China Macro Outlook Path towards policy normalisation amidst ongoing pandemic risks
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China Macro Outlook Path towards policy normalisation amidst ongoing pandemic risks February 2021 PUBLIC
ICBC Standard Bank | China Macro Outlook
Contents
PUBLIC
China Macro Insights
Strong 2020 GDP growth justifies room for gradual policy normalisation 4
China remains on course to lead global recovery in 2021 and beyond 5
Most economies are expected to recover from the severe pandemic shock 6
Solid growth recovery in Q4 exceeded the pre-pandemic output level 7
But consumption remained as a growth laggard throughout 2020 8
Strong supply-side recovery started to show early signs of plateauing 9
Property and infrastructure-led investment rebound is slowing down 10
Exports benefited from unexpected demand for pandemic-related goods 11
Consumption faces fresh lockdown pressure despite notable Q4 rebound 12
Inflation divergence reflects weaker recovery momentum in consumption 13
PBoC may gradually shift away from its highly accommodative credit policy 14
…with extra caution against risks of re-inflating asset bubbles 15
Ultra-proactive fiscal policy is likely to be normalised at the NPC meeting 16
2ICBC Standard Bank | China Macro Outlook
Contents
PUBLIC
Market Implications
Front-end interbank rates saw heightened volatility in Jan-2021… 17
…leading to notable movements of CGB yields across different tenors 18
But PBoC is determined to hold policy rates and absorb excessive liquidity 19
PBoC balance sheet expansion is very timid compared to peers… 20
… while rate differentials between China and US remain significant 21
Dollar weakness and macro-recovery continue to support the yuan 22
Yuan’s two-way fluctuation and balanced capital flows to be key focuses 23
Appendix
Appendix I: Market awaits further policy clarity at the March NPC meeting 24
Key economic targets in the past Government Work Reports (2018 – 2020)
Appendix II (a): Phase-One deal remains incomplete 25
Appendix II (b): Shortfall of the Phase One deal might be too big to ignore 26
Appendix III: “Six guarantees” have been Beijing’s top policy priorities in 2020 27
Appendix IV: China’s COVID-19 emergency relief policy package (Feb-Mar) 28
3ICBC Standard Bank | China Macro Outlook
Strong 2020 GDP growth justifies room for gradual policy normalisation
PUBLIC
● After a challenging Q1, China ended 2020 on a high note: with 2.3% annual growth and 6.5% growth yoy in
Q4, exceeding consensus and recovering beyond pre-pandemic output levels.
● Lifting China’s GDP beyond the CNY 100tn threshold during a pandemic is indeed a significant milestone
for Beijing. That said, the so-called ‘V-shaped’ recovery so-far is heavily reliant on investment and
unexpected resilience in exports.
● Private consumption in itself remained a growth laggard throughout 2020, and it is now facing renewed
challenges from sporadic Covid-clusters and local lockdowns. New measures to further unleash domestic
consumption are expected to be outlined during March meetings.
● That said, the robust 2020 performance still justifies room for gradual policy normalisation in 2021 –
especially fiscal policy – to continue economic rebalancing towards private consumption-based growth.
● Recent shift in PBoC’s monetary stance towards risk prevention against re-inflating asset bubbles, curbing
excessive short-term borrowing, has already put banks and property developers under tighter regulatory
scrutiny. This has also triggered an unexpected episode of interbank liquidity squeeze in January. Given
this context, we think the central bank is unlikely to seek an immediate exit from the highly
accommodative credit policy in the near term.
● On the other hand, the yuan is on course to receive further support from macro fundamentals including
replenishing trade surplus, commitment to gradual policy normalisation, a low interest rate environment
and sufficient yield differentials between US and China. PBoC appears to prefer more two-way volatility.
● In a nutshell, with China’s recovery still facing lingering threats from the global pandemic, 2021 macro
policy tone is likely to remain flexible and data dependent – with emphasis on “stability”. Policy
normalisation is likely to be rolled out at a gradual and managed pace, especially as precautionary policy
buffers are needed in the event of domestic or external uncertainties that may hinder 'dual circulation’.
