1. Date
Ting Lu +852 2536 3718
China economist
Merrill Lynch (Hong Kong)
ting.lu@baml.com
China’s landing
in the short and long run:
Hard or soft?
Product ID
1
2. China in 2011-20: The major challenge:
Aging population
Date
The aging population
• As of 2010: Age 0-14: 16.6%; Age 15-
million person
350 59: 70.1%; Age 60 or above: 13.3%; 65
300 and above: 8.9%.
250
200
150
• Compare with 2000，Ratio of age
100
50
group 0-14 declined 6.3 ppt, ratio of age
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 group 15-59 rose 3.4ppt, ratio of 60 and
Age 0-14 Age 65 and abov e
above rose 2.9 ppt，ratio 65 and above
rose 1.9 ppt.
The falling size of young working age population
million person
600 • The size of age group 20-34 peaked in
2000, and dropped 22.0% from 2000 to
500
2008.
400
300
• The size of age group 20-44 peaked in
200
2000, and dropped 3.6% from 2000 to
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Age 20-44 20-39 20-34
2008.
Source: CEIC, BofA Merrill Lynch calculations.
2
3. Date Lewis turning point in China
1.6
1.5 Impact of global
1.4 financil crisis
Lew is turning
1.3
point in China
1.2
1.1
1.0
0.9
0.8
0.7
0.6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Labor supply-demand ratio
More people from villages to cities? Urbanization ratio rose to 51.3% in 2011 from
36.2% in 2000. Net increase in urban population is 253mn in the period of 2000-2010.
Migrant population rose 81% to 261mn in the same period.
3
4. Date
%
30
40
50
60
70
80
90
1960
1963
1966
1969
1972
1975
1978
1981
Japan
1984
1987
1990
1993
China 1996
1999
2002
2005
Dependency ratio: China vs. Japan
2008
2011
4
7. 10
12
14
16
0
2
4
6
8
%
1980 Date
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
GDP grow th
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
Impact on growth: double digit is history
7
2026
8. Still backward: Versus other countries
Date
0.950 and over 0.700–0.749 0.450–0.499
0.900–0.949 0.650–0.699 0.400–0.449
0.850–0.899 0.600–0.649 0.350–0.399
0.800–0.849 0.550–0.599 under 0.350
0.750–0.799 0.500–0.549 not available
China and World Human Development Index. Source: UNDP, 2008 update
8
9. Date Sill backward: Versus the US
12 China in 2010 China Japan
Real growth of GDP per capita,
Japan 1960s Hong Kong, Singapore,
10
Korea and Taiw an
8
6 Japan 1980s
%
4
2
0
0 25 50 75 100 125
GDP per capita, as % of US
9
10. Date
China’s capital stock
Total length of railroad Number of airports
KM
15,000
250,000
13,000
200,000
11,000
150,000 9,000
7,000
100,000
5,000
50,000 3,000
0 1,000
-1,000
India
US
UK
China
Korea
Brazil
Russia
Japan
France
Germany
India
US
UK
Brazil
Russia
China
Japan
Korea
France
Germany
Total length of paved roadway Number of vehicles per 1000 people
KM
7,000,000 900
6,000,000 800
700
5,000,000
600
4,000,000 500
3,000,000 400
2,000,000 300
200
1,000,000
100
0 0
India
US
UK
Korea
China
Japan
Brazil
France
Russia
Germany
India
US
UK
Korea
Japan
China
Brazil
France
Russia
Germany
Source: CEIC, BofA Merrill Lynch calculations. 10
11. Date Flying geese: This time it’s domestic flight
Less developed regions in China could see
higher growth going forward as growth
trickles down from more developed areas.
Differentiation in GDP growth across
regions will provide rich implications for
investment.
Regional differentiation in GDP growth
% YoY
16
14
12
10
8
6
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
National Central East West
Source: CEIC, BofA Merrill Lynch calculations.
