little too noble?
Finally, in July, the IMF let it be known that unless something went terribly wrong,
the RMB would be included in the SDR when the Board met in November. Didn’t
July’s informal approval give the Chinese a big green light to gasp a little oxygen?
One might a thunk so. But the green light turned red again immediately. The reaction to the 2% ‘devaluation’ was so severe that officials had little choice but to pull
the RMB back north and wait a couple of more months (chart above). In November,
the RMB was formally inducted into the SDR and the game was over. The RMB
promptly fell by 10% in trade-weighted terms – right back to where it would, and
probably should have been all along, had it not been for the coveted SDR. By July
2016, the RMB’s detour had rejoined the main road, where it then continued on its
journey north.
To continue marching northward again may sound strange, because it occurred in
the face of significant capital outflow, a $1trn drop in foreign reserves and an awful
lot of market and political hoopla – myopic though it remains – regarding the RMB’s
bilateral value against the US dollar, subjects to which we now turn.
3
China: the rise and rise (and rise) of the RMB
24 Feb 2017
How many reserves are enough?
China’s foreign reserves have fallen by some $1trn since the middle of 2014. Some
were spent chasing the SDR / pushing the RMB to its mid-2015 peak. Some were
spent keeping the RMB on its trade-weighted appreciation path since returning to
trend in July-2016. In all, one-quarter of China’s reserves have been spent in the past
2.5 years. Plainly, this can’t go on forever. At some point outflows and officials will
come to loggerheads. Which begs the questions everyone are asking: how many
reserves does China need? And what happens when you get to that number?
People used to think
$3trn of reserves
were too many. Now
they’re not so sure
How many reserves “are enough” depends on what you plan to do with them.
There are only two reasons to hold foreign reserves: to dampen swings in the exchange rate and, if you run a trade deficit, to service your debt and/or continue to
import if your exports hit a snag. From the first angle, concern over China’s reserve
levels seems premature. From the second, it seems misplaced entirely.
Start with the first concern, where there’s more than a little irony involved. Back in
2006 when China’s reserves hit $1trn, everyone wondered why it needed so many.
Inflows were strong, current account surpluses were high. The RMB was a “oneway bet”. Inflows and surpluses continued and, by 2008, people were asking why
China needed $2trn of reserves. The RMB was a bigger “one-way bet” than before.
Soon they were asking why China needed $3trn and then $4trn of reserves. Oneway this, one-way that. The future was so certain.
China – FX reserves
USD bn, incl fwd commitments
4,500
3,821
4,000
3,500
3,181
3,370
3,312
2,986
2,847
3,000
2,399
2,500
1,946
2,000
1,528
1,500
1,000
3,843
610
819
1,066
500
0
04
05
06
07
08
09
10
11
12
13
14
15
16
Of course it wasn’t really and one day it all stopped. People sold instead of bought.
Reserves fell back to $3trn. That used to be “too many”. Now it was too few. Talk
of one-way bets returned. Now they were down instead of up.
Three points. First, there’s no such thing as a one-way bet. They last until the day
they don’t. Sentiment swings, and swings again. The chart of China’s inflows and
outflows at the top of the next page makes that plain. Inflows have turned to
outflows and vice-versa five times since the global financial crisis. Second, $3trn of
reserves is still a boatload of reserves. Not long ago, people thought that was too
many.
Finally, the reason you accumulate reserves isn’t to hold them, it’s to spend them.
When everyone wants in, accumulation lets you keep your currency ‘swimming
down the middle’ where fundamentals might say it ought to be. When everyone
wants out, you spend them for the same purpose. Up or down, in or out, you lean
against the tide of one-way bets, much like central banks anywhere use interest
rates to lean against the tide of investor sentiment generally. Buying – and sell-
4
China: the rise and rise (and rise) of the RMB
24 Feb 2017
China– capital inflow/outflow
BoP capital acct surplus as % of GDP
Inflow: Asia's V-shaped recovery
15
10
Inflow:
RMB appreciation
5
One-way bets last
until the day they
don’t
Outflow:
Fed hike worries
China growth worries
0
-5
-10
Outflow:
Lehman collapse;
Global financial crisis
-15
08
09
Outflow:
EU debt crisis;
10
11
12
13
14
15
16
17
ing – reserves is a natural and normal part of central bank activity in any emerging
market economy.