4ICBC Standard Bank | China Macro Outlook
China remains on course to lead global recovery in 2021 and beyond
PUBLIC
IMF World Economic Outlook Growth Projections (Jan 2021 WEO Update)
10.0%
8.1%
8.0%
6.3%
6.0% 5.5% 5.6%
5.0%
4.3% 4.2%
4.0% 3.1%
1.9%
2.0%
0.0%
-2.0%
-3.0%
-4.0%
-4.9%
-6.0%
-8.0%
-8.0%
-10.0%
2020 2021 2022
Global Economy Advanced Economies Emerging Markets & Developing Economies China
Source: IMF, ICBC Standard
5ICBC Standard Bank | China Macro Outlook
Most economies are expected to recover from the severe pandemic shock
PUBLIC
Growth outlook of key economies
2020 2021 2022
Advanced Economies -4.9 4.3 3.1
US -3.4 5.1 2.5
Euro Area -7.2 4.2 3.6
Germany -5.4 3.5 3.1
France -9.0 5.5 4.1
Italy -9.2 3.0 3.6
Spain -11.1 5.9 4.7
UK -10.0 4.5 5.0
Japan -5.1 3.1 2.4
Canada -5.5 3.6 4.1
Emerging Markets and Developing Economies -2.4 6.3 5.0
China 2.3 8.1 5.6
India -8.0 11.5 6.8
Russia -3.6 3.0 3.9
Brazil -4.5 3.6 2.6
South Africa -7.5 2.8 1.4
Nigeria -3.2 1.5 2.5
Saudi Arabia -3.9 2.6 4.0
Source: IMF (WEO Jan 2021), ICBC Standard
6ICBC Standard Bank | China Macro Outlook
Solid growth recovery in Q4 exceeded the pre-pandemic output level
PUBLIC
China’s economy expanded by 6.5% yoy in Q4 vs. 4.9.% in Q3 But the recovery was unbalanced and heavily relied on public support
20% 10% 10.0%
15% 8% 8.0%
6.9% 6.9% 6.7%
6.5% 6.4% 6.5%
6.2% 6.0% 6.0%
10% 6% 6.0%
4.9%
5% 4% 4.0%
3.2%
0% 2% 2.0%
-5% 0%
0.0%
-10% -2%
-2.0%
-15% -4%
-4.0%
-20% -6%
-6.0%
-25% -8% -6.8%
-8.0%
2020-Mar
2018-Mar
2019-Mar
2018-Jun
2019-Jun
2020-Jun
2017-Dec
2018-Sep
2018-Dec
2019-Sep
2019-Dec
2020-Sep
2020-Dec
FAI (3m mov. Avg.) Retail Sales (3m mov. Avg.) Net Exports Investment
IP (3m mov. Avg.) Quarterly GDP Growth (yoy %, RHS) Contribution to real GDP Growth % Consumption Quarterly GDP Growth ( yoy %, constant price)
Source: WIND, ICBC Standard Source: WIND, ICBC Standard
7ICBC Standard Bank | China Macro Outlook
But consumption remained as a growth laggard throughout 2020
PUBLIC
Retail sales failed to catch up with supply-side recovery in 2020 and is facing renewed lockdown challenges to reverse the declining trend
10%
8.0%
6.5%
4.9%
5%
6.1% 3.2%
0% 2.3%
0.7%
-1.6%
-5% -3.9%
-4.8%
-6.8% -5.9%
-6.8% -7.2%
-10% -8.6%
-9.9%
-11.4%
-15% -13.5%
-16.2%
-20% -19.0%
-20.5%
-25%
Jan - Dec Jan - Feb Jan - Mar Jan - Apr Jan - May Jan - Jun Jan - Jul Jan - Aug Jan - Sep Jan - Oct Jan - Nov Jan - Dec
2019 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020
Retail Sales (YTD yoy) Fixed Asset Investment (YTD yoy) Industrial Production (YTD yoy) GDP (YTD yoy) Quarterly GDP (yoy)
Source: WIND, ICBC Standard
8ICBC Standard Bank | China Macro Outlook
Strong supply-side recovery started to show early signs of plateauing
PUBLIC
PMI began to moderate from post-lockdown high towards year-end Manufacturing and private firms led the supply-side recovery
60 60 15%
10%
55 55
5%
0%
50 50
-5%
-10%
45 45
-15%
-20%
40 40
-25%
-30%
35 35
Industrial Production (yoy %) IP - Manufacturing
Official Manufacturing PMI Caixin Manufacturing PMI