11
12. Date The great leap forward in human capital
Million person
8
7
6
5
4
3
2
1
0
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
New ly enrolled Fresh graduates
12
14. Date Lewis turning point: Impact on wage
% YoY
24
20
16
12
8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Wage at State Ow ned Enterprises Urban Collectiv es
14
15. Date Inflation: Chinese style
Jan 2001 =1
2.0
1.8
1.6
1.4
1.2
1.0
0.8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Food Clothing Transport & Telecom
15
16. China could overtake the US on nominal GDP
Date
USD, bn
50000
40000
30000
20000
10000
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
China GDP in USD US GDP
16
18. Date Signs of slowdown
Power consumption Oil processing and metal output
%YoY % YoY
30 40
30
20
20
10
10
0
0
-10
-10
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
July
2007 2008 2009 2010 2011 2012
Pow er consumption 2nd industry 3rd industry Crude oil processing Ten non-ferrous metals
Cement and steel PMI and IP
% YoY % % YoY
50 60 25
40
55 20
30
20 50 15
10
45 10
0
-10 40 5
-20
35 0
2007 2008 2009 2010 2011 2012
2005 2006 2007 2008 2009 2010 2011 2012
Cement Crude steel PMI IP (RHS)
18
19. Date Analyze and predict the slowdown
The declining ratio of exports to GDP The three major demand-side components of GDP
% y oy
%
50
40 40
30
30 20
10
20 0
-10
10 -20
-30
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Real FAI grow th Real retail sales grow th
Real ex port grow th
Ratio of ex ports to GDP
The enlarging gap between FAI and GFCF in China
Value added of exports accounts for about half of
RMB, bn headline value of exports in China. In 2011,
30,000
exports contributed 13% of GDP.
25,000
20,000
In 2011, FAI and real estate FAI makes up 47%
15,000
and 10.0% of GDP respectively.
10,000
5,000
0
In value added terms (by stripping out imported
capital goods and raw materials for FAI), FAI
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Gross Fix ed Capital Formation Headline FAI contributes 42% of China’s GDP. Value added of
consumption contributed 45% to GDP in 2011.
19
20. Date Consumption is still supported by robust income growth
% YoY
25
20
15
10
5
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Retail Sales Urban income per capita, y td Rural income per capita, y td
20
21. Date Sources of slowdown: External demand
%,y oy
6.0
Forecast
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
1Q2013
2Q2013
US EA Japan
21
22. Date Sharp decline of export growth
Exports, imports and trade surplus The sub-index Export orders of PMI and export growth
% YoY USD bn
80 40 % YoY
75 60
60 30 65 40
40 20 55 20
20 10 45 0
35 -20
0 0
25 -40
-20 -10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
-40 -20
PMI: Ex port orders China's ex port grow th (RHS)
2005 2006 2007 2008 2009 2010 2011 2012
Trade balance (RHS) Exports Imports
Major destinations of China’s exports Processing imports and exports
% YoY
80 % YoY
80
60
60
40 40
20 20
0 0
-20
-20
-40
-40
2004 2005 2006 2007 2008 2009 2010 2011 2012
2007 2008 2009 2010 2011 2012 Processing ex ports Processing imports
ASEAN EU Japan US
22
23. Date Property FAI growth has been falling
% YoY
60
50
40
30
20
10
0
-10
2007 2008 2009 2010 2011 2012
Infrastructure Manufacturing Real estate
23
24. Date Property FAI growth more stable than starts, but….
%YoY
80
60
40
20
0
-20
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Property FAI New Home Starts
Home completion Home under construction
24
25. Date Policy-making amid the leadership transition
Start of China’s
housing reforms
Local govts’
five years
1998 2002/03 2007/08 2012/13
Hu and Wen’s 10 years
25
26. Date
The economics of drainage
New or Expansion
Manufacturing
Capacity
Relocation (from
coast to inland) √
FAI
Low-cost public housing √
Infrastructure
and housing Low profile infrastructure √
High profile infrastructure
Private housing
26
27. Date How do local govts fund infrastructure in the future?
The sharp difference between central and local govt • Over the past weekend, the heaviest rainstorm in Beijing in
61 years has killed 37 people and stranded numerous cars
RMB, bn
30000
on drowned streets and underpasses.
25000 • Why Beijing lacks some basic infrastructure despite
enormous investment in pass years? Why some
20000
infrastructure like highways is favored and some other
15000 infrastructures are disfavored by governments?
10000
5000 • The answer lies in a better understanding of the special
0 structure of the Chinese government and public finance and
1999 2001 2003 2005 2007 2009 2011 the solution also lies in a fiscal reform. In China, with a few
Central Local exceptions like railway, almost all infrastructures were built
by local governments, which are prohibited from raising
money from bond markets but are under pressure to boost
GDP growth.
Fiscal revenue of local and central govt
• With this backdrop, local officials naturally biased their
RMB, bn
10,000 spending towards productive investment projects like
highways, roads, ports and industrial parks which could
8,000 boost GDP growth, while cut spending on drainage, subway,
6,000
social housing and hospital which are good for social welfare
but are less productive in the near term.
4,000
• It’s not all local government’s fault. Prohibited from
2,000
borrowing long-term funding from capital markets, local
0 governments have to rely on relatively short-term loans for
1999 2001 2003 2005 2007 2009 2011 funding their infrastructure spending, but they have to favor
Central Local those profitable projects which could generate enough cash
flow for repaying bank loans.
