Tuesday Sept. 8, 2015 www.bloombergbriefs.com Exports, IP, FAI, Retail Sales, Real Estate, Credit Data CHINA PREVIEW BY FIELDING CHEN, BLOOMBERG INTELLIGENCE ECONOMIST Exports: Export data are slated for release today. The consensus forecast is for a 6.6 percent year-on-year fall in August. The yuan’s fall may not provide meaningful help for Chinese exporters as the currencies of China’s competitors have declined even more. Industrial Production, FAI, Retail Sales: The NBS is scheduled to release details of industrial output, fixed asset investment and retail sales for August on Sunday. Early signs from PMIs and metal prices point to a slowing manufacturing sector. The annual growth rate will be flattered by a lower base for comparison, as industrial output slowed sharply in August 2014. Growth in retail sales may remain steady and fixed asset investment may remain broadly weak. Pollution controls ahead of Beijing’s Sept 3. military parade and volatile markets introduce uncertainty into the August data. Real Estate: Also on Sunday, the NBS will update on real estate. National house prices and sales have continued to rise on a series of interest rate cuts and the loosened home-purchase restrictions. Abundant inventory has so far prevented stronger sales from passing through to a rebound in real estate investment and construction. Credit: The central bank update on credit data for August. Banks may have extended more loans to the real economy after a seasonal dip in lending in July. China Reserve Drop Collateral Damage From Yuan Fall A record drop in China’s FX reserves in August suggests the central bank’s surprise move to devalue the yuan has triggered substantial capital outflows. FX reserves came in at $3.56 trillion in August, down almost $94 billion from $3.65 trillion in July and below expectations of a $3.58 trillion total. China’s move to devalue the yuan raised fears of capital outflows triggering financial instability. Yesterday’s data suggest selling pressure has increased, forcing the PBOC into intervention to stabilize the currency. The hope for the PBOC, we believe, is extreme selling pressure on the yuan subsides, and they can allow a moderate depreciation to restore export competitiveness. The fear is that yesterday’s data will reinforce the market view that the only way for the yuan to go is down, and accelerate capital outflows. — Tom Orlik and Fielding Chen, Bloomberg Economists DATE EVENT SURVEY PRIOR 9/8 Trade Balance $48B $43B 9/8 Exports -6.6% -8.3% 9/8 Imports -7.9% -8.1% 9/10 CPI 1.8% 1.6% 9/10 PPI -5.6% -5.4% 9/10-15 New Yuan Loans 850B 1480B 9/10-15 Agg Financ CNY 1010B 718.8B 9/10-15 Money Supply M1 6.8% 6.6% 9/10-15 Money Supply M2 13.3% 13.3% 9/13 Retail Sales 10.6% 10.5% 9/13 Industrial Production 6.3% 6.0% 9/13 Fixed Assets YTD 11.2% 11.2% 9/14-18 FDI CNY — 5.2% INSIDE FINANCIAL CONDITIONS Assets at 900% of GDP Ease China Debt Crisis Fears. CHART OF THE WEEK Fed September Liftoff Essentially a Coin Flip Among Economists MANUFACTURING PMI Shows No Traction for Chinese Stimulus, More to Come CHINA'S CHALLENGES China's Turmoil Could be Just a Blip, If 1960s Japan Is a Guide CURRENCIES The Weak FX Arrangements Tied to Russia and China ECB Wary European Central Bank Lays Ground for Longer QE Program BI INSIGHTS Ways to Deliver a Jolt to China’s Power Sector CALENDAR FINANCIAL CONDITIONS
Transcript
Tuesday
Sept. 8, 2015
www.bloombergbriefs.com
Exports, IP, FAI, Retail Sales, Real Estate, Credit Data
CHINA PREVIEW BY FIELDING CHEN, BLOOMBERG INTELLIGENCE ECONOMIST
Exports: Export data are slated for release today. The consensus forecast is for a 6.6percent year-on-year fall in August. The yuan’s fall may not provide meaningful help forChinese exporters as the currencies of China’s competitors have declined even more.
Industrial Production, FAI, Retail Sales: The NBS is scheduled to release details ofindustrial output, fixed asset investment and retail sales for August on Sunday. Earlysigns from PMIs and metal prices point to a slowing manufacturing sector. The annualgrowth rate will be flattered by a lower base for comparison, as industrial output slowedsharply in August 2014. Growth in retail sales may remain steady and fixed assetinvestment may remain broadly weak. Pollution controls ahead of Beijing’s Sept 3.military parade and volatile markets introduce uncertainty into the August data.
