Macro Monday - Macquarie€¦ · 2015 Economy starts the year on a weak note, 5 Jan 2015 Rising...

Please refer to page 13 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

CHINA

Inside

Market & Sector Performance 2

Activity data watch 3

Policy outlook 4

Commodity space 5

Property market 6

Liquidity watch 7

Exchange rate 8

Industrial indicators 9

China in a snapshot 10

Forecasting table 11

Data review and preview

Date Indicator Actual MacQ Cons. Prev.

Review

8-Feb Exports, %yoy

-3.3 -1.1 5.9 9.7

8-Feb Imports, %yoy

-19.9 -6.6 -3.2 -2.4

8-Feb Trade bal., US$ bn

60 41 49 50

Preview

10-Feb CPI, % yoy -- 0.9 1.0 1.5

10-Feb PPI, % yoy -- -3.5 -3.7 -3.3

10-15 Feb

M2, %yoy -- 12.2 12.1 12.2

10-15 Feb

New loans, RMB bn

-- 1,400 1,350 697

Source: Bloomberg, Macquarie Research, Feb 2015

Recent Macro Mondays

Headwinds from regulation, economy, currency and policy, 2 Feb 2015

Three questions in everyone’s mind, 26 Jan 2015

A cooling down message sent by A-share regulators, 19 Jan 2015

How to read the RMB7tn stimulus report? 12 Jan 2015

Economy starts the year on a weak note, 5 Jan 2015

Rising interbank rates amid weaker RMB, 22 Dec 2014

Economy remains weak but new loans start to accelerate, 15 Dec 2014

9 February 2015 Macquarie Capital Securities Limited

Macro Monday Markets confused by mixed policy signals Major macro themes of the past week

China equities continued correction despite RRR cut: Last week H-shares fell

0.2% while A-shares tumbled another 4.2%. A-shares have already corrected

10% from the peak in mid-Jan. The biggest macro event in the past week was a

50bp RRR cut by the PBoC last Wednesday night. While markets initially got

excited by the cut, the PBoC poured cold water on it the next day by setting the

28-day reverse repo rate at a quite high level of 4.8%. For comparison, the 3-

month MLF was only at 3.5%. The move confused markets as it implied a much

less accommodative policy stance. Meanwhile, the other two headwinds were

from further margin financing tightening as well as floods of IPOs ahead of the

Chinese New Year. As the result, A-shares continued to be under pressure even

after the RRR cut. Outside of China, crude oil price continued to recover, with

Brent oil price now up 24% from the trough in mid-Jan.

More cuts to come: The RRR cut last week was the first broad cut since May

2012 (China cut RRR: Beginning of the beginning, 4 Feb 2015). It is mainly

meant to compensate for the shortfall in capital inflows. Last year, China’s

financial account balance swung from a surplus of US$326bn in 2013 to a

deficit of around US$20bn. Note that China raised RRR from 7.0% in 2004 to

21.5% in 2011 to sterilize the massive capital inflows. Now the course is

reversing. We expect three more RRR cuts (50bp each) and two interest rate

cuts (25bp each) in this year.

Policy mix: Stable currency + loose liquidity: Last week the PBoC kept the

RMB fixing rate largely stable, in line with our view that the PBoC will maintain

a stable RMB to avoid large capital outflows (Don’t worry about RMB, 30 Jan

2015). Also a sharp RMB depreciation would hinder the mandates of RMB

internationalization and one-belt-one-road. As such, we continue to hold the

view that the USD/CNY market rate will be range-bound between 6.00 and

6.30 in 2015. Meanwhile, we expect the PBoC to use various measures to

meet the liquidity spike around the Chinese New Year holidays.

A grain of salt needed for all macro data from Jan: January trade data,

released over the weekend, were lower than expected. However, we don’t

want to read too much into these data regarding the strength of the economy.

Experiences suggest that these data are hard to interpret. Specifically, Jan

exports declined 3% yoy (consensus: +6%), while imports plunged by 20%

(consensus: -3%). As a result, the trade surplus rose to a record high of

US$60bn in Jan. However, don’t forget that export growth in Jan 2014 was

biased up by the Chinese New Year, as it plunged in Feb 2014. Therefore,

there is no need to feel pessimistic about external demand.

