Research notes from Deutsche Bank’s Tom Mayer.
Global risks dampening RMB outlook
December 5, 2011
China is not immune to the current global turmoil. The cut in the reserve requirement ratio by 50 bps to 20.5% for big banks marks the first explicit easing move in 3 years. Furthermore, in October the People’s Bank of China turned net seller of foreign assets for the first time in four years. China’s FX reserves fell by USD 61 bn in September, the fourth time in recent years that FX reserves declined.
The fall in China’s FX reserves and the net selling of foreign assets show that China, even with its mammoth USD 3.2 tr FX reserve “war chest”, is not immune to global risk aversion. The previous monthly declines in FX reserves in recent years coincided with spikes in the VIX index, indicating a correlation with a rise in global risk aversion. China’s financial markets, while relatively closed, have seen increasing integration with the global markets in recent years. China’s firms have increasingly raised funds offshore in the Hong Kong’s CNH and synthetic RMB bond markets, and both saw intense selling pressure in September. Since synthetic RMB bonds are quoted in RMB but settled in USD, settlements can lead to outflows of funds from mainland issuers, which was likely the case in September and October. This, coupled with an outlook for slower export growth, has muted expectations of RMB appreciation. In fact, the NDF markets have priced in a slight RMB depreciation next year. Nevertheless, all things considered, China’s superior GDP growth and economic outlook as well as its vast FX reserves are key mitigating factors for liquidity risks.
German GDP set to stagnate in 2012
December 5, 2011
German GDP grew by 0.5% QoQ in Q3 and the unemployment rate dropped further in November. However, the general downward trend in sentiment indicators for Germany is unbroken. In addition, monthly activity indicators such as production and order intake weakened substantially during Q3. At the same time, fiscal policy is tightening across the euro zone.
Germany’s strong export dependence, a huge advantage during the 2010/11 global upswing, is becoming its Achilles heel again. With 40% of German exports going to EMU countries the massive deceleration in EMU activity will hit German exports hard. They should grow by a meagre 1 ¾% in 2012 (imports: +3%). Furthermore, we expect investment in machinery and equipment to fall slightly in 2011 as capacity utilisation is declining and extreme uncertainty deters new investments. Also, growth in private consumption is likely to slow to +¾% as unemployment is set to increase somewhat and the 2012 wage round is likely to disappoint employees. All in all, the growth contribution from domestic demand should shrink to a meagre ½ percentage point. We have thus made a further downward revision to our outlook and now expect a technical recession in H1 2011. Even with some modest recovery in H2 this means that GDP will stagnate in 2012 after reaching a good +3% in 2011.
Thomas Mayer is Chief Economist of Deutsche Bank Group and Head of Deutsche Bank Research.