July 2, 2013
China Strategy
Rising US rates and hot money: two
edged sword for China equities
Portfolio Strategy Research
Rising US rates: Two sides of a coin
Chenjie Liu
Rising US govt bond yields can be a double-edged sword for China,
leading to hot money outflows, but better US growth may also benefit
China exporters. However, the two effects differ in timing and magnitude.
In terms of timing, the outflows have already begun but China growth or
earnings have yet to benefit. In terms of magnitude, growth linkages have
weakened but hot money outflows could exacerbate valuation pressures.
Hot money outflows may continue in 2H13 and reverse in 1-2Q14
Our analysis indicates that expectations for RMB appreciation, US-China
interest spreads and economic growth spreads are the key factors driving
hot money flows into China, which tend to be greater when the economic
fundamentals for China are strong. Over the past three years, correlation of
hot money flows with A-share and MXCN returns are 71%/60% respectively
– mostly as a result of strong macro during hot money inflow periods, and
the higher A-share correlation is probably due to direct domestic liquidity
influence. Based on our ECS team’s estimates for RMB forex rates, interest
rates and economic growth, we believe that hot money outflows may
continue in 2H13, putting pressure on equities, but may reverse to minor
inflows by 1-2Q14.
+86(10)6627-3324 chenjie.liu@ghsl.cn
Beijing Gao Hua Securities Company Limited
Jason Sun
+86(10)6627-3187 jason.sun@ghsl.cn
Beijing Gao Hua Securities Company Limited
Helen Zhu
+852-2978-0048 helen.zhu@gs.com
Goldman Sachs (Asia) L.L.C.
Timothy Moe, CFA
+852-2978-1328 timothy.moe@gs.com
Goldman Sachs (Asia) L.L.C.
Ben Bei
+852-2978-1220 ben.bei@gs.com
Goldman Sachs (Asia) L.L.C.
Sector preference: More defensive in 2H13; pro-cyclicals in 1-2Q14
We find defensives are less exposed to hot money outflows but cyclicals are
far more susceptible. Compared to CSI300, the SME/GEM boards are less
exposed to hot money outflows. We screen for stocks less impacted by hot
money outflow and may benefit from reforms in 2H13. Pro-cyclical sectors
may do better in 1-2Q14 when hot money is likely to begin flowing back.
Hot money moves vs. SHCOMP Index: Outflows in 2H13; inflows in 1-2Q14
Hot money (Rmb bn 3-m average)
(Rmb bn)
SHCOMP index (RHS)
400
3,000
GS estimates
300
2,800
200
2,600
100
Hot money
outflow?
0
Hot money
inflow??
2,400
2,200
-100
2,000
-200
-300
1,800
Jan/11
Jul/11
Jan/12
Jul/12
Jan/13
Jul/13
Jan/14
Source: Wind, Gao Hua Securities Research, GS Global ECS Research estimates
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by
non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Goldman Sachs
July 2, 2013
China
Executive summary: Rising US rates to see hot money outflows
first; growth implications later and weaker
As the Fed looks to accelerate its exit from QE3, yields on 10-year US treasury bills have
been gradually rising. On one hand, this means that hot money (short-term international
capital flows) could flow back into the US and other developed economies (DMs). On the
other, it means the US economy would have improved as the Fed exits from QE3, which
should be positive for China’s growth. This report examines how the backdrop of higher
US treasury bills yields affects China equities. For the more directly impacted A-share
market, we also review sectoral and stock implications in detail. Our key findings are:
Hot money outflows started but China exporters have yet to benefit from US
recovery; magnitude of the latter is diminishing. Rising yields on US treasury notes
imply two things: an outflow of hot money and a boost for Chinese exporters, though the
timing and magnitude of these two effects could differ. In terms of timing, the outflows
have already began in May but exporters have yet to benefit from the potential US
recovery—we think it will be late 2013 before they do. In terms of magnitude, the impact of
exports on China’s economic growth has diminished in recent years. In addition, as
liquidity in China is already tight, hot money outflows could further directly deteriorate Ashare market performance. Impact on offshore fundflows is more indirect.
