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Feeling the PRD pulse Special Report: Shop Talk – China, ASEAN and robotics and 12, respectively). The US, Europe and Middle East are the main overseas markets among those surveyed. In terms of credit, 46% of respondents reported that it is more difficult to borrow money now than in 2014, while only 8% said it has become easier (Figure 14). This is disappointing, considering the multiple rounds of policy interest rate and reserve requirement ratio (RRR) cuts since then. Monetary conditions were also kept accommodative throughout 2015 and in Q1-2016. Presumably, a slowing economy has turned banks more cautious on lending due to concerns over rising nonperforming loans. This finding also echoes our monthly tracker, which shows that funding costs have stayed high for small and medium enterprises (SMEs). The financing cost component of our proprietary SME Confidence Index has been persistently below the 50 neutral mark since late 2014 (Figure 15). In Q2-2016, we saw a slowdown in monetary and credit growth – reflecting a return to prudence and a renewed commitment towards deleveraging – give way to fiscal policy shouldering a larger easing burden. Survey echoes likely ‘L-shaped’ growth Our survey shows a reasonably stable labour market and healthy income growth, all things considered. This keeps consumption supported and should help China avoid a hard landing. However, a combination of lingering high wages and financing costs, Figure 12: What is your view on partner markets in 2016? % of respondents 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Negative Source: Standard Chartered Research Figure 14: How easy is it to borrow money now vs 2014? % of respondents Moderately negative Neutral Moderately positive Positive Figure 13: What is your view on China in 2016? % of respondents, this and the 2015 survey 50% 40% 30% 20% 10% 0% Negative 2015 2016 Moderately negative Source: Standard Chartered Research Neutral Moderately positive Figure 15: SMEs’ financing costs remain elevated Bank and non-bank financing cost components Positive Harder Same Easier 0% 10% 20% 30% 40% 50% Source: Standard Chartered Research 56 54 52 50 48 46 44 42 50 threshold Bank financing cost index Source: Standard Chartered Research Non-bank financing cost index 40 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 19 July 2016 12
Feeling the PRD pulse Special Report: Shop Talk – China, ASEAN and robotics weak orders, narrowing margins and widespread pessimism means tougher times still for an already over-leveraged China Inc. More defaults are likely on the horizon, especially if China is serious about its economic transformation goals. Indulging in the old habit of keeping zombie companies alive because of fallout fears would only hurt the growth rate in the medium term. Against this backdrop, the government’s growth target of above-6.5% for the next five years looks ambitious in the absence of additional policy stimulus. There seems to be policy space available for stimulus, but the leadership may not (and should not, in our view) be seeking a strong economic rebound given the sluggish global recovery and the need to cut capacity and deleverage domestically. An ‘L-shaped’ trajectory for China in the coming years, therefore, sounds appropriate to us. The government delivers policy relief for corporates Tackling the challenges, starting with the government Less of a push from minimum wage hikes PRD manufacturers generally do not mind statutory minimum wage hikes in the ‘good times’; they tend to already pay above the minimum level and would hike wages given a demand-driven shortage at any rate. In challenging times, however, manufacturers become more sensitive – and vulnerable – to wage hikes. It is not surprising, therefore, that 15% of our respondents said minimum wage increases have had a ‘huge’ impact on wage levels, up from a mere 7% last year. Another 57% said that regulatory wage hikes have forced them to raise wages more than they had planned. 28% (down from 30% last year) said they would have hiked wages anyway, regardless of minimum wage changes. Minimum wage hikes do appear to have a growing impact on actual wages, especially for the least skilled part of the workforce, as economic headwinds increase. It is likely a relief to corporates that Beijing has taken a less assertive stance on mandating wage increases in its 13th Five Year Plan (FYP, 2016-20), calling only for ‘rationally determined minimum wage rates’. This contrasts with the targeted minimum wage increases of ‘at least 13% a year on average’ in the government’s 12th FYP (2011-15), during which the actual average increase was 13.1%. Starting this year, provinces have also been allowed to hike minimum wages only once every two to three years (from at least once every two years). So far this year, only seven provinces have hiked minimum wages by an average of 11% (Figures 16 and 17), versus last year’s average increase of 14.9% among 27 provinces. Chongqing hiked wages the most this year (20%) because of its lower base and because it did not hike in 2015 (unlike Shanghai and Tianjin, which tend to hike wages annually). Figure 16: Minimum wages in selected provinces/cities Top-tier minimum wage levels, CNY 2,500 Figure 17: Less urgency for provinces to hike minimum wages 30 Number of provinces that adjusted minimum wages 2,000 1,500 2015 2016 25 20 15 Average minimum wage 1,000 10 500 5 0 Shanghai Tianjin Jiangsu Shandong Liaoning Chongqing Hainan 0 2011 2012 2013 2014 2015 2016YTD Source: Wen Wei Po, Standard Chartered Research Source: Sina Finance, Standard Chartered Research 19 July 2016 13
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