IP - SOEs IP - Private Enterprises
Source: WIND, ICBC Standard Source: WIND, ICBC Standard
9ICBC Standard Bank | China Macro Outlook
Property and infrastructure-led investment rebound is slowing down
PUBLIC
YTD FAI resumed positive growth in September but the rebound was primarily led by real estate and infrastructure investment
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
2020-Jul
2019-Oct
2020-Jan
2020-Jun
2020-Oct
2019-Dec
2020-Feb
2020-Dec
2020-Mar
2019-Sep
2020-May
2020-Aug
2020-Sep
2019-Nov
2020-Nov
2020-Apr
FAI YTD (yoy %) FAI - Real Estate FAI - Manufacturing FAI - Infrastructure
Source: WIND, ICBC Standard
10ICBC Standard Bank | China Macro Outlook
Exports benefited from unexpected demand for pandemic-related goods
PUBLIC
Q4 trade growth was gained by taking a greater share of global Notable pick up in exports to US further aided exports rebound in Q4
exports, which also boosted current account surplus to record highs led by ASEAN and the EU in (YTD exports, yoy %)
100 100% (yoy %, YTD)
20%
80 80%
10%
60 60%
0%
40 40%
-10%
20 20%
-20%
0 0%
-20 -20% -30%
-40 -40% -40%
Current Account (USD bn, LHS) Exports (% yoy)
US EU ASEAN Africa LATAM
Imports (% yoy)
Source: WIND, ICBC Standard Source: WIND, ICBC Standard
11ICBC Standard Bank | China Macro Outlook
Consumption faces fresh lockdown pressure despite notable Q4 rebound
PUBLIC
Monthly growth momentum in retail sales began to gather pace But e-Commerce has been indispensable in driving the recovery of
since Sep. led by pick-up in auto sales and consumer goods retail sales as other segments all remained negative in YTD terms
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
-30%
-30%
-40% -40%
-50% -50%
2019-Oct
2020-Jul
2020-Jan
2020-Jun
2020-Oct
2019-Dec
2020-Feb
2020-Dec
2020-Mar
2020-Sep
2019-Sep
2020-May
2020-Aug
2019-Nov
2020-Nov
2020-Apr
Retail Sales - Restaurants Retail Sales - Goods Retail Sales YTD (yoy %) Retail Sales - Goods
Retail Sales - Restaurants Retail Sales - Online sales
Retail Sales - Cars Retail Sales (yoy %)
Retail Sales - Auto
Source: WIND, ICBC Standard Source: WIND, ICBC Standard
12ICBC Standard Bank | China Macro Outlook
Inflation divergence reflects weaker recovery momentum in consumption
PUBLIC
Core CPI remained below 1.0% in Q4 and further dipped into Factory deflationary pressure finally reversed the trend in Jan 2021
deflation territory due to high base effect supported by rising commodity prices
6% 6% 15% 15%
5% 5%
10%
10%
4% 4%
5%
3% 3%
5%
2% 2% 0%
0%
1% 1%
-5%
0% 0%
-5%
-10%
-1% -1%
-2% -2% -10% -15%
2018-Jul
2019-Jul
2020-Jul
2018-Jan
2019-Jan
2019-Oct
2020-Jan
2021-Jan
2018-Oct
2020-Oct
2018-Apr
2019-Apr
2020-Apr
PPI Consumer Durable Goods
Headline CPI Core CPI (excl food & energy) Non-food CPI
Manufactured Industrial Input Raw Materials
Source: WIND, ICBC Standard Source: WIND, ICBC Standard
13ICBC Standard Bank | China Macro Outlook
PBoC may gradually shift away from its highly accommodative credit policy
PUBLIC
