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China policy and markets round-up: China population growth slows, April credit data disappoints, PPI inflation surges

Crowd cycling China green transport from Alamy 28Mar21
By Addison Gong
14 May 2021

In this round-up, China records the lowest population growth in decades, the pace of credit expansion moderates, and a surge in the country’s factory gate prices adds to global inflation concerns.

China’s population hit 1.412bn last year, up from 1.4bn in 2019 and an increase of 72.06m from 2010, according to the National Bureau of Statistics (NBS). The average annual growth rate was 0.53% for the past decade, slower than the 0.57% recorded for the 2000-2010 period. Those aged 60 or above made up 18.7% of the population, which was 5.44 percentage points higher compared to 2010. The male to female ratio was 51.24 to 48.76.

Economists worry that an aging population and other factors such as gender imbalance could pressure China’s long-term growth.

Citi Research flagged factors such as the population growth – the lowest in six decades – and the “dangerously low” fertility rate as the main worrying signs from China’s latest population census. But they also said that things like faster-than-expected urbanization, solid education progress and improved sex composition are encouraging.

UOB’s economist Ho Woei Chen wrote this week: “While the changing demographics could be a constraint on China’s economic growth rate in the coming years, there would be offsetting factors including the large size of its population and economy as well as rising income and improvement in productivity from technology adoption.

“The demographic transition will also mean changes in consumer preferences and demand, and new opportunities for various products and services,” she added.

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China’s consumer price index (CPI) rose 0.9% year-on-year in April, while the producer price index (PPI) surged 6.8% versus a 4.4% rise in March, according to the NBS.

The CPI inflation was slightly lower than market expectation of 1%, but PPI inflation came above consensus forecast of 6.5% and reached a 3.5-year high, according to economists.

Higher import prices and the domestic drive to reduce carbon emissions are the two major drivers of the surge in raw material prices and PPI inflation, said Nomura economists in a Tuesday note, adding that they are “convinced” that PPI inflation will exceed 7% year-on-year in May.

Barclays’ economists, Chang Jian and Zhou Yingke, expect PPI inflation to hit 8% in May-June before moderating to 6% to 7% in the second half.

While policymakers are certainly concerned by the surging PPI inflation, the PBoC is unlikely to move until headline CPI inflation rises close to 3% year-on-year or if core CPI hits 2%, according to a note from Société Générale this week.

“That said, we do not rule out the possibility that the PBoC hikes rates before then, but only if the economic data meaningfully exceed expectations in the coming few months,” Wei Yao and Michelle Lam at SocGen wrote. But the “increasingly likely scenario” is that the PBoC gets no window to hike at all as the growth momentum may have started to weaken by the year end, they added.

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The PBoC shrugged off inflation concerns in its 2021 first quarter monetary policy report published on Tuesday.

The central bank admitted that as China is a major importer of commodities, rising global commodity prices could mean elevated PPI inflation in the next two quarters. But it said it was not concerned because the year-on-year comparison was skewed by a low base, and that historically, PPI has always been volatile. In addition, it expects commodity price gains to moderate as global production capacity gradually recovers. The risk of imported inflation is largely controllable, the PBoC said. It added that there has been limited pass-through from PPI inflation to CPI inflation in China in recent years, and that it is expecting mild CPI inflation in 2021.

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China’s total social financing (TSF) grew by Rmb1.85tr in April, compared to Rmb3.1tr a year ago, according to the People’s Bank of China (PBoC). Outstanding TSF rose 11.7% year-on-year, which was 0.6 percentage points slower than what was recorded the previous month.

New bank loans fell to Rmb1.47tr from Rmb1.7tr in April 2020. M2 money supply rose 8.1% year-on-year, though the pace slowed by 1.3 percentage points compared to March, and three percentage points on an annual basis. The M2 growth was also below consensus forecast of 9.2%.

“The outturn of money and credit data in April is significantly below market expectation, as new loans and TSF dropped sharply and the M2 growth hit a 21-month low,” economists at Citi wrote in a Wednesday note. “Despite the dovish signals from the PBoC, the April disappointing data may signal that an earlier than expected policy normalization could be under way, which could contradict the conventional view that policy stability should be expected ahead of the [Chinese Communist Party’s] 100 year anniversary celebration on July 1.”