Regarding import data, it might reflect a lot of impacts: falling commodity

prices (import prices for iron ore, crude oil, coal, aluminium all down 40-50%

yoy) as well as weak domestic demand. Late CNY this year might also play a

role, as production will only fully resume in mid-March. Given falling prices, it

makes sense for manufacturers to postpone imports. As such, we are

cautious in reading too much from import data as well. The same lesson

applies to inflation data. Jan CPI, to be released on Feb 10, might fall below

1.0% yoy. But one should also bear in mind that it’s biased down as CNY was

in Jan last year, and food prices would rise ahead of the CNY holidays.

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

Macquarie Wealth Management Macro Monday

9 February 2015 2

Market & Sector Performance

Fig 1 Tech and telecom led the rally Fig 2 MSCI China gained 2.8% YTD

Source: Datastream, Macquarie Research, February 2015 Source: Datastream, Macquarie Research, February 2015

Fig 3 MSCI China gained 0.6% last week Fig 4 MSCI China valuation remains low


Fig 5 HSI advanced 0.7% w/w Fig 6 SHCOMP fell another 4.2% last week


-8.1-6.9

-5.6-5.1

-4.6-3.3

-1.7-1.4

-0.8-0.7-0.6

0.00.00.40.50.60.7

1.61.92.1

3.53.8

8.8

-10 -5 0 5 10

AirlinesUtilities

HealthcareRetailing

MarineCapital goods

Transpt infrastructureConst. materials

Cons durables/apparelCons stapleAutomobileChemicalsInsurance

BanksMetals & mining

MSCI ChinaReal estate

Software & servicesDiversified financials

EnergyPaper/forestry

TelecomTech hardware

MSCI China sectors: 1-week performance (%)

-14.1-9.9-9.4

-8.0-6.8

-4.6-4.6-4.6

-2.5-0.9-0.8-0.6

1.92.12.42.8

4.15.46.2

9.113.2

15.919.3

-20 -10 0 10 20 30

RetailingDiversified financials

Paper/forestryCapital goods

Const. materialsHealthcare

MarineUtilities

BanksChemicals

EnergyReal estate

InsuranceCons staple

Metals & miningMSCI China

Cons durables/apparelAutomobile

Transpt infrastructureAirlines

Tech hardwareTelecom

Software & services

MSCI China sectors: 2015 YTD performance (%)

