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And then there was none…. Jim Walker Chief Economist September 2005. China will have a severe cyclical downturn in the next two years The current upswing, dating from early 2002, is Schumpeterian in nature Business creation is destroying profits - PowerPoint PPT Presentation
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Jim WalkerChief Economist
September 2005
And then thereAnd then therewas none…was none…
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 2©2005 CLSA Asia-Pacific Markets (“CLSA”).
China’s first capitalist cycle
China will have a severe cyclical downturn in the next two years
The current upswing, dating from early 2002, is Schumpeterian in nature
Business creation is destroying profits
As is natural in the late-cycle, costs are also rising
China’s cost structure is amplifying the problems
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 3©2005 CLSA Asia-Pacific Markets (“CLSA”).
What is a Schumpeterian cycle?
Entrepreneurial swarming
Cause? Private property rights, WTO membership – changes to the institutional framework, not inventions or innovations
Creative destruction
Skilled and managerial labour intensive
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 4©2005 CLSA Asia-Pacific Markets (“CLSA”).
China’s labour shortage
Skilled and managerial workers are in increasingly short supply
Wage inflation and job turnover are both high
The Taiwanese talent pool is almost dry
Time will solve the problem but not within this cycle
Productivity growth threatened
General inflation will result
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 5©2005 CLSA Asia-Pacific Markets (“CLSA”).
Another Austrian element
Banks cause cyclical fluctuations in market economies
China’s banks have been a cycle-damping influence previously
This cycle will be more normal
Expect a secondary credit contraction after the downturn begins
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 6©2005 CLSA Asia-Pacific Markets (“CLSA”).
When will it happen?When will it happen?
Variable Danger signal when: Current status: Overheating signalMay 2005:
MacroFast monetary growth relative to history YoY growth rate significantly exceeds 10-
year averageM1 below 10-year average; M2 below 10-year average
No
Rapid credit expansion relative to trend Deviation from trend on our BCR chart is greater than +1 standard deviation although real overheating present at only +2 or +3 sds
On trend No
Adjusted resource gap (the current account of the balance of payments plus net foreign direct investment inflows)
Deficit exceeds 3% of GDP Surplus of 5% of GDP estimated for 2004. CLSA estimate of 3.9% surplus in 2005
No
Accelerating general inflation CPI in excess of 5% CPI is 2.7% YoY in March. Core inflation rising from last year though
No
Rising asset prices with pressure building on most risky
Rotation from property and bonds to equities. Double-digit rises in property prices
General property inflation now in double-digits. Domestic share market the worst performer in Asia in 2004
Yes, but largely contained in the property market. Gambling
outlets growing though
Rising costs, particularly labour Wages rise faster than sales growth or nominal GDP. Raw material input costs rising fast
Official income statistics understating increases
Yes
MicroCorporate earnings Profits in general fall from previous period
(seasonally adjusted). Surprising on the downside
1Q05 'A' share corporate earnings growth in single digits
Yes
Accounts receivable Rising inexplicably in general Double digit rises but below nominal GDP growth. Not explosive yet
No
China’s overheating checklist
Source: CLSA Asia Pacific Markets
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 7©2005 CLSA Asia-Pacific Markets (“CLSA”).
We are lowering our forecast growth range for 2006 to 5-7%
Cost pressures on Chinese companies are unrelenting. The worst of the oil price increases have yet to be felt because of controlled product prices
Money supply is plentiful but money demand is faltering
Import growth profile is not about an inventory cycle. Domestic demand growth in 2Q05 around 8% compared with 18% in 2Q04
China growth – profitless and joblessChina growth – profitless and jobless
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 8©2005 CLSA Asia-Pacific Markets (“CLSA”).
Strains in the system are showing
1Q04 2Q04 3Q04 4Q04 1Q05 2Q0544.2 46.2 32.6 14.7 6.6 0.9
3 8 9 14 11 15
Net profit growth (YoY)
‘A’ share PROFITS UNDER PRESSURE
Source: CLSA Asia Pacific Markets
No. of sectors showing negative YoY profit growth (out of 22)
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 9©2005 CLSA Asia-Pacific Markets (“CLSA”).
