CHINA Macro Monday - MacquarieMacro Monday A week of stabilized RMB and heavy liquidity injection...

Please refer to page 14 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

CHINA

Inside

Market & Sector Performance

(HK stocks) 2

Market & Sector Performance

(China stocks) 3

Activity data watch 4

Policy outlook 5

Commodity space 6

Property market 7

Liquidity watch 8

Exchange rate 9

Industrial indicators 10

China in a snapshot 11

Macquarie China Macro Products 13

Data review and preview

Date Indicator Actual MacQ Cons. Prev.

Review

27-Jan Industrial profit, % yoy

-4.7 -- -- -1.4

Preview

1-Feb NBS mfg PMI -- 49.6 49.7 49.6

Source: Bloomberg, Macquarie Research, January 2016

1 February 2016 Macquarie Capital Limited

Macro Monday A week of stabilized RMB and heavy liquidity injection from the PBoC A tough January for global markets: Last week H-shares rebounded 2%,

snapping a four-week losing streak. Energy stocks led the recovery as oil

prices have rallied over 30% from the bottom on Jan 20. A-shares, however,

slumped again by another 6% over the disappointment on delayed RRR/rate

cuts. On the currency front, the RMB was little moved last week thanks to the

PBoC’s intervention while the HKD also stabilised at 7.79 after a roller-coaster

ride in the week before (Fig 38 and 39). For the whole of January, H-shares

shed 15% while A-shares lost 23%.

Heavy injection of liquidity to meet new year demand: The PBoC now

views that cutting the RRR is too high-profile and could weigh on the RMB.

Therefore, it has refrained from cutting the RRR over the past two weeks, but

still managed to inject nearly RMB2tn (equivalent to 150bp RRR cut) through

reverse repo and SLO. That said, compared to RRR cuts, these liquidity tools

are temporary in nature and costly for banks which have to pay interest on

borrowed money, while banks could obtain liquidity with zero cost from a

lower RRR. As such, when the RMB depreciation expectation recedes, the

PBoC could still cut the RRR to release liquidity to the banking system.

RMB stability remains the priority for now: Over the past ten days, the

PBoC consistently set daily fixing around 6.55, regardless the previous day’s

closing (Fig 38). Ironically, the goal of last Aug’s reform is just to align these

two. In any case, by doing so, the PBoC sent a strong signal of a stable RMB.

It marks a sharp U-turn from what it did in the first week of Jan, when the

PBoC accelerated the RMB depreciation and spooked the markets. Looking

ahead, in the next one or two months, we expect the PBoC to keep a tight grip

on the RMB. A stable RMB could provide a more benign backdrop for the

markets than the past month, as it could help reduce capital outflows. Fig 40

shows that capital outflows surged last Aug when the RMB unexpectedly

devalued on Aug 11. However, as the RMB stabilized after that, capital

outflows eased as well. But capital outflows picked up again after the RMB

resumed depreciation from Nov. For this Jan, China’s FX reserves could

easily drop another US$100-150bn due to the accelerated depreciation earlier

that month. But we expect capital outflows to improve from Feb thanks to a

stabilized RMB lately. That said, we see another testing point could come in

late March or April, when a possible ECB easing in March and expectations of

a Fed hike in June could send US$ stronger and weigh on the RMB then.

Is the economy in a hard landing? In the past five years, every year there

was a point when pundits claimed that “China is in a hard landing!” Now it’s

such a moment again. While the economy remains pretty weak, we see little

evidence suggesting that the fundamentals have deteriorated sharply over the

past few months. Instead, while the economy is still slowing down, mainly

dragged by the financial sector, the deceleration is in a gradual way (see our

data preview for Jan). Instead of dwelling on indicators mainly determined by

the industrial sector (we argued two years ago that Li Keqiang index is much

less relevant these days), we prefer to take a more nuanced view on China’s

economy by digging deeper into various data across regions and industries

(see a note we published last week: China in 2015: Huge divergence).

We will not publish Macro Monday next week due to the Chinese New Year

holidays. To our readers, Kung Hei Fat Choi!

