Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

Macroeconomics

<p><strong>Economic disruptions due to Covid-19 reduced global US dollar purchasing power by US$3.8trn in the first half of the year. Compared with advanced economies, developing Asia has fared better, relatively speaking. Asian exports have rebounded as the China’s economy  has normalised and as lockdown restrictions in the US and Europe eased over the summer. August regional trade data suggests that the best is behind for Asian exporters though. While one month’s worth of data does not constitute a trend,  there are good reasons to be cautious.  The post- Covid-19 recovery is petering out. The number of infection cases are once again rising in the US and Europe while US restrictions on Chinese technology companies are tightening Notwithstanding another round of government enforced national lockdowns in advanced countries, we expect Asian export growth to moderate from here. </strong></p>

Economic disruptions due to Covid-19 reduced global US dollar purchasing power by US$3.8trn in the first half of the year. Compared with advanced economies, developing Asia has fared better, relatively speaking. Asian exports have rebounded as the China’s economy  has normalised and as lockdown restrictions in the US and Europe eased over the summer. August regional trade data suggests that the best is behind for Asian exporters though. While one month’s worth of data does not constitute a trend,  there are good reasons to be cautious.  The post- Covid-19 recovery is petering out. The number of infection cases are once again rising in the US and Europe while US restrictions on Chinese technology companies are tightening Notwithstanding another round of government enforced national lockdowns in advanced countries, we expect Asian export growth to moderate from here. 

Ping An Digital Economic Research Center

Zheng Zeng

Ping An Digital Economic Research Center (DERC)

Ping An - DERC

Ping An Digital Economic Research Center (DERC) utilizes more than 50 TB of high frequency data points, more than 30 years of historical data and more than 1.5 billion data points to drive research on the “AI + Macro Forecast” and provide insights and methods towards precise macroeconomic trends. 

Ping An DERC is a research center for Ping An Insurance (Group) Company of China, Ltd. (“Ping An”) is a world-leading technology-powered retail financial services group. With over 204 million retail customers and 534 million internet users, Ping An is one of the largest financial services companies in the world.

<div class="content-highlight">
<p><strong>China SME Financing Report Series Report II by Fudan-Ping An Research Institute for Macroeconomy</strong></p>
</div>
<div>As the coronavirus pandemic keeps worsening outside China and sends shock waves across the global economy, <strong>the central government of China has increased financial support for micro, small and medium enterprises (MSMEs, or SME for short in this report) following the “Two Sessions” meeting</strong> in May. This includes: (1) reducing loan rates; (2) asking large state-owned banks to increase their lending to small businesses by no-less-than 40% this year; (3) using a re-lending program of RMB400 billion (US$5.8 billion) to incentivize local banks to make unsecured loans to small businesses; and (4) encouraging financial institutions to make concessions of RMB1.5 trillion to all types of companies.</div>
<div></div>
<div>
<div>
<strong>However, difficulties in discerning the use of the loans and supervising post-lending funding have led to a dilemma when implementing these relief policies.</strong> On one hand, if SME loan policies are too generous with rates too low and covenants too loose, regulatory arbitrage may arise, with funds flowing to the real estate and capital markets, aggravating resource misallocation and encouraging a pivot away from the real economy. On the other hand, if SME funding costs are too high and issuing conditions too demanding, small businesses may be unwilling to borrow to maintain production and operations, and instead they will lay off employees and reduce investments to deal with the pandemic.</div>
<div></div>
</div>
<div>Evidence suggests that：</div>
<div>
<ul>
<li>Some companies have used loan subsidies granted by local fiscal authorities to <strong>profit from interest margins</strong>.</li>
<li>
<div>Due to increased risks, small businesses are<strong> less willing to borrow</strong> to restore operations in the absence of low-cost loans. </div>
</li>
</ul>
<p>To ensure relief funds are funneled directly to small businesses in need, and to avoid<br>arbitrage and circular funding, we recommend that all local governments <strong>set up an indicator </strong><strong>system comprising 29 items under five dimensions</strong> to monitor local SME financing, and speed up data integration and information sharing based on the local small and medium enterprise financing platform, precisely measuring the SME financing gap and monitoring the flow of loan funds based on data from multiple sources.</p>
</div>
<p></p>
<blockquote>
<p style="text-align: center;"><strong>Dilemma of SME financing relief policies in Charts</strong></p>
</blockquote>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/847/original/image_546907858361600399388597.png?1600399390" class="editor-image img-responsive" data-smartkarma-image-id="159847"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/845/original/image_378457837341600399357441.png?1600399360" class="editor-image img-responsive" data-smartkarma-image-id="159845"></figure>


