Ping An Digital Economic Research Center

Zheng Zeng

Ping An Digital Economic Research Center (DERC)

Ping An - DERC

Ping An Digital Economic Research Center (DERC) utilizes more than 50 TB of high frequency data points, more than 30 years of historical data and more than 1.5 billion data points to drive research on the “AI + Macro Forecast” and provide insights and methods towards precise macroeconomic trends. 

Ping An DERC is a research center for Ping An Insurance (Group) Company of China, Ltd. (“Ping An”) is a world-leading technology-powered retail financial services group. With over 204 million retail customers and 534 million internet users, Ping An is one of the largest financial services companies in the world.

FX & Rates

<div>This report aims to resolve problems in forecasting long-term interest rates in China.</div>
<div></div>
<div>
<div>
<strong>Traditional convergence theory cannot satisfy current forecasting requirements.</strong> The long-lasting downward trend of China's economic growth is well known, and the decline in growth is bound to cause a decline in rates of return. It must be noted that convergence theory can only provide insight into issues like “the continual declining trend of economic growth”.</div>
</div>
<div></div>
<div>
<div>
<strong>Current demographic analysis makes it possible to forecast the long-term fluctuation trend of interest rates.</strong> Since there is already academic research on demographics and asset prices, based on this, we performed quantitative optimization by applying Grid Search. Data again confirmed the economic theory that the ratio of the population group aged between under 30 to over 40 is highly correlated with long-term trends in interest rates.</div>
</div>
<div></div>
<div>
<div>
<strong>Demographic trends, together with wavelet analysis, can provide a more detailed dualcycle model to forecast long-term interest rates.</strong> Firstly, we employed the Hermite interpolation method to increase the population data frequency. Then, with the interest rate wavelet cycle, we came up with a model that could better fit the overall trend of interest rates. This dual cycle model could explain why these two interest rate cycles have been asymmetric since 2012: because China's long-term population structure has been rapidly flattening since 2012.</div>
</div>
<div></div>
<div>Figure 17: Interest Rate Forecast After adding the Dual Cycle</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/579/original/image_99006239091600314108033.png?1600314111" class="editor-image img-responsive" data-smartkarma-image-id="159579"></figure>
</div>
<div>
<div style="text-align: left;" class="content-caption">Source: OECD, Ping An DERC</div>
<div>Given the current data, the terminal interest rate is still trending downward, and the sharpest fall in rates of return will appear around Q2 next year.</div>
</div>

This report aims to resolve problems in forecasting long-term interest rates in China.



Traditional convergence theory cannot satisfy current forecasting requirements. The long-lasting downward trend of China's economic growth is well known, and the decline in growth is bound to cause a decline in rates of return. It must be noted that convergence theory can only provide insight into issues like “the continual declining trend of economic growth”.




Current demographic analysis makes it possible to forecast the long-term fluctuation trend of interest rates. Since there is already academic research on demographics and asset prices, based on this, we performed quantitative optimization by applying Grid Search. Data again confirmed the economic theory that the ratio of the population group aged between under 30 to over 40 is highly correlated with long-term trends in interest rates.




Demographic trends, together with wavelet analysis, can provide a more detailed dualcycle model to forecast long-term interest rates. Firstly, we employed the Hermite interpolation method to increase the population data frequency. Then, with the interest rate wavelet cycle, we came up with a model that could better fit the overall trend of interest rates. This dual cycle model could explain why these two interest rate cycles have been asymmetric since 2012: because China's long-term population structure has been rapidly flattening since 2012.


Figure 17: Interest Rate Forecast After adding the Dual Cycle




Source: OECD, Ping An DERC
Given the current data, the terminal interest rate is still trending downward, and the sharpest fall in rates of return will appear around Q2 next year.


“Dual Cycle” Forecast Model Of Long-Term Interest Rates

Macroeconomics

<blockquote>
<p><strong>Loose Credit? A Sense of Bitter Reality</strong></p>
</blockquote>
<p>On June 1, The People's Bank of China (PBOC) stepped up efforts to loosen credit with the aid of innovative monetary policy instruments, further confirming the direction towards a looser monetary policy. Will such policy trigger a new round of credit expansion? This paper studied local officials and sought to reach a conclusion that can be relatively long lasting.</p>
<p>Why did we analyse local officials? This is largely due to our assumption that the time is not yet ripe for PBOC to loosen monetary policy without a target. Consequently, the credit cycle should respond to the local political cycle. Having retrieved and studied data on all governors and party secretaries of mainland China's 31 provinces and municipalities since 1978, we found:</p>
<ol>
<li>
<p>Local credit supply and the tenure of provincial governors and provincial party secretaries are in an <strong>inverted U-shaped relation</strong>. Local credit supply grows most rapidly when the local official serves for about three years.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/527/original/%E6%BC%94%E7%A4%BA%E6%96%87%E7%A8%BF1.png?1600305617" class="editor-image img-responsive" data-smartkarma-image-id="159527"></figure>
</li>
<li>
<div>A leadership transition of local officials is taking place nationwide at the moment. In addition, <strong>credit growth brought by incumbent officials</strong> is starting to slow down, which will likely pressure the growth of credit.</div>
</li>
</ol>
<div>Data in the balance sheet of PBOC also points to a slowdown in credit growth in H2. Hence, we think it is difficult for credit growth to further increase in H2.</div>