-10.6-7.8

-5.5-1.7-1.1

0.61.41.61.82.42.53.1

4.65.35.36.26.97.17.48.3

14.217.117.9

-20 -10 0 10 20

Paper/forestryDiversified financials

RetailingConst. materials

Capital goodsCons staple

EnergyBanks

ChemicalsMarine

HealthcareUtilities

Real estateMSCI China

Cons durables/apparelTech hardware

AutomobileMetals & mining

InsuranceTranspt infrastructure

TelecomAirlines

Software & services


-10.6-7.8

-5.5-1.7-1.1

0.61.41.61.82.42.53.1

4.65.35.36.26.97.17.48.3

14.217.117.9

-20 -10 0 10 20




EnergyBanks

ChemicalsMarine

HealthcareUtilities





TelecomAirlines

Software & services


-10.6-7.8

-5.5-1.7-1.1

0.61.41.61.82.42.53.1

4.65.35.36.26.97.17.48.3

14.217.117.9

-20 -10 0 10 20




EnergyBanks

ChemicalsMarine

HealthcareUtilities





TelecomAirlines

Software & services


55

57

59

61

63

65

67

69

Aug

-13

Sep

-13

Oc

t-1

3

Nov-1

3

Dec-1

3

Jan-1

4

Fe

b-1

4

Mar-

14

Ap

r-1

4

Ma

y-1

4

Jun-1

4

Jul-1

4

Aug

-14

Sep

-14

Oc

t-1

4

Nov-1

4

Dec-1

4

Ja

n-1

5

Feb-1

5

MSCI China Index

-14.2%21.7%

5

7

9

11

13

15

17

19

21

23

25

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

MSCI China 12m Forward PE

9.7x

+1 S.D. = 14.8x

-1 S.D. = 8.5x

Avg. since 2004 = 11.6x

21000

21500

22000

22500

23000

23500

24000

24500

25000

25500

Aug

-13

Sep

-13

Oc

t-1

3

No

v-1

3

De

c-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

Aug

-14

Sep

-14

Oc

t-1

4

Nov

-14

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Hang Seng Index

-11.9%19.5%

1950

2150

2350

2550

2750

2950

3150

3350

Au

g-1

3

Se

p-1

3

Oct-

13

No

v-1

3

De

c-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-1

4

Apr-

14

Ma

y-1

4

Jun

-14

Ju

l-14

Au

g-1

4

Se

p-1

4

Oct-

14

No

v-1

4

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Shanghai Composite

-11.7%

70%


9 February 2015 3

Activity data watch

Fig 7 Market retreated on A-share weakness

China stock rally losing steam of late: Market under

pressure as regulatory tightening intensified.

Global PMIs remained soft: Soft PMI readings suggest

downside risks to growth in the near term.

Growth stabilized in Dec: Industrial production growth

picked up to 7.9% yoy in Dec from 7.2% in Nov.

The macro backdrop remains weak: We expect the tug of

war between soft fundamentals and policy support that

began this March to continue.

Source: CEIC, Macquarie Research, February 2015

Fig 8 Global PMIs weakened in recent months Fig 9 The world in disinflation

Source: Bloomberg, Macquarie Research, February 2015 Source: Bloomberg, Macquarie Research, February 2015

Fig 10 Industrial production showed some recovery Fig 11 Power production surged in Feb on low base


Note: the latest coal consumption figure represents the month-to-date average daily coal consumption growth from a year ago. Source: Wind, Macquarie Research, February 2015

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

Feb 1

3

Apr 13

Jun 1

3

Aug 1

3

Oc

t 1

3

Dec 1

3

Feb 1

4

Apr 14

Jun 1

4

Aug 1

4

Oc

t 14

Dec 1

4

Feb 1

5

Hang Seng China Enterprise Index

Industrial production - 1 month lag (RHS)

%, yoy

49

50

51

52

53

54

43

45

47

49

51

53

55

57

59

61

Jan

-12

Ma

r-1

2

May

-12

Jul-

12

Se

p-1

2

No

v-1

2

Jan

-13

Ma

r-1

3

May

-13

Jul-

13

Se

p-1

3

No

v-1

3

Jan

-14

Ma

r-1

4

May

-14

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

US Eurozone

Japan China (RHS)

Manufacturing PMI

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Ja

n-1

2

Ma

r-1

2

Ma

y-1

2

Ju

l-12

Se

p-1

2

No

v-1

2

Ja

n-1

3

Ma

r-1

3

Ma

y-1

3

Ju

l-13

Se

p-1

3

No

v-1

3

Ja

n-1

4

Ma

r-1

4

Ma

y-1

4

Ju

l-14

Se

p-1

4

No

v-1

4

Ja

n-1

5

China US Eurozone Japan

% yoy CPI inflation

-5

0

5

10

15

20

25

30

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

De

c-1

1

Mar-

12

Ju

n-1

2

Sep-1

2

Dec-1

2

Ma

r-1

3

Jun-1

3

Sep

-13

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

De

c-1

4

Cement production Steel production

% yoy

-30

-20

-10

0

10

20

30

40

50

Mar-

11

Ma

y-1

1

Ju

l-1

1

Sep

-11

Nov-1

1

Jan-1

2

Mar-

12

May

-12

Jul-1

2

Sep

-12

Nov-1

2

Jan-1

3

Mar-

13

Ma

y-1

3

Ju

l-1

3

Sep

-13

Nov-1

3

Jan-1

4

Mar-

14

May

-14

Jul-1

4

Sep

-14

Nov-1

4

Jan-1

5

Daily coal consumption at major IPPs

National power generation

% yoy


9 February 2015 4

Policy outlook Robust credit data in Dec: Dec loan data (RMB697bn) was decent, albeit below market

expectations, which were unrealistically high. Total Social Financing (TSF) beat expectations,

thanks to a jump in shadow banking lending. It makes last Nov and Dec look very similar to

last May and June. Every time growth headwinds intensify, the PBoC seems to lift the

monthly loan quota by ~RMB200bn. Then the economy might have a short stabilization.

