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Growth in private non-residential investment (corporate capex) appears likely to slow from 1.3% in Q3 to less than 1% in Q4. Firms are apparently channelling much of their earnings growth into expansion of their overseas sales and manufacturing infrastructure rather than domestic capital investment. Residential investment should pick up from 1.2% in Q3 to around 3% in Q4, however, reflecting modest improvements in employment and income levels as well as stimulus provided by a 100bp interest rate discount for loans extended under the Japan Housing Finance Agency's Flat 35S programme. Housing starts – a leading indicator for residential investment – remain around all-time lows but recorded a further increase in November. Public investment is somewhat more difficult to estimate given that the relevant Integrated Statistics on Construction Works data have yet to be published for November. At this point in time, we are anticipating a decline of somewhere around 3% (Q3: -1.0%). Combining these forecasts implies that domestic demand will subtract around 0.1pp from overall GDP growth for Q4 after making a +1.1pp contribution in Q3. Economy set to stage a gradual recovery from early 2011 Stripping out the distorting impacts of fiscal measures, the Japanese economy has been in a soft patch since mid-2010 due to a slowdown in exports. However, with global manufacturing activity having begun a cyclical upswing around October, we expect Japanese exports to move back into recovery mode sooner rather than later. Exports to China have already begun to pick up again, and other emerging economies look likely to be a major source of demand over the coming months. Industrial production data also paint a relatively positive picture, with manufacturing output levelling out in November and projected to increase in both 1400 1300 1200 1100 1000 900 800 700 Chart 3: Housing Starts (k units, s.a., annualised) Monthly Quarterly 600 04 05 06 07 08 09 10 Source: MLIT, BNP Paribas Chart 4: Real Exports to China (JPY bn, s.a.) 1,400 1,300 1,200 1,100 1,000 900 800 700 600 05 06 07 08 09 10 Source: MOF, BoJ, BNP Paribas December and January. GDP in Q1 2011 will be pushed down at least to some extent by a pullback in consumer spending after the previous quarter's surge in demand for household appliances. However, we believe that stronger exports should help to prevent a second successive quarter of negative growth. Ryutaro Kono/ Hiroshi Shiraishi 13 January 2011 Market Mover 20 www.GlobalMarkets.bnpparibas.com
China: 2010 Money Growth Exceeds Target • In 2010, new loans reached RMB 7.95trn and M2 grew 19.7%. Both overshot the official target. • The incremental loan-to-deposit ratio dropped to 66.0% in 2010 from 73.1% in 2009, suggesting that a large amount of excess liquidity remains in the banking system. • Foreign reserves increased by USD 448.2bn to stand at USD 2.85trn at the end of 2010, a sizable part of which was contributed by hot money inflows. • Due to the monetary tightening in place, the money market rate has surged and will remain on an upward trend. • The normalisation of monetary policy is a key task for the monetary authorities in 2011, but the money supply will have to accommodate strong growth in activity. 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Chart 1: New Loans (Monthly, RMB bn) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: BNP Paribas, PBOC 2006 2007 2008 2009 2010 Chart 2: Outstanding L/D Ratio versus Incremental L/D Ratio (%) 90 L/D L/D New loans failed to slow to the target In 2010, China departed from the extremely loose monetary policy of 2009, but failed to meet its tightening targets. Broad money supply (M2), narrow money (M1) and lending rose by 19.7%, 21.2% and 19.7%, respectively, by the end of December. Although the growth rates were 8.0, 11.2 and 11.8 percentage points respectively lower than in 2009, they continued to exceed the control target of 17-18%. This is particularly true for new loans. The new loan quota was RMB 7.5trn, but the level of new loans reached RMB 7.95trn, 6% more than the target. This figure was achieved even after the extraordinary controlling efforts last December. In reality, the underlying figure should be larger: many of the loans called in in December would have been remade in January. The fact that new loans exceeded the quota suggests that the monetary authorities had to allow the financing that the level of economic activity desperately demanded. Chart 1 indicates that, although CBRC reinforced lending controls, in H2 2010 the level of new loans was RMB 1.1trn more than in H2 2009, an increase of 49.5%. The monetary authorities have decided to normalise monetary policy (15-17% growth in money supply and loans) in 2011, but we believe it will only be the start of the normalisation which will not be completed in 2011. In other words, money supply growth will remain strong. 80 70 60 50 40 30 00 01 02 03 04 05 06 07 08 09 10 Source: BNP Paribas, PBOC Excessive liquidity remains in the system Excessive liquidity has been the outstanding phenomena in China’s financial system and the key reason behind inflation’s rise to a high level as well as the bubble in house prices. The outstanding loanto-deposit (L/D) ratio was 66.7% at the end of last year, exactly the same as it was in 2009. However, the incremental L/D ratio fell from 73.1% in 2009 to only 66.0% in 2010. Although the required reserve ratio had been raised to 18.3% on average (19.0% for large banks and 16.5% for medium-sized and small banks), theoretically there is still 15% or RMB 10.8trn available to lend (of course, this part of money has been used to finance inter-bank borrowing and discount bills). Xingdong Chen 13 January 2011 Market Mover 21 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: USD 105bn. This could give an extra
Page 5 and 6: hire and a pick-up in consumer spen
Page 7 and 8: ECB: Warning Shot • The tone of t
Page 9 and 10: Germany: Stronger for Longer • Go
Page 11 and 12: second half. This is predicated on
Page 13 and 14: France: Slippery Forecast for Q4 GD
Page 15 and 16: Japan: PM Sets Out Two Key Challeng
Page 17 and 18: state boundaries. For companies in
Page 19: Japan: Estimating Q4 GDP Growth •
Page 23 and 24: Brazil: Inflation Calls for Bold Po
Page 25 and 26: US: Where to Allocate Money in Rate
Page 27 and 28: Time to take some chips off the tab
Page 29 and 30: maturity Treasury curve shows that
Page 31 and 32: EUR Swap Spreads: Summary of Forces
Page 33 and 34: EMU Debt Monitor: CDS Analysis Char
Page 35 and 36: EMU Debt Monitor: Redemptions • O
Page 37 and 38: Sell BTP June 13 versus BTP Nov 15
Page 39 and 40: increase in market volatility, and
Page 41 and 42: JGBs: Demons’ Gate in Q2 • JGBs
Page 43 and 44: Table 1: BNP Paribas' Inflation For
Page 45 and 46: Table 3: BNP Paribas' Inflation For
Page 47 and 48: USDi: 10y TIPS Auction Preview •
Page 49 and 50: Table 1: BNP Paribas Carry Analysis
Page 51 and 52: Germany 10y: Stalling below MT 61.8
Page 53 and 54: AUD: The Wrong Kind of Liquidity
Page 55 and 56: oad. BNP Paribas economists have al
Page 57 and 58: Chart 2: USDJPY - Secondary low in
Page 59 and 60: Economic Calendar: 14 - 21 January
Page 61 and 62: Key Data Preview 114 112 110 108 10
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Page 65 and 66: Key Data Preview Chart 9: UK Employ
Page 67 and 68: Key Data Preview 120 115 110 105 10
Page 69 and 70: Treasury and SAS Issuance Calendar
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Central Bank Watch Interest Rate EU
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FX Forecasts* USD Bloc Q1 '11 Q2 '1
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For Production and Distribution, pl
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