Outflows of hot money may continue in 2H13 but the trend could reverse in 1-2Q14.
Our model on factors that influence hot money flows indicates that expectations for RMB
appreciation, US-China interest spreads and economic growth spreads are the key factors
driving hot money flows. Stronger relative positioning for China’s fundamentals attracts
hot money, thus it is not surprising that there is positive correlation between hot money
trends and earnings as well as equities returns. The hot money correlation with A-shares
(3-month average) since 2008 is 71%, vs. 60% for MXCN. The higher correlation for Ashares makes sense given offshore equities are more sensitive to global equities
movements and the hot money directly impacts domestic liquidity but not offshore
fundflow (driver of which are discussed in our June 16, 2013 report ‘A lot is priced in but
limited near-term catalysts). Based on our ECS team’s estimates for RMB forex rates,
interest rates and economic growth, we believe that hot money could continue to flow out
of China in 2H13 and only reverse to minor inflows in 1-2Q of 2014.
Exporters should benefit from a stronger US economy, probably this winter. Our
economists expect US GDP yoy growth to trend up starting in 4Q2013. We believe this shift
could drive growth in Chinese exports. However, the timing may to too late to offset any
negative impact from the hot money outflows that began in May. Further, the importance
of exports to China’s economic growth has gradually diminished in recent years.
Picking sectors: Aim for defensives and avoid cyclicals. For the more directly impacted
A-share market, we find that not surprisingly, defensive sectors (such as food & beverage,
media, electrical components, health care and consumer durables) are less exposed to
outflows of hot money. Cyclicals, such as oil & gas, coal, chemicals, non-ferrous metals
and transport are far more susceptible to hot money outflows. Further, compared with the
CSI 300 Index, the SME/GEM boards are less exposed to the outflows.
We think hot money outflows in 2H13 are a headwind. We screen for A-share stocks
from our analysts’ coverage universe that are in sectors less impacted by hot money and
are relatively more likely to enjoy potential benefits from reforms in 2H13. Further, we think
that the improving fundamentals of China’s economy and hot money inflows may
gradually benefit equity returns in 1-2Q14. At that point, we could begin to prefer procyclicals.
Goldman Sachs Global Economics, Commodities and Strategy Research
2
July 2, 2013
China
Rising US rates: Two sides of a coin
Concerns of a US exit from QE3 are intensifying, and 10-year treasury yields could
continue to rise. At the most recent FOMC meeting, US Fed Chairman Bernanke
announced that tapering of quantitative easing measures will begin “later” in 2013, and
may be finished in 2014. Our US economists’ estimate of QE3 tapering beginning in
December now faces greater risk (see US Economics Analyst: A More Graceful Exit from
QE, June 21, 2013). At the same time, the team estimates 10-year treasury yields could
continue to rise.
China: Two sides of a coin – hot money flows out, and exports may benefit. US 10year treasury yields are gradually increasing, which could cause hot money to leave China,
and create a tighter liquidity environment. On the other hand, in this case, the upward
movement in US treasury yields would imply better US economic growth; historically, this
benefits Chinese exports.
Despite this, there are differences in the timing and degree of hot money outflows
and benefits to exporters. Time differences: According to our estimates, rising US
treasury yields may precede US GDP growth recovery and what this means for China is
that hot money outflows would begin before exporters benefit. Magnitude differences:
Following the 2008 financial crisis, exports became a less important driver of the Chinese
economy.
The current hot money outflow could have a more negative effect on the stock
market. With China’s liquidity situation already tight (our China economics team believes
the three-month interbank market rate could remain at 5%-6% for longer, below its recent
peak of 10%, but still 200 bp higher than the beginning of the year. Please refer China:
Downgrade 2013/2014 growth on tighter financial conditions, June 24, 2013), further
sustained outflow of hot money could have a more serious negative effect on the economy
and the stock market.
Exhibit 1: Rising US rates – two sides of a coin: hot money outflow; better US growth
perspective
US Exiting
QE
Rising
US rates
Liquidity
tightening
Hot
money
outflow
Better US
growth
Benefiting
China export
Source: Wind, Gao Hua Securities Research.