Drivers behind surging TSF in Dec: The jump was mainly due to off-balance sheet

lending, which surged to RMB729bn in Dec from RMB28bn in Nov. We see three drivers.

First, it might be due to the rising inflow of household money into the red-hot A-share

market, via the shadow banking channel. Second, Beijing might ease control on shadow

banking temporarily to bolster growth. Third, banks might rush to lend to the LGFVs before

China is set to tighten regulation on local government debt in 2015.

Policy to turn more accommodative: To be sure, loan quota could be used in a highly

nimble way, enabling Beijing to respond to the growth slowdown promptly. But its effect

has also proved short-lived, so that Beijing has to roll out new stimulus measures every

few months. In 2015, we think Beijing will use a combination of mini-stimulus and more

traditional monetary policy such as interest rate and RRR cuts.

Fig 12 Loan growth accelerated in Nov and Dec Fig 13 M2 growth moderated in Dec

Source: CEIC, Macquarie Research, February 2015 Source: CEIC, Macquarie Research, February 2015

Fig 14 Fiscal spending remained weak in Dec Fig 15 Property investment sputtered in Dec


0

200

400

600

800

1,000

1,200

Ja

n

Fe

b

Ma

r

Apr

Ma

y

Ju

n

Ju

l

Au

g

Se

p

Oct

No

v

De

c

2012 2013 2014

Rmb bn New RMB loans

10

12

14

16

18

20

22

24

26

28

30

De

c-0

6

Ju

n-0

7

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

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

M2 growth

%, yoy

Jan 11 - current: 14.0%

Dec 08 - Dec 10: 23.4%

Jan 06 - Nov 08: 17.4%

12.2%

-10

0

10

20

30

40

50

60

Jun

-11

Se

p-1

1

Dec

-11

Mar-

12

Jun

-12

Se

p-1

2

Dec

-12

Mar-

13

Jun

-13

Se

p-1

3

Dec

-13

Mar-

14

Jun

-14

Se

p-1

4

Dec

-14

Fiscal spending

% yoy

2011: 21.6% 2012:

15.3%

2013: 10.9%

1.2%

-2

3

8

13

18

23

28

33

38

Mar-

13

Apr-

13

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oct-

13

Nov-1

3

Dec-1

3

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May

-14

Jun-1

4

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov-1

4

Dec-1

4

Overall FAI Manufacturing

Infrastructure Real Estate

% yoy FAI


9 February 2015 5

Commodity space

Fig 16 Iron ore price slumped 6% last week

Commodity space remained weak

Iron ore price slumped 6% last week.

Steel price fell 0.8% last week.

Cement prices continued to decline amid weak

demand and inventory overhang.

Copper prices rebounded 3.7% as speculators exit

short position.

Crude oil prices surged for the second week on reports

of potential supply fall.

Source: Wind, Macquarie Research, February 2015

Fig 17 Steel price fell 0.8% w/w Fig 18 Cement prices dropped 0.3% last week

Source: Wind, Macquarie Research, February 2015 Source: Wind, Macquarie Research, February 2015

Fig 19 Copper price rebounded 3.7% w/w Fig 20 Brent crude oil price advanced 9.1% w/w


50

70

90

110

130

150

170

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

2012 2013

2014 2015

USD/tonIron ore

63

2,450

2,950

3,450

3,950

4,450

4,950


2012 2013

2014 2015

RMB/ton Steel

2,513340

350

360

370

380

390

400

410


2012 2013

2014 2015

RMB/ton Cement

344

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000


2012 2013

2014 2015

USD/ton Copper

5,666

40

50

60

70

80

90

100

110

120

130

140


2012 2013

2014 2015

USD/barrel Brent

58


9 February 2015 6

Property market

Fig 21 Home price continued to improve sequentially

Home price drop narrowed: National home price decline

eased further sequentially in Dec, with 66 out of 70 cities

surveyed seeing MoM price decreases (67 out of 70 in

Nov).

Property transactions to improve on policy easing:

Property sales growth in top-30 cities picked up further in

Dec despite weak seasonality. However, national property

sales were weak.