Debt, imports and ‘reserve guidelines’
There’s a second reason to hold FX reserves. If you’re an old-fashioned emerging
market economy, you run trade deficits – and you rely on foreign loans to pay for
your excess imports. Reserves allow you to keep buying imports temporarily if foreign loans dry up. They also allow you to keep servicing your foreign debts – again
temporarily – if your exports hit a snag. This is where IMF (and others’) reserve
guidelines come into play. If reserves cover X months worth of imports and Y percent of your short-term debt, you’re okay. Or not, if you fall short.
But this isn’t China. China doesn’t run deficits. It runs surpluses. Big ones. And
has done for the past 25 years. China isn’t borrowing money from foreigners, it’s
lending to them, big time. Back in 2006-2008, China’s current account surpluses
averaged 9% of GDP (chart below). Surpluses are lower today but China is still
lending to its neighbors an amount equivalent to 2% of its GDP every day, week
and month of the year. Currently, this amounts to US$20bn of net foreign lending
every month.
China runs big surpluses. It’s lending
to outside world, not
borrowing from it
China – current account balance
% of GDP
12
10
8
6
4
2.1%
2
0
04
05
06
07
08
09
10
11
12
13
14
15
16
17
5
China: the rise and rise (and rise) of the RMB
24 Feb 2017
Do that for 25 years and you wind up with a pretty big external bank account.
China’s latest statement, dated September 2016, is shown in the table below. The
country does have some gross liabilities, including some gross debt. If one defines
‘debt’ as the sum of bonds, loans and deposits, China’s gross debt comes to $863bn.
Could reserves cover this? Yes, nearly four times over.
China – international assets & liabilities
USD bn, September 2016
Net assets
1,747
Gross assets
6,491
Foreign reserves
Currency
3,264
3,166
Foreign reserves
Currency
3,264
3,166
FDI (outward)
1,310
FDI
-1,651
Securities
Equities
Bonds
-454
-379
-75
Gross liabilities
4,744
FDI (inward)
2,961
Securities
Equities
Bonds
341
207
133
Securities
Equities
Bonds
795
586
208
538
Loans
314
Loans
223
Loans
Other
Deposits
Trade Credit
366
25
283
Other
Deposits
Trade Credit
1,035
366
551
Other
Deposits
Trade Credit
668
341
268
"Debt" (Bonds+
Loans+Depos)
ST debt (Depos)
173
"Debt" (Bonds+
Loans+Depos)
ST debt (Depos)
1,036
"Debt" (Bonds+
Loans+Depos)
ST debt (Depos)
863
25
366
341
FX reserve adequacy ratios
Ratio to gross debt
Ratio to gross ST debt
Ratio to net debt
Ratio to net ST debt
3.7
9.3
infinite or n.a.; China is a net creditor
infinite or n.a.; China is a net creditor
More importantly, it’s net debt that matters and China’s isn’t just low, it’s negative.
Foreigners owe China money, not vice-versa. If Trump shows up on China’s doorstep
asking for his $100 back, Xi says, sure, right after you give me my $200 back. It’s not
hard to imagine whose currency would go up, and whose down, in that scenario.
The bottom line is that IMF and others’ guidelines for reserve adequacy are anachronisms, left over from 30 years ago when so many emerging markets ran external
deficits. Some still do of course and the guidelines are helpful here. For China, and
much the rest of Asia, they are irrelevant. The next time you see a newspaper headline claiming China’s reserves have fallen another notch closer to the IMF’s guideline
mark, smile and save your dollar.