Real Estate: Also on Sunday, the NBS will update on real estate. National houseprices and sales have continued to rise on a series of interest rate cuts and the loosenedhome-purchase restrictions. Abundant inventory has so far prevented stronger salesfrom passing through to a rebound in real estate investment and construction.
Credit: The central bank update on credit data for August. Banks may have extendedmore loans to the real economy after a seasonal dip in lending in July.
China Reserve Drop Collateral Damage From Yuan Fall
A record drop in China’s FX reserves in August suggests the central bank’s surprisemove to devalue the yuan has triggered substantial capital outflows. FX reserves camein at $3.56 trillion in August, down almost $94 billion from $3.65 trillion in July and belowexpectations of a $3.58 trillion total. China’s move to devalue the yuan raised fears ofcapital outflows triggering financial instability. Yesterday’s data suggest selling pressurehas increased, forcing the PBOC into intervention to stabilize the currency. The hope forthe PBOC, we believe, is extreme selling pressure on the yuan subsides, and they canallow a moderate depreciation to restore export competitiveness. The fear is thatyesterday’s data will reinforce the market view that the only way for the yuan to go isdown, and accelerate capital outflows.
— Tom Orlik and Fielding Chen, Bloomberg Economists
DATE EVENT SURVEY PRIOR
9/8 Trade Balance $48B $43B
9/8 Exports -6.6% -8.3%
9/8 Imports -7.9% -8.1%
9/10 CPI 1.8% 1.6%
9/10 PPI -5.6% -5.4%
9/10-15 New Yuan Loans 850B 1480B
9/10-15 Agg Financ CNY 1010B 718.8B
9/10-15 Money Supply M1 6.8% 6.6%
9/10-15 Money Supply M2 13.3% 13.3%
9/13 Retail Sales 10.6% 10.5%
9/13 Industrial Production 6.3% 6.0%
9/13 Fixed Assets YTD 11.2% 11.2%
9/14-18 FDI CNY — 5.2%
INSIDEFINANCIAL CONDITIONS Assets at 900% of GDP Ease China DebtCrisis Fears.
CHART OF THE WEEK Fed September Liftoff Essentially a CoinFlip Among Economists
MANUFACTURING PMI Shows No Traction for ChineseStimulus, More to Come
CHINA'S CHALLENGESChina's Turmoil Could be Just a Blip, If1960s Japan Is a Guide
CURRENCIESThe Weak FX Arrangements Tied toRussia and China
ECBWary European Central Bank LaysGround for Longer QE Program
BI INSIGHTSWays to Deliver a Jolt to China’s PowerSector
CALENDAR
FINANCIAL CONDITIONS FIELDING CHEN AND TOM ORLIK, BLOOMBERG INTELLIGENCE ECONOMISTS
FINANCIAL CONDITIONS FIELDING CHEN AND TOM ORLIK, BLOOMBERG INTELLIGENCE ECONOMISTS
Assets at 900% of GDP Ease China Debt Crisis FearsThe markets are fixated on the chances
of a debt crisis in China. An analysis ofthe other side of the balance sheet showsrobust assets, suggesting financialArmageddon remains a distant prospect.
China's corporate assets rose to about550 percent of GDP in 2013, up from 350percent in 2008. That more than outpacesthe increase in corporate borrowing from100 to 150 percent of GDP over the sameperiod. The asset data are from thecensus conducted every five years by theNational Bureau of Statistics. Debt iscalculated based on data from thePeople’s Bank of China.
Household assets rose to about 330percent of GDP in 2013, up from 285percent in 2008. China's households aresubstantial net creditors, with assetsconsiderably in excess of debts thatcurrently stand at less than 40 percent ofGDP. Household assets are estimated onthe basis of figures from the NBS, thePBC and other official sources. Realestate and bank deposits are the biggesthousehold assets, accounting for 70percent and 24 percent respectively in2013. Stocks accounted for only 2percent of total household assets.
Government assets are harder tocalculate. The census found that thevalue of the assets of public agencies andsocial organizations was equal to about17 percent of GDP in 2013. Foreignexchange reserves add another 39percent to the central bank's balancesheet. Other assets, like the value ofgovernment land, are difficult to add up.China’s central government debt was 16percent of GDP in 2013.
