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TIT
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//
CHINA AND JAPAN – 2015 OUTLOOK
FEBRUARY // 2015
TIT
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TABLE OF CONTENTS
» China
» Japan
» 1950 or 1990?
2
TIT
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TH
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AT
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GO
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HE
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CHINA
Do n
ot m
ove
or
de
lete
th
is te
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bo
x.
For
cro
pp
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urp
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s o
nly
, a
nd
do
es n
ot p
rin
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TIT
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OE
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// C
hin
a 2
014: E
conom
ic R
efo
rm is n
ot a D
inner
Part
y
GROWTH STABILIZES
» Q4 growth stable
at 7.3% YoY,
unchanged from
Q3
» Bloomberg
Monthly GDP
tracker came in
at 7.1% in Dec,
up from 6.7% in
Nov
» Real activity
indicators
strengthen from
a low base
4
GDP Growth – NBS and BBG Monthly Estimate
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PROPERTY CONTRACTS
» Residential real
estate sales
down close to
10% in 2014
» New construction
following sales
down
» Real estate
construction +
associated
sectors = about
20% of GDP
5
Real estate sales and new construction contract
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STIMULUS STILL ‘MINI’
» Despite
November’s rate
cut China’s
monetary
conditions
remain tight:
• Real interest
rates high
• Loan growth
slow
• Real effective
exchange rate
appreciates
6
Bloomberg Monetary Conditions Index
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EQUITY BOOM, STIMULUS BUST
» Most visible
response to the
rate cut is the
equity boom
» Cost of credit
rises as equity
markets suck up
all available
funds
» Wealth effect
negligible
7
Shanghai Market, New Accounts and Trading Volume
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THE COST OF STIMULUS
» Resurgent
lending would set
back
deleveraging and
rebalancing
agendas
8
Outstanding credit, and debt servicing costs as
% GDP
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DEVALUING THE YUAN?
» A weaker
exchange rate
would support
growth by
boosting
overseas
demand
» But it could also
push rates up by
triggering capital
outflows, and risk
the ire of the U.S.
9
Yuan spot price, central parity, and trading band
TIT
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// T
ITLE
OF
TH
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GO
ES
HE
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JAPAN
Do n
ot m
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or
de
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th
is te
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bo
x.
For
cro
pp
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urp
ose
s o
nly
, a
nd
do
es n
ot p
rin
t.
TIT
LE
OF
PR
ES
EN
TA
TIO
N G
OE
S H
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// C
hin
a 2
014: E
conom
ic R
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rm is n
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inner
Part
y
2% IN 2 YEARS NOW 2 HARD
» Falling oil prices
have pushed the
Bank of Japan’s
2 percent
inflation target
out of reach
» BOJ lowers
inflation forecast
to 1 percent in
fiscal 2015, down
from 1.7 percent
11
CPI, core CPI, core-core CPI, YoY
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A VIRTUOUS CIRCLE?
» Bank of Japan continues to focus on virtuous circle
» Diminished slack + Higher inflation expectations = More capital spending and higher wages
» Tankan survey provides supporting evidence – economy operating at full capacity
12
Tankan Survey Measures of Capacity Utilization
TIT
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OR A VICIOUS CYCLE?
» Price
expectations on
5 year horizon
basically
unchanged from
2012
» Low
unemployment
triggering limited
response from
wages
13
-8
-6
-4
-2
0
2
4
2 3 4 5 6
Cash
Earn
ing
s -
Yo
Y
Unemployment Rate
1Q13 - 4Q14
1Q98 - 4Q12
Linear (1Q13 -4Q14)
Japan’s Phillips Curve
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OR A VICIOUS CYCLE?
» Why haven’t
low interest
rates and high
profits
triggered
higher capital
spending?
» Demographic
decline, fiscal
drag, and loss
of world-
beating
position all
weigh on
outlook
14
Sony, Apple, Samsung Revenue, Blns $
0
20
40
60
80
100
120
140
160
180
2001 2005 2009 2013
Sony
Samsung
Apple
Source: Bloomberg
TIT
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ANY ASSETS LEFT TO BUY?
» BOJ already
ahead of other
major central
banks in assets
as % GDP
» Scope to
increase JGB
purchases
limited by size
of market
» Push back
target or shift
emphasis to
core-core CPI?
15
Central Bank Assets as % GDP
TIT
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ITLE
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TH
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GO
ES
HE
RE
1950 OR 1990?
Do n
ot m
ove
or
de
lete
th
is te
xt
bo
x.
For
cro
pp
ing p
urp
ose
s o
nly
, a
nd
do
es n
ot p
rin
t.
TIT
LE
OF
PR
ES
EN
TA
TIO
N G
OE
S H
ER
E
// C
hin
a 2
014: E
conom
ic R
efo
rm is n
ot a D
inner
Part
y
GDP/CAPITA – CHINA IS JAPAN IN 1950
» China remains
relatively poor –
PPP adjusted
GDP/capita is
20% of U.S
» That’s below the
level of Japan in
1950 –
suggesting
decades of rapid
growth ahead
17
-20
-15
-10
-5
0
5
10
15
20
0 20 40 60 80 100
GD
P G
row
th
GDP per capita as % of U.S.
China Japan
India Mozambique
Mexico Korea
Source: Bloomberg, Penn World Table
GDP/Capita as % of U.S and GDP Growth
TIT
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// C
hin
a 2
014: E
conom
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Part
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INVESTMENT/GDP – CHINA IS JAPAN IN 1990
» Looking at other
metrics, China
looks more like
Japan in 1990:
• Investment as
% GDP
• Real estate as
% GDP
• Exports as %
world imports
18
Investment as % GDP
TIT
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MITI VERSUS NDRC
» MITI exercised
iron control over
Japan’s industry
» NDRC has a
more laissez
faire approach
» Result could be
1950 levels of
development
achieved at price
of 1990 levels of
capital and credit
intensity
19
Summer of the bureaucrats