Goldman Sachs Global Economics, Commodities and Strategy Research
3
July 2, 2013
China
Exhibit 2: Our ECS team expects better US GDP yoy
growth and rising 10-year govt bond yield post 2013
Exhibit 3: Our ECS team expects 10-year govt bond yield
to rise more gradually, post 2Q13
USA - Real GDP (% chg yoy)
(%)
Increase over prev. qtr (bps, RHS)
USA - 10 Year Govt. Bond Yield (Quarterly Path)
(%)
US 10 Year Govt. Note Yield %
4.0
45
GS estimates
6
10
9
4
8
40
3.5
GS forecast
3.75
3.5
3.0
3
7
2
2.75
2.5
6
0
5
4
-2
2.4
2.5
3.05
3.1
3.2
3.25
40
3.6
3.3
35
2.85
30
2.6
25
2.25
2.0
20
20
1.85
1.5
15
15
15
15
15
3
1.0
10
10
10
10
10
10
10
2
-4
1
0
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-6
Source: Gao Hua Securities Research, GS Global ECS Research estimates
5
0.5
5
5
5
5
0
0.0
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Source: Gao Hua Securities Research, GS Global ECS Research estimates
Hot money outflows: Volumes and impacts
Hot money outflows had already begun in May 2013 (about Rmb117 bn according to our
calculations). The stock market and hot money have exhibited strong correlation over the
past few years, similarly for valuations and earnings vs. hot money. Our three-factor model
of influences on hot money flows indicates that expectations for RMB appreciation, USChina interest spreads and economic growth spreads are the key factors driving hot money
flows. Based on our ECS team’s estimates for RMB forex rates, interest rates and economic
growth, we believe that hot money could continue to flow out of China in 2H13 and only
reverse to inflows in 1-2Q14.
Hot money outflow had already begun in May (about Rmb117 bn). There are numerous
ways to calculate the scale of hot money, the most important being World Bank residual
method (1985), John Cuddington’s direct method (1986), and Michael Dooley’s mixed
method (1986). 1We calculate monthly hot money, based on the availability and frequency
of data, using the World Bank residual method (1985):
Hot money = changes in foreign exchange reserves – trade surplus – net FDI
Based on the above method, we find that hot money began to flow out of China in May—as
much as Rmb117 bn—though hot money was flowing into China in the previous four
months (Jan-Apr 2013), at a rate of over Rmb100 bn monthly. This is based on the residual
method, not taking into account “false trades” (over reporting by exporters or under
reporting by importers) in the current account data. However, academics have not yet
developed a reliable way to measure the scope of monthly “false trades” as a component
of hot money, so we continue to use the residual method to measure monthly hot money.
1
For more details on these methods, and their various advantages and disadvantages, please see Chinese Academy of Social Sciences
economist Zhang Ming’s paper “China’s Short-term International Capital Flow: Estimation Based on Various Methods and Levels” (The Journal of
World Economy, 2011 Issue 2).
Goldman Sachs Global Economics, Commodities and Strategy Research
4
July 2, 2013
China
Overall growth trends of hot money flow and domestic M2/social financing are
basically in line. Hot money flow directly affects China’s base currency, and we have
found that changes in growth trends of hot money flow and M2/social financing are
basically in line. In addition, hot money makes up a significant proportion of monthly social
financing (monthly average since 2006 at 10.7%). Hot money is speculative, to a certain
extent, and generally a short-term capital flow, making it highly correlated with the stock
market (with higher correlation than M2/TSF growth) and other asset prices.
Three-factor model - RMB appreciation expectations, US-China interest spreads and
economic growth spreads affect hot money flow. We construct a model of the factors
influencing hot money flow in China (E-G co-integration model, stationary residuals tested
by ADF approach), and found that RMB appreciation expectations, US-China interest
spreads and economic growth spreads are the three factors most correlated with hot
money flows. Of these, RMB appreciation expectations can account for some of the shortterm capital flow into China; US-China interest spreads can partially account for the
influence of short-term differences in capital gains; and US-China economic growth
spreads can account for the influence on relative changes in the two countries’
fundamentals on hot money flow.