Taken together, China's total assetsequaled about 900 percent of GDP in2013, compared with total debt of 220percent. That reflects a combination ofChina's status as a nation of savers, atboth the household and national level,and the rapid appreciation of asset pricesover the last decade. Total assets includethe banks’ net assets, not the totalfigures.
Strong assets on the other side of thebalance sheet do not mean China is immune to crisis. It's likely asset pricesare inflated, the combined effect of torridexpansion in the money supply andilliquid markets. When confidenceevaporates, assets can be hard to sell atany price. That’s what U.S. banksdiscovered about their collateralized debtobligations in the financial crisis. Thereare sections of the corporate sector, such
as mining and steel, where liabilities significantly exceed assets.
It does mean that the chances of acrisis are reduced. Back in 2007 it tookonly a small fall in U.S. house prices totrigger a flood of “jingle mail” as bankrupthouseholds posted their keys back to thebank. In China, household debt in 2014was 17 percent of real estate assets —house prices would have to fall by 80percent to push households underwater.
Fitch Ratings believes China willcontinue with policy easing to steereconomic growth. ,Andrew Colquhounhead of Asia-Pacific sovereigns, saysdomestic consumption remains resilientdespite the stock market rout. Fitchexpects China's GDP to grow at between6 and 6.5 percent in 2016
The gap between the value of theoffshore yuan and the onshore yuan willbe sustained as the Chinese economyremains under pressure, according toanalyst at . "TheFiona Lim Maybankoffshore-onshore yuan gap has beenpretty persistent because of yuandepreciation expectations," she said.
Verbal reassurance from the Chinesegovernment about the prospects for theyuan has improved market sentiment,says of Tommy Xie Oversea-Chinese
. "Investors are confidentBanking Corpthe authorities have the capability tostabilize the yuan at around 6.4 againstthe dollar," he said.
Hong Kong’s property prices maycorrect next year despite gains in thesecond half of 2015, as an economicslowdown in China and Hong Kong startsto weigh on real estate, according to
. ResidentialJPMorgan Chase & Coprices may start to fall by 5 percent to 10percent annually starting in 2016, said
, head of Hong KongCusson Leungresearch, conglomerates and property forJPMorgan. Prices of new housing will riseby 5 percent in the second half of 2015,as demand remains strong. Prices ofexisting housing may increase by 10percent, according to Leung.
Pacific Investment Management Co.says the savings glut that dictated thedirection of the bond market a decadeago is keeping borrowing costs downagain in 2015. Individuals preparing forretirement and emerging nations that areaccumulating funds will drive more moneyinto savings, , an economicJoachim Felsadviser at Pimco and the former chiefeconomist at Morgan Stanley, wrote in areport this week. People then funnel themoney into Treasuries, helping keepyields down.“The global savings glut ishere to stay and actually more likely toincrease than ebb,” said Fels. The trendis “important to understand why globalrates are as low as they are.”
CHART OF THE WEEK CRAIG TORRES AND CATARINA SARAIVA
Sept. Liftoff Basically a Coin Flip Among Economists
U.S. central bankers face their toughest policy call in years — raise interest rates orwait a little longer. Whatever the decision, about half of economists will be wrong.
Forty-eight percent of 54 economists surveyed Aug. 27-31 by Bloomberg Newssee a September increase in the benchmark lending rate, the first move up since2006. That’s down from 77 percent in an Aug. 7-12 survey, though it is still doublethe 24 percent who say the first move will occur in December. Seventeen percentsaid October.
The polarized views came after turbulence in global financial markets in the pastweek cast doubt on when the Federal Reserve would raise rates. Policy makershave their own gaps to bridge: New York Fed President William C. Dudley said thevolatility weakened the September liftoff case, while Fed Vice Chairman StanleyFischer remained confident inflation would move higher.
“The odds of a September rate increase are below 50 percent but not by much,”said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and a formerFed board economist. At the same time, the Fed won’t pay a high price if it decidesto delay. “There isn’t anything that screams inflation or that screams financial bubbleready to explode tomorrow morning,” he said.
September supporters expect the U.S. economy has enough underlyingmomentum to shake off the recent global stock market correction spurred by aslowdown in China. The December backers argue there’s no rush to tighten becauseinflation rates are too low, and the Fed risks slowing it further by raising rates andspooking nervous markets.