Property FAI to remain weak: Property FAI growth

declined in Dec, the first yoy contraction recorded.


Fig 22 National property sales decelerated in Nov Fig 23 Housing starts jumped in Oct on base effect

Source: Wind, Macquarie Research, February 2015 Source: CEIC, Macquarie Research, February 2015

Fig 24 Property sales weakened slightly in Jan Fig 25 Inventory-to-sales ratio picked up slightly in Jan


-15

-10

-5

0

5

10

15

20

De

c-0

5

Ju

n-0

6

De

c-0

6

Ju

n-0

7

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

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

yoy mom annualized

% National Home Price - 70-city

-40

-20

0

20

40

60

80

100

4Q

04

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

Floor space sold

%, yoy

1Q04 - 2Q07: 36.6%

3Q07 - 2Q10: 19.7% 3Q10 - 2Q13:

8.4% 4Q14-6.1%

0

5

10

15

20

25

30

35

40

45

-30

-10

10

30

50

70

4Q

04

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

Housing starts

Property FAI (RHS)

%, yoy %, yoy

4Q14: -14.4%

4Q14: 5.6%

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000


2012 2013

2014 2015

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

4

6

8

10

12

14

16

18

20

0

20

40

60

80

100

120

Ap

r-1

0

Ju

l-1

0

Oc

t-1

0

Jan-1

1

Ap

r-1

1

Jul-1

1

Oc

t-1

1

Jan-1

2

Ap

r-1

2

Jul-1

2

Oc

t-1

2

Ja

n-1

3

Ap

r-1

3

Jul-1

3

Oc

t-1

3

Ja

n-1

4

Ap

r-1

4

Jul-1

4

Oc

t-1

4

Jan-1

5

Commodity housing inventory

Inventory-to-sales ratio (RHS)

sqm mn MonthsInventory in top 10 cities


9 February 2015 7

Liquidity watch

Fig 26 Shadow financing and FX inflows slowed Fig 27 Interbank liquidity remained tight last week

Source: Wind, Macquarie Research, February 2015. Source: Wind, Macquarie Research, February 2015

Fig 28 WMP yields edged up slightly last week Fig 29 Treasury yields fell last week

Source: CEIC, Macquarie Research, February 2015 Source: Wind, Macquarie Research, February 2015

Fig 30 Credit bond yields eased last week Fig 31 UST yield picked up last week


19,449

9,477

5,163

2,7771,811

222

16,678

10,135

2,899

779

2,430

435

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Total Loans Off-balance sheet

lending

FX purchase

Bond financing

Equity financing

RMB, bn

2013 2014

1

2

3

4

5

6

7

8

9

10

11

Feb-1

1

May-1

1

Aug-1

1

No

v-1

1

Feb-1

2

May-1

2

Aug

-12

Nov-1

2

Feb-1

3

May-1

3

Aug-1

3

No

v-1

3

Feb-1

4

May

-14

Aug-1

4

Nov-1

4

Feb

-15

7-day repo 3m Shibor%

3

4

5

6

7

Feb

-11

Ma

y-1

1

Aug

-11

No

v-1

1

Feb

-12

Ma

y-1

2

Aug

-12

No

v-1

2

Feb

-13

Ma

y-1

3

Aug

-13

No

v-1

3

Fe

b-1

4

Ma

y-1

4

Aug

-14

No

v-1

4

Fe

b-1

5

Expected annualized return of bank WMP: 3m

Annualized yield of Yu'E Bao

% pa

0

50

100

150

200

250

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Feb-1

0

May

-10

Au

g-1

0

Nov-1

0

Fe

b-1

1

May

-11

Au

g-1

1

Nov-1

1

Feb-1

2

May

-12

Au

g-1

2

Nov-1

2

Fe

b-1

3

Ma

y-1

3

Au

g-1

3

Nov-1

3

Feb-1

4

May

-14

Au

g-1

4

No

v-1

4

Feb-1

5

10y-2y spread (bp, RHS)