Q2-Q3 2020 saw the highest pace of credit expansion since GFC Double-digit growth in broad social credit since March began to
with considerable growth of bank lending and total social financing show signs of moderation towards year-end
6,000 35% 18.0%
30%
5,000 16.0%
25%
4,000 14.0% 13.7%
13.2% 13.3%
20% 12.8%
3,000 12.0%
11.1%
15%
2,000 10.0% 10.1%
10%
1,000 8.0%
5%
- 0% 6.0%
2016-Dec
2017-Jun
2017-Dec
2018-Jun
2018-Sep
2018-Dec
2019-Jun
2019-Dec
2020-Jun
2020-Dec
2016-Sep
2017-Sep
2019-Sep
2020-Sep
2017-Mar
2018-Mar
2019-Mar
2020-Mar
2016-Dec
2010-Dec
2011-Jun
2011-Dec
2012-Jun
2012-Dec
2013-Jun
2013-Dec
2014-Jun
2014-Dec
2015-Jun
2015-Dec
2016-Jun
2017-Jun
2017-Dec
2018-Jun
2018-Dec
2019-Jun
2019-Dec
2020-Jun
2020-Dec
M2 yoy % Total Social Financing yoy %
New Loan (CNY bn) Total Social Financing (CNY bn)
Core Bank Lending yoy %
M2 (yoy %)
Source: WIND, ICBC Standard Source: WIND, ICBC Standard
14ICBC Standard Bank | China Macro Outlook
…with extra caution against risks of re-inflating asset bubbles
PUBLIC
Financial conditions marginally tightened since June as regulatory tone shifted towards curtailing speculative investments
20% 4
Deleveraging Cycle
15% 3
10% 2
5% 1
0% 0
-5% -1
Looser
Financial
Conditions
-10% -2
Financial Condition Index (RHS) GDP Growth (yoy %, LHS) M2 Growth (yoy %, LHS) Total Social Financing (yoy %, LHS)
Source: WIND, ICBC Standard
Note: Negative reading of Caixin Financial Condition Index reflects loose financial condition, and positive reading means tighter financial condition in the onshore China market.
15ICBC Standard Bank | China Macro Outlook
Ultra-proactive fiscal policy is likely to be normalised at the NPC meeting
PUBLIC
Over CNY 4.5tn of local government bonds new issuance in 2020 dwarfs records in the past ten years
(CNY bn) CNY 4.5tn new local government bond
800 issuance in 2020 marks 1.5 times of
the CNY 3.0tn record in 2019
700
600
500
400
300
200
100
0
2018-Jul
2019-Jul
2020-Jul
2018-Jan
2018-Jun
2019-Jan
2020-Jan
2018-Oct
2019-Jun
2019-Oct
2020-Jun
2021-Jan
2020-Oct
2017-Dec
2018-Feb
2018-Dec
2019-Feb
2019-Dec
2020-Feb
2020-Dec
2018-Mar
2019-Mar
2020-Mar
2018-May
2018-Aug
2018-Sep
2019-May
2019-Aug
2019-Sep
2020-May
2020-Aug
2020-Sep
2018-Nov
2019-Nov
2020-Nov
2018-Apr
2019-Apr
2020-Apr
General Local Government Bond Special Purpose Bond
Source: WIND, ICBC Standard
Note: * NPC meeting in May has approved CNY 3.75tn worth of special purpose bond quota for 2020. By the end of H1 2020, more than CNY 2.37tn worth of special purpose bond have
already been issued, accounting for nearly 65% of the annual quota. 16ICBC Standard Bank | China Macro Outlook
Front-end interbank rates saw heightened volatility in Jan-2021…
PUBLIC
Overnight and 7-day rates went through volatile movements in Jan, but PBoC remained determined to hold 7-day OMO rates unchanged
6.0%
5.0%
4.0%
3.0%
2.0% 2.20%
1.0%
0.0%
2010-Jan
2010-May
2011-Jan
2012-Jan
2013-Jan
2014-Jan
2015-Jan
2015-May
2016-Jan
2017-Jan
2018-Jan
2019-Jan
2020-Jan
2020-May
2021-Jan
2010-Sep
2011-May
2011-Sep
2012-May
2012-Sep
2013-May
