Where Is Inflation Expectation Heading To? —— Outlook on US and China’s Economic Growth

Sunny Liu

May. 25th, 2009

www.sw108.com

申万研究 2

1. US: Where is Inflation Expectation Heading To?

2. China: Can ‘Central Pick-up’ Be China’s New Engine of Long-term Growth?

MAIN CONTENTS

www.sw108.com

申万研究 3

1.1 US: Business Cycle Stepping into Inflation Expectation Stage

Deflation Stage:

Demand↓

Price↓

Profit↓

Supply↓Demand↑

Price↓

Profit↓

Supply↓

Demand↑

Price↑

Profit↑

Supply↑

Inventory↑

Inventory↓

Eco

no

mic D

ow

ntu

rn

Trough

Peak Peak

Reco

very

Pro

sperity

Deflation → Price Recovery →Inflation Expectation

www.sw108.com

申万研究 4

1.2 Where Is Inflation Expectation Coming From?

A: Monetary Expansion → Liquidity Pressure

Source: FED;SWS Research

www.sw108.com

申万研究 5

Source from: FED; SWS Research

Short-term Liquidity Facilities Play Major Part of Monetary Expansion

www.sw108.com

申万研究 6

B: Recovery Expectation

- 6

- 4

- 2

0

2

4

6

8

10

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09E

3Q09E

2010E

%

US GDP Growth Rate Forecast

Source： IMF; SWS Research

www.sw108.com

申万研究 7

C: Investors Risk-Taking Appetite Rising

Yields of Treasury Up and Down during the Crisis

0

1

2

3

4

5

6

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

USGG2YR I NDEX USGG10YR I NDEX

Source: Bloomberg; SWS Research

www.sw108.com

申万研究 8

TROUGHBANK

Lending Frozen

POLICIES

TARP\QE\etc.Credit Frozen

Low Investment

Underwater Housing-equity

High Unemployment

Bank Regulation towards ‘Shadow Banking Activity’

Risk Management

New Loss Increase

Low Lending

Housing Market Up

Unemployment Ease

Investment Up

Loss Reduce

Lending Increase

Peak

DE

FL

AT

IO

NP

RIC

E

RE

CO

VE

RY

INF

LA

TIO

N

EX

PE

CT

AT

ION

INF

LA

TI

ON

Growth-focusing Policies

Alerting to Inflation

1.3 Recovery Pushes Excessive Liquidity Leakage

www.sw108.com

申万研究 9

Concerns: Excessive Liquidity Might Drive Up Inflation

Mo

netary E

xpan

sio

n

Eco

no

mic

Do

wn

turn

Cre

dit F

rozen

Fisc

al E

xpan

sion

Real Economy

Capital Market

Commodity

Excessive Liquidity

Insufficient Demand & Low

Level InvestmentNO

Lower Yields

NO

Current Price

Attractive

Possible

High Inflation

Increased Demand， Price Go Up

RentalMaterials

Etc.

BondStock

www.sw108.com

申万研究 10

A: Household BS Deleveraging→Slow Consumption Recovery

1.3.1 Slow Recovery In US Economy

1

6

11

16

21

Mar-80

Mar-82

Mar-84

Mar-86

Mar-88

Mar-90

Mar-92

Mar-94

Mar-96

Mar-98

Mar-00

Mar-02

Mar-04

Mar-06

Mar-08

%

/总负债 总资产 /住宅按揭 总资产 /消费信贷 总资产

Residential Mortgages Push Up Household Liability Level

Source： FED; Bloomberg; SWS Research

www.sw108.com

申万研究 11

B: Financial Sector BS Deleveraging→Slow Financing Environment Recovery

source： Bloomberg; SWS Research

Business credit tighten

-30-20-10

010203040506070

2Q90

2Q91

2Q92

2Q93

2Q94

2Q95

2Q96

2Q97

2Q98

2Q99

2Q00

2Q01

2Q02

2Q03

2Q04

2Q05

2Q06

2Q07

2Q08

百分点

-4

-2

0

2

4

6

8

10%

大中型银行 小银行 GDP季环比增速（右轴）

-20

-10

0

10

20

30

40

50

60

70

80

1Q96

4Q96

3Q97

2Q98

1Q99

4Q99

3Q00

2Q01

1Q02

4Q02

3Q03

2Q04

1Q05

4Q05

3Q06

2Q07

1Q08

百分点

0

1

2

3

4

5

6%

收紧信用卡透支条件的银行净占比收紧其他消费贷款条件的银行净占比PCE年同比（右轴）

Consumption credit tighten

www.sw108.com

申万研究 12

• Demographic Bonus No Longer Supports Over-borrowing Growth Pattern

• Over Last Half Century, Average GDP Growth Rate is 3.2%; Future Potential Growth Rate Expected Around 2.5%

