20151207-大和证券-Will_this_receding_tide_beach_all_boats__19页_2mb_2mb

2016 Macro Outlook Summary

Core Content

This document provides a macroeconomic outlook for 2016, emphasizing the continued impact of the US dollar's strength and the Federal Reserve's policy normalization on global markets, particularly in Asia. It highlights the challenges China faces due to persistent capital outflows, balance-of-payments deficits, and the shift from carry-trades to reverse carry-trades. The report also outlines the broader economic scenarios for the G3 economies and the potential consequences of the ongoing dollar deleveraging process.

Main Points

1. Dollar Strength and Fed Policy Normalization

• The US Dollar is expected to remain strong in 2016, driven by the Fed's gradual tightening cycle.
• The Fed is anticipated to implement its first rate hike in December 2015, followed by three more in 2016, pushing the Fed funds target rate to 1.13% by year-end.
• The strengthening of the dollar poses significant challenges for Asian economies, especially China, due to the large amount of dollar-denominated debt held by non-US borrowers.

2. Global Dollar Deleveraging

• The process of global dollar deleveraging has barely begun.
• Capital outflows from Asia, particularly China, have been substantial, with USD660bn leaving China between April 2014 and September 2015.
• The balance-of-payments deficit is expected to widen to USD390bn in 2016, compared to USD280bn in 2015, further constraining China's policy space.

3. Reverse Carry-Trades

• The shift from carry-trades (long-CNY/short-USD) to reverse carry-trades (short-CNY/long-USD) is a new source of outflows from China.
• This trend is driven by the weakening of the CNY, reduced yields in China, and the attractiveness of higher yields in the US.
• The PBOC's aggressive monetary easing has made it easier for market participants to establish reverse carry-trades, exacerbating capital outflows.

4. China's Economic Challenges

• China's multi-year easing efforts have failed to counteract the capital outflows.
• The current-account surplus is no longer sufficient to offset the capital-account deficit.
• China is facing a triple threat: money outflows, deflationary pressure, and erosion of export competitiveness due to the strong dollar and fixed CNY exchange rate.

5. Regional Economic Outlook

• Asia ex-Japan is projected to grow at 5.6-5.9% in 2016, slightly lower than 2015.
• China's growth is expected to slow further to 6.0-6.5% in 2016, falling short of the regional average.
• The US is projected to grow at 2.6% in 2016, slightly better than the previous year, supported by accommodative monetary policy and strong consumer spending.
• The Eurozone is expected to grow at 1.4% in 2016, with weak potential growth and continued ECB easing.

Key Information

• Balance of Payments Deficit: China's BOP deficit is expected to grow in 2016, reaching USD390bn.
• Capital Outflows: These have neutralized previous monetary easing efforts and continue to put pressure on the CNY.
• Dollar Debt: Total non-US dollar debt stands at around USD9.8tn, with only a 2.6% deleveraging since 2014.
• Exchange Rate Dynamics: The CNY remains roughly pegged to the USD, leading to real appreciation and increased pressure on exports.
• Monetary Policy Constraints: The PBOC has limited room for maneuver due to the shrinking monetary base and the need to manage outflows.

Conclusion

The report suggests that China is the main pressure point for the region and the global economy in 2016. The continued strength of the US Dollar and the Fed's tightening cycle will likely lead to more capital outflows and a worsening balance-of-payments situation. The shift to reverse carry-trades is expected to intensify, putting further downward pressure on the CNY. The PBOC may need to reduce its forex intervention to avoid a contraction in the monetary base, which could lead to a debt-deflation scenario or a currency crisis. The document concludes that managing these macroeconomic forces will be critical for China and the rest of Asia in 2016.