2013-Sep
2014-May
2014-Sep
2015-Sep
2016-May
2016-Sep
2017-May
2017-Sep
2018-May
2018-Sep
2019-May
2019-Sep
2020-Sep
Overnight SHIBOR rate (%) 7-day Reverse Repo rate (%)
Source: WIND, ICBC Standard
17ICBC Standard Bank | China Macro Outlook
…leading to notable movements of CGB yields across different tenors
PUBLIC
Yield of 1yr CGB notably bounced back in Jan 2021 due to front-end Yet CGB yields are likely to remain range bound in the near term as
liquidity squeeze in the interbank system markets await further policy clarities after the Chinese New Year
120
3.4%
10yr CGB
3.22%
3.2% 100
5yr CGB
3.08%
3.0% 80
2.8% 3yr CGB
2.88% 60
2.6%
1yr CGB 40
2.66%
2.4%
20
2.2%
1yr CGB,
2021-01-13, 0
2.16%
2.0%
2020-Nov-01 2020-Dec-01 2021-Jan-01 2021-Feb-01
5yr-10yr CGB spread (bps) 3yr-10yr CGB spread (bps)
1yr CGB YTM 3yr CGB YTM 5yr CGB YTM 10yr CGB YTM
Source: WIND, ICBC Standard Source: Bloomberg, ICBC Standard
18ICBC Standard Bank | China Macro Outlook
But PBoC is determined to hold policy rates and absorb excessive liquidity
PUBLIC
Longer-term benchmark rates remain unchanged since last May and are likely to remain so for longer as near-term rate hike highly unlikely
6.0%
5.0%
4.65%
4.0%
3.85%
3.0%
2.95%
2.0%
1.50%
1.0%
0.0%
2015-Jul
2016-Jul
2017-Jul
2018-Jul
2019-Jul
2020-Jul
2015-Jan
2015-May
2016-Jan
2017-Jan
2018-Jan
2018-May
2019-Jan
2020-Jan
2021-Jan
2015-Sep
2016-Sep
2016-Nov
2017-Sep
2018-Sep
2019-Sep
2019-Nov
2020-Sep
2015-Mar
2015-Nov
2016-Mar
2016-May
2017-Mar
2017-May
2017-Nov
2018-Mar
2018-Nov
2019-Mar
2019-May
2020-Mar
2020-May
2020-Nov
MLF (1-yr, %) 1-yr LPR 5-yr LPR 1-yr benchmark deposit rate
Source: WIND, ICBC Standard
19ICBC Standard Bank | China Macro Outlook
PBoC balance sheet expansion is very timid compared to peers…
PUBLIC
Balance sheet growth of major central banks (monthly, USD tn)
(USD tn) (USD tn)
10.0 10.0
9.0 9.0
8.0 8.0
7.0 7.0
6.0 6.0
5.0 5.0
4.0 4.0
3.0 3.0
2.0 2.0
2015-Jul
2016-Jul
2017-Jul
2018-Jul
2019-Jul
2020-Jul
2015-Jan
2016-Jan
2017-Jan
2018-Jan
2019-Jan
2020-Jan
2021-Jan
2015-Mar
2015-Sep
2016-Mar
2016-Sep
2017-Mar
2017-Sep
2018-Mar
2018-Sep
2019-Mar
2019-Sep
2020-Mar
2020-Sep
2015-May
2015-Nov
2016-May
2016-Nov
2017-May
2017-Nov
2018-May
2018-Nov
2019-May
2019-Nov
2020-May
2020-Nov
Bank of Japan Federal Reserve European Central Bank PBoC
Source: WIND, ICBC Standard
20ICBC Standard Bank | China Macro Outlook
… while rate differentials between China and US remain significant
PUBLIC
Yield spread between China-US 10yr government bond remains at above 200bps
300 7.4
7.2
250
7.0
200
6.8
150
6.6
100
6.4
50
6.2
0 6.0
2014-Jan 2015-Jan 2016-Jan 2017-Jan 2018-Jan 2019-Jan 2020-Jan 2021-Jan
China-US 10yr Yield Spread (RHS) USD-CNY Spot Rate (LHS)
Source: WIND, ICBC Standard
21ICBC Standard Bank | China Macro Outlook
Dollar weakness and macro-recovery continue to support the yuan
PUBLIC
Yuan has appreciated by more than 8% against USD in H2-2020 Persistent dollar weakness supported extended yuan rally
7.4 0.6 7.4 105
7.3
103
7.2 0.5
7.2
7.1 101