Since the RMB exchange rate reforms of 2005, hot money flows have been more
correlated with equity indices, particularly A-shares. Our calculated correlation between
monthly hot money volume and the Shanghai Composite Index (three-year rolling
correlation coefficient) began to rise following the 2005 RMB exchange rate reforms, and is
currently around 80%, implying a high degree of correlation between short-term hot
money flows and the stock market. During the 2008-2009 financial crisis, RMB appreciation
basically stagnated, and the hot money–A-share correlation remained stable (around 40%).
After 2009, the correlation between the two increased.
In addition, we found that the hot money (3-month average) correlation with MXCN Index
is 60% since 2008 (vs. 71% for SHCOMP Index in the same period). We think the correlation
between hot money and the MXCN index is likely a reflection of the fact that when the
underlying China economy is stronger, then relative growth differentials are higher,
currency appreciation is higher, so offshore performs better too fundamentally. However,
the lower correlation for MXCN vs. A-shares makes sense as A-shares directly benefit from
hot money flow impact on domestic liquidity, whereas offshore markets are more sensitive
to global factors and not directly impacted by domestic liquidity. More details on factors
driving offshore fundflows can be found in our June 16, 2013 China strategy report titled ‘A
lot is priced in, but limited near-term catalysts’ and our June 4, 2013 regional strategy
report titled ‘Macro Factors at Play: Rising US rates…and AeJ growth’.
Valuation and earnings growth have a positive correlation with hot money flow—
valuations lead somewhat, while earnings growth moves with hot money flow. The
CSI 300 index 12-month P/E valuation is correlated with hot money flow, and leads it
slightly. However, because of structural problems with stock supply (see our September 26,
2011 report A-share strategy topic: Liquidity constraints result in lower market valuation),
valuation volatility has led to a lower correlation with hot money flow in recent years,
although the three-year rolling correlation remains high. Earnings growth and hot money
flow have a clearly positive correlation, which is logical given that hot money flow can be
affected by economic fundamentals.
Hot money outflow could continue through 2H13, and may shift to inflow in 1-2Q14.
Based on our ECS team’s estimates, the RMB may remain stable in 2Q13-2Q14, though it is
likely to face depreciation pressure in 1Q14 based on current NDF (Non-Deliverable
Forward) market data. At the same time, the team expects US-China interest spreads will
slowly narrow. According to our economists, US GDP growth will gradually accelerate in
2H13, while China GDP growth will continue to decline, though it will begin to improve in
1Q14. According to our three-factor model, taking into account RMB forex expectations,
Goldman Sachs Global Economics, Commodities and Strategy Research
5
July 2, 2013
China
US-China interest spreads and US-China fundamental spreads in 2H13 and 1-2Q14, we
believe hot money outflow in China will continue through 2H13, and shift to inflow in 12Q14.
Exhibit 4: Hot money estimated by World Bank approach
– Rmb 117 bn outflow in May 2013
Exhibit 5: Hot money (3-m average) vs. SHCOMP index –
positively correlated
Hot money estimated by World bank approach
500
400
Hot money (Rmb bn 3-m average)
(Rmb bn)
(Rmb bn)
SHCOMP index (RHS)
400
Hot money = changes in Foreign exchange reserves - trade surplus
- net FDI
7,000
Correlation=71% (since 2008)
300
6,000
Correlation=40% (since 2005)
200
300
5,000
Correlation=35% (since 2000)
200
100
4,000
0
3,000
-100
2,000
-200
1,000
-300
0
100
0
-100
-200
-300
-400
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Wind, Gao Hua Securities Research estimates.
Source: Wind, Gao Hua Securities Research estimates.