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Macro Monday

1 February 2016 2

Market & Sector Performance (HK stocks)

Fig 1 MSCI China sector performance: 1 week Fig 2 MSCI China sector performance: YTD

Source: Datastream, Macquarie Research, January 2016 Source: Datastream, Macquarie Research, January 2016

Fig 3 MSCI China rose 1.9% last week Fig 4 MSCI China valuation

Note: MSCI China captures large and mid cap representation across China H shares, B shares, Red chips and P chips. Source: Datastream, Macquarie Research, January 2016

*Latest as of 29 Jan 2016. Source: Datastream, Macquarie Research, January 2016

Fig 5 A-H premium Index Fig 6 HK market daily turnover


-1.2

-1.1

-0.3

-0.1

0.9

1.3

1.5

1.9

1.9

2.3

3.0

3.4

4.0

7.2

-2 0 2 4 6 8

Cons disc

Materials

Insurance

Cons staple

I.T.

Healthcare

Utilities

Real estate

MSCI China

Banks

Industrials

Diversified financial

Telecom

Energy

MSCI China: 1-week performance (%)

-20.5

-17.1

-17.1

-17.0

-16.5

-16.2

-14.6

-13.9

-13.2

-12.5

-12.4

-9.6

-6.2

-3.0

-25 -20 -15 -10 -5 0

Insurance

Real estate

Healthcare

Diversified financial

Industrials

Utilities

Cons disc

Materials

Cons staple

Banks

MSCI China

I.T

Energy

Telecom

MSCI China: YTD performance (%)

50

55

60

65

70

75

80

85

Feb-1

4

Mar-

14

Ap

r-1

4

May-1

4

Ju

n-1

4

Jul-1

4

Aug-1

4

Sep-1

4

Oc

t-1

4

Nov-1

4

Dec-1

4

Ja

n-1

5

Feb-1

5

Mar-

15

Ap

r-1

5

May-1

5

Ju

n-1

5

Jul-1

5

Aug-1

5

Sep-1

5

Oc

t-1

5

No

v-1

5

Dec-1

5

Jan-1

6

MSCI China Index

22%

-34%39%

5

7

9

11

13

15

17

19

21

23

25

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

MSCI China 12m-forward PE

Avg. since 2004 = 11.5x

9.5x

+1 S.D. = 14.3x

-1 S.D. = 8.6x

85

105

125

145

165

185

Se

p-0

8

Ja

n-0

9

Ma

y-0

9

Se

p-0

9

Jan

-10

Ma

y-1

0

Se

p-1

0

Ja

n-1

1

Ma

y-1

1

Se

p-1

1

Ja

n-1

2

Ma

y-1

2

Se

p-1

2

Ja

n-1

3

Ma

y-1

3

Se

p-1

3

Ja

n-1

4

Ma

y-1

4

Se

p-1

4

Ja

n-1

5

Ma

y-1

5

Se

p-1

5

Ja

n-1

6

AH premium indexParity = 100

0

50

100

150

200

250

Ja

n-1

4

Ma

r-1

4

Ma

y-1

4

Ju

l-1

4

Se

p-1

4

No

v-1

4

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

No

v-1

5

Ja

n-1

6

Weekly average daily turnover

HKD bn HKEx Main Board


1 February 2016 3

Market & Sector Performance (China stocks)

Fig 7 SSE180 sector performance: 1 week Fig 8 SSE180 sector performance: YTD


Fig 9 China stocks slumped by 6.1% last week Fig 10 A-share valuation

Source: Datastream, Macquarie Research, January 2016

*Latest as of 29 Jan 2016. Source: Datastream, Macquarie Research, January 2016

Fig 11 CSI300 vs. ChiNext Fig 12 A-share daily turnover


-14.1

-10.0

-9.9

-8.5

-8.3

-7.6

-6.9

-6.2

-6.1

-5.6

-4.3

-3.6

-3.5

-3.0

-15 -10 -5 0

Telecom

Industrials

Transportation

Infrastructure

Materials

Utilities

IT

Natural resources

Cons. disc.

SSE180

Energy

Cons staple

Financial

Healthcare

SSE180 sectors: 1-week performance (%)

-33.4

-28.1

-25.0

-24.6

-23.8

-23.5

-23.3

-22.7

-21.1

-21.1

-18.2

-18.1

-17.7

-17.1

-35 -25 -15 -5

Telecom

IT

Industrials

Cons. disc.

