Phat dragon

a weekly chronicle of the Chinese economy

28 April 2011

• Auto sales have had a mixed beginning to the year. After a robust
January, Phat Dragon’s seasonally adjusted sales estimates have Auto sales, imports and production
decelerated in both February and March, pushing the 3mma of
year-ended growth down to a paltry 8%. The average growth rate %yr %yr
150 300
through 2009 and 2010, which includes some negatives from the
125 Sales (lhs) 250
early months of 2009, was 41%. Domestic production trends are
100 Domestic output (lhs) 200
not dramatically out of line with sales though, indicating that any Imports (rhs)
inventory build will not be spectacular. Indeed, domestic output is up 75 150
7% as of March, suggesting quite nimble decision making across the 50 100
fragmented industry. Imports are another question entirely of course.
25 50
Imports were up 45% as of March. While some foreign suppliers have
reasonable claims to grow market share from a low base, it is not 0 0
plausible to think that overall imports can maintain this high altitude -25 Sources: CEIC, Westpac Economics.
Imports averaged 4½% of sales in 2010.
-50
path if the overall market were to remain subdued. 2011 is looking -50 -100
like a consolidation year for autos amid the multi decade trend of Jan-05 Jan-07 Jan-09 Jan-11
structural uplift - and Phat Dragon wonders what the world’s major
producers have got pencilled into their sales plans?

• Recent data on US housing turnover have shown an unusually Housing sales by region
high proportion of all cash (about a third) and distressed (40%, not
mutually exclusive of cash) sales. Anecdotal reports out of California 200
%yr %yr
200
indicate a heightened amount of Chinese interest in local property, 175 Centre 175
mainly in the $US1-2 million range: and the buyers almost without 150 East 150
exception pay cash. Phat Dragon’s take? If what one hears over 125 West 125
scotch and Cubans is to be believed, everybody with means is doing 100 100
it - and not just in the US market either. Jones is not a common 75 75
name on the Mainland, but the pursuit of bragging rights is universal. 50 50
25 25
• Checking in on real estate, the Mainland’s two largest developers, 0 0
Vanke and Evergrande, have reported respectable, if slowing -25 Sources: CEIC, Westpac Economics. -25
earnings growth of late. Both firms have been able to pursue a -50 -50
successful strategy of targeting new markets away from the Tier 1 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
cities, where policy restrictions are less severe. 95% of Evergrande’s
new projects are in 2nd or 3rd Tier cities, while Vanke’s strength in
Tier 3 locales is well known. It is the smaller developers focussed
solely on the investor market in Tier 1, reliant on bank loans and
sales revenue for finance, who are set to take the brunt of any Contributions to global patent filings growth
slowdown in the housing space. As if to emphasize its separation
from these firms, Evergrande has pursued an offshore bond raising. ppt cont. ppt cont.
10 10
It has $US1.3 billion set to mature in 2015. Phat Dragon’s forecasts
8 ROW China 8
imply one fifth of that obligation will be paid off outright by currency Korea Germany
appreciation. 6 6
Japan USA
4 4
• World Intellectual Property Organisation data indicates that country 2 2
of origin global patent filings rose 5.5% in 2010. Chinese filings rose 0 0
55.6%, to reach 7.5% of the total, leapfrogging Korea to grab fourth -2 -2
place overall. The US remains #1 ahead of Japan and Germany. -4 -4
Here is a stunning, perhaps shocking comparison for those keen to -6 Sources: WIPO, Westpac.
-6
Contribution to full year growth.
pigeonhole China: it contributed 28% of world GDP growth in 2010
-8 -8
and 51% of the growth in patent filings. Foreigners relocating R&D 2007 2008 2009 2010
facilities to the Mainland with local JV partners ready to leverage
the ‘imported’ innovation are driving this trend. Phat Dragon, who • Stats of the week: The average value of cars imported by China
filed on four continents last year, said the following on Dec 15: in 2009 was $US35k, versus an average value of $US7k for
“Note to firms everywhere: don’t get complacent about competitive Chinese car exports* *(thanks Markus).
advantages over Chinese firms based on technology gaps”.

Westpac Institutional Banking Group – Economic Research – economics@westpac.com.au – www.westpac.com.au

Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because
of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac’s financial services guide can be obtained by calling 132 032, visiting www.
westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy
or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation
to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by
The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail,
fax or mailing list please send an e-mail to economics@westpac.com.au or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax
number and company details on all correspondence. © 2011 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character.
Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The
ultimate outcomes may differ substantially from these forecasts.