Trade balance $33.6Bn (vs $21.2 expected and $31.1 prior)
Exports 12.7% YoY (vs 7% expected; 5.6% prior)
Imports 5.3% YoY (vs 7% expected; 7.6% prior)
Trade breakdown – Two way trade partners;
- 14% YoY growth from the USA (9.4% last month). Double the YTD run rate and largest trade growth since Jan 2013.
- EU showed continued recovery with 16% YoY growth in trade; the largest growth rate in well over 18 months.
- UK was the main stand out in EU doubling their growth rate to 40% from 23% in October (4X their YTD run rate).
- Japan continued recovery with 2.6% YoY growth (last month 0.8%) with a prior 12 months of deflation in trade.
- ASEAN saw strength although Indonesia remained muted.
The recovery and continued strength in Chinese trade figures have a number of implications in our mind;
- Positive trade balance – with US steepening yield curve, currency risks in Asia become increasingly problematic except for those countries with a large and increasing trade balance (and a currently pegged currency). Allocations to China should therefore increase. We think the Banks are likely to be key beneficiaries of this “allocation” trade.
- Recovering and robust exports – with the vast majority of current Bank NPLs and the highest NPL ratios being situated in East coast China in manufacturing and export industries we think that strength in this area could help alleviate some NPL pressure and would be a significant surprise to the market. 1H SMLs already showed a shrinking trend (peaking at only 3% of gross loans). We advise paying close attention to the SML trends in the Chinese Banks at the FY results in February. FAI and LGFV related NPLs are yet to surface and although cognizant of the risks, we think that financial reform could help to inflate some of these longer term issues away.
- Strong trade helps support economic rebalancing – with stronger trade figures, China can not only afford to let the RMB appreciate, it is actually in their interests – helping to spur domestic consumption.
- As the RMB appreciates, Bank liquidity constraints can be loosened – as we continually highlight; current high RRR and low LDR rates are nothing to do with loan growth but everything to do with keeping the RMB cheap. As this requirement wanes, liquidity can be released, supporting Bank margins and RoEs even in a muted loan growth environment. History suggests margins will also be maintained if deposit competition increases (see India).
- As financial reform picks up pace, China can control inflation through monetary means, helping them stomach a higher rate as consumption increases, thus making previously uneconomic “sunk cost” FAI and LGFV investment… economic.
There are many reasons we feel that the best way to play strong trade in China is through the banks. These include their direct exposure to manufacturing recovery (through NPL and SMLs) and the implications for financial reform of an improving trade environment. Chinese financial reform will both have system benefits that should be reflected by Bank valuations, but also operational opportunities that should help to maintain earnings at super normal levels in the medium term.
Valuations obviously do not reflect this, but furthermore, there may also be an opportunity for earnings growth in the medium term that is certainly not expected consensually. A shift in lending mix from pseudo municipal to consumer may help to increase marginal lending profitability; fee income will inevitably increase as financial markets deepen and LGFV lending is sold to a burgeoning municipal market and with SMLs shrinking at 3% of gross lending implying NPLs may peak at 1.5-2% (so long as a crisis is averted), 300% provisioning may begin to look too high meaning that write backs could potentially be possible.
Admittedly these earnings stories are a long shot, but with 20% ROEs implying a warranted PB of 1.8X (80% higher than current levels) even assuming ZERO loan growth, you are likely to get paid while you wait.
RMB continues to appreciate.
IMF Deputy Managing director in a speech in Beijing at the weekend ; US tighetening of liquidity “… is very positive for China”. He stated that he thinks it will have a “very big” impact on China’s economy and offers China a window of around 5 years in which China can adjust its economy.
BUY Agricultural Bank (1288 HK); ICBC (1398 HK) and Bank of China (3988 HK)