Infrastructure

Transportation

Healthcare

Utilities

SSE180

Materials

Natural resources

Financial

Energy

Cons staple

SSE180 sectors: YTD performance (%)

1900

2300

2700

3100

3500

3900

4300

4700

5100

Fe

b-1

4

Ma

r-14

Ap

r-1

4

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

Au

g-1

4

Se

p-1

4

Oc

t-1

4

No

v-1

4

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Ma

r-15

Ap

r-1

5

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oc

t-1

5

No

v-1

5

De

c-1

5

Ja

n-1

6

Shanghai Composite

70%

68%

-43%

5

10

15

20

25

30

35

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Shanghai A-share 12m-forward PE

Avg. since 2004 = 14.3x

11.0x

+1 S.D. = 19.9x

-1 S.D. = 8.7x

85

135

185

235

285

Jan

-14

Fe

b-1

4

Mar-

14

Apr-

14

May-1

4

Jun

-14

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov-1

4

Dec-1

4

Jan

-15

Feb-1

5

Mar-

15

Apr-

15

May-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

De

c-1

5

Jan

-16

CSI300 ChiNext

1 Jan 14 = 100 Stock market performance

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2200

Ja

n-1

4

Ma

r-14

Ma

y-1

4

Ju

l-1

4

Sep

-14

No

v-1

4

Ja

n-1

5

Ma

r-15

Ma

y-1

5

Ju

l-1

5

Sep

-15

No

v-1

5

Ja

n-1

6

Weekly average daily turnover

RMB bn China stock market


1 February 2016 4

Activity data watch

Fig 13 Industrial growth moderated in December

Growth weakened in December: Industrial production

growth slowed to 5.9% YoY in December.

NBS PMI edged up in December: NBS PMI picked up to

49.7 in December from 49.6 in November.

The macro backdrop remains weak: We expect a tug-of-

war between soft fundamentals and policy support to

continue.

Source: CEIC, Macquarie Research, January 2016

Fig 14 China PMI edged up slightly in December Fig 15 CPI inflation edged up in December

Source: Bloomberg, Macquarie Research, January 2016 Source: Bloomberg, Macquarie Research, January 2016

Fig 16 Cement and steel production Fig 17 Coal usage weakened in January

Note: Smoothed cement production growth for Jan–Mar 2015 due to data volatility.


Note: The latest coal-consumption figure represents the month-to-date average daily coal-consumption growth from a year ago.

Source: Wind, Macquarie Research, January 2016

8.88.78.8

9.29.0

6.9

8.07.7

7.2

7.9

6.86.8

5.65.9

6.1

6.8

6.06.1

5.75.6

6.25.9

0.0

0.2

0.4

0.6

0.8

1.0

1.2

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Mar-

14

Apr-

14

May

-14

Ju

n-1

4

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov-1

4

De

c-1

4

Jan

-15

Fe

b-1

5

Mar-

15

Apr-

15

May

-15

Ju

n-1

5

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Industrial production, yoy

Industrial production, qoq - RHS

% yoy % mom

43

45

47

49

51

53

55

57

59

61

43

45

47

49

51

53

55

57

59

61

De

c-1

2

Fe

b-1

3

Apr-

13

Ju

n-1

3

Au

g-1

3

Oct-

13

De

c-1

3

Fe

b-1

4

Apr-

14

Ju

n-1

4

Au

g-1

4

Oct-

14

De

c-1

4

Fe

b-1

5

Apr-

15

Ju

n-1

5

Au

g-1

5

Oct-

15

De

c-1

5

US Eurozone

Japan China

Manufacturing PMI

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Oct-

12

De

c-1

2

Fe

b-1

3

Ap

r-13

Ju

n-1

3

Au

g-1

3

Oct-

13

De

c-1

3

Fe

b-1

4

Ap

r-14

Ju

n-1

4

Au

g-1

4

Oct-

14

De

c-1

4

Fe

b-1

5

Apr-

15

Jun

-15

Au

g-1

5

Oct-

15

Dec

-15

US Eurozone Japan China

% yoy CPI inflation % yoy

-10

-5

0

5

10

15

Dec-1

2

Feb

-13

Ap

r-1

3

Jun-1

3

Aug

-13

Oc

t-1

3

Dec-1

3

Feb

-14

Ap

r-1

4

Jun-1

4

Aug

-14

Oc

t-1

4

Dec-1

4

Feb

-15

Ap

r-1

5

Jun-1

5

Aug

-15

Oc

t-1

5

Dec

-15

Cement production

Steel production

% yoy

-30

-20

-10

0

10

20

30

40

50

Jan-1

2

Mar-

12

May

-12

Jul-1

2

Sep

-12

Nov-1

2

Jan-1

3

Mar-

13

May

-13

Jul-1

3

Sep

-13

Nov-1

3

Ja

n-1

4

Mar-

14

May

-14

Ju

l-1

4

Sep

-14

Nov-1

4

Ja

n-1

5

Mar-

15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-1

6

Daily coal consumption at major IPPs

National power generation

% yoy


1 February 2016 5

Policy outlook Credit growth remains expansionary: New loans to the real economy increased