In net terms, China’s
reserve ratios aren’t
just high, they’re infinite. China is a net
creditor to the world
Reserves in the big leagues
China doesn’t have a debt issue. But if outflows continue, reserves could eventually
run dry. And China’s in the SDR big leagues now. Don’t ‘real’ central banks keep a
hefty stockpile?
No. The ECB holds essentially zero reserves, at least compared to China’s $3trn
(chart at top left of next page). Of course this means it has to let the euro run
wherever it may. And run it does. Since the collapse of Lehman Brothers in 2008,
the euro has made 7 large moves against the dollar averaging 20% each time (chart
at top right of next page). Down-up, down-up – 7 times in 8 years; 20% per move.
They make the 2% ‘devaluation’ in the RMB in August 2015 look like the trivial
event that it was.
6
China: the rise and rise (and rise) of the RMB
24 Feb 2017
FX reserves – China & ECB
Euro vs US dollar
USD bn, 2016, incl fwd commitments
Jan08=100, monthly avg, increase=appreciation
3,500
106
3,000
2,986
+17%
102
+18%
98
2,500
+13%
94
2,000
90
1,500
86
-24%
82
1,000
GFC
78
500
55
74
-22%
-18%
EU debt
crisis
7 moves since 2008: avg 20%
-29%
70
China
08
ECB
09
10
11
12
13
14
15
16
17
Alas, the euro’s moves make two more things clear too. First, fundamentals don’t
necessarily drive currencies. The relative growth outlooks as between Europe and
the US didn’t swing 7 times in 8 years. Monetary policies of the US and Europe
didn’t see-saw 7 times in 8 years either. That didn’t stop the euro. Little wonder
that emerging market central banks see the need to hold a few reserves.
The second thing the 7 moves make clear is that predicting currency movements is
tricky business and may be a mug’s game altogether. No one we know predicted
any of those moves, although everyone got it ‘right’ – a couple of times probably –
by the third or fourth bounce. That doesn’t count.
The euro has made 7
big moves since 2008.
No one we know predicted any of them
The unpredictably of the euro and its estrangement from the fundamentals are
worth bearing in mind today. Everyone and their brother seems to be positioned
for a stronger dollar this year based on expectations for a couple of 25 basis point
Fed hikes. Good fundamental reason. Useless since 2008. And would 50 basis
points of padding offset another 2000 basis point swing anyway?
More on this later. Here, the point is a simpler one: if you’re willing to let your currency float, you needn’t hold a nickel of reserves. But if you don’t hold a nickel of
reserves, you’d best put your coat on. It’s windy outside.
FX reserves – key SDR member countries
USD bn, end-2016, incl fwd commitments
3,500
3,000
2,986
2,500
2,000
1,500
1,158
1,000
500
101
55
39
UK
ECB
US
China
Japan
7
China: the rise and rise (and rise) of the RMB
FX reserves – China & Japan
24 Feb 2017
Euro and yen value vs US dollar
USD bn, 2016, incl fwd
Jan08=100, monthly avg, increase=appreciation
3,500
150
3,000
2,986
140
130
2,500
JPY
50%
moves
120
2,000
110
1,500
1,158
1,000
100
90
500
EUR
80
70
China
Japan
08
09
10
11
12
13
14
15
16
17
The ECB isn’t the only ‘real’ central bank that doesn’t keep a stock of reserves. Neither the Fed nor BoE hold any to speak of either (chart at bottom of previous page).
But again, the US and UK must forego currency stability for this reason. Capital
mobility leaves no option.
Japan? Japan does hold a few reserves (chart above left). But the lesson here is
there’s no point having them if you don’t use them. Japan leaves them in the vault
and the yen has perhaps been even more volatile than the euro (chart above right).
The yen hasn’t made seven 20% moves since 2008 but it has made a couple of 40%50% moves and a couple in the 15%-20% range to boot.
Not surprisingly, accusations of Japanese currency manipulation never get far. One
could point a finger at the BoJ’s quantitative easing policies, and the ECB’s too,
but they learned from the Fed. And it’s not clear that QE in any of these countries
accounted for more than a temporary / sentiment-driven movement in currencies
anyway. Virtually all of the QE money purportedly ‘injected’ into these economies
went nowhere but into the basements of their central banks in the form of excess
bank reserves.