Loose Credit? A Sense of Bitter Reality

On June 1, The People's Bank of China (PBOC) stepped up efforts to loosen credit with the aid of innovative monetary policy instruments, further confirming the direction towards a looser monetary policy. Will such policy trigger a new round of credit expansion? This paper studied local officials and sought to reach a conclusion that can be relatively long lasting.
Why did we analyse local officials? This is largely due to our assumption that the time is not yet ripe for PBOC to loosen monetary policy without a target. Consequently, the credit cycle should respond to the local political cycle. Having retrieved and studied data on all governors and party secretaries of mainland China's 31 provinces and municipalities since 1978, we found:


Local credit supply and the tenure of provincial governors and provincial party secretaries are in an inverted U-shaped relation. Local credit supply grows most rapidly when the local official serves for about three years.



A leadership transition of local officials is taking place nationwide at the moment. In addition, credit growth brought by incumbent officials is starting to slow down, which will likely pressure the growth of credit.


Data in the balance sheet of PBOC also points to a slowdown in credit growth in H2. Hence, we think it is difficult for credit growth to further increase in H2.

Mismatch Between Financial and Political Cycles - Be Alert to the Risk of a Credit Cycle Recession

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<p><strong><em>With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021. </em></strong>  </p><p>China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. </p><p>As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. </p><p>As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China. </p>

With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021.   China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China. 

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

<p>Consumer inflation pressures remain well contained in Asia for now. Asian money supply growth has accelerated appreciably as regional central bankers ease monetary policy to combat the Covid-19 economic shock but in eight of the ten countries we track CPI is running at or below year earlier levels. Importantly producer prices, are falling in most countries, implying that there are few pipeline inflation pressures. India is the exception.</p>

Consumer inflation pressures remain well contained in Asia for now. Asian money supply growth has accelerated appreciably as regional central bankers ease monetary policy to combat the Covid-19 economic shock but in eight of the ten countries we track CPI is running at or below year earlier levels. Importantly producer prices, are falling in most countries, implying that there are few pipeline inflation pressures. India is the exception.

<p><strong>Asia was relatively quick to contain the Covid-19 virus outbreak. Most economies did not go into the full lockdown and if they did, are back to normal operations levels. India is the exception. Nonetheless consumers have been slow to return, and exports are plummeting. Understandably corporate profits have been hit across the region. The June Japan Tankan Survey offers some interesting insights, which we rather suspect are shared by many companies in Asia – that there is no V-shaped recovery in the offing and the business operating environment is going to tough. </strong></p>

Asia was relatively quick to contain the Covid-19 virus outbreak. Most economies did not go into the full lockdown and if they did, are back to normal operations levels. India is the exception. Nonetheless consumers have been slow to return, and exports are plummeting. Understandably corporate profits have been hit across the region. The June Japan Tankan Survey offers some interesting insights, which we rather suspect are shared by many companies in Asia – that there is no V-shaped recovery in the offing and the business operating environment is going to tough. 

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

China Treasury (CHINA GOVT)

“Dual Cycle” Forecast Model Of Long-Term Interest Rates

This report aims to resolve problems in forecasting long-term interest rates in China. Traditional convergence theory cannot satisfy current...

Ping An - DERC

Mismatch Between Financial and Political Cycles - Be Alert to the Risk of a Credit Cycle Recession

We found an inverted U-shaped relation between the tenure of local officials and the growth of local creditsupply.

Ping An - DERC

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

China's total social financing has increased by

Prasenjit K. Basu

Asian Inflation Risks Contained

Consumer inflation pressures remain well contained in Asia for now. Asian money supply growth has accelerated appreciably as regional central...

Sharmila Whelan

Corporate Asia - Tough Times Ahead

Asia was relatively quick to contain the Covid-19 virus outbreak. Most economies did not go into the full lockdown and if they did, are back to...

Sharmila Whelan

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)