RMB833bn in December, compared with RMB697bn in December 2014. Total social

financing jumped RMB1.8tn in December vs RMB1.7tn a year ago. M2 growth moderated

to 13.3% YoY in December from 13.7% in November but was still higher than the full-year

target of 12% for 2015. Meanwhile, M1 growth, which is indicative of corporate liquidity

conditions, remained strong, rising 15.2% YoY in December from 15.7% in November. We

believe the accommodative monetary policy stance will continue to support growth in the

near term.

Fiscal spending grew 23% YoY in November vs 34% in October. The robust public

spending is a clear indication of the government’s supportive fiscal stance.

Fig 18 New loans to the real economy Fig 19 M2 grew 13.3% YoY in December

Source: CEIC, Macquarie Research, January 2016 Source: CEIC, Macquarie Research, January 2016

Fig 20 Fiscal spending accelerated in 2015 Fig 21 Fixed asset investment slowed in December


0

200

400

600

800

1,000

1,200

1,400

1,600

Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Se

p

Oc

t

No

v

De

c

2013 2014 2015

Rmb bnNew RMB loans to the real economy

5

10

15

20

25

30

35

Dec-0

6

Jun-0

7

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1

Dec-1

1

Jun-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Jun-1

4

Dec-1

4

Jun-1

5

Dec-1

5

M2 growth%. yoy

13.3

-10

-5

0

5

10

15

20

25

30

35

40

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Se

p-1

3

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Ma

r-1

5

Ju

n-1

5

Se

p-1

5

De

c-1

5

Fiscal spending

% yoy

2013: 10.9%

-6.6%

2014: 8.2%

2015: 13.2%

-5

0

5

10

15

20

25

30

Dec-1

3

Feb-1

4

Apr-

14

Jun-1

4

Au

g-1

4

Oct-

14

Dec-1

4

Feb-1

5

Apr-

15

Jun-1

5

Au

g-1

5

Oct-

15

De

c-1

5

Overall FAI Manufacturing

Infrastructure Real Estate

% yoy FAI


1 February 2016 6

Commodities space

Fig 22 Iron ore prices edged down last week

Commodity prices remained weak.

Iron ore prices fell 1.1% last week.

Steel prices rose 0.2%.

Cement prices fell 0.3%.

Copper prices rose 2.0%.

Crude oil prices rallied 6.8%.


Fig 23 Steel prices edged up last week Fig 24 Cement prices weakened last week

Source: Wind, Macquarie Research, January 2016 Source: Wind, Macquarie Research, January 2016

Fig 25 Copper prices rose last week Fig 26 Brent crude oil prices rose further last week


35

55

75

95

115

135

155

175

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2013 2014

2015 2016

USD/tonIron ore

42

1,600

2,100

2,600

3,100

3,600

4,100

4,600


2013 2014

2015 2016

RMB/ton Steel

2,029

290

310

330

350

370

390

410


2013 2014

2015 2016

RMB/ton Cement

294

4,200

4,700

5,200

5,700

6,200

6,700

7,200

7,700

8,200

8,700


2013 2014

2015 2016

USD/ton Copper

4,545

25

45

65

85

105

125


2013 2014

2015 2016

USD/barrel

34

Crude oil: Brent


1 February 2016 7

Property market

Fig 27 Home prices saw continued rise in Dec

Home prices continue to recover: National home prices

rose 2.4% MoM annualized in December. Of the cities

surveyed, 39 out of 70 saw MoM price increases, compared

with 33 in November.

Property transactions slowed in December: National

property sales rose 2% YoY in December. Property sales

growth in the top-30 cities remained strong going into

January.

Property FAI remained weak: Property FAI growth

declined 1.9% YoY in December after falling 5.1% in

November.