The policy-setting Federal Open Market Committee next meets Sept. 16-17, givingofficials time to digest the August employment report due Sept. 4.
The December camp includes some influential Wall Street economists, includingthose at Morgan Stanley and Goldman Sachs Group Inc., who maintained their calldespite Fischer’s comments on Saturday that there is “good reason” to believeinflation will move higher.
“I didn’t see much in the Fischer speech that we didn’t know already,” GoldmanSachs chief economist Jan Hatzius said. “Our view remains that September liftoffprobability is low, though not zero.”
Fischer’s remarks at the Kansas City Fed’s annual retreat in Jackson Hole,Wyoming, also contrasted with comments on Wednesday from Dudley that the casefor moving in September was “less compelling,” though he didn’t take it completelyoff the table.
MANUFACTURING TOM ORLIK, BLOOMBERG INTELLIGENCE ECONOMIST
MANUFACTURING TOM ORLIK, BLOOMBERG INTELLIGENCE ECONOMIST
PMI Shows No Traction for Chinese Stimulus, More to ComeChina’s PMI data shows the factory
sector is slumping into the second halfand support for growth and employmentfrom the services sector is weakening.With the government alreadyadministering a heavy dose of stimulus inthe last week, we don’t expect animmediate reaction. The chance of afurther rate cut before the end of the yearis edging up.
The official purchasing managers indexcame in at 49.7, down from a reading of50 in July and the lowest reading sinceAugust 2012. The final reading for theCaixin manufacturing PMI came in at47.3, slightly higher than the flash readingof 47.1 but still the lowest since 2009.
The official non-manufacturing PMI andCaixin services PMI also fell, thoughholding above the 50 mark that separatesimproving from deteriorating conditions.The relative resilience of China’s servicessector remains a positive, though thelatest signs suggest the slowdown isbecoming more broad-based.
The flash reading for Korea’s exports inAugust, also released today, showedoverseas sales down 14.7 percent yearon year, substantially below a 3.4 percentcontraction in July. As Korea's andChina’s exports tend to move together,that’s a bad sign for China’s factories.
Taken together with continued lowmetal prices, the latest evidence points toincreased downward pressure on growth.A sub-50 reading for the official PMI,which has better coverage of big stateowned enterprises, suggests that thegovernment stimulus has not gainedtraction even in the sectors of theeconomy most likely to benefit.
It’s possible that August andSeptember’s data will be impacted byarrangements for the military parade —scheduled for Sept. 3. Factories aroundBeijing have been closed to ensure cleanair for the parade. Workers will stay homeon Sept. 3 and 4.
Our suspicion is that firms will ramp upproduction before and after the pollutioncontrols and holiday rather than turndown orders, and so the impact won’t be
visible in the data. That said, combinedwith the regular national holiday inOctober it does introduce an additionaluncertainty into interpreting the data at analready challenging time for China’spolicy makers.
The government has alreadysignificantly ratcheted up its support forboth the markets and the real economy.Last week saw a rate cut, reserverequirement cut, expansion of the localgovernment bailout fund to 3.2 trillionyuan from 2 trillion yuan, and amped-upsupport for the stock market.
With the policy cavalry already on theway, the latest troubling data likely won’tprompt an immediate additional response.It does provide further evidence that theimpact of past stimulus has so far beenoutweighed by a continued contraction inreal estate and exports. The chances of afurther move to cut rates before the endof the year have increased.
On the exchange rate, we continue tobelieve that both the market and China’spolicy makers would like to see a weakeryuan. However, Beijing doesn’t want tosee a rapid depreciation with theattendant risk of capital flight and financialinstability. Given that, the most likely
course at present appears to be a continued uneasy stability with thesuspicion that the central bank is active inholding the currency above the 6.4 mark.
In the details of the officialmanufacturing PMI release, new ordersand new export orders contracted at afaster rate. Production slowed butcontinued expanding. Productionoutpacing new orders points to a buildupof inventory which could weigh on futureoutput. One positive — the index ofexpectations rose for a second month,suggesting factories remain confident inthe outlook. The Caixin manufacturingsurvey showed orders and productionboth contracting.