2y treasury yield

10y treasury yield

% bp

3

4

4

5

5

6

6

7

7

8

8

Feb

-11

May

-11

Aug

-11

Nov-1

1

Fe

b-1

2

May

-12

Aug

-12

Nov-1

2

Feb

-13

May

-13

Aug

-13

Nov-1

3

Feb

-14

May

-14

Aug

-14

Nov-1

4

Fe

b-1

5

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

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

Au

g/1

1

Oc

t/1

1

De

c/1

1

Fe

b/1

2

Ap

r/1

2

Ju

n/1

2

Au

g/1

2

Oc

t/1

2

De

c/1

2

Fe

b/1

3

Ap

r/1

3

Ju

n/1

3

Au

g/1

3

Oc

t/1

3

De

c/1

3

Fe

b/1

4

Ap

r/1

4

Ju

n/1

4

Au

g/1

4

Oc

t/1

4

De

c/1

4

Fe

b/1

5

China 10y treasury yield

US 10y treasury yield (RHS)

% %


9 February 2015 8

Exchange rate

Fig 32 RMB strengthened 0.2% last week

RMB strengthened on PBoC guidance.

Spot RMB advanced 0.2% against USD last week.

HKD weakened slightly last week.

FX purchases fell the most in Dec since 2007.

On a trade weighted basis, the RMB continued to

appreciate against a basket of currencies despite weak

spot rate against USD.


Fig 33 HKD weakened slightly last week Fig 34 FX purchases fell sharply in Dec


Fig 35 Euro stabilized last week Fig 36 RMB resisted depreciation

Source: Bloomberg, Macquarie Research, February 2015 Source: Bloomberg, Macquarie Research, February 2015

6.00

6.05

6.10

6.15

6.20

6.25

6.30

6.35

6.40

6.45

Ju

l-12

Se

p-1

2

No

v-1

2

Ja

n-1

3

Ma

r-1

3

Ma

y-1

3

Ju

l-13

Se

p-1

3

No

v-1

3

Ja

n-1

4

Ma

r-1

4

Ma

y-1

4

Ju

l-14

Se

p-1

4

No

v-1

4

Ja

n-1

5

Fixing Spot

Upper bound

Lower bound

USD/CNY

6.126

6.041

6.245

7.750

7.755

7.760

7.765

7.770

19,500

20,500

21,500

22,500

23,500

24,500

25,500

Ju

n-1

3

Ju

l-13

Au

g-1

3

Se

p-1

3

Oct-

13

No

v-1

3

De

c-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-1

4

Apr-

14

Ma

y-1

4

Ju

n-1

4

Ju

l-14

Au

g-1

4

Se

p-1

4

Oct-

14

No

v-1

4

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Hang Seng Index USD/HKD (RHS)

-150

-50

50

150

250

350

450

550

650


2012 2013 2014

RMB, bn

80

85

90

95

100

105

110

115

120

125

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov

-14

Dec

-14

Jan

-15

Feb-1

5

RMB EURO JPY

KRW DXY

1 Jul 2014 = 100 Currency value against USD

Appreciation

97

99

101

103

105

107

109

111

Jul-

14

Au

g-1

4

Se

p-1

4

Oct-

14

Nov

-14

Dec

-14

Jan

-15

Feb-1

5

Spot CNY against USD

CNY NEER

1 Jul 2014 = 100

Appreciation


9 February 2015 9

Industrial indicators

Fig 37 Excavator demand remained weak

Hard industrial data suggest economic fundamentals

remained fragile

Excavator sales closed the year on a weak note.

Container throughput growth moderated in Nov.

Power consumption growth edged up further in Dec.

Passenger vehicle sales growth rebounded in Dec.


Fig 38 Railway freight dropped further in Dec Fig 39 Container throughput moderated in Nov


Fig 40 Power consumption improved further in Dec Fig 41 Auto sales rebounded in Dec