Fig 28 National property sales softened in 4Q15 Fig 29 Housing starts remained weak in 4Q15


Fig 30 Top-city home sales remained strong in January Fig 31 Inventory-to-sales ratio dropped further in December


-15

-10

-5

0

5

10

15

20

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Sep

-13

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Ma

r-1

5

Ju

n-1

5

Se

p-1

5

De

c-1

5

yoy

mom annualized

% 70-city new home prices

-40

-20

0

20

40

60

80

100

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

Floor space sold

%, yoy

1Q04 - 2Q07: 37%

3Q07 - 4Q09: 20% 1Q10 - 2Q13:

9%

4Q15:5%

3Q13 - 3Q15: 6%

-30

-10

10

30

50

70

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

Housing starts

%, yoy

1Q04 - 2Q07: 14%

3Q07 - 2Q10: 23%

3Q10 - 4Q13: 11%

4Q15:-18%

1Q14 - 4Q15: -13%

1000

2000

3000

4000

5000

6000

7000


2013 2014

2015 2016

thou sqm, 4wma Weekly housing transactions in 30 major cities

4

6

8

10

12

14

16

18

20

0

20

40

60

80

100

120

Ma

r-11

Ju

n-1

1

Se

p-1

1

De

c-1

1

Ma

r-12

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-13

Ju

n-1

3

Se

p-1

3

De

c-1

3

Ma

r-14

Ju

n-1

4

Se

p-1

4

De

c-1

4

Ma

r-15

Ju

n-1

5

Se

p-1

5

De

c-1

5

Commodity housing inventory

Inventory-to-sales ratio (RHS)

sqm mn MonthsInventory in top 10 cities


1 February 2016 8

Liquidity watch

Fig 32 Total liquidity supply was stable in 2015 Fig 33 Interbank rate fell slightly last week

v Source: Wind, Macquarie Research, January 2016 Source: Wind, Macquarie Research, January 2016

Fig 34 Market interest rates were stable last week Fig 35 Treasury yields edged up last week

Source: CEIC, Macquarie Research, January 2016 Source: Wind, Macquarie Research, January 2016

Fig 36 Corporate bond yield rose last week Fig 37 UST yield fell further last week


16.7

9.8

2.9

0.92.4

0.4 0.3

17.0

11.3

0.6

-2.2

2.9

0.8

3.7

-5

0

5

10

15

20

Total Loans Off-balance sheet

lending

FX purchase

Bond financing

Equity financing

Local govt.debt

issuance

RMB, tn

2014 2015

Liquidity supply

1

3

5

7

9

11

Nov

-06

Ap

r-0

7

Se

p-0

7

Feb-0

8

Jul-0

8

Dec

-08

May

-09

Oc

t-0

9

Mar-

10

Au

g-1

0

Jan-1

1

Ju

n-1

1

Nov

-11

Ap

r-1

2

Se

p-1

2

Fe

b-1

3

Ju

l-1

3

Dec

-13

Ma

y-1

4

Oc

t-1

4

Mar-

15

Au

g-1

5

Jan-1

6

7-day repo rate 3m Shibor%

2.5

3.5

4.5

5.5

6.5

Jan

-12

Mar-

12

Ma

y-1

2

Jul-

12

Se

p-1

2

Nov-1

2

Jan

-13

Mar-

13

Ma

y-1

3

Jul-

13

Se

p-1

3

Nov-1

3

Jan

-14

Mar-

14

May

-14

Jul-

14

Se

p-1

4

Nov-1

4

Jan

-15

Mar-

15

May

-15

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Expected annualized return of bank WMP: 3m

Annualized yield of Yu'E Bao

% pa

0.0

0.5

1.0

1.5

2.0

2.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-1

1

Ap

r-1

1

Jul-1

1

Oc

t-1

1

Ja

n-1

2

Ap

r-1

2

Jul-1

2

Oc

t-1

2

Jan-1

3

Ap

r-1

3

Jul-1

3

Oc

t-1

3

Jan-1

4

Ap

r-1

4

Jul-1

4

Oc

t-1

4

Ja

n-1

5

Ap

r-1

5

Ju

l-1

5

Oc

t-1

5

Jan-1

6

10y-2y spread (bp, RHS)

2y treasury yield

10y treasury yield

% bp

1.8

2.8

3.8

4.8

5.8

6.8

7.8

Jan

-12

Apr-

12

Jul-12

Oct-

12

Ja

n-1

3

Apr-

13

Jul-13

Oct-

13

Jan

-14

Apr-

14

Ju

l-14

Oct-

14

Jan

-15

Apr-

15

Jul-15

Oct-

15

Jan

-16

1y AA corporate bond

1y LGFV bond

1y Railway bond

%

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

4.7

Ju

l/1

2

Se

p/1

2

No

v/1

2

Ja

n/1

3

Ma

r/1

3

Ma

y/1

3

Ju

l/1

3

Se

p/1

3

No

v/1

3

Jan/1

4

Ma

r/1

4

Ma

y/1

4

Ju

l/1

4

Se

p/1

4

No

v/1

4

Ja

n/1

5

Ma

r/1

5

Ma

y/1

5

Jul/15

Se

p/1

5

No

v/1

5

Ja

n/1

6

China 10y treasury yield

US 10y treasury yield (RHS)

% %


1 February 2016 9

Exchange rate

Fig 38 RMB was stable last week

RMB was kept stable last week.