Both the official manufacturing andnon-manufacturing surveys showedemployment falling. We believe the dropin employment in the non-manufacturingsurvey reflects its coverage of real estateand construction, rather than a broadbased drop in services employment. Thatsaid, the Caixin survey — which does notinclude construction — shows servicesemployment expanding at only a marginalrate. Weakening employment indicatorsare another reason to expect strongerpolicy support.
CHINA'S CHALLENGES ENDA CURRAN AND YOSHIAKI NOHARA, BLOOMBERG NEWS
CHINA'S CHALLENGES ENDA CURRAN AND YOSHIAKI NOHARA, BLOOMBERG NEWS
China's Turmoil Could be Just a Blip, If 1960s Japan Is a Guide China’s economic slowdown and
market crash often evoke comparisonswith Japan’s bust in the 1990s, a periodthat saw the world’s second-largesteconomy of the time tip into prolongedstagnation.
Both economies experienced rapid,debt-fueled growth that spurred soaringreal estate prices and stock marketbubbles. Japan’s run-up eventually endedin a hard landing that the country is stillrecovering from. The argument saysChina could end up suffering a similarfate.
Yet a more apt parallel may instead beits neighbor’s experience of the 1960s.That’s according to Paul Sheard, chiefglobal economist at ratings companyStandard & Poor’s in New York, whoworked in Japan between 1976 and 2006.
The history shows a number ofsimilarities, and augurs for an ultimatelybenign outcome for China’s stocks andthe economy, though not without the needfor patience and a sustained effort bypolicy makers.
Here’s what happened: The Japaneseeconomy soared in the build-up to the1964 Tokyo Olympics as new highwaysand bullet-train lines were rolled out andfactories were set up amid a constructionboom. The stock market went on aroller-coaster ride as growth boomed thenslowed, and got walloped when policymakers tightened credit.
After a big sell-off in 1963, authoritiesintervened. In 1964 and 1965, two entitieswere established to prop up the market,documents compiled by the Bank ofJapan show. Commercial banks helped
fund the first vehicle, which spent 193.6billion yen on shares, with the centralbank pitching in after their money ran out.The second vehicle bought another 234.9billion yen, with the BOJ shouldering 95percent of the cost.
The interventions, which according toresearch cited in a National Bureau ofEconomic Research paper amounted to
"On the basis ofJapan’s experience,
China’s current travailsmay turn out to be amere blip on the path
to prosperity"
about 6 percent of the market, eventuallyworked. Shares began to rally, andeconomic development continued apace.
“It turned out to be a superb movebecause it prevented a financialdepression,” said Hiroshi Takeuchi, aprofessor of economics at the Universityof Shizuoka in central Japan. “Oncethings settled, a new wave of economicgrowth started.”
It’s a strategy China may be hoping toemulate. After Shanghai stocks gainedabout 150 percent in the year to June 12,
a meltdown since has wiped out around$5 trillion in shareholder value. Theturmoil forced the government tointervene by banning major shareholdersfrom selling stakes, suspending newlistings and asking brokerages to helpboost the market backed by the centralbank, among other measures. Japan tookseveral of the same steps.
Like Japan five decades earlier, Chinais still at a middling stage of economicdevelopment, meaning the economy hassignificant room to grow.
"The parallel with the 1960s is moremeaningful," said David Mann, chief Asiaeconomist at Standard Chartered Plc inSingapore. "Starting from the fact thatChina today still only has one fifth of thecapital stock per worker that the U.S. orJapan has today tells us that there isplenty more efficient and productiveinvestment yet to be done in China."
Comparisons only go so far. China isfacing a shrinking labor force, quitedifferent to Japan in the 1960s. China’seconomy is also more open than Japan’swas then, leaving it vulnerable to capitaloutflows that are now complicating itsexchange-rate policy.
Still, like Japan in the 1960s, China isexperiencing a rapid upgrading of itsindustrial infrastructure and its capitalmarkets are growing in globalprominence, said Frederic Neumann,co-head of Asian economic research atHSBC Holdings Plc in Hong Kong.
"On the basis of Japan’s experience,China’s current travails may turn out to bea mere blip on the path to prosperity,"Neumann said.
CURRENCIES DAVID POWELL, BLOOMBERG INTELLIGENCE ECONOMIST
The Weak FX Arrangements Tied to Russia and ChinaMany of the currency arrangements
most vulnerable to adjustment are inAfrica. Nonetheless, market participantsmay focus on countries elsewhere,particularly those that might be tempted toweaken their currencies to staycompetitive with Russia or China. Belarusand Kyrgyzstan appear to have theshakiest monetary arrangements amongthe countries of the former Soviet Union.In Asia, Brunei and Laos may alsowarrant attention.