Mizuho Bank’s chief Asian FX strategist Ken Cheung Kin Tai said in an analysis: “With uneven recovery and still benign CPI inflation in China, the PBoC has no urgency to begin its rate hike cycle when the window guidance appears to be effective to curb the credit creation.”

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Between January and April, foreign direct investment in China rose 38.6% year-on-year to Rmb397.1bn, according to the Ministry of Commerce (Mofcom). There were 14,533 new foreign-invested companies, 50.2% more than a year ago, Mofcom data showed.

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Total assets in China’s banking industry rose 9% year-on-year during the first quarter of 2021 to Rmb329.6tr, according to the China Banking and Insurance Regulatory Commission (CBIRC). Chinese banks’ non-performing loan ratio dropped to 1.8% at the end of March, from 1.84% in December 2020.

Insurance companies’ total assets grew 4.1% from the start of the year to Rmb24.3tr , data from the regulator showed.

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China wants its banks to issue at least Rmb300bn of financial bonds with proceeds dedicated to supporting small and micro-sized enterprises (SMEs), according to minutes from a Wednesday State Council meeting. The meeting reiterated the target for the big five Chinese state-owned banks to ensure an over 30% growth in inclusive SME loans this year.

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Foreign holding of bonds in China’s interbank market rose by Rmb58.1bn in April, according Bond Connect data. The increase mostly came from central government bonds and policy bank bonds.

The total amount held by foreign accounts by the end of the month, Rmb3.62tr, made up 3.4% of the market.

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The wealth management joint venture between BlackRock, China Construction Bank and Singapore’s Temasek Holdings has received a licence from the CBIRC to start business operations.

The Shanghai-based unit, called BlackRock CCB Wealth Management, was approved by the regulator in August 2020. It is 50.1% owned by the US-based fund manager and 40% by CCB’s wealth management subsidiary, with Temasek holding the rest.

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BNP Paribas and the US’s Interactive Brokers signed a strategic cooperation memorandum on Tuesday with local authorities in Shanghai to set up onshore securities units in the Lujiazui financial district, according to onshore media reports.

BNP has already submitted an application to set up a China securities venture, though it is yet to disclose the ownership structure of the entity. Beijing now allows fully foreign-owned securities companies, having removed a 51% cap for non-Chinese ownership in April 2020.

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The leverage ratio at central government-owned enterprises dropped by 2.2 percentage points compared to 2016, a senior official of the State Council’s State-owned Assets Supervision and Administration Commission said at a press briefing this week.

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Industrial Bank has appointed Lv Jiajin, China Construction Bank’s former vice president, as its new chairman, Caixin reported, citing sources. The job has been vacant since ex-chairman Gao Jianping retired in September 2019.

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Xiaomi Corp will be taken off a US government blacklist by the Department of Defense (DoD), according to various media reports citing a US court filing. Xiaomi’s Hong Kong listed shares jumped 4.8% on Wednesday following the news.

In January, Xiaomi had been added by the DoD to a list of companies with alleged ties to the Chinese Communist Party. An executive order by former US president Donald Trump bans US investments in the blacklisted firms.

The Chinese smartphone maker filed a lawsuit against the DoD and the Department of the Treasury. Xiaomi and the DoD have now “agreed upon a path forward that would resolve this litigation without the need for contested briefing”, the reports said, citing the filing.

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China International Capital Corp and China Securities Co has wrapped up the pre-IPO education process for China Telecom Corp to list on the mainboard of the Shanghai Stock Exchange, according to the Beijing Securities Regulatory Bureau. Both firms reckon China Telecom is ready for an A-share listing, they said in separate reports published on the regulator’s website this week.

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China’s auto sales rose 8.6% year-on-year in April to 2.25m vehicles, data from the China Association of Automobile Manufactures showed. On a monthly basis, however, sales declined 10.8%. For the January to April period, the number of cars sold was up 51.8% from a year ago.

By Addison Gong
14 May 2021