7.0 0.4
7.0 99
6.9
6.8 0.3 97
6.7 6.8
6.6 0.2 95
6.5
6.6 93
6.4 0.1
6.3 91
6.4
6.2 0.0
89
6.1
6.0 -0.1 6.2 87
CNH-CNY Spread (RHS) USDCNY USDCNH USDCNY (LHS) USDCNH (LHS) Dollar Index (RHS)
Source: WIND, ICBC Standard Source: Bloomberg, ICBC Standard
22ICBC Standard Bank | China Macro Outlook
Yuan’s two-way fluctuation and balanced capital flows to be key focuses
PUBLIC
Recent yuan rally may have limited strength to break record lows PBoC markedly reduced dollar weighting in the CFETS RMB Index
Top 15 basket currencies in the CFETS RMB Index
7.3 7.3
Weighting
New Weighting Old Weighting Old Weighting
7.2 7.2 Change
Currency (Jan 2021 - (Jan 2020 -Dec (Jan 2017 - Dec
(Present vs
present) 2020) 2019)
7.1 7.1 2020)
7.0 7.0 USD 18.79% 21.59% 22.40% ↓ -2.80%
EUR 18.15% 17.40% 16.34% ↑ 0.75%
6.9 6.9
JPY 10.93% 11.16% 11.53% ↓ -0.23%
6.8 6.8
KRW 9.88% 10.68% 10.77% ↓ -0.80%
6.7 6.7
AUD 5.89% 5.20% 4.40% ↑ 0.69%
6.6 6.6
MYR 4.31% 3.70% 3.75% ↑ 0.61%
6.5 6.5
RUB 3.85% 3.65% 2.63% ↑ 0.20%
6.4 6.4
HKD 3.59% 3.57% 4.28% ↑ 0.02%
6.3 6.3 THB 3.19% 2.98% 2.91% ↑ 0.21%
6.2 6.2 SGD 3.12% 2.82% 3.21% ↑ 0.30%
6.1 6.1 GBP 3.00% 2.75% 3.16% ↑ 0.25%
6.0 6.0 SAR 2.71% 2.16% 1.99% ↑ 0.55%
CAD 2.26% 2.17% 2.15% ↑ 0.09%
MXN 2.11% 1.98% 1.69% ↑ 0.13%
USDCNY USDCNH AED 1.69% 1.57% 1.87% ↑ 0.12%
Source: WIND, ICBC Standard Source: CFETS, ICBC Standard
23ICBC Standard Bank | China Macro Outlook
Appendix I: Market awaits further policy clarity at the March NPC meeting
PUBLIC
Key economic targets in the past Government Work Reports (2018 – 2020)
2020 2019 2018
GDP Target (%) “Endeavour to achieve the 13th FYP target” 6.0% - 6.5% 6.50%
GDP Actual GDP (CNY bn) -- 99,086.50 91,928.11
Previous GDP growth rate (yoy %) 6.10% 6.70% 6.90%
Official Fiscal Deficit (CNY bn) 3,760 ↑ 2,760 2,380
Official Fiscal Deficit Ratio (% GDP) > 3.6% ↑ 2.8% 2.6%
Special Bond Quota (CNY bn) 3,750 ↑ 2,150 1,350
Special Bond Quota (% GDP) 3.75% ↑ 2.18% 1.47%
Fiscal Special Sovereign Bond (CNY bn) 1,000 ↑ NA NA
Broad Fiscal Deficit Ratio (% GDP) > 8.5% ↑ 5.0% 4.1%
Railway Infra-Investment (CNY bn) 900 ↑ 800 732
Road and Water Transport Infra-
NA - 1,800 1,800
Investment (CNY bn)
Tax Cuts (CNY bn) 2,500 ↑ 2,000 1,100
Household Disposable Income Growth "Same as nominal GDP "Same as nominal
= 6.5%
(yoy %) growth rate" GDP growth rate"
Urban New Job Creation (mn) 9.0 ↓ 11.0 11.0
Social
Unemployment Rate (%) 6.0% ↑ 5.5% 5.5%
10 estimated
Poverty Reduction (mn) = 10 10
(“Eliminate extreme poverty”)
CPI (%) 3.5% ↑ 3.0% 3.0%
New Loan Growth for SMEs (%) > 40% ↑ 30% --
Monetary
M2 (yoy %) “Markedly higher than "Same as nominal "Reasonabl
↑
Total Social Financing (yoy %) 2019” GDP growth rate" e growth"
Source: WIND, ICBC Standard
24ICBC Standard Bank | China Macro Outlook
Appendix II (a): Phase-One deal remains incomplete
PUBLIC
China has accelerated manufactured goods purchasing from the US since May, but the actual Phase-One purchase of goods across
agricultural, manufactured and energy sectors all missed the targets by the end of 2020.