Spot RMB was largely flat against USD.

HKD was stable last week.

FX purchases fell RMB629bn in December.

Trade-weighted RMB weakened.


Fig 39 HKD stabilised last week Fig 40 FX purchases decline worsened in December


Fig 41 USD weakened slightly last week Fig 42 Trade-weighted RMB weakened last week

Source: Bloomberg, Macquarie Research, January 2016 Source: Bloomberg, Macquarie Research, January 2016

5.95

6.05

6.15

6.25

6.35

6.45

6.55

6.65

Ma

r-1

3

Ma

y-1

3

Ju

l-1

3

Se

p-1

3

No

v-1

3

Ja

n-1

4

Ma

r-1

4

Ma

y-1

4

Ju

l-1

4

Se

p-1

4

No

v-1

4

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

No

v-1

5

Ja

n-1

6

Fixing Spot

Upper bound

Lower bound

USD/CNY

7.750

7.760

7.770

7.780

7.790

7.800

7.810

7.820

7.830

18,000

20,000

22,000

24,000

26,000

28,000

Ma

r-1

4

Ma

y-1

4

Ju

l-1

4

Sep

-14

No

v-1

4

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Sep

-15

No

v-1

5

Ja

n-1

6

Hang Seng Index USD/HKD (RHS)

-800

-600

-400

-200

0

200

400

600


2013 2014 2015

RMB, bn

75

80

85

90

95

100

105

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

No

v-1

4

Dec

-14

Jan

-15

Feb-1

5

Mar-

15

Ap

r-15

May-1

5

Jun

-15

Ju

l-15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov

-15

Dec

-15

Jan

-16

RMB EURO JPY KRW

1 Jul 2014 = 100 Currency value against USD

Appreciation

92

97

102

107

112

117

122

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov

-14

Dec

-14

Jan

-15

Feb-1

5

Ma

r-15

Ap

r-15

Ma

y-1

5

Ju

n-1

5

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov

-15

Dec

-15

Jan

-16

Spot CNY against USD CNY NEER

1 Jul 2014 = 100

Appreciation


1 February 2016 10

Industrial indicators

Fig 43 Excavator demand remains weak

Hard industrial data suggests economic fundamentals

remain fragile.

Excavator sales fell 28% YoY in December.

Railway freight fell 8% YoY in December.

Container throughput grew 1.9% YoY in November.

Power consumption growth fell 2% YoY in December.

Passenger vehicle sales grew 18% YoY in December.


Fig 44 Railway freight fell 8% in December Fig 45 Container throughput grew 1.9% in November


Fig 46 Power consumption fell 2% in December Fig 47 Auto sales grew 18% in December


-50

-30

-10

10

30

50

70

90

110

130

150

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Ju

n-1

1

Dec-1

1

Jun-1

2

Dec-1

2

Ju

n-1

3

Dec-1

3

Jun-1

4

Dec-1

4

Ju

n-1

5

Dec-1

5

Excavator sales

% yoy

-28%

-20

-15

-10

-5

0

5

10

15

20

25

Dec

-08

Ju

n-0

9

Dec

-09

Jun-1

0

Dec-1

0

Jun-1

1

Dec-1

1

Jun-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Ju

n-1

4

Dec

-14

Jun-1

5

Dec-1

5

Railway freight

% yoy

-8%

-20

-10

0

10

20

30

40

Nov

-08

Jun-0

9

Jan-1

0

Au

g-1

0

Mar-

11

Oc

t-1

1

May-1

2

Dec

-12

Ju

l-1

3

Feb

-14

Se

p-1

4

Ap

r-1

5

Nov

-15

Container throughput

% yoy

1.9%

-10

-5

0

5

10

15

20

25

30

Dec

-08

Jun-0

9

Dec

-09

Jun-1

0

Dec

-10

Jun-1

1

Dec

-11

Jun-1

2

Dec

-12

Ju

n-1

3

Dec

-13

Jun-1

4

Dec

-14

Jun-1

5

Dec

-15

Power consumption

% yoy

-2.%

-20

0

20

40

60

80

100

De

c-0

8

Ju

n-0

9

Dec

-09

Jun

-10

Dec

-10

Ju

n-1

1

De

c-1

1

Ju

n-1

2

De

c-1

2

Ju

n-1

3

De

c-1

3

Ju

n-1

4

De

c-1

4

Jun

-15

Dec

-15

Passenger vehicle sales

% yoy

18.3%


1 February 2016 11

China in a snapshot

Fig 48 GDP composition

Growth: GDP growth slowed to 6.8% YoY in 4Q15.