Costs are squeezing marginsCosts are squeezing margins
Input Prices Index
40
45
50
55
60
65
70
75
Apr-0
4M
ay-0
4Ju
n-04
Jul-0
4Au
g-04
Sep-
04O
ct-0
4No
v-04
Dec-
04Ja
n-05
Feb-
05M
ar-0
5Ap
r-05
May
-05
Jun-
05Ju
l-05
Aug-
05Se
p-05
50.0 = no change on previous month, S.Adj.
Increasing rate of inf lation
Increasing rate of deflation
Output Prices Index
40
45
50
55
60
65
70
75
Apr-0
4M
ay-0
4Ju
n-04
Jul-0
4Au
g-04
Sep-
04O
ct-0
4No
v-04
Dec-
04Ja
n-05
Feb-
05M
ar-0
5Ap
r-05
May
-05
Jun-
05Ju
l-05
Aug-
05Se
p-05
50.0 = no change on previous month, S.Adj.
Increasing rate of inf lation
Increasing rate of deflation
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 10©2005 CLSA Asia-Pacific Markets (“CLSA”).
Jobless growth?Jobless growth?
Employment Index
45
50
55
Apr
-04
May
-04
Jun-
04
Jul-0
4
Aug
-04
Sep-
04
Oct
-04
Nov
-04
Dec
-04
Jan-
05
Feb-
05
Mar
-05
Apr
-05
May
-05
Jun-
05
Jul-0
5
Aug
-05
Sep-
05
50.0 = no change on previous month, S.Adj.
Increasing rate of growth
Increasing rate of contraction
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 11©2005 CLSA Asia-Pacific Markets (“CLSA”).
Manufacturing sector expansionManufacturing sector expansion
Purchasing Managers' Index
45
50
55
60
Apr-
04
May
-04
Jun-
04
Jul-0
4
Aug-
04
Sep-
04
Oct
-04
Nov-
04
Dec-
04
Jan-
05
Feb-
05
Mar
-05
Apr-
05
May
-05
Jun-
05
Jul-0
5
Aug-
05
Sep-
05
50.0 = no change on previous month, S.Adj.
Improving business conditions
Deteriorating business conditions
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 12©2005 CLSA Asia-Pacific Markets (“CLSA”).
Above target M2 but no reaction Above target M2 but no reaction
China M2 growth and bank lending
0
5
10
15
20
25
30
35
Jan-
02
Apr-0
2
Jul-0
2
Oct
-02
Jan-
03
Apr-0
3
Jul-0
3
Oct
-03
Jan-
04
Apr-0
4
Jul-0
4
Oct
-04
Jan-
05
Apr-0
5
Jul-0
5
Bank Lending growth %YoY Bank Lending growth %QoQ sa 3mma
Source: CEIC
8
11
14
17
20
23
26
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
M2 growth %YoY M2 growth %QoQ sa 3mma
Source: CEIC
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 13©2005 CLSA Asia-Pacific Markets (“CLSA”).
Import growth shows demand slowing Import growth shows demand slowing
China import growth
-20
0
20
40
60
80
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
(%YoY)
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 14©2005 CLSA Asia-Pacific Markets (“CLSA”).
Mitigating forces Mitigating forces
A
B
a
b
c
China's growth cycle is here A = 1998B = 2015a = 2001b = 2006/7c = 2008/9
IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. Page 15©2005 CLSA Asia-Pacific Markets (“CLSA”).
Real GDP growth in the range 4-5% in 2007, maybe earlier
Deflation likely as credit contracts and asset markets fall
Global inflation pressures defused – commodity prices will fall temporarily
Banking sector recapitalisation will become a matter of urgency. Foreign investors will be welcomed
Profile of the downturnProfile of the downturn
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