Exhibit 6: Hot money (3-m average) vs. MXCN index –
positive, but lower correlation
Exhibit 7: RMB appreciation expectation vs. SHCOMP
index – positively correlated
(Rmb bn)
400
(%)
Hot money (Rmb bn 3-m average)
MXCN index (RHS)
Correlation=60% (since 2008)
RMB appreciation expectation
7,000.0
14.0
SHCOMP Index (RHS)
120
12.0
6,000.0
300
Correlation=35% (since 2005)
200
Correlation=30% (since 2000)
100
10.0
5,000.0
8.0
80
100
6.0
4,000.0
4.0
60
3,000.0
2.0
0
40
0.0
2,000.0
-100
-2.0
-200
20
1,000.0
-4.0
0.0
Source: Bloomberg, Wind, Gao Hua Securities Research estimates.
Goldman Sachs Global Economics, Commodities and Strategy Research
2013/05
2013/01
2012/09
2012/05
2012/01
2011/09
2011/05
2011/01
2010/09
2010/05
2010/01
2009/09
2009/05
2009/01
2008/09
2008/05
2008/01
2007/09
2007/05
2007/01
2006/09
2006/05
2006/01
2005/09
2005/05
2005/01
2004/09
2004/05
0
2004/01
-6.0
-300
Source: Wind, Gao Hua Securities Research estimates.
6
July 2, 2013
China
Exhibit 8: Hot money vs. M2/TSF stock yoy growth –
positively correlated
Hot money (Rmb bn 3-m average)
(Rmb bn)
Exhibit 9: Size of hot money (monthly) vs. TSF monthly
flow
Hot money (monthly) as % of TSF monthly flow
(%)
TSF stock yoy growth (RHS)
400
40
M2 yoy growth (RHS)
35
300
30
200
Average
80%
70%
60%
50%
25
100
20
0
15
40%
30%
20%
10%
-100
10
-200
5
0%
-10%
-20%
-300
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-30%
2006
2007
2008
2009
2010
2011
2012
2013
Source: Wind, Gao Hua Securities Research estimates.
Source: Wind, Gao Hua Securities Research estimates.
Exhibit 10: Correlation between hot money and SHCOMP
index turned positive significantly post the reform of
RMB exchange rate (2005)
Exhibit 11: CSI300 12-m P/E valuation vs. Hot money –
positively correlated but stock supply issues weighed on
valuation recent years though
3-year Correlation between Hot money and SHCOMP index
100%
The reform of RMB exchange
rate (2005)
80%
(Rmb bn)
Hot money (3-m average)
CSI300 12m fP/E (RHS)
(x)
400
40
300
35
60%
200
40%
100
30
25
20
20%
0
15
0%
-100
10
-20%
-200
5
-300
0
-40%
-60%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Wind, Gao Hua Securities Research estimates,
Goldman Sachs Global Economics, Commodities and Strategy Research
Source: Wind, Gao Hua Securities Research estimates,
7
July 2, 2013
China
Exhibit 12: Correlation between hot money and CSI300
12-m P/E valuation turned significantly positive in recent
years, with high volatility
Exhibit 13: Similarly for CSI300 earnings growth –
fundamentals attracts hot money
(%)
(%)
3-year correlation between Hot money and CSI300 earnings growth
3-year correlation between Hot money and CSI300 12m fP/E
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
-10%
-10%
May-09
-20%
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
2007
May-1
2008
2009
2010
2011
2012
2013
Source: Wind, Gao Hua Securities Research estimates,
Source: Wind, Gao Hua Securities Research estimates,
Exhibit 14: CSI300 earnings growth vs. Hot money –
positively correlated
Exhibit 15: RMB appreciation expectation (NDF 12-m) vs.
