A stronger economy, increased credit demand and higher property prices. These are the key points from the first Asia Cracked China Experts survey.
Respondents were from a variety of industries – banking, commodity trading, investing, stockbroking, journalism, precious metals, education, digital advertising, head-hunting, house management and accounting.
This survey will run on a monthly basis and over time it’ll be interesting to see how the data trends.
Each respondent works at the coalface of their respective industries and I highly value their perspectives on the direction of the Chinese economy. The diversity of the industries surveyed also results in a broad view of China. The results are not meant to be scientific. The strength of the survey lies in the qualitative responses of the expert respondents. Having said that, the quantitative results do provide some indications of sentiment.
Email me for the full survey results: Below are some of the key findings. For the full survey results, please email me at firstname.lastname@example.org or send me a tweet @kevinwyeoh
Here are the results:
1) Over the next 6 months, the Chinese economy will:
There was almost complete agreement for a stronger economy over the next 6 months. Reasons varied, but the main ones included:
i) “The new kids on the block”: The fact that there’s a new Government means projects will start to get approved after the policy paralysis of 2012. And a new Government wants to make a positive first impression.
Education services exec: “The new regime will try to keep it relatively steady for the first year.”
Teacher: She cited confidence in the new Government vs the old Government and the capacity of the new Government to enact reforms. Though she is realistic and knows that it’s still early days (summarised points from her response in Chinese):
ii) Improving data:
Stockbroker: “Data points are suggesting a mild recovery…IP, exports, money supply etc.”
Commodities analyst: “Companies in materials and industrials will likely feel better simply because activity levels are up.”
iii) The realist view: These respondents accepted that the economy would strengthen in the short-term, but remain very sceptical in the long-term, because of the large imbalances in the Chinese economy.
Chief rep: “China’s economy is in cyclical recovery and poised for its last “hurrah”. Will take the pressure off to make significant reforms. This means China gets stuck on a perpetual slow growth rate medium-long term (i.e. 2-4% avg) resulting in eventual political crisis.”
Journo: “I think growth with increase, but structurally the economy will weaken. Infrastructure investment will help keep growth buoyant – the central government’s economic work meeting has already signaled we can expect more infrastructure construction – but it will be financed with debt taken on by local governments that can’t afford it.
It will also likely postpone the shakeout in excess capacity in the metals sector. Economic weakness in the US and EU will also likely be a drain on growth. Consumption might increase, but will not be enough to take up the slack from exports or substitute investment. So we will have more investment, compounding problems that will need to be sorted out in the not so distant future.”
iv) My view: I don’t disagree with most of what’s been expressed above. My own view corresponds more closely with the “realist” view as I don’t think the Chinese economy has been through the necessary pain and adjustment to put it on a more sustainable footing.
The Government has been opting for the easy way out and the longer this continues, the harsher the future cleansing that’ll be required.
2) Over the next 6 months, demand for credit in the Chinese economy will:
Along with a strengthening economy, the large majority of respondents believed that credit demand will be stronger over the next 6 months.
i) SME credit demand and reasonably priced credit: An auditor had the following nuanced reasoning:
Auditor: I base my answer on the question making reference to bank credit.
I believe that demand for credit among SOEs will weaken but that this will be offset by the existing latent demand for reasonably priced credit among the country’s SMEs and privately owned enterprises.
China’s capital markets are unique and essentially composed of two markets for credit, the second of which is a titanic-sized shadow banking sector comprised of trust companies, micro-credit companies, leasing firms, credit guarantee companies and outright underground banks.
As banks evolve their business models (and strategic necessity is pressuring them to do so), you will see greater reach by the banks into other areas of the company they historically avoided. This will initially be driven by smaller institutions who are under capital pressure due to low LDRs. The widening NIM ratios between the big banks and small banks is indicative of this trend also taking shape.
Thus, demand for credit will be less driven by real demand and rather by the option of reasonably priced credit emerging.
ii) Cyclical recovery: With the Chinese economy rebounding, so will credit demand.