The line in the sand
China is tightening
the capital account.
That should surprise
no one. Stability has
always been paramount
The question remains: if outflows from China continue, the central bank would
have to choose between tightening up the capital account and letting the currency
float. Which would it choose, and when would it choose it? Where is the line in
the sand?
Stability has always been paramount in China and continued appreciation since
July 2016 suggests the authorities wish to keep the trade-weighted RMB on the
appreciation path it has run for the past 20 years. Were outflows to exceed the
current account surplus – currently $20bn per month – reserve losses could threaten
this objective. With reserves having fallen by $1trn since June-2014, the question
becomes, how much further will authorities allow reserves to fall before they close
up the capital account?
Our sense is not by a lot more than they already have. The capital account is already
being tightened – outward personal and corporate investment is being scrutinized
more closely and sometimes postponed or rejected; previous approvals are sometimes being withdrawn; banks are being asked to delay outward remittances until
8
China: the rise and rise (and rise) of the RMB
A reasonable guess
is that China would
tolerate another
$300bn-$500bn of
reserve losses before
finally squeezing
outflows to the same
level of inflows
24 Feb 2017
an equivalent inward flow can be matched with it, and so on. Interest rates have
also been snugged up to encourage investors to stay home. (see: “CN: what to
watch for as the PBoC tightens”, Feb 20) Given all this, a reasonable guess might
be that authorities tolerate another $300bn - $400bn of reserves losses before outflows were eventually squeezed by enough to bring them into line with inflows
from the current account surplus currently running at $20bn / month.
If so, that would stabilize reserves at $2500bn-$2700bn, a level last seen in mid-2010
(and which most thought excessive at the time), though equilibrium would presumably leave the trade trade-weighted RMB running more sideways than northward.
If the authorities wished to ensure an upward path for the RMB, they could squeeze
outflows a little harder / sooner. When sentiment turned, as it regularly does, the
screws could be loosened, leaving the upward path of the trade-weighted RMB
intact.
It’s worth noting at this point that a stronger currency supports several explicitly
stated reform goals currently being pursued – namely, to encourage consumptiondriven growth over export-driven growth, and to encourage spending over saving
more generally. While we have long disagreed with the policy of encouraging consumption over investment, a strong currency does encourage consumption spending at the same time it discourages exports. Plainly it also tends to lower trade surpluses, which by definition represent excess saving and investment over and above
domestic demand.
In all likelihood, the capital account will continue to be squeezed for the sake of
stability in the currency and reserves. Surely this trade-off surprises very few. For
how long and ultimately how tightly the screws get turned remains to be seen. But
for now, the important fact remains that the trade-weighted currency continues to
head north and reserves remain at a very substantial $3trn. That’s not a bad picture.
What might brighten it further?
That would stabilize
reserves at $2500bn $2700bn – a level last
seen in mid-2010 and
which most thought
excessive at the time
A few things. Obviously investor sentiment is key. As the chart of capital inflow /
outflow at the top of page 5 shows, swings occur regularly and can amount to many
percentage points of GDP. For many reasons, one could reasonably expect better
sentiment going forward, perhaps substantially better. China’s GDP growth has
stabilized [2]. Domestic debt (total social financing) has stabilized as a percentage
of GDP [3]. The manufacturing and service sector PMIs have both turned north. CPI
and PPI inflation have both turned north. Global trade, including Asia’s, has been
rising for the past 12-14 months. Growth in the US and Europe is noticeably better
today than a year ago. Bottom line? One-way bets last until the day they don’t.
Domestic and external factors alike suggest that day could come tomorrow.
Funnily enough, events in Europe could have the biggest impact on China‘s capital
flows and the RMB this year. This owes to the ‘swimming down the middle’ nature
of the trade-weighted RMB and the fact that many Chinese – corporations and
Moms and Pops alike – seem to have the same myopic view of the RMB that Trump
has: they all gauge its value primarily in terms of the US dollar. This is a mistake but
in this case it could turn out to be a lucky one for the RMB and the PBoC.
