CHINA ECONOMIC OUTLOOK: GROWTH, POLICY AND TRADE WAR Larry Hu Head - - PowerPoint PPT Presentation

▶
china economic outlook growth policy and trade war
SMART_READER_LITE
LIVE PREVIEW

CHINA ECONOMIC OUTLOOK: GROWTH, POLICY AND TRADE WAR Larry Hu Head - - PowerPoint PPT Presentation

Jul 05, 2023 375 likes •573 views

CHINA ECONOMIC OUTLOOK: GROWTH, POLICY AND TRADE WAR Larry Hu Head of China Economics Macquarie Capital Limited larry.hu@Macquarie.com +852 96358052 STRICTLY CONFIDENTIAL Market is defined by four Games of Chicken ....My only question

slide-1
SLIDE 1

STRICTLY CONFIDENTIAL

CHINA ECONOMIC OUTLOOK: GROWTH, POLICY AND TRADE WAR

Larry Hu Head of China Economics Macquarie Capital Limited larry.hu@Macquarie.com +852 96358052

slide-2
SLIDE 2

PAGE 2

Market is defined by four Games of Chicken

“....My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

  • -- Donald Trump, Aug 2019
  • 1. Trump vs. the Fed
  • 2. The Fed vs. the Market
  • 3. Trump vs. Xi
  • 4. Xi vs. the Market

Report: “3-Level Stimulus: How policy drives market performance”

slide-3
SLIDE 3

PAGE 3

Where we are in the cycle: 2011-12 vs. 2018-19

65 70 75 80 85 90 95 100 105 110 115 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MSCI China

2011 2018

Jan 01=100

95 100 105 110 115 120 125 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MSCI China

2012 2019

Jan 01=100

slide-4
SLIDE 4

PAGE 4

Every down cycle starts with tightening

  • 5

5 10 15 20 25 30 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

Infrastructure FAI ytd yoy % Tightening started

40 45 50 55 60 65 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

Manufacturing PMI

US Germany

Tighteing started

slide-5
SLIDE 5

PAGE 5

Stocks derated under tightening

  • 40
  • 30
  • 20
  • 10

10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

MSCI China (12m forward): 2011

PE changes EPS revision

%

  • 24
  • 20
  • 16
  • 12
  • 8
  • 4

4 8 12 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

MSCI China (12m forward): 2018

PE changes EPS revision

%

slide-6
SLIDE 6

PAGE 6

Clogged transmission of monetary policy: Falling Treasury yields and rising credit spread

2.5 3.0 3.5 4.0 4.5 5.0 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

10-year treasury yield % Level-1 started

250 300 350 400 450 500 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

Credit spread bp Level-1 started

slide-7
SLIDE 7

PAGE 7

Commodity prices fall with stocks

2,000 2,200 2,400 2,600 2,800 3,000 3,200 800 850 900 950 1,000 1,050 1,100 1,150 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 CRB metal index SHCOMP (RHS)

Level-1 started

2,400 2,600 2,800 3,000 3,200 3,400 3,600 800 820 840 860 880 900 920 940 960 980 1,000 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 CRB metal index SHCOMP (RHS)

Level-1 started

slide-8
SLIDE 8

PAGE 8

Stimulus escalates when PMI drops below 50

49 50 51 52 53 54 55 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

NBS manufacturing PMI Nov 2011 Jan 2015 Dec 2018

  • 10

10 20 30 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MSCI China (12m forward): 2012 vs. 2019

PE changes in 2019 EPS revisions in 2019 PE changes in 2012 EPS revisions in 2012

%

slide-9
SLIDE 9

PAGE 9

Treasury yields and credit spread

2.5 3.0 3.5 4.0 4.5 5.0 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

10-year treasury yield % Level-2 started

250 300 350 400 450 500 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

Credit spread bp Level-2 started

slide-10
SLIDE 10

PAGE 10

Why we are now: More slowdown ahead

  • 60
  • 40
  • 20

20 40 60

  • 10
  • 5

5 10 15 20 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 CREIS 100-city housing prices Macau gross gaming revenue (RHS)

yoy % yoy %

  • 40
  • 30
  • 20
  • 10

10 20 30 40 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

12mma yoy %

100-city land transaction (leading 6 months) New starts

slide-11
SLIDE 11

PAGE 11

Not only China, but globally

  • 1

1 2 3 4 5 6 7 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19

Global trade growth % yoy Jan 2018

  • 10
  • 5

5 10 15 20 25 30 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19

Earnings growth

China's industrial companies S&P500

yoy %

slide-12
SLIDE 12

PAGE 12

When stimulus goes to Level-3

  • 5

5 10 15 20 25 30 35 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

Industrial profits yoy % Level-3 started

  • 10
  • 5

5 10 15 20 25 30 35 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18 4Q18 2Q19

Broad fiscal revenue growth yoy % Level-3 started

slide-13
SLIDE 13

PAGE 13

The focus will be infra this time

  • 15

15 30 45 60 75 9 13 17 21 25 29 33 37 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 TSF Shadow financing (RHS)

yoy % yoy %

10 20 30 40 50 60 9 13 17 21 25 29 33 37 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 TSF Mortgage loans (RHS)

yoy % yoy %

slide-14
SLIDE 14

PAGE 14

Treasury yields and commodity prices

2.5 3.0 3.5 4.0 4.5 5.0 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

10-year treasury yield % Level-3 started

500 600 700 800 900 1,000 1,100 1,800 2,300 2,800 3,300 3,800 4,300 4,800 5,300 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Steel prices CRB metal index (RHS)

Yuan/ton Level-3 started

slide-15
SLIDE 15

PAGE 15

Trade war: China is targeting swing states and the financial market

500 1,000 1,500 2,000 2,500 3,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

China's soybean imports from the US

2019 2018 Average of 2015-17

US$ mn

  • 100
  • 50

50 100 150 200 250 300 350 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19

China's imports from the US

Soybeans Energy products Auto

3mma yoy %

slide-16
SLIDE 16

PAGE 16

Trade war: domestic politics or geopolitics?

150 200 250 300 350 400 450 500 550 600 650 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

China's trade surplus (over the past 12 months)

Overall US

US$ bn

  • 25
  • 20
  • 15
  • 10
  • 5

5 10 15 20 25 30 35 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 China'e exports to the US China's imports from the US

12mma yoy %

China’s hypothesis 1: Trade war is just for trade balance China’s hypothesis 2: Trade war is to contain China

slide-17
SLIDE 17

PAGE 17

Trade war: domestic politics or geopolitics?

Hypothesis 1: Trade war has escalated into a currency war. Hypothesis 2: China’s economy is terrible Hypothesis 3: The PBoC grabbed the window to prove line in the sand Our view is 3, while trade war remains as the biggest driver for the RMB

70 75 80 85 90 95 100 105 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 USD/CNY Dollar Index (RHS)

slide-18
SLIDE 18

PAGE 18

Conclusions

1. Policy under Level-2 now. Earnings are the key. 2. Stimulus is likely to go to Level-3 in 1-2 quarters 3. Bad news is good news, as recession risk will prompt policy makers to escalate stimulus and de-escalate trade war

95 100 105 110 115 120 125 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MSCI China

2012 2019

Jan 01=100