China: Trip Notes-After the Slowdown

- We visited Beijing, Chongqing, Changsha and Shanghai during July 27-30 – "We
discussed the slowdown, the 12th Five-Year Plan, property, energy efficiency and local government financing from the perspective of regulators, experts, banks and local authorities. Here is a summary of key takeaways."
- Officials are certain of a 2H slowdown, but also confident in meeting targets
"Policymakers target 9% growth for the whole year and above 8% for 4Q, in line with our forecasts. Investment in economic housing is expected to make up for some of the shortfalls elsewhere."
- Policy to curb speculative property demand would likely remain in place – "Many are waiting to buy after prices correct deeper. Thus, policy would avoid a major
correction but would keep the pressure on demand, while increasing supply."
- Principal near-term risks are energy efficiency and external weakness – "To
reduce carbon intensity, authorities are clamping down on heavy industry, reducing export VAT rebates and curbing housing investment, adding some risk of over-tightening. External demand is still the greatest near-term risk."
- Monetary policy and banking policy on hold in 2H – "There would unlikely be any rate hikes this year. The Rmb7.5 trillion loan target leaves sufficient credit supply in 2H, though effective credit demand may be questionable. Low NPL ratio and high coverage should prevent further tightening from the CBRC."
- The 12th Five-Year Plan still focuses on investment – "Local development plans
remain aggressive, with cities like Chongqing planning railways to Europe and the Indian Ocean and the 10 million urbanization plan in 10 years. Though the growth target may be set lower at 7%, most ministries believe that at least 9% growth can be achieved."
- UDIV debt: It’s much more about the land than the project – "We provide some
detail on the creation and operation of a UDIV. The key is that the capital gains from developing a UDIV’s land pays the loans much more than any income stream of a project. This obviously is predicated on a robust property market, which our hosts expect can still last a while due to urbanization. But with the aggressive investment plan, fast urbanization would be a necessity."
- Standardizing UDIV finance – "The banking regulator has required all banks to
standardize their UDIV loan portfolios by Sep 30, so that every loan is backed either by a specific asset or by project revenue. No government guarantees are allowed. So banks are seeking additional collateral or guarantors. Some local governments are finding innovative ways to attract private capital."

Citigroup China Macro View 20100803

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