Demographics: China’s working-age (15–64) population

has peaked and is set to decline, which will weigh on

China’s long-term potential growth rate.

Inflation: CPI inflation edged up to 1.6% YoY in December,

while PPI deflation remained deep.

External: Export growth improved to -1.5% YoY in

December.


Fig 49 GDP growth: YoY vs QoQ Fig 50 Working-age population has peaked

Source: CEIC, Macquarie Research, January 2016 Source: UN, Macquarie Research, January 2016

Fig 51 Subdued CPI and PPI inflation Fig 52 Export growth improved in December


8.4 8.39.1

10.0 10.111.3

12.7

14.2

9.6

9.210.6

9.5

7.7 7.7 7.3

-4

-2

0

2

4

6

8

10

12

14

16

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Consumption

Investment

Net exports

Real GDP

pp

9.5

9.2

8.9

8.1

7.67.4

7.97.8

7.5

7.9

7.67.4

7.47.27.2

7.07.06.9

6.86.6

6.76.76.7

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

GDP, yoy

GDP, qoq - RHS

% yoy %F'cast

40

45

50

55

60

65

70

75

80

0

200

400

600

800

1000

1200

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

working age population (15-64) % of total population (RHS)

mn %

Projection

-8

-6

-4

-2

0

2

4

6

8

10

Ju

n-0

2

Mar-

03

Dec-0

3

Sep

-04

Jun-0

5

Mar-

06

Dec-0

6

Sep

-07

Jun-0

8

Mar-

09

Dec

-09

Sep

-10

Jun-1

1

Mar-

12

Dec-1

2

Sep

-13

Ju

n-1

4

Mar-

15

Dec-1

5

CPI

PPI

% yoy

1.6%

-5.9%-25

-15

-5

5

15

25

35

-10

0

10

20

30

40

50

60

70

Dec-1

0

Ju

n-1

1

Dec-1

1

Ju

n-1

2

Dec-1

2

Ju

n-1

3

Dec-1

3

Jun-1

4

Dec-1

4

Jun-1

5

Dec-1

5

Trade balance - LHS

Export - RHS

Import - RHS

US$ bn %, yoy


1 February 2016 12

Fig 27 China economic forecasts

Macquarie China Economic forecasts

Unit 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2014 2015 2016 2017

Growth

GDP YoY, % 7.0 7.0 6.9 6.8 6.6 6.7 6.7 6.7 7.3 6.9 6.7 6.5

GDP QoQ,% 1.3 1.9 1.8 1.6 1.1 1.6 1.7 1.7 -- -- -- --

Inflation

CPI YoY, % 1.2 1.4 1.7 1.5 1.7 1.5 1.5 1.7 2.0 1.4 1.6 2.0

PPI YoY, % -4.6 -4.7 -5.7 -5.9 -4.9 -4.5 -3.3 -2.5 -1.9 -5.2 -3.5 -1.5

Activities

Industrial production YoY, % 6.4 6.3 5.9 5.9 -- -- -- -- 8.3 6.1 5.7 5.0

Retail sales YoY, % 10.5 10.2 10.7 11.1 -- -- -- -- 12.0 10.7 10.0 9.5

Fixed asset investment (ytd) YoY, % 13.5 10.4 8.7 9.3 -- -- -- -- 15.7 10.0 8.0 7.5

Manufacturing YoY, % 10.4 9.4 6.2 7.6 -- -- -- -- 13.5 8.1 6.0 6.0

Property YoY, % 9.0 3.9 0.8 -0.9 -- -- -- -- 11.1 2.5 4.0 4.0

Infrastructure YoY, % 22.8 17.6 16.6 15.6 -- -- -- -- 20.3 17.3 15.0 12.0

Trade

Exports YoY, % 4.6 -2.2 -5.9 -5.1 -- -- -- -- 6.0 -2.6 1.0 3.2

Imports YoY, % -17.8 -13.6 -14.4 -11.9 -- -- -- -- 0.7 -14.4 -2.0 2.1

Trade balance US$ bn 124 140 164 175 -- -- -- -- 380 602 650 690

Monetary

M2 (period-end) YoY, % 11.6 11.8 13.1 13.3 -- -- -- -- 12.2 13.3 12.5 12.0

New bank loans Rmb bn 3,670 2,880 3,340 1,820 -- -- -- -- 9,781 11,710 12,000 12,500