Household Financial Burden Rise Substantially

40

45

50

55

60

65

70

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

%

C: Long-term Growth by Over-borrowing Not Sustainable

10

11

12

13

14

15

Mar

-80

Sep-

81

Mar

-83

Sep-

84

Mar

-86

Sep-

87

Mar

-89

Sep-

90

Mar

-92

Sep-

93

Mar

-95

Sep-

96

Mar

-98

Sep-

99

Mar

-01

Sep-

02

Mar

-04

Sep-

05

Mar

-07

%

Household Repayments on Debt Already Rising

source： Bloomberg; SWS Research

www.sw108.com

申万研究 13

1.3.2 Liquidity Eventually Leaves Capital Market Without Profits Support

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Mar- 80 Mar- 86 Mar- 92 Mar- 980

2000

4000

6000

8000

10000

12000

NI KKI E I NDEX J apan Corporate Current Profi ts Bi l l i on J PY（ ）

Source: Bloomberg; SWS Research

Stock Market Shrink as Profit Down

www.sw108.com

申万研究 14

1.3.3 Commodity Market Attracts Liquidity

Source: Bloomberg; SWS Research

Oil Price Up With Inflation Expectation Shows

40

65

90

115

140

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

BRUNT BRUNT (Dec 09) WTI WTI (Dec 09)

www.sw108.com

申万研究 15

Source: Bloomberg; SWS Research

Q: Is Inflation Expectation Leading to Stagflation?

- 505

10

152025

CPI YOY I ndex PPI YOY I ndex

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

- 4

- 2

0

2

4

6

8

GDPAANN% I ndex( r i ght scal e)

www.sw108.com

申万研究 16

A1: Liquidity Leakage May Not as much as Expectated

• Inflation-alert Monetary Policy Maker: Long-term Inflation Target at 2%;Majority of Excessive Liquidity Facilities are Short-term

• Shadow Banking System (ABS|SIF|ARPS|ORS|CRS): Traditionally No Regulation; Investment Bank Activities

• Hedge Funds: 30% Loss during Crisis

• Investment Banks: Gone with Wind

Source: Fed; SWS Research

Total Assets(Ti l l i on USD)

02468

1012

US BankSystem

Top 5 BHC ShadowBanks

Hedge Fund Top 5I nvestment

Bank

Liquidity Leakage Through Financial Markets

www.sw108.com

申万研究 17

A2: Liquidity Alone Cannot Explain Inflation

Selected Models for Inflation Indicator

Source: SWS

www.sw108.com

申万研究 18

-202468

101214161820

Jan-

67

Jan-

70

Jan-

73

Jan-

76

Jan-

79

Jan-

82

Jan-

85

Jan-

88

Jan-

91

Jan-

94

Jan-

97

Jan-

00

Jan-

03

Jan-

06

Jan-

09

5060708090100

M2% YOY I ndex CPI YOY I ndexPPI YOY I ndex CAPI TAL UTI LI ZATI ON

Source: Bloomberg; SWS

Capital Utilization Still Far Lower than Historical Average

Morosani Model Predicts Little Chance for Inflation

www.sw108.com

申万研究 19

Conclusions:

• Inflation Expectation Stage May see Throughout 2H 2009

• Early As Q3 2009 May Be The Peak of Inflation Expectation

• Little Probability shows High-Inflation Rather Than Price Recovery

www.sw108.com

申万研究 20

1. US: Where is Inflation Expectation Heading To?

2. China: Can ‘Central Pick-up’ Be China’s New Engine of Long-term Growth?

MAIN CONTENTS

www.sw108.com

申万研究 21

Market Power Dragging Down Growth

2.1 GDI* Makes Growth Shinning During the World Recession

EXPORT DECLINES

- 15

- 10

- 5

0

5

10

15

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

- 20. 0

- 10. 0

0. 0

10. 0

20. 0

30. 0

40. 0

WORLD GDP YOY% WORLD TRADE VOLUMN YOY%

CHI NA EXPORT% RI GHT HAND（ ）

80859095

100

CONSUMER CONFI DENCE I NDI EX CONSUMER SATI SFACTI ON I NDEX

CONSUMER EXPECTATI ON I NDEX

CONSUMER SENTIMENT INDEX

Source: CEIC;SWS Research * Government Direct Investment

www.sw108.com

申万研究 22

Policies Refocusing on Investment-lead Growth 2H 2008:

Fiscal Expansion: Fiscal Deficit of ￥ 950 billion(2.9% of GDP); ￥ 4 trillion government direct investment; Rejuvenation plans of 10 major industries