Commodities analyst: “Project related demand will most likely be up. Still unsure if the private sector will have similar appetite, should depend on their destocking progress and out look of the economy.
I am not seeing a slow down of investment appetite in steel, cement and ali yet, but machinery guys are nowhere close to spending on more capacity. ”
Journo: “If more infrastructure construction gets the greenlight from Beijing, it will result in more credit demand. If housing prices are really going up, then that could result in more housing construction starts, and might result in more housing demand as people start buying before prices go up even higher.”
iv) My view: Credit demand should increase with a recovering economy. Also, banks generally try to lend as much as possible earlier in the year.
What I’ll be focusing on in 2013 will be the make-up of lending.
2012 saw a deceleration in new loans in the 2nd half of the year, presumably because borrowers were uncertain about the economic outlook. Another theme was the fall in medium-long term loan demand. In the place of long-term loans, trust financing rose to an all-time high, accounting for 8.2% of total loans, up 6.6% year-on-year.
Will medium-long term loans continue to decline as a proportion of overall lending? And will shadow financing continue to rise, increasing the underlying structural risks in the Chinese economy?
Noone thinks monetary policy will tighten over the next 6 months. 2/3 of respondents think the PBoC will hold tight, with 1/3 expecting a loosening bias.
i) “Stay the same camp”: Inflation, politics and bad debts in the banking system are the main reasons for holding tight.
Banker: “Inflation is the hidden tiger.”
Stockbroker: “Monetary policy has been effective so far and is therefore likely to continue.
Education exec: “Not sure, depends on the new PBOC Governor who should replace Zhou next March.”
Journo: “Rising bad debt problems will mean that the banks need more liquidity in order to keep making loans. However, Beijing is still wary of inflation picking up again.
Hence, I expect the central bank to continue using OMO operations to keeping interbank lending rates at a fairly steady level. That might involve pumping more cash into the system, but it won’t result in looser monetary conditions. It will be aimed at keeping things steady.”
ii) “Loosening camp”: The loosening camp thinks that relaxed policy is needed to fund investment and that inflation is less of a concern now. However their comments were still hedged – any loosening will not result in a gargantuan stimulus a la the 2009 mistake.
Commodities analyst: “Has to be expansionary to fund investment, although in my meeting with some officials last month, they said monetary policy should stay as flat as 2012. I’m sceptical simply because there is no way other than pumping more into the ‘total social financing’ numbers in 2013 to fund these projects.”
Chief Rep: “CPI, housing inflation etc less of a concern now. Chinese government will loosen slightly, this is more normalisation than stimulus. Chinese govt won’t go to full out stimulus because prior stimulus widely regarded as a failure.”
iii) My view: No change. I think inflation is still a concern. Plus, given some recent photos showing that property projects are starting to sell again (the photos below show a queue which started at 6am for a Foshan project!), I doubt the PBoC will want to risk another massive property buying binge.
There was almost a 50/50 split between those who think property prices will rise and those who think they’ll stay the same.
i) Prices to stay the same: Uncertainty and a lack of demand were cited as reasons for prices to not increase.
Auditor: “Financing channels for developers are once more opening up which should ease some of the financial pressures they have been under – and in particular moderate the pressure to sell assets down quickly. At the same time though, I think demand is limited. The combination of these 2 factors should be stable prices, low transaction volume.”
Headhunter: “Still a lot of uncertainty in the markets as it has slowed down slightly in Q42012.”
ii) Prices to increase: Pent-up demand was a key reason.
Education exec: “With new Chairman Xi in control, there is less stress regarding the power hand over. As there is pent-up demand waiting to see if the new leader is capable, so far looks decent.”
iii) My view: Increase but not a massive boom. I agree that there is pent-up demand and as shown by the pics above (and there are similar scenes in other cities across China), people want to buy. However, the Government will not want to inflate the property bubble even more. Thus, there will likely be some Government intervention if prices start to rise too quickly.
Email me for the full survey results: If you would like the full survey results, which includes all responses across each industry and responses to industry specific questions, please email me at email@example.com or tweet me @kevinwyeoh