1-yr deposit rate (period-end) % 2.50 2.00 1.75 1.50 1.25 1.00 1.00 1.00 2.75 1.50 1.00 1.00

1-yr lending rate (period-end) % 5.35 4.85 4.60 4.35 4.10 3.85 3.85 3.85 5.60 4.35 3.85 3.85

RRR (period-end) % 19.5 18.5 18.0 17.5 17.0 16.5 15.5 14.5 20.0 17.5 14.5 13.0

Exchange rate (spot, period end) USDCNY

6.24 6.21 6.36 6.49 -- -- -- -- 6.20 6.49 6.60 6.50

Current account/Fiscal balance

Current account (as % of GDP) % -- -- -- -- -- -- -- -- 2.1 2.7 2.8 2.6

Fiscal balance (as % of GDP) % -- -- -- -- -- -- -- -- -2.1 -2.4 -3.0 -3.0

Note: Numbers in bold are forecast values.



1 February 2016 13

Macquarie China Macro Products 1. Regular data comments:

Monthly data preview: Jan data preview: A hard landing or a policy misstep?, 28 Jan 2016

IP/FAI/Property: 4Q/2015 GDP: Another year of muddle-through, 19 Jan 2016

Trade data: Eight takeaways from Nov trade and FX reserve data, 8 Dec 2015

Money/Credit: Aug money data: Strong M1 number boding well for growth in 4Q, 11 Sep 2015

Inflation: August inflation: CPI inflation at 12-month high and PPI deflation at 71-month low, 10 Sep 2015

NBS PMI: What PMI data can and cannot tell us, 1 Sep 2015

2. Ad hoc comments:

China in 2015: Huge divergence, 29 Jan 2016

What’s behind the sharp drop in FX reserves and the recent RMB depreciation? 7 Jan 2016

Update on capital flows: Huge outflows in 3Q15, but reversed in Oct, 19 Nov 2015

Takeaways from the 13th 5-year Plan, 4 Nov 2015

The PBoC cuts interest rate, RRR and liberalized deposit rate all at once, 23 Oct 2015

US marketing feedback: 9 Q&A on China, 8 Oct 2015

Myths and Realities: 7 Q&As on RMB, 11 Sep 2015

Aug FX reserves number indicates capital outflows are manageable, 7 Sep 2015

The PBoC cut interest rate and RRR for financial and economic stability, 25 Aug 2015

No sizable depreciation: Guidance from the PBoC, 13 Aug 2015

What is China’s actual capital outflow?, 27 Jul 2015

Is China’s GDP overstated due to falling import prices? 23 July 2015

Another step toward financial deregulation: Loan-to-deposit ratio to be scrapped, 24 Jun 2015

US marketing feedback: Eleven Q&As on China, 18 Jun 2015

Where tsunamis are formed, 13 Apr 2015

3. Thematic Research

China 2016 Outlook, 14 Dec 2015

(Annual outlook for 2016)

China Liquidity Series (II) - Why China needs to cut RRR 20 times in the next five years?, 16 Mar 2015

(A primer on China’s monetary policy transition)

China Liquidity Series (I) - A guide to RMB and the PBoC, 17 Jul 2014

(A primer on how to understand RMB, liquidity and monetary policy in China)

A U-shaped recovery: Outlook for the remainder of this year, 7 Aug 2015

(Taking stock of economic development in 1H15 and update macro outlook for 2H15)

Mini-cycle, China style: Lessons from the near past, 28 May 2014

(A study on the stop-go mini-cycle, the most important macro pattern in China and a major market mover)

Understanding “stimulus,” 16 Apr 2014

(An early attempt in quantifying mini-stimulus measures)

Lessons from China Policy Forum: Stable economy & difficult reforms, 09 Apr 2014

(Takeaways from our Policy Forum held in Beijing)

4. Macro Monday

RMB could remain stable in the near term, 25 Jan 2016

Questions on macro data and capital flows, 18 Jan 2016

All eyes on RMB again, 11 Jan 2016


1 February 2016 14

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2015

AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients)

Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients)

Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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