Monetary Expansion: Credit Injection ￥ 7-8 trillion

02468

101214

FI NAL PRODUCT BUSI NESS I NVESTMENT NET EXPORT

Contribution of three Elements Towards Growth

Source： NBS; SWS Research

www.sw108.com

申万研究 23

Source： NBS; SWS Research

56789

1011121314

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

GDPqoq GDPannual

GROWTH FORECAST

Government-lead Investment Pushes V-shape Growth During Crisis in 2009

www.sw108.com

申万研究 24

Source： Bloomberg; SWS Research

Over-sea Economies Only Gradually Bottom-up

2.2 World Slow Recovery → Trade Recovery But Only Partially

- 15. 0

- 10. 0

- 5. 0

0. 0

5. 0

10. 0

2007 2008F 2009F 2010F

WORLD GROWTH US

EU J APAN

OECD WORLD TRADE GROWTH

www.sw108.com

申万研究 25

Growth-focusing Expansion→Resource Reallocation

• Effectiveness→Developing Area

• Regional Developmental Balancing→Developing Area

Past Experiences Show Positive Impacts On Regional Development by Central Government-lead Investment

• In 1999, Western Expansion

• In 2003, North-Eastern Rejuvenation

• In 2004, Central Pick-up

‘Central’ Benefits The Most During The Government-lead Investment

www.sw108.com

申万研究 26

Source: NBS; SWS

0

5

10

15

20

25

30

351997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

四川安徽辽宁河北江苏

Middle Rising Substantially

Top 10 Provinces in Investment Growth

Past Experiences Show Positive Impacts On Regional Development by Government-lead Investment

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009.2

SICHUANSHANDONG BEIJING ZHEJIANG

SHANDONG

SHANDONG LIAONING MONGOLIA JIANGXI ANHUI JIANGXI YUNNAN

SHANNXIGUANGDONG

HELONGJIANG GUIZHOU JIANGSU JIANGSU MONGOLIA LIAONING LIAONING HENAN LIAONING SICHUAN

CHONGQING HEBEI GUANGDONG JIANGXI JIANGXI MONGOLIA HENAN HENAN JILIN FUJIAN JILIN HEBEI

FUJIAN ZHEJIANG XINJIANGCHONGQING MONGOLIA JIANGXI HEBEI

SHANDONG TIANJIN JILIN TIANJIN JIANGXI

YUNNAN HUNAN JILIN BEIJINGCHONGQING HENAN HUNAN JILIN HENAN LIAONINGHENAN SHANNXI

HUNAN JILIN LIAONING SHANXI ZHEJIANG ANHUI ANHUI HEBEI ANHUI SHANNXI ANHUI ANHUIGUANGDONG SHANNXI SHANGHAI SHANNXI SHANXI ZHEJIANG

SHANDONG YUNNAN HEBEI HUNAN HEBEI LIAONING

SHANXI GANSU SHANXI HUNAN ANHUI SHANXI GUANGXI GUANGXI SHANNXI HEBEI SHANNXI GUIZHOU

Sichuan

Anhui

Liaoning

Hebei

Jiangsu

www.sw108.com

申万研究 27

Developing North-Eastern & Central Beaten The National Level

Developed South-eastern Left Far Behind

Source from： SWS Research *data for Shanghai and Zhejiang are for 2008

Fixed Capital Investment Plan In 2009

　 　TARGETED INVESTMENT LEVEL

1HEILONGJIANG 35.02JIANGXI 30.03SICHUAN 30.04LIAONING 30.05SHANNXI 30.06JILIN 28.07HUNAN 25.08GUANGXI 25.09NINGXIA 25.0

10MONGOLIA 25.011TIANJIN 25.012XINJIANG 25.013SHANXI 24.014SHANDONG 20.015HENAN 20.016ANHUI 20.017HUBEI 20.018YUNNAN 20.019GANSU 20.020CHONGQING 18.021HEBEI 18.022JIANGSU 17.023GUANGDONG 16.024GUIZHOU 16.025FUJIAN 15.026QINGHAI 15.027BEIJING 15.028TIBET 15.029HAINAN 12.030ZHEJIANG 10.031SHANGHAI 6.0

　NATIONAL AVERAGE 20.0

0

5

10

15

20

25

30

35

40

HEILONGJIANGJIANGXISICHUANLIAONINGSHANNXIJILINHUNANGUANGXININGXIAMONGOLIA TIANJINXINJIANGSHANXISHANDONGHENANANHUIHUBEIYUNNANGANSUCHONGQINGHEBEIJIANGSUGUANGDONGGUIZHOUFUJIANQINGHAIBEIJINGTIBETHAINANZHEJIANGSHANGHAI

www.sw108.com

申万研究 28

Central Beaten the National Average ← Government Favoring Policies Developed South-Eastern Declined Below the National Average ← Real

Estate Adjustment; International Trade Deterioration

Source from: NBS; SWS Research *Central Government Invest indicates the share each province from the total ￥ 100billion central government direct investment

Latest Evidence Supports Central Pick-up

SELECTED 2009 JAN/FEB FIXED CAPITAL INVESTMENT GROWTH

　INVESTMENT

GROWTH% %%CHAN

GECENTRAL GOV.