-50

-30

-10

10

30

50

70

90

110

130

150

Dec-0

7

Ju

n-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Ju

n-1

0

Dec-1

0

Jun-1

1

Dec-1

1

Ju

n-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Ju

n-1

4

Dec-1

4

Excavator sales

% yoy

-36%

-15

-10

-5

0

5

10

15

20

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1

De

c-1

1

Ju

n-1

2

Dec-1

2

Jun-1

3

Dec-1

3

Jun-1

4

Dec-1

4

Railway freight

% yoy

-10.7%-20

-10

0

10

20

30

40

Nov-0

7

Jun-0

8

Ja

n-0

9

Aug-0

9

Mar-

10

Oc

t-1

0

May

-11

De

c-1

1

Jul-1

2

Fe

b-1

3

Sep-1

3

Ap

r-1

4

Nov-1

4

Container throughput

% yoy

7.2%

-10

-5

0

5

10

15

20

25

30

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

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

Power consumption

% yoy

4.2%

-20

0

20

40

60

80

100

De

c-0

7

Ju

n-0

8

De

c-0

8

Ju

n-0

9

Dec

-09

Ju

n-1

0

De

c-1

0

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

Passenger vehicle sales

% yoy

16%


9 February 2015 10

China in a snapshot

Fig 42 GDP decomposition

Growth: GDP remained flat at 7.3% in 4Q14, bringing

annual GDP to 7.4% for 2014, the slowest in decades.

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

has peaked and is set to decline going forward, which will

weigh on China’s long-term potential growth rate.

Inflation: Pressures remain contained amid soft domestic

demand and weak global commodity prices.

External: Trade surplus reached record high in Jan as

imports remained subdued.


Fig 43 GDP growth: yoy vs qoq Fig 44 Working age population has peaked

Source: CEIC, Macquarie Research, February 2015 Source: UN, Macquarie Research, February 2015

Fig 45 Subdued CPI vs PPI inflation Fig 46 Record trade surplus on weak imports


8.4 8.39.1

10.0 10.111.3

12.7

14.2

9.6

9.2

10.49.3

7.8 7.8 7.4

-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

7.57.3 7.3

7.06.8 6.8

7.2

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

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

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

1

Mar-

02

Dec-0

2

Sep

-03

Jun-0

4

Mar-

05

De

c-0

5

Sep

-06

Jun-0

7

Mar-

08

Dec-0

8

Sep

-09

Jun-1

0

Ma

r-1

1

Dec-1

1

Sep

-12

Jun-1

3

Mar-

14

Dec-1

4

CPI

PPI

% yoy

1.5%

-3.3%

-20

0

20

40

60

80

-10

0

10

20

30

40

50

60

Jan

-10

Ju

l-10

Jan

-11

Ju

l-11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Trade balance - LHS

Export - RHS

Import - RHS

US$ bn %, yoy


9 February 2015 11

Fig 47 China economic forecasts

Macquarie China Economic forecasts

Unit 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2013 2014 2015 2016

Growth

GDP YoY, % 7.4 7.5 7.3 7.3 7.0 6.8 6.8 7.2 7.7 7.4 7.0 6.5

GDP QoQ,% 1.6 1.9 1.9 1.5 1.6 1.7 1.9 1.9 -- -- -- --

Inflation

CPI YoY, % 2.3 2.2 2.0 1.5 1.5 1.4 1.4 1.7 2.6 2.0 1.5 2.0

PPI YoY, % -2.0 -1.5 -1.3 -2.7 -2.3 -1.7 -1.7 -0.7 -1.9 -1.9 -1.5 0.5

Activities

Industrial production YoY, % 8.7 8.9 8.0 7.6 -- -- -- -- 9.7 8.3 8.1 7.4

Retail sales YoY, % 11.9 12.3 11.9 11.7 -- -- -- -- 13.1 12.0 11.5 12.0

Fixed asset investment (ytd) YoY, % 17.6 17.2 14.4 14.7 -- -- -- -- 19.6 15.7 14.0 12.0

Manufacturing YoY, % 15.2 14.6 12.8 12.8 -- -- -- -- 18.5 13.5 12.0 10.0

Property YoY, % 16.3 12.6 10.3 7.5 -- -- -- -- 20.3 11.1 10.0 8.0

Infrastructure YoY, % 20.9 23.7 18.5 19.1 -- -- -- -- 21.2 20.3 18.0 16.0

Trade

Exports YoY, % -3.5 4.9 12.9 8.5 -- -- -- -- 7.8 6.0 8.0 6.0

Imports YoY, % 3.3 1.3 1.3 -1.6 -- -- -- -- 7.3 0.7 6.0 5.0

Trade balance US$ bn 17 86 128 149 -- -- -- -- 261 380 450 498

Monetary

M2 (period-end) YoY, % 12.1 14.7 12.9 12.2 -- -- -- -- 13.6 12.2 13.0 13.0

New bank loans Rmb bn 3,014 2,725 1,945 2,098 -- -- -- -- 8,892 9,781 11,000 12,000