Hot money (3-m average) – exchange rate benefits
Hot money (quarterly)
(Rmb bn)
(Rmb bn)
CSI300 (ex. Financials) earnings ytd yoy growth (RHS)
1,200
140%
1,000
120%
800
Hot money (Rmb bn 3-m average)
RMB appreciation expectation (RHS)
400
14
12
300
10
100%
200
600
8
80%
400
60%
6
100
200
4
40%
0
0
2
20%
-200
0
-100
0%
-400
-600
-20%
-800
-40%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Wind, Gao Hua Securities Research estimates,
Goldman Sachs Global Economics, Commodities and Strategy Research
-2
-200
-4
-300
-6
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Wind, Gao Hua Securities Research estimates,
8
July 2, 2013
China
Exhibit 16: Sino-US bond yield spread (10-year govt
bond) vs. Hot money (3-m average) – yields benefits
Exhibit 17: Sino-US GDP yoy growth differences
(quarterly) vs. Hot money (3-m average) – fundamental
benefits
Hot money (Rmb bn 3-m average)
(Rmb bn)
Hot money (Rmb bn)
(%)
(Rmb bn)
Sino-US bond 10-years govt. note yield spread (RHS)
400
Sino-US GDP yoy growth difference (RHS)
(%)
3
1,200
300
2
14
1,000
12
800
200
1
100
10
600
400
8
0
200
0
6
0
-1
-100
-200
-2
-200
4
-400
2
-600
-3
-300
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
-800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Wind, Gao Hua Securities Research estimates,
Source: Wind, Gao Hua Securities Research estimates,
Exhibit 18: Our three-factor model to explain the hot
money moves
Exhibit 19: Our ECS team estimates RMB would be stable
in 2Q13-2Q14
Three factors model – to explain the hot money moves
US$ vs. RMB spot price
6.50
Coefficient
Std. Error
t-Statistic
Prob.
Constant
-89.5
43.9
-2.0
0.0438
RMB appreciation
25.1
3.4
7.4
0.0000
Yields gap
15.1
10.4
2.4
0.0501
(Jan 2004 - May 2013)
Non-Deliverable Forward market US$ vs. RMB exchange
rate (12-m)
6.45
6.40
GS estimates
6.35
6.30
6.25
GDP growth gap
9.0
4.9
1.8
0.0701
6.20
6.16 (3Q13)
R-squared
Adjusted R-squared
0.58
0.56
Source: Wind, Gao Hua Securities Research estimates,
Goldman Sachs Global Economics, Commodities and Strategy Research
6.15
Jul/12
Sep/12
Nov/12
Jan/13
Mar/13
May/13
Jul/13
Sep/13
6.16 (4Q13)
Nov/13
Jan/14
6.16
(1Q14)
Mar/14
6.16
(2Q14)
May/14
Source: Wind, Gao Hua Securities Research, GS Global ECS Research
estimates
9
July 2, 2013
China
Exhibit 20: Our ECS team expects US rates to move
higher, while China policy rate remain stable in 2H13
Exhibit 21: Our ECS team expects better GDP growth in
US in 2H13, worse growth in China
GDP growthe gaps (RHS)
Interest rate gaps (RHS)
(%)
(%)
USA - 10 Year Govt. Bond Yield (Quarterly Path)
8.0
(%)
(%)
5.0
USA - Real GDP (% chg yoy)
7.0
9.0
China - Real GDP (% chg yoy)
China 1-year lending rate (%)
7.0
4.5
8.0
4.0
7.0
6.0
3.5
5.0
6.0
5.0
6.0
3.0
4.0
5.0
4.0
4.0
3.0
2.5
2.0
3.0
1.5
2.0
1.0
1.0
0.0
2012
2013
2014
3.0
2.0
2.0
0.5
1.0
0.0
0.0
2015
Source: Wind, Gao Hua Securities Research, GS Global ECS Research
estimates
1.0
0.0
2012
2013
2014
2015
Source: Wind, Gao Hua Securities Research, GS Global ECS Research
estimates
Benefiting China’s exporters? Effect likely later and weaker
The benefits to exporters from the stronger US economy may come too late. Our US
economists estimate that US GDP will increase 1.7%/1.5%/2.0% yoy in 2Q/3Q/4Q of 2013.
This implies real recovery in yoy growth may occur in 4Q13 and may only start to benefit
Chinese exporters at that point. However, the timing is too late when compared with the
current outflows of hot money.
The correlation between US treasury bill interest rates and Chinese GDP growth has
declined sharply in recent years. Historical data indicates a positive correlation between
interest rates on US treasury bills and Chinese GDP growth, especially from 2001 to 2010.
In recent years the correlation has been weakening as China’s labor costs rise and its
currency appreciates, resulting in an economic model that is less geared towards exports.