Given the bilateral focus on the US dollar, a fall in the RMB vs the dollar encourages
bandwagon outflow, even though the trade-weighted RMB may be headed north.
And, as discussed earlier, most expect a stronger dollar this year based on expectations for a couple of rate hikes from the Fed. If everyone is correct, it could be a
tough year for the PBoC.
But what if the euro surprises, like it’s done 7 times in the past 8 years? What if the
euro rose vs the dollar? In that case, the basket arithmetic means the RMB would
fall against the euro and rise against the dollar. ‘Dollar myopia’ would push the
bandwagon in favor of the PBoC. Reserves would once again head north instead
of south.
9
China: the rise and rise (and rise) of the RMB
China is still growing
3 times faster than
the developed world.
The RMB is likely to
continue north accordingly
24 Feb 2017
Is such a euro move possible? Plainly, the 7 moves since 2008 prove it is. Consider:
at 1.05 per US dollar, the euro is already extraordinarily weak. Some of this owes to
expectations of Fed hikes, some of it owes to fears of anti-globalization candidates
winning one (or more) of the several European elections coming up and some of it
owes to a newly-awakened fear of Grexit.
But what if these risks don’t materialize? What if the anti-globalization forces don’t
get elected, as most still anticipate? What if Greece’s debt gets rolled over for a
101st time? And what if the economy continues to improve in 2017 as it has very
noticeably for the past year? Then Europe could all-of-a-sudden look pretty good.
And today’s very weak euro could all-of-a-sudden move as sharply and unpredictably as it has 7 other times since 2008. This time it would be north.
That’s a lot of what-ifs. Dollar-euro may go up. It may go down. More certain is
that China will continue to grow 3 times faster than the developed world and incomes will rise three times faster accordingly. Which means that, beneath all huckus-ruckus of bilateral currency moves that few can explain and fewer can predict,
the trade-weighted RMB remains ever so likely to continue its 20-year march north.
Notes:
[1] Since June-2014, most Asian currencies have neither risen nor fallen against a simple basket of dollars, euros
and yen. The HK dollar is an exception, as it is pegged to the US dollar. The Malaysian ringgit is another
exception, having suffered from commodity exposure and political turmoil.
Asia – appreciation vs tri-currency basket since June 2014
% versus basket of USD, EUR and JPY, as at 19Feb17
16
RMB back where it should have been
all along
12.6
12
8.8
8
2.9
4
1.8
1.1
0.6
0
-0.7
-4
-1.2
-2.0
-8
-12
-16
-19.4
-20
HKD
TWD
THB
CNY
INR
KRW
IDR
SGD
PHP
MYR
10
China: the rise and rise (and rise) of the RMB
24 Feb 2017
[2] GDP growth appears to have stabilized around 6.5%. We expect it will continue to slow over the mediumterm, probably by 1.25 - 1.75 percentage points every 10 years. In the near-term, China’s growth will likely
outpace the developed world’s by a factor of 2-3.
China – GDP growth step-down
% YoY
14
Downshift-1
12.2
12
10.8
9.9
10
9.9
Downshift-2
10.2 10.0
9.4
Dripdown
8.8
8.1
8
7.6
8.1
7.5
7.9
7.6
7.9
7.7
7.4
7.5
7.2
7.1
7.0
Stability
7.0
6.9
6.8
6.7
6.7
6.7
6.8
6
4
2
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
[3] Total social financing appears to have stabilized at around 200%of GDP. Total national debt appears to have
stabilzed at about 240% of GDP.
China -- national debt
% of GDP, qtr avg
236%
National
debt
240
238%
200
200%
199%
Govt debt
(Central + local)
160
Total social
financing
120
80
"Shadow banking"
1. Entrusted loans
2. Trust Co. loans
3. Bankers' acceptances
40
33%
30%
0
05
06
07
08
09
10
11
12
13
14
15
16
17
Sources:
Trade weighted exchange rates are from the BIS. All other data are from CEIC Data, Bloomberg and DBS
Group Research (forecasts and transformations).