INv 　INVESTMENT

GROWTH% %%CHAN

HECENTRAL GOV.

INv

YUNNAN 80.2 3.1 1.00 56 GUANGXI 22.3 2.7 -0.10 31

SICHUAN 45 6.8 0.80 62

SHANDONG 17.5 7.9 -0.60 34

HEBEI 59.1 2.5 0.50 JIANGSU 20.9 14.4 -0.70 30

JIANGXI 44.8 2.7 0.40 36 FUJIAN 8.9 4.4 -0.80 21

SHANNXI 63.2 2.0 0.40 40 ZHEJIANG 10.6 6.1 -0.90 16

ANHUI 36.4 6.3 0.40 45SHANGHA

I 0.9 4.6 -1.20LIAONIN

G 48 2.1 0.30 36GUANGD

ONG 10.6 8.1 -1.20 15

GUIZHOU 70.7 1.4 0.30 48 BEIJING -20.6 2.3 -1.30 　

www.sw108.com

申万研究 29

Q: Can Central Pick-up Be The New Engine For Growth?

2009 2010 2015 2020 2030

Central

East

Infrastructure Investment

Industrial Relocation :Labor Intensive

Industrial Relocation ： Capital Intensive

Urbanization In Central Areas: Real Estate, Industrial Engineering

Service+Finance+R&D

Consumptions In Central Areas

Path of Industrial Relocation

www.sw108.com

申万研究 30

Undertakings of the AnalystSunny Ying LiuI am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein.

Information Disclosure with respect to the CompanyThe Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact compliance@sw108.com for the relevant disclosure materials.

Information Disclosure：

 

This report is to be used solely by the clients of Shenyin & Wanguo Securities Research Institute Co, Ltd. (hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report.

This report is based on published information which the Company believes to be reliable, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments.

The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.sw108.com). The clients may ask for follow-up explanations if they so wish.

The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein.

The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. The Company strongly suggests the clients to consider themselves whether the opinions or suggestions herein are suitable for the clients’ particular situations; and to consult an independent investment consultant if necessary.

Under no circumstances shall the information contained herein or the opinions expressed herein forms an investment recommendation to anyone. Under no circumstances shall the Company be held responsible for any loss caused by the use of any contents herein by anyone.

Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company.

www.sw108.com

申万研究 31

Disclaimer：

The Company possesses all copyrights of this report. The Company reserves all rights related to this report. Unless otherwise indicated in writing, all the copyrights of all the materials herein belong to the Company. In the absence of any prior authorization by the Company in writing, no part of this report shall be copied, photocopied, replicated or redistributed to any other person in any form by any means, or be used in any other ways which will infringe upon the copyrights of the Company. All the trademarks, service marks and marks used herein are trademarks, service marks or marks of the Company, and no one shall have the right to use them at any circumstances without the prior consent of the Company.

This report may be translated into different languages. The Company does not warrant that the translations are free from errors or discrepancies.

 

This report is for distribution in Hong Kong only to persons who fall within the definition of professional investors whether under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) (the “SFO”) or the Securities and Futures (Professional Investor) Rules (Chapter 571D of the laws of the Hong Kong under the SFO).

 

This report is for distribution in the United Kingdom only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) order 2001 (as amended) (the “Order”) or (ii) are persons falling within Article 49(2)(a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc”) of the Order (All such persons together being referred to as “Relevant Persons”). This document is directed only at Relevant Persons. Other Persons who are not Relevant Persons must not act or rely upon this document or any of its contents.

 

Neither this report nor any copy of it may be taken or transmitted into the United States of America, its territories or possessions or distributed, directly or indirectly, in the United States of America, its territories or possessions or to any U.S. person (Within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended). Any failure to comply with this restriction may constitute a violation of U.S. securities laws. Neither this report nor any copy of it may be taken or transmitted into Canada. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report the clients agree to be bound by the foregoing limitations.

www.sw108.com

申万研究 32

Shanghai SWS Research & Consulting Co., Ltd.Ying Liu (Sunny) liuying@sw108.com

申万研究 • 拓展您的价值SYWG Research • CHINA Value Revealed