Going a step further, (1) the Chinese economy is currently under pressure from leverage
and needs to both control low-yield investment and manage liquidity flowing into the real
economy; (2) at the same time, policymakers are becoming more tolerant of slower growth
rates and are less likely to engage in stimulus policies; (3) the correlation between GDP
growth rates and stock market earnings is declining (Please refer to our report: Why
China’s corporate profit growth deviates from nominal GDP growth, Sep 3, 2012). As such,
even if the US growth recovery has some positive impact for Chinese exports, the impact
on the stock market may be even lesser.
Goldman Sachs Global Economics, Commodities and Strategy Research
10
July 2, 2013
China
Exhibit 22: China export yoy growth vs. US GDP yoy
growth – may benefit exports by end of 2013
Exhibit 23: Relationship between US rates and China
growth has weakened in recent years
(%)
USA - Real GDP (% chg yoy RHS)
50
Higher US Rates = High China Growth
0.8
China export yoy growth (quarterly)
(%)
6
GS
estimates
4
40
0.6
0.4
0.2
30
2
20
0.0
Asian
Financial
Crisis
-0.2
0
-0.4
-10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Wind, Gao Hua Securities Research, GS Global ECS Research
estimates
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
estimates
Exhibit 24: Our China economic team revised their GDP
forecasts lower on June 24 2013
Exhibit 25: GS China GDP yoy growth forecasts –
7.5%/7.3%/7.0%/7.4%/7.7% for 2Q13-2Q14
GS Old
GDP yoy
CPI yoy
7.8
2.8
GS New
7.4
2.4
% chg
% chg
20
2013
20
GS Forecasts
Consensus
18
7.6
16
GDP (yoy)
16
14
GDP (qoq sa ann)
14
2.9
18
12
12
10
2014
GS Old
GDP yoy
CPI yoy
8.4
3.5
GS New
7.7
2.6
Consensus
7.8
3.4
Source: Consensus Economics, GS Global ECS Research estimates.
10
8
8
6
6
4
4
2
2
0
2005
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
estimates
How to position when facing outflows and later & weaker growth
Our analysis indicates that in 2H13 China equities may remain under pressure from the
outflows of hot money and that the (potentially reduced) benefits of an improved US
economy to Chinese exporters may not appear until late 2013. We think that hot money
could begin to flow back into China in 1-2Q14 as the RMB continues to appreciate, interest
spreads shrink and fundamentals of the Chinese economy improve slightly. The impacts
may be particularly meaningful for the A-share market, where hot money directly impacts
liquidity.
In this section, we analyze the relationship between hot money flows and A-share sector
performance to find defensive sectors that are least impacted by hot money outflows. We
Goldman Sachs Global Economics, Commodities and Strategy Research
11
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
-6
-30
Correlation of change in US 10-Year Rates & China
-0.6
Dec-96
-4
-20
Dec-97
-2
Relationship has
weakened, but still
positive correlation
Global
Financial
Crisis
Dec-05
0
10
July 2, 2013
China
further pick stocks from the Gao Hua coverage universe that may be in defensive space in
2H13.
Historically, hot money flows have had relatively little impact on defensives while
cyclicals are much more exposed. We examined the correlation between historical hot
money flows and sector performance and found that defensive sectors, such as food &
beverage, media, electrical components, health care and consumer durables are less
exposed to outflows of hot money. However, we found cyclicals, such as oil & gas, coal,
chemicals, non-ferrous metals and transport are far more susceptible to hot money
outflows.
In our accompanying report: No rain, no rainbow, July 2, 2013, we lower our CSI300 target
to 2,380 (from 2,800) for end-201E (implying 8% upside in the next six months) and
introduce our 1H14E target at 2,600 to factor in potential cyclical stabilization helped by US
recovery by end-2013 or early-2014. We also upgrade consumer durables (the defensive
sector) to Overweight to replace capital goods (the cyclical sector).
Impact on the SME/GEM boards could be minor. Compared with the CSI 300, hot
money flows has had less impact on the performance of the SME/GEM boards than CSI300
index since 2011. We think that hot money outflows in 2H13 could have a bigger effect on
the CSI300 index.
