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30 Nov 2015
RMB to outperform Asian FX even as growth slowing on all fronts – RBC CM
FXStreet (Delhi) – Research Team at RBC Capital Markets, notes that growth in China remains challenged by structural headwinds from continued deleveraging and unfavorable demographics.
Key Quotes
“In addition to this, China is facing an intensifying cyclical slowdown. Investment, especially real estate, remains a major drag on top-line growth, amid oversupply, high real interest rates, a backdrop of extended leverage, and the structural shift to reduce the investment share of growth from 46% to ~35% over the next 5–10 years.”
“The investment slowdown is set to fall from an average of 9.5% in the last five years to 4.6% over the next five years. Exports remain under pressure thanks to an overvalued exchange rate and weak external demand.”
“Consensus expects that consumption will pick up the slack and be the main driver of growth, but we see downside risk to this. In particular, the labor market is still adjusting to the demographic shift (an aging population and smaller working-age population), higher wages, and low productivity.”
“The government’s chief priority is to ensure that the registered urban unemployment rate does not rise above 4.5%. The unemployment rate of 4.05% in September 2015 is low, but we think it is artificially low due to older workers, with the highest unemployment rate, retiring from the workforce. The size of the 64+ year-old cohort has accelerated in recent years to 8.4% of the population.”
“Leading indicators point to upside risk to the unemployment rate; employment is contracting in both the manufacturing and services sectors. By the end of 2016, we expect the benchmark one-year lending rate to be at 4.10% (-25bp) and the RRR (for major banks) to be at 15.5% (-200bp). The risk is that the one-year lending could be cut by an additional 25bp and some of the easing is brought forward into the end of 2015. USD/RMB interest rate and growth differentials will continue to widen.”
Key Quotes
“In addition to this, China is facing an intensifying cyclical slowdown. Investment, especially real estate, remains a major drag on top-line growth, amid oversupply, high real interest rates, a backdrop of extended leverage, and the structural shift to reduce the investment share of growth from 46% to ~35% over the next 5–10 years.”
“The investment slowdown is set to fall from an average of 9.5% in the last five years to 4.6% over the next five years. Exports remain under pressure thanks to an overvalued exchange rate and weak external demand.”
“Consensus expects that consumption will pick up the slack and be the main driver of growth, but we see downside risk to this. In particular, the labor market is still adjusting to the demographic shift (an aging population and smaller working-age population), higher wages, and low productivity.”
“The government’s chief priority is to ensure that the registered urban unemployment rate does not rise above 4.5%. The unemployment rate of 4.05% in September 2015 is low, but we think it is artificially low due to older workers, with the highest unemployment rate, retiring from the workforce. The size of the 64+ year-old cohort has accelerated in recent years to 8.4% of the population.”
“Leading indicators point to upside risk to the unemployment rate; employment is contracting in both the manufacturing and services sectors. By the end of 2016, we expect the benchmark one-year lending rate to be at 4.10% (-25bp) and the RRR (for major banks) to be at 15.5% (-200bp). The risk is that the one-year lending could be cut by an additional 25bp and some of the easing is brought forward into the end of 2015. USD/RMB interest rate and growth differentials will continue to widen.”