China SME Financing Report Series Report II by Fudan-Ping An Research Institute for Macroeconomy

As the coronavirus pandemic keeps worsening outside China and sends shock waves across the global economy, the central government of China has increased financial support for micro, small and medium enterprises (MSMEs, or SME for short in this report) following the “Two Sessions” meeting in May. This includes: (1) reducing loan rates; (2) asking large state-owned banks to increase their lending to small businesses by no-less-than 40% this year; (3) using a re-lending program of RMB400 billion (US$5.8 billion) to incentivize local banks to make unsecured loans to small businesses; and (4) encouraging financial institutions to make concessions of RMB1.5 trillion to all types of companies.



However, difficulties in discerning the use of the loans and supervising post-lending funding have led to a dilemma when implementing these relief policies. On one hand, if SME loan policies are too generous with rates too low and covenants too loose, regulatory arbitrage may arise, with funds flowing to the real estate and capital markets, aggravating resource misallocation and encouraging a pivot away from the real economy. On the other hand, if SME funding costs are too high and issuing conditions too demanding, small businesses may be unwilling to borrow to maintain production and operations, and instead they will lay off employees and reduce investments to deal with the pandemic.


Evidence suggests that：


Some companies have used loan subsidies granted by local fiscal authorities to profit from interest margins.

Due to increased risks, small businesses are less willing to borrow to restore operations in the absence of low-cost loans. 


To ensure relief funds are funneled directly to small businesses in need, and to avoid arbitrage and circular funding, we recommend that all local governments set up an indicator system comprising 29 items under five dimensions to monitor local SME financing, and speed up data integration and information sharing based on the local small and medium enterprise financing platform, precisely measuring the SME financing gap and monitoring the flow of loan funds based on data from multiple sources.



Dilemma of SME financing relief policies in Charts




China: Speeding up Data Integration to Solve the Dilemma of SME Financing Relief Policies

FX & Rates

<div>This report aims to resolve problems in forecasting long-term interest rates in China.</div>
<div></div>
<div>
<div>
<strong>Traditional convergence theory cannot satisfy current forecasting requirements.</strong> The long-lasting downward trend of China's economic growth is well known, and the decline in growth is bound to cause a decline in rates of return. It must be noted that convergence theory can only provide insight into issues like “the continual declining trend of economic growth”.</div>
</div>
<div></div>
<div>
<div>
<strong>Current demographic analysis makes it possible to forecast the long-term fluctuation trend of interest rates.</strong> Since there is already academic research on demographics and asset prices, based on this, we performed quantitative optimization by applying Grid Search. Data again confirmed the economic theory that the ratio of the population group aged between under 30 to over 40 is highly correlated with long-term trends in interest rates.</div>
</div>
<div></div>
<div>
<div>
<strong>Demographic trends, together with wavelet analysis, can provide a more detailed dualcycle model to forecast long-term interest rates.</strong> Firstly, we employed the Hermite interpolation method to increase the population data frequency. Then, with the interest rate wavelet cycle, we came up with a model that could better fit the overall trend of interest rates. This dual cycle model could explain why these two interest rate cycles have been asymmetric since 2012: because China's long-term population structure has been rapidly flattening since 2012.</div>
</div>
<div></div>
<div>Figure 17: Interest Rate Forecast After adding the Dual Cycle</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/579/original/image_99006239091600314108033.png?1600314111" class="editor-image img-responsive" data-smartkarma-image-id="159579"></figure>
</div>
<div>
<div style="text-align: left;" class="content-caption">Source: OECD, Ping An DERC</div>
<div>Given the current data, the terminal interest rate is still trending downward, and the sharpest fall in rates of return will appear around Q2 next year.</div>
</div>

This report aims to resolve problems in forecasting long-term interest rates in China.



Traditional convergence theory cannot satisfy current forecasting requirements. The long-lasting downward trend of China's economic growth is well known, and the decline in growth is bound to cause a decline in rates of return. It must be noted that convergence theory can only provide insight into issues like “the continual declining trend of economic growth”.




Current demographic analysis makes it possible to forecast the long-term fluctuation trend of interest rates. Since there is already academic research on demographics and asset prices, based on this, we performed quantitative optimization by applying Grid Search. Data again confirmed the economic theory that the ratio of the population group aged between under 30 to over 40 is highly correlated with long-term trends in interest rates.