Next, we screen stocks from our analysts’ coverage universe that are in sectors less
impacted by hot money and that are relatively more likely to enjoy potential benefits from
reforms in 2H13. Our screening methodology is as such: 1) Select sectors that have low
correlation with hot money outflows (Exhibit 24) and are likely to benefit from China
reforms (See Reforming China – shifting into higher gear, May 27, 2013); 2) Select the Buyrated stocks within these sectors.
Further, we think that the fundamentals of the Chinese economy and hot money flows may
gradually benefit the stock market in 1-2Q14. At that point, we could begin to prefer procyclicals.
Exhibit 26: Correlation between hot money changes and sector performance – defensives
less impacted, cyclicals suffered more
Correlation between hot money and sector performance
(Jan 2011 to date)
5 sectors with high correlation
100%
90%
80%
5 sectors with low correlation
66%
70%
67%
67%
67%
68%
68%
69%
69%
70%
71%
72%
72%
73%
73%
74%
75%
77%
77%
79%
79%
83%
86%
61%
60%
51%
50%
40%
30%
20%
10%
0%
-10%
-4%
Source: Wind, Gao Hua Securities Research, GS Global ECS Research estimates
Goldman Sachs Global Economics, Commodities and Strategy Research
12
July 2, 2013
China
Exhibit 27: SME/GEM index impacted less than CSI300 index when hot money flows out
of China
Correlation between hot money and index performance
(Jan 2011 to date)
76%
74.4%
74%
72%
70.2%
70%
68%
66.8%
66%
64%
62%
GEM Index
SME Index
CSI300 Index
Source: Wind, Gao Hua Securities Research, GS Global ECS Research estimates
Exhibit 28: Our A-share stock picks when facing hot money outflows but later and weaker impact on growth
Rating
Price (Pricing
currency, July 1
2013)
Potential
TP (Pricing
P/E CY P/E CY P/B CY P/B CY
upside/downsid
currency)
2013 (X) 2014 (X) 2013 (X) 2014 (X)
e to TP
1m perf (%)
1m relative perf (%,
vs. SHCOMP Index)
2.4
5.2
17.9
2.8
22.8
35.5
4.5
-1.6
11.2
3.2
-0.4
12.4
3.4
-5.5
7.3
Wind ticker
Name
Sector
600498.SH
Fiberhome Telecom
IT
Buy
16.81
17.10
1.7%
22.0
17.2
2.6
300002.SZ
Beijing Ultrapower
IT
Buy
16.80
17.30
3.0%
19.7
16.2
3.0
300291.SZ
Hualubaina Film
Consumer Disc.
Buy
37.31
42.21
13.1%
31.2
23.3
5.0
600600.SH
Tsingtao Brewery (A)
Consumer Staples
Buy
38.95
44.40
14.0%
25.5
20.8
3.6
601888.SH
CITS
Consumer Disc.
Buy*
30.29
37.20
22.8%
18.6
15.8
4.0
600079.SH
Humanwell Healthcare
Health Care
Buy
26.47
34.00
28.4%
25.4
19.0
3.7
3.2
-4.0
8.7
600521.SH
Huahai Pharmaceutical
Health Care
Buy*
15.59
22.80
46.2%
26.7
19.5
4.7
4.0
-10.4
2.4
002251.SZ
Better Life
Consumer Staples
Buy
22.55
27.70
22.8%
14.3
11.5
2.4
2.0
-6.9
5.9
601933.SH
Yonghui Superstores
Consumer Staples
Buy*
12.48
16.50
32.2%
24.1
18.4
3.4
2.9
-5.2
7.6
Note: 1) Closing prices as of July 1, 2013; Rating with * indicates the stock is on Conviction List.
2) We screen stocks that are in sectors less impacted by hot money and that are relatively more likely to enjoy potential benefits from reforms in 2H13.
Source: Wind, Gao Hua Securities Research estimates, Goldman Sachs Research estimates
Goldman Sachs Global Economics, Commodities and Strategy Research
13
July 2, 2013
China
Disclosure Appendix
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Investment Banking Relationships
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Buy
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