27
28. Date Social housing: the great leap forward?
mn square meters
800
700
600
500
400
300
200
100
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Social housing Commodity housing
28
32. Date China’s grain consumption as percentage of global
Corn prices: China and US Soybean prices: China and US
RMB/Ton USD/Bushel RMB/Ton USD/Bushel
3,000 10 6,000 20
5,500 18
8 5,000 16
2,500
4,500 14
6
2,000 4,000 12
4 3,500 10
1,500 3,000 8
2
2,500 6
1,000 0 2,000 4
2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012
Corn: China Dalian Corn: US CME (RHS) Soy bean: China Dalian Soy bean: US CME (RHS)
Grain consumption composition in China Balance of China’s grain production and consumption
Million tons % w orld total
600 35
500 30
25
400
20
300
15
200
10
100 5
0 0
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Rice Wheat Corn Soy bean
Rice Wheat Corn Soy bean Production Consumption
32
33. Date Weak link between pork and grain prices
Weak link between pork and grain prices Food CPI breakdown
RMB/kg RMB/kg % YoY
35 5.0 100
4.5 80
30
4.0
60
25 3.5
3.0 40
20 2.5 20
2.0 0
15
1.5
10 1.0 -20
-40
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
2005 2006 2007 2008 2009 2010 2011 2012
Pork Corn (RHS) Soy bean meal (RHS)
CPI: Food: Grain CPI: Food: Vegetable CPI: Food: Pork
China’s hot inventory
Limited impact of US drought on China’s food inflation
(1) China is still relatively self-sufficient on grain (imports
% MoM mn
accounting for 9.5% of total food consumption);
4 480
3 470
2
(2) Almost all food imports are soybean, but China
460
1
imports 57% of soybeans from non-US markets and
450 soybean output in the US is less affected by droughts;
0
440
-1
-2 430 (3) The major channel from global corn and soybean
-3 420 prices to China’s inflation is pork, but China has its
-4 410 unique pork price cycle, which happens to be in its
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
downturn in 2H12 and pork prices’ response to feed
Number of liv e hogs (RHS) Liv e hogs Breeding sow s
grain price shocks is quite slow.
33
34. What does the Chinese government
Date will do and have to do?
• Ease property tightening measures by cancelling home purchase restrictions and
encouraging land/home supply;
• Cut RRR and ease/raise the 75% loan-to-deposit ratio;
• Increase fiscal spending of the central government;
• Open up long-term bond financing to provincial governments;
• Cut tax, especially value added and corporate income tax;
• Appropriately easing restrictions on lending to local governments
34
35. Date YoY change of home prices in top-tier cities
% YoY
30
20
10
0
-10
-20
2006 2007 2008 2009 2010 2011 2012
Beijing Shanghai Shenzhen
35
36. Date Regional differentiation of property prices
RMB per sqm
20,000
15,000
10,000
5,000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
National Beijing Shanghai
36
37. Date Chinese cities are quite “small”
% of city population to national population
25.0
20.0
15.0
10.0
5.0
0.0
Beijing Shanghai New Toky o Mex ico Moscow Bangkok London Seoul
York City
City
37
38. Fiscal revenue and expenditure of the
Date central government
%
35
30
25
20
15
10
5
0
-5
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Fiscal balance/GDP (RHS) Fiscal rev enue
Fiscal ex penditure
38
39. Date The history of local government debt
RMB, bn
14000
12000
10000
8000
6000 Forecast
4000
2000
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total local gov t debt Local gov t total rev enue
39
40. Date The overestimated local government debt
Local government’s fiscal revenue
RMB, bn
LGFV debt is an important issue, and will
12000 drag the market down from time to time.
10000
But we believe it’s manageable. We don’t
8000
expect banking crisis, crash of FAI and
6000 collapse of the economy because:
4000
• It’s domestic debt;
2000
0 • Local govts are not that bad;
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
• Local govts fiscal revenue accounts for
Primary fiscal revenue Fiscal transfer from central govt Net Income from land sales
88% total national fiscal revenue, and it’s
The rising amount of local government debt
growing at 30% pace this year;
RMB tn % YoY • Massive fiscal transfer from central to
12 70
60
local;
10
50
8
40
• The low debt burden of the central
6
30 government;
4 20
2 10 • Total govt debt (central plus local)
0 0
should be about 45-50% of GDP
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total local govt debt Growth rate (RHS)
40
41. The 75% cap on loan-to-deposit ratio is not
Date untouchable
%
105
90
75
60
45
30
15
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
RRR Loan-to-deposit Ratio
41
43. Date Currency: redback versus greenback
21 June 2010 =100
110
108
106
104
102
100
98
96
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12
RMB-NEER RMB-USD
43
44. Date
-15
-10
-5
0
5
10
15
20
25
30
%YoY
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
IP
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Pow er use
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Pow er use: Industry
Dec-11
Mar-12
Jun-12
44
Can we trust China’s GDP statistics?
