China Economic Highlights
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02 Dec. 2013
The China Weekly: Your “Eyes and Ears” on Important Economic News of the Week
Rating for MNC’s: NEUTRAL/POSITIVE
Bond yields remain elevated – is this the start of bank deleveraging?
Bond yields in China remained elevated last week, with five-year AAA+ rated corporate bonds hitting 6.0456 percent on Friday, up from 6.0146 percent the previous Friday, and 5.7394 percent two weeks prior (they averaged 4.7869 percent through the first 10 months of the year). And spreads between these highly rated corporate bonds and benchmark 10-year treasury bonds have widened to 1.494 basis points – higher than the 1.4557 basis points seen during the cash crunch in June. Interbank rates also remained elevated last week – the 7-day repo averaged 4.7 percent on Friday, down just a few ticks from Monday’s 4.74 percent – despite the 17 billion RMB injection from the PBoC. The tightness in Chinese liquidity, and the follow-on of rising bond yields has gotten the attention of the western media in recent days – and much of the coverage is predictably hyperbolic. But while liquidity needs are elevated, especially at medium-sized banks (for reasons we outlined last week), the overall banking system seems to be adapting to a world of higher rates. It remains to be seen whether the central bank will stand its ground (or be allowed to stand its ground by higher authorities) once these rates start to impact the real economy more visibly. However, we view somewhat elevated rates, especially if they can be sustained and volatility can be compressed, to be a positive first step toward unwinding the increased leverage in the banking system. The commentary around such dynamics is likely to emphasize the dangers of tight liquidity – and they do exist – but higher interbank interest rates could be step one in a necessary process of deleveraging.
Readers may have noticed that we have been writing about real estate a lot recently. At present, this is a primary space to monitor, from a policy standpoint and an economic growth standpoint. For example, a robust real estate tax is one key element that would be needed to help induce significant fiscal reform. If the central government wants the localities to borrow less, new revenue streams will have to become available, via transfers and broader-ranging taxes. However, the political likelihood of a real estate tax is slim at present – mostly because the first step in implementing such a duty would be to set up a functioning unified national property registration system. This move would be tantamount to asset disclosure for local government officials, and since many properties are owned by individuals who wish to remain anonymous, it is essentially a non-starter. The intention to implement such a registration system, supposedly coming to fruition by the end of 2014, has been emphasized by the leadership several times this year – most recently in the past few days. But previous attempts at such a regulation have been thwarted or simply ignored by local governments. We remain skeptical that such a system will be implemented by the mooted deadline, thus hindering the imposition of greater fiscal changes.
Meanwhile, the count of cities that have enacted new real estate tightening policies is now up to ten – with Nanjing being the latest addition. The southern capital has joined other second-tier cities that are following the lead of Beijing and Shanghai, by raising down payments on second homes. However, if monetary growth remains strong, then the renewed restrictions are unlikely to deter property speculators. What’s more, the moves may simply be perfunctory changes by local governments to appear to be addressing the issue of quickly rising prices – in order to appease Beijing. We explained in a recent Chart of the Week why localities have incentives to continue allowing strong price appreciation. Still, slower credit and monetary expansion, if successfully enacted by the central bank, would be the strongest force for tamping down growth in real estate prices. We continue to expect the central bank to pursue this path (although it is unlikely to be a smooth process), with the consequence of slower economic growth in 2014.
The NBS announced last week that profits at industrial enterprises (only including those with 20 million RMB or greater in annual revenue) increased 13.7 percent y-o-y through the first ten months of the year. The print was up from 13.5 percent growth through September. State-owned and state-controlled enterprises grew profit by 9.1 percent y-o-y through the first ten months while private company profits increased 17.5 percent during the same period. Industrial profits have improved since the doldrums of the summer, due in large part to heavy industries seeing a rebound from stepped-up infrastructure spending in Q3. Still, the bulk of state-owned companies continue to rely heavily on government subsidies, masking the true dynamics in their margins. The industrial sector will continue to struggle until the challenges of high leverage and overcapacity are addressed.