After the authorities in Kazakhstanabandoned the peg between the tengeand the U.S. dollar, the country could bethought of as a regional benchmark.Belarus appears to be in worse shape,though the economic fundamentalsbetween the two countries differconsiderably. Belarus is weakest amongthe former Soviet republics in our index ofcurrency vulnerability because of its closeties to Russia — rather than dependenceon oil, as in the case of Kazakhstan.Forty-five percent of Belarusian exportsgo to its large neighbor, and surelyaggregate income will have declinedbecause of Russia's sharp slowdown.
Belarus has other weak fundamentals.External debt was above average at theend of 2013 — the latest reporting period— at 56.7 percent of gross nationalincome. Total reserves only covered onemonth of imports in 2014. In addition, theywere only as large as 17 percent of totalexternal debt. That compares with anaverage of 46 percent for the region.
Though Belarus's central bank devaluedits ruble versus the dollar in January, itsability to avoid further depreciationcontinues to weaken — foreign currencyreserves had declined to $2 billion at theend of July from $2.5 billion at the end ofJanuary, compared with a recent high of$4.7 billion in August 2013.
The currency arrangement ofKyrgyzstan also looks weak, even thoughit may not be as bad as that ofKazakhstan. The worst statistic that mayweigh on the Kyrgyz som is the currentaccount deficit. The InternationalMonetary Fund forecasts it to end thisyear at 17 percent of GDP. Its externaldebt is also very high — it stood at 98.4percent of GNI. Total reserves are only aslarge as 32.9 percent of that debt.
Our separate index for Asia rates
Brunei as having the weakest monetaryarrangement in the region, though thestory isn’t directly related to China. Thelargest source of vulnerability for Brunei’sdollar is the country’s dependence on oil.Oil rents — a measure of profits from theoil industry — measured about 23.6percent of GDP at the end of 2013 — thelargest in the region by far. The fall in oilprices is having a detrimental impact onthe country’s balance of payments. TheIMF forecasts the current-account deficitto measure 9.8 percent of GDP.
The situation for the Laotian kip looksvulnerable as well. The country has anumber of weaknesses. The IMFforecasts its current account deficit to
measure 20.1 percent of GDP. Externaldebt measured 81.4 percent. Thatcompares with an average of 46 percentfor the Asian countries included in theanalysis. Total reserves covered onlythree months of imports and 12.4 percentof external debt. Laos will also want tolimit the rise of the prices of its goods andservices in China with about 38 percent ofexports destined to the nation. Laos hasthe second-largest share of its exportsgoing to China of the Asian countries inour study, after Myanmar.
An explanation of the methodology behind this
analysis is available on the Bloomberg terminal at
EUROPEAN CENTRAL BANK MAXIME SBAIHI, BLOOMBERG INTELLIGENCE ECONOMIST
Wary ECB Lays Ground for Longer QE ProgramThe European Central Bank sees
adverse external factors slowing the euro-area recovery. Today’s trimmed economicforecasts and tweaked QE rhetoric showthat policy makers are taking the risksseriously. President Mario Draghi spenthis press conference preparing minds fora bigger, possibly longer-lastingquantitative easing program should theoutlook deteriorate. This strengthens ourconviction that the ECB will move towardmore asset purchases rather than fewer,though no material adjustments to policyare likely in the near term.
Draghi seemed quite happy with thedomestic factors behind the euro-arearecovery, yet he made clear that theoverall economic situation is beinginfluenced by the rest of the world. In hisintroductory statement, he noted "weexpect the economic recovery tocontinue, albeit at a somewhat weakerpace than earlier expected, reflecting inparticular the slowdown in emergingmarket economies, which is weighing onglobal growth and foreign demand foreuro area exports."
Draghi spent most of his pressconference explaining that he doesn’tknow how strong external winds are andto what extent they are perilous for theeuro-area recovery. He clearly pointed afinger at China — without mentioning it — when talking about effects "observedover the last few weeks." He said, "We’llhave to see whether these effects aretransitory or permanent," and added,"then we’ll decide whether to do more ornot." Linking that to Draghi’sacknowledgment that the challengesfaced by the emerging economies are"unlikely" to be quickly reversed alreadygives the hint of an answer.