11
China: the rise and rise (and rise) of the RMB
24 Feb 2017
GDP & inflation forecasts
GDP growth, % YoY
CPI inflation, % YoY
2013
2014
2015
2016f
2017f
2013
2014
2015
2016f
2017f
US
Japan
Eurozone
1.5
2.0
-0.3
2.4
0.3
0.9
2.6
1.2
1.9
1.7
1.0
1.7
2.7
1.0
1.6
1.5
0.4
1.5
1.6
2.7
0.6
0.1
0.8
0.0
1.2
-0.1
0.2
2.2
0.5
0.6
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
5.6
4.7
7.1
4.4
2.9
5.4
5.0
6.0
6.1
2.9
0.9
6.0
4.9
5.0
5.9
2.0
2.8
6.7
5.0
4.2
6.8
2.0
3.2
6.2
5.3
4.5
6.4
2.8
3.4
6.6
6.4
2.1
2.9
2.4
2.2
6.6
6.4
3.1
4.2
1.0
1.9
4.1
6.4
2.1
1.4
-0.5
-0.9
0.6
3.5
2.1
1.8
-0.5
0.2
2.7
4.5
2.2
2.7
0.9
1.5
3.4
China
Hong Kong
Taiwan
Korea
7.7
3.1
2.2
2.9
7.3
2.5
4.0
3.3
6.9
2.4
0.7
2.6
6.7
1.0
1.5
2.7
6.5
2.0
2.1
2.5
2.6
4.3
0.8
1.3
2.0
4.4
1.2
1.3
1.4
3.0
-0.3
0.7
2.0
2.6
1.4
1.0
1.8
1.5
1.0
1.6
India*
6.7
7.3
7.6
6.9
7.6
9.5
6.0
4.9
4.8
5.0
* fiscal year ending Mar
Policy & exchange rate forecasts
Policy interest rates, eop
Exchange rates, eop
current
1Q17
2Q17
3Q17
4Q17
current
1Q17
2Q17
3Q17
4Q17
0.75
-0.10
0.00
1.00
-0.10
0.00
1.25
-0.20
0.00
1.50
-0.20
0.00
1.75
-0.20
0.00
…
112.8
1.058
…
111
1.08
…
113
1.08
…
114
1.07
…
115
1.07
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam^
4.75
3.00
3.00
n.a.
1.50
6.50
4.75
3.00
3.25
n.a.
1.50
6.50
4.75
3.00
3.50
n.a.
1.50
6.50
5.00
3.00
3.50
n.a.
1.50
6.50
5.00
3.00
3.50
n.a.
1.50
6.50
13,332
4.45
50.2
1.41
35.0
22,809
13,339
4.46
49.8
1.44
36.3
22,782
13,518
4.56
50.2
1.45
36.5
22,782
13,697
4.67
50.7
1.46
36.6
22,782
13,876
4.78
51.1
1.48
36.8
22,782
China*
Hong Kong
Taiwan
Korea
4.35
n.a.
1.38
1.25
4.35
n.a.
1.38
1.25
4.35
n.a.
1.38
1.25
4.35
n.a.
1.38
1.25
4.35
n.a.