(USD bn)
25
21.6
20 18.9
17.5
16.7
15
10.6
9.8
10 9.1
8.7
4.8 4.5
5 3.9 4.0 4.2
0.9
0.4
0
2017 2018 2019 2020 Q1 2020 Q2 2020 Q3 2020 Q4 Outstanding
(Quarterly avg) (Quarterly avg) (Quarterly avg) (Acutal) (Actual) (Actual) (Actual) Commitment
Energy goods Agricultural Goods Manufactured Goods
Source: PIIE, ICBC Standard
25ICBC Standard Bank | China Macro Outlook
Appendix II (b): Shortfall of the Phase One deal might be too big to ignore
PUBLIC
By the end of 2020, China has purchase $100bn worth of goods from US, yet still only accounted for less than 60% of the Phase One target
(USD bn) Purchase Commitments
180 169.5
150
120 Actual Purchases
100.0
90
60
30
0
2020 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 Jun 2020 Jul 2020 Aug 2020 Sep 2020 Oct 2020 Nov 2020 Dec
($bn) Agriculture Manufactured Goods Energy
40 120 30
Purchase Commitments 33.4 Purchase Commitments Purchase Commitments 25.3
100 110.8 25
30
Actual Purchases 19.4 80 20
Actual Purchases 66.7
20 60 15 Actual Purchases
9.8
40 10
10
20 5
0 0 0
2020 Jan
2020 Jul
2020 Jun
2020 Dec
2020 Oct
2020 Feb
2020 Mar
2020 May
2020 Sep
2020 Aug
2020 Nov
2020 Apr
2020 Dec
2020 Jul
2020 Jan
2020 Jun
2020 Aug
2020 Oct
2020 Feb
2020 Mar
2020 May
2020 Sep
2020 Nov
2020 Apr
2020 Jan
2020 Mar
2020 Jul
2020 Jun
2020 Dec
2020 Oct
2020 Feb
2020 May
2020 Sep
2020 Aug
2020 Nov
2020 Apr
Source: PIIE, ICBC Standard
26ICBC Standard Bank | China Macro Outlook
Appendix III: “Six guarantees” have been Beijing’s top policy priorities in 2020
PUBLIC
Fiscal Monetary
Timeline Policy Measures since end-March (see Appendix for previous measures)
Policy Policy
A key Politburo meeting marked Beijing proposal to increase its fiscal deficit to 3.5% as a share of GDP (from a
Mar.27 de-facto 3% ceiling), issue special sovereign debt and allow local governments to sell more infrastructure bonds as
(Politburo part of a package to stabilise the economy. The ramped-up spending on infrastructure investment could be backed Y
meeting) by as much as CNY 2.5-2.8 trillion worth of local government special bonds. Beijing is also likely to have to lower
its economic growth target for 2020, down from the original target of around 6% agreed in December 2019.
The PBOC reduces the interest rate on 7-day reverse repurchase agreements to 2.2% from 2.4% while injecting CNY
Mar.30 Y
50 billion into the banking system. The rate cut was the largest of its sort since 2015.
The State Council called for lower reserve-requirement ratios for smaller banks, more infrastructure bond issuances
by local governments, and other steps including tax exemptions on new-energy vehicle purchases. A State Council
Mar. 31 Y Y
meeting pledged another 1 trillion CNY of funding through the central bank’s relending and rediscounting
program, a cheaper credit line for small commercial lenders.