1-yr deposit rate (period-end) % 3.00 3.00 3.00 2.75 2.50 2.25 2.25 2.25 3.00 2.75 2.25 2.25

1-yr lending rate (period-end) % 6.00 6.00 6.00 5.60 5.35 5.10 5.10 5.10 6.00 5.60 5.10 5.10

RRR (period-end) % 20.0 20.0 20.0 20.0 19.5 19.0 18.5 18.0 20.0 20.0 18.0 17.0

Exchange rate (spot, period end) -- -- -- -- -- -- -- -- 6.05 6.20 6.10 6.00

Current account/Fiscal balance

Current account (as % of GDP) % -- -- -- -- -- -- -- -- 2.0 2.1 2.2 2.2

Fiscal balance (as % of GDP) % -- -- -- -- -- -- -- -- -2.1 -1.8 -2.2 -2.3

Note: Numbers in bold are forecasted values. Source: CEIC, Macquarie Research, February 2015


9 February 2015 12

Macquarie China Macro Products

1. Regular data comments:

HSBC Flash PMI: China Flash - First macro data from 2015 and ECB QE, 23 Jan 2015

IP/FAI/Property: China Flash - Growth stabilizes on surging loans, but rate/RRR cuts still much needed, 20 Jan 2015

Money/Credit: China Flash - Dec money data and three questions for 2015, 15 Jan 2015

Trade: China Flash - Trade numbers beat consensus in Dec but disappoint for the full year, 13 Jan 2015

Inflation: China Flash - The PBoC should take action to fight disinflation, 9 Jan 2015

Monthly data preview: China View - Dec data preview: Worsening PPI deflation weighs on corporate

earnings, 30 Dec 2014

PMI: China Flash - PMI continues downward trajectory, 1 Dec 2014

2. Ad hoc comments:

China Views - Don’t worry about RMB, 30 Jan 2015

China Views - Nine lessons from 2014, 8 Jan 2015

China Flash - First rate cut by current government, 21 Nov 2014

China Views - Q&A on liquidity and rate/RRR cuts, 8 Nov 2014

China View - Long-term implications of QE-end for China, 30 Oct 2014

China Flash - Six questions on policy easing, 17 Sep 2014

Light at the end of the tunnel: Takeaways from Politburo meeting and the probe into Zhou Yongkang, 29 Jul 2014

HK marketing feedback, 8 Jul 2014

China eases loan-to-deposit ratio calculation: Killing two birds with one stone, 30 Jun 2014

National home prices start to fall for the first month, 18 Jun 2014

3. Thematic Research

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)

Mid-year review and outlook: Better 4Q after summer volatility, 30 Jun 2014

(Taking stock of economic development in 1H14 and update macro outlook for 2H14)

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)

Home price growth has peaked; what’s next? 26 Feb 2014

(Among the first in calling for property slump in 1H14 and subsequent improvement in 2H14)

China in 2014: Déjà vu or a fresh start? 25 Nov 2013

(Year Ahead report, calling for a sharp slowdown in 1H14)

4. Macro Monday

Headwinds from regulation, economy, currency and policy, 2 Feb 2015

Three questions in everyone’s mind, 26 Jan 2015

A cooling down message sent by A-share regulators, 19 Jan 2015

How to read the RMB7tn stimulus report? 12 Jan 2015

Economy starts the year on a weak note, 5 Jan 2015


9 February 2015 13

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 First South - 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 2014

AU/NZ Asia RSA USA CA EUR Outperform 51.80% 58.06% 45.07% 44.42% 60.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients)

Neutral 31.80% 27.37% 30.99% 50.10% 35.37% 33.51% (for US coverage by MCUSA, 3.08% of stocks followed are investment banking clients)

Underperform 16.39% 14.57% 23.94% 5.48% 4.08% 19.68% (for US coverage by MCUSA, 0.44% 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/disclosures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 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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