The ECB president said that there was"no discussion" on changing the size orpace of the purchase program today. Still,reading from the introductory statement,he also made clear that purchases are"intended to run until the end ofSeptember 2016, or beyond, ifnecessary.” The reference to "or beyond,
Read this analysis on the Bloomberg terminal with additional charts at .BI ECON<GO>
if necessary" is new and time-specific.Previous statements have only suggestedthat the program could be added to ifneeded.
Furthermore, changes announced todaycould make an extension easier toimplement, should it come to bewarranted. The Governing Councildecided to make a minor technicaladjustment to the QE program byincreasing the share limit to 33 percentfrom 25 percent — provided the ECBdoesn’t have a blocking minority power.While he justified this decision as anormal one after a six-month review "toensure the full implement of the program,"in practice it will allow the ECB to buy awider pool of assets.
Reflecting weaker external demand, thestaff economic growth forecasts havebeen revised down for this year and thenext two. GDP is now expected toincrease by 1.4 percent in 2015, 1.7percent in 2016 and 1.8 percent in 2017.That’s roughly in line with the Bloombergconsensus but stands lower than theprevious forecasts of 1.5 percent, 1.9percent and 2 percent, respectively.
The central bank also took the ax to theinflation forecasts. It now expects inflationto be at 0.1 percent 2015, 1.1 percent in2016 and 1.7 percent in 2017. Thatcompares with previous forecasts of 0.3percent, 1.5 percent and 1.8 percent,respectively. Importantly, it is lower oilprices that are the main factor behindthese revisions, and Draghi seemedlittle-troubled by second-round effects.That is the main reason that the forecastfor inflation in 2017 was revised down byfar less than the figures for 2016. Still, heraised the possibility of seeing negativeinflation readings in the short term, beforethey’re lifted by base effects and thebroader recovery toward the end of theyear.
Draghi sensibly warned that the newforecasts should be taken with a pinch ofsalt. After all, the cut-off date for thetechnical assumptions behind the newforecasts was Aug. 12, before somesignificant gyrations in financial markets."The events that took place since then area downside risk to the projectionsthemselves," he added, in another gentlydovish statement.
BI INSIGHTS BY JOSEPH JACOBELLI, BLOOMBERG INTELLIGENCE ANALYST
BI INSIGHTS BY JOSEPH JACOBELLI, BLOOMBERG INTELLIGENCE ANALYST
Ways to Deliver a Jolt to China’s Power Sector
China could undertake a number ofmeasures to improve the power sector,lower retail power prices and thusindirectly boost the economy. The actionsare all related to the liberalization of itselectricity markets.
Several countries in the region haveopened up or are in the process ofopening up their markets. By regionalstandards, the Australian power market isthe most advanced, while those of Japan,the Philippines and Singapore aredeveloping at different rates.
China has already introduced directpower selling by generators to large usersin a limited number of regions. It plans toadvance power retailing and other marketreforms in the coming years.
Successful reform, if administeredaggressively, would boost the economythrough the creation of new jobs andoperational efficiencies for industryparticipants. Competition and greaterefficiency could also reduce the price ofretail power, especially to industry.
The authorities could more urgentlyforce through power reform, especiallythe separation of transmission anddistribution, so that power companies andothers may become more efficientthrough competition and cut theiroperating costs.
They could also force mergers of thelisted companies of the major powergroups, improving the management of thecompanies and creating growth througheconomies of scale.
Foreign companies, which have richexperience in competitive markets, couldbe allowed to participate in the Chineseelectricity retailing sector, creating morecompetition and some growthopportunities.
BLOOMBERG ECONOMIC STATISTICS {ECST <GO>}
Huaneng Group's Major Power Generation Subsidiaries
*As of March 31, 2015
Listed Power Companies That Are Part of National Groups
On Sunday, the NBS will update on realestate — the biggest single contributor toChina’s domestic demand. Nationalhouse prices and sales have continued torise on a series of interest rate cuts andthe government’s looseninghome-purchase restrictions. Abundantinventory, especially in smaller cities, hasso far prevented stronger sales frompassing through to a rebound in realestate investment and construction.Without a reacceleration in investment,rising prices and sales may give onlylimited support to the economy.