Politburo leaders in a statement pledged a raft of measures to strengthen the role of the market in land use,
Apr. 3 capital markets and labour mobility to build a more efficient economy. The Politburo also called for improvements
Y
(Politburo to the country’s stock market infrastructure, faster development of the bond market and actively expanding
meeting) financial-sector opening., and interest rates reform.
PBoC announced cut of targeted Reserve Ratio Requirement (RRR) for smaller banks by 1.0 percentage points in
Y
two phases. The targeted RRR cut will release around CNY 400 billion into the banking system.
Apr. 17 The Politburo for the first time put forward the goal of "six guarantees (六保)”, which includes ensuring residents’
(Politburo employment, a basic livelihood and market participation, food and energy security, supply chain stability, and
Y
meeting) grassroots operations. ‘Full-employment and undisrupted functioning of social fabrics‘ as well as ‘people’s
livelihoods‘ have been identified as top priority by the government.
PBoC cut MLF rate by 20bps to 2.95% from 3.15%, the lowest since 2017, and injected CNY 100bn via 7-day repo.
Apr. 17-20 The one-year LPR was subsequently lowered to 3.85% from 4.05%, and the five-year tenor dropped by 10bps to Y
4.65% down from 4.75%.
MoF approved another CNY 1tn quota for special purpose bonds to be placed by end-May. NDRC outlined the five-
Apr. 20 year “New Infrastructure investment plan” worth CNY 10tn from 2020. 24 provinces have submitted CNY 8tn Y
worth of infrastructure investment projects for 2020 so far (see next slide).
State Council lowered the bad-loan coverage ratio for medium-small sized banks by 20 bps in phases, to unleash
Apr. 21 Y
additional credit to support small and micro-sized businesses.
Source: WIND, ICBC Standard
27ICBC Standard Bank | China Macro Outlook
Appendix IV: China’s COVID-19 emergency relief policy package (Feb-Mar)
PUBLIC
Fiscal Monetary
Timeline Policy Measures
Policy Policy
Feb. 1 Import tariffs exemption for medical materials used in epidemic control until March 31.
Y
PBoC strengthened countercyclical adjustments of monetary policy through open market operations. Together with
other financial regulators, the PBoC rolled out 30 policy measures to support enterprises. Y
Feb. 3-4 PBoC added a net CNY 150bn liquidity to the interbank market. The total injection announced was CNY 1.6tn, the
largest single-day addition of its kind since 2004. Y
Feb. 5 State Council announced support for debt financing and insurance for virus-impacted firms, and allowed local
government to sell another CNY 848bn of bonds before March. Y
Feb. 6 PBoC issued credit support for enterprises heavily affected by the epidemic (small and micro companies and key
manufacturing sectors) to borrow at record-low rate of 1.6% through state-owned commercial banks. PBoC also Y
provided CNY 300bn for large banks and selected local banks in Hubei and other severely-hit provinces.
Feb. 9 State Council announced total spending worth CNY 80.55bn as emergency funds to mitigate against COVID-19
related shocks to the economy. Y
Feb. 15 Various tax relief measures worth CNY 1tn (or about 1% of GDP), including reductions in employers' required
social insurance payments, lower electricity fees and VAT waivers. Y
Feb. 17-20 PBoC lowered MLF rate by 10bps to 3.15% from 3.25%, the lowest since 2017, and injected CNY 100bn via 7-day
repo. PBoC lowered the benchmark borrowing costs for new corporate and household loans. The one-year LPR was Y
lowered to 4.05% from 4.15%, and the five-year tenor was lowered to 4.75% down from 4.8%.
Mar. 4 7 provinces announced investment projects worth CNY 25tn with CNY 3.5tn to be fully allocated within 2020
Y
Mar. 12-13 PBoC allows a higher cap of 1.25 on foreign debt, a move aimed at helping smaller and private companies raise
more funds overseas. PBoC also cut Reserve Requirement Ratio (RRR) by 0.5 - 1.0 percentage points for banks,
Y
freeing up an additional CNY 550bn liquidity to the interbank market to help virus-impacted companies. The RRR
for large banks is currently 12.5%. Qualified joint-stock commercial banks would enjoy an additional cut of 100 bps.
Source: WIND, ICBC Standard
28ICBC Standard Bank | China Macro Outlook
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