1.38
1.25
6.87
7.76
30.7
1,129
6.93
7.78
32.2
1,199
7.02
7.78
32.4
1,201
7.11
7.78
32.5
1,204
7.19
7.78
32.7
1,206
India
6.25
6.25
6.25
6.25
6.25
66.8
69.6
70.5
71.4
72.4
US
Japan
Eurozone
^ prime rate; * 1-yr lending rate
Market prices
Policy rate
Current
(%)
US
Japan
Eurozone
10Y bond yield
Current
1wk chg
(%)
(bps)
FX
Current
1wk chg
(%)
Index
Equities
Current
1wk chg
(%)
0.75
0.10
0.00
2.37
0.06
0.23
-4
-3
-12
101.0
112.8
1.058
0.5
0.1
-0.3
S&P 500
Topix
Eurostoxx
2,364
1,556
3,334
0.6
0.3
0.7
Indonesia
Malaysia
Philippines
Singapore
Thailand
4.75
3.00
3.00
Ccy policy
1.50
7.57
4.04
4.92
2.23
2.69
3
-5
-5
-3
1
13332
4.45
50.2
1.405
35.0
-0.1
0.2
-0.4
0.9
0.1
JCI
KLCI
PCI
FSSTI
SET
5,373
1,704
7,336
3,138
1,567
-0.1
-0.2
0.7
1.3
-0.6
China
Hong Kong
Taiwan
Korea
4.35
Ccy policy
1.38
1.25
…
1.91
1.07
2.19
…
4
-5
5
6.87
7.76
30.7
1129
-0.2
0.0
0.3
1.5
S'hai Comp
HSI
TWSE
Kospi
3,251
24,115
9,769
2,106
0.7
0.0
0.1
1.2
6.25
6.92
6
66.8
0.1
Sensex
28,893
2.1
India
12
China: the rise and rise (and rise) of the RMB
24 Feb 2017
Recent Research
ID: next move is a rate hike 21 Feb 17
FX: mid-quarter update
1 Nov 16
SG budget: building the future economy
21 Feb 17
SG: down but not out
1 Nov 16
CN: what to watch for as PBoC tightens
20 Feb 17
Rates: global rates roundup
31 Oct 16
TW: diversifying into Southeast Asia
21 Oct 16
CN: cyclical bottom
19 Oct 16
IN: assessing current account
improvement
18 Oct 16
PHgov bonds: expensive (still)
11 Oct 16
SG: upgraded
20 Feb 17
TW: Trump’s policies and Taiwan
14 Feb 17
SG: shaping the future
6 Feb 17
FX: USD strength hits a roadblock
3 Feb 17
IN budget: a balanced approach
2 Feb 17
Rates: global rates roundup 2 Feb 17
TW: shifting into higher gear
27 Jan 17
SG: time to recalibrate
26 Jan 17
EZ: ECB stays defensive 24 Jan 17
SGD: sticking to neutral 7 Oct 16
EZ: not taper time yet
7 Oct 16
CN: avoiding the Minsky moment
6 Oct 16
IN: monetary policy committee lowers rates
4 Oct 16
Qtrly: Economics-Markets-Strategy 4Q16
ID: looking at an S&P upgrade
19 Jan 17
US: pop goes the headline
18 Jan 17
Asia cyclical dashboard
CNH: SDR inclusion - right time, right place
8 Sep 16
IN: savings rate in need of a boost
2 Sep 16
IDR: towards further resilience
1 Sep 16
17 Jan 17
IN budget: stability over growth
12 Jan 17
Rates: SGS: US-dependent
10 Jan 17
IN: is oil the next headache?
13 Dec 16
Qtrly: Economics-Markets-Strategy 1Q17
15 Sep 16
8 Dec 16
SGS: on Fed watch
30 Aug 16
Global growth: redefining strength
26 Aug 16
TW: 5 things you need to know about the
aging population
18 Aug 16
ID: FDI much stronger than it appears
30 Nov 16
SG: risks beneath the GDP figures
18 Aug 16
EZ: ECB challenged by higher bond yields
16 Nov 16
CN: the risk of keeping status quo
17 Aug 16
TW: 7 likely outcomes in 2017
15 Nov 16
CN: why falling private investment growth
is a worry
12 Aug 16
ID: tax revenues slipping
11 Aug 16
SG: labour market pain
10 Aug 16
Global: revenge of the demographic dividend 14 Nov 16
US: structural interest rate compression
2 Nov 16
Disclaimer:
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herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees,
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are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982.
Tel: 65-6878-8888. Company Registration No. 196800306E.
13