45. Date Know China’s economic structure first
Service and Agriculture is more stable than industry How about China’s service sector?
For the financial sector which is dominated by
%YoY
16
commercial banks, bank loan and deposit growth was
16.0% and 12.3% yoy respectively in 1H.
12
• In the sector serving international trade, export and
8
import growth registered 9.2% and 6.7% yoy respectively
in 1H.
4
• Retail sales registered a 14.4% nominal and 11.5% yoy
0
real growth in 1H, meaning decent growth of shops and
gasoline stations.
00
01
02
03
04
05
06
07
08
09
10
11
12
GDP 1st 2nd 3rd
• Spending on government service must be growing too.
The three major demand-side components of GDP Though only about a third of government expenditure is
used on government itself, growth of payment on
% y oy
government service should be quite close to growth of
50 fiscal expenditure, which was at 21.3% yoy in 1H, only
40 slightly below 21.6% in 2011.
30
20 • The number of passengers carried by all transportation
10 vehicles could be a good proxy for travel. Growth of that
0 actually slightly picked up to 8.2% yoy in the first five
-10
months of 2012 from 7.6% in 2011.
-20
-30
•Power consumption in the service sector grew 12.1%
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
yoy in 1H, only slightly down from 13.5% in 2011.
Real FAI grow th Real retail sales grow th
Real ex port grow th
45
46. Date Why power consumption is different production
Power consumption and production could be different In theory, power production and consumption should be
very close to each other as electricity is hardly storable.
%, y oy However, we believe power consumption released by the
30 National Energy Administration (NEA) is a better indicator
25 of actual power demand/output than NBS’ power output
20 data, which only include enterprises with annual sales
15
revenue above RMB5mn before 2011 and RMB20mn.
10
5
0 The difference between power production and consumption
-5 then depends on the power generated by smaller plants. If
-10 the supply condition of coal is tight, smaller plants generate
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
less power as they are in disadvantage compared with
large independent power producers (IPP) in securing coal
Pow er consumption Pow er production supply.
Service and Agriculture is more stable than industry Before Jan 2010, power production and consumption
largely moved together. After that, the supply condition of
tons, mn coal has been increasingly slack as reflected by climbing
100
inventory in selected IPPs. Consequently, the role played
80 by smaller plants has been increasing over time. After Jan
2010, most power consumption data released by the NEA
60 tends to be higher than production data released by the
NBS, which might underestimate actual power output by
40
excluding smaller electricity plants.
20
0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
46
47. Date Then distorted power consumption structure
Breakdown of China’s power consumption
Power consumption of the service industry, which
2%
accounts for 43% of the economy but consumes only
12%
Agriculture
10.7% of total power, grew 11.3% yoy in 2Q (down
from 13.1% in 1Q and 13.5% in 2011).
11%
Growth of power consumption of industry (40% of the
Industry
economy and 74% of power demand) slumped to 3.0%
yoy in 2Q from 4.5% in 1Q and 11.8% in 2011.
Serv ice
Ferrous and non-ferrous metals consume 19% of
power but contributes only 5% to GDP and 12.5% to IP
Residential (The non-ferrous metals sector consumes 7.5% of
75% national power but contributions only 1.7% to China’s
GDP and 4.3% to IP). A 15ppt slowdown of the metal
sector could lower power consumption by about 3ppt,
but the impact on GDP is only 0.75ppt. Actually that’s
Regulations led to some volatility of metal output
roughly the case from 2011 to 2012.
%YoY
40 And the unique base effect
30
From summer 2010 Beijing started pushing local
governments to reach the special 11th Five-year-plan
20 energy efficiency target. Under pressure, many local
10 governments reduced or even cut off power supply to
some heavy users of power.
0
-10 However, right after end-2010, Beijing eased its push
on energy efficiency and local governments stopped
Mar-10
Jul-10
Sep-10
Mar-11
Jul-11
Sep-11
Mar-12
Jul-12
Sep-12
Jan-10
Jan-11
Jan-12
May-10
Nov-10
May-11
Nov-11
May-12
nagging manufacturers. Manufacturers were eagerly to
Ten non-ferrous metals Steel product Crude steel increase their inventories.
47