Demographic trends, together with wavelet analysis, can provide a more detailed dualcycle model to forecast long-term interest rates. Firstly, we employed the Hermite interpolation method to increase the population data frequency. Then, with the interest rate wavelet cycle, we came up with a model that could better fit the overall trend of interest rates. This dual cycle model could explain why these two interest rate cycles have been asymmetric since 2012: because China's long-term population structure has been rapidly flattening since 2012.


Figure 17: Interest Rate Forecast After adding the Dual Cycle




Source: OECD, Ping An DERC
Given the current data, the terminal interest rate is still trending downward, and the sharpest fall in rates of return will appear around Q2 next year.


“Dual Cycle” Forecast Model Of Long-Term Interest Rates

<blockquote>
<p><strong>Loose Credit? A Sense of Bitter Reality</strong></p>
</blockquote>
<p>On June 1, The People's Bank of China (PBOC) stepped up efforts to loosen credit with the aid of innovative monetary policy instruments, further confirming the direction towards a looser monetary policy. Will such policy trigger a new round of credit expansion? This paper studied local officials and sought to reach a conclusion that can be relatively long lasting.</p>
<p>Why did we analyse local officials? This is largely due to our assumption that the time is not yet ripe for PBOC to loosen monetary policy without a target. Consequently, the credit cycle should respond to the local political cycle. Having retrieved and studied data on all governors and party secretaries of mainland China's 31 provinces and municipalities since 1978, we found:</p>
<ol>
<li>
<p>Local credit supply and the tenure of provincial governors and provincial party secretaries are in an <strong>inverted U-shaped relation</strong>. Local credit supply grows most rapidly when the local official serves for about three years.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/527/original/%E6%BC%94%E7%A4%BA%E6%96%87%E7%A8%BF1.png?1600305617" class="editor-image img-responsive" data-smartkarma-image-id="159527"></figure>
</li>
<li>
<div>A leadership transition of local officials is taking place nationwide at the moment. In addition, <strong>credit growth brought by incumbent officials</strong> is starting to slow down, which will likely pressure the growth of credit.</div>
</li>
</ol>
<div>Data in the balance sheet of PBOC also points to a slowdown in credit growth in H2. Hence, we think it is difficult for credit growth to further increase in H2.</div>


Loose Credit? A Sense of Bitter Reality

On June 1, The People's Bank of China (PBOC) stepped up efforts to loosen credit with the aid of innovative monetary policy instruments, further confirming the direction towards a looser monetary policy. Will such policy trigger a new round of credit expansion? This paper studied local officials and sought to reach a conclusion that can be relatively long lasting.
Why did we analyse local officials? This is largely due to our assumption that the time is not yet ripe for PBOC to loosen monetary policy without a target. Consequently, the credit cycle should respond to the local political cycle. Having retrieved and studied data on all governors and party secretaries of mainland China's 31 provinces and municipalities since 1978, we found:


Local credit supply and the tenure of provincial governors and provincial party secretaries are in an inverted U-shaped relation. Local credit supply grows most rapidly when the local official serves for about three years.



A leadership transition of local officials is taking place nationwide at the moment. In addition, credit growth brought by incumbent officials is starting to slow down, which will likely pressure the growth of credit.


Data in the balance sheet of PBOC also points to a slowdown in credit growth in H2. Hence, we think it is difficult for credit growth to further increase in H2.

Mismatch Between Financial and Political Cycles - Be Alert to the Risk of a Credit Cycle Recession

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<p><strong><em>With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021. </em></strong>  </p><p>China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. </p><p>As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. </p><p>As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China. </p>

With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021.   China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China. 

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

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Asian Exports & Covid - Best Is Behind

Economic disruptions due to Covid-19 reduced global US dollar purchasing power by US$3.8trn in the first half of the year. Compared with advanced...

Sharmila Whelan

China: Speeding up Data Integration to Solve the Dilemma of SME Financing Relief Policies

Fudan-Ping An Research Institute for Macroeconomy

Ping An - DERC

“Dual Cycle” Forecast Model Of Long-Term Interest Rates

This report aims to resolve problems in forecasting long-term interest rates in China. Traditional convergence theory cannot satisfy current...

Ping An - DERC

Mismatch Between Financial and Political Cycles - Be Alert to the Risk of a Credit Cycle Recession

We found an inverted U-shaped relation between the tenure of local officials and the growth of local creditsupply.

Ping An - DERC

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

China's total social financing has increased by

Prasenjit K. Basu

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