26 April 2012

Macro Asian Economics

abc
Global Research

Chart of the Week

Asias roaring debt cycle

Forget deleveraging. Asia is confidently striding in the other direction. Debt is piling up. Growth is driven by credit. And on the streets of the regions capitals, the levity of leverage is all too palpable. In many ways, thats a good thing. The region should be adding extra zing to its growth to help the rest of the world out of its slump. Reassuringly, there are no signs that Asias debt splurge will come to an imminent end. Liquidity is still ample. Savings are high. And global interest rates are unlikely to rise any time soon. Even the Eurozone crisis last year, suspended at least for now by the ECBs liquidity injection, only slowed, but didnt derail, Asias debt train. With productivity gains slowing, and profits as a result looking a little wobbly as well, questions will eventually be raised over how all that borrowing may be repaid. The region has a few more years of growth in it. But leverage, as the rest of the world is currently finding out, has two sides. And not both of them pretty.

I love deadlines. I like the whooshing sound they make as they fly by. Douglas Adams

Frederic Neumann Economist The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2822 4556 fredericneumann@hsbc.com.hk Tushar Arora Economics Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

You may have seen the chart before. But well show it to you again. It simply tells the story best. The chart traces the average credit to GDP ratio for the region. Look back to the early 1990s. At the time, the US economy slipped into recession and the Japanese bubble popped. As a result, the Fed and the BoJ cut rates and kicked off an Asian credit cycle in the process. Leverage swiftly rose, dragging up growth along with it, until the bust of 1997. Debt was
Chart 1: On the rise again: bank credit to GDP ratio (%, simple average)
105 100 Asian Financial Crisis

leverage
95 90 85 Global 80 75 Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Credit to GDP ratio Asia ex J
Source: CEIC, HSBC

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Financial C risis Mar-11

Asia ex JP ex CH

Macro Asian Economics 26 April 2012

abc

subsequently unwound in a painful process that took many years to complete. Since about 2006, the bank credit to GDP ratio started to rise again, only this time even more rapidly than before, firing up local demand once again and helping the region to sail through the Global Financial Crisis with only minor scars. Now, the aggregate leverage ratio is nearly where it stood at its peak in 1997.
Chart 2: Not all countries did it: credit to GDP ratio (%, phase 1 = 1Q 1992 2Q 1997, phase 2 = 1Q 2008 until latest)
40 35 30 25 20 15 10 5 0 -5 CH* HK IN ID SK P has e 1
Source: CEIC, HSBC; NB: China phase 1 from 1Q 1993 to 2Q 1997

MY P has e 2

PH

SG

SL

TW

TH

Clearly, there are notable differences among countries. Our second charts shows the change in the credit to GDP ratio in the run-up to the Asian Financial Crisis (phase 1) and over the latest leverage cycle starting in 1Q 2008 (phase 2). A number of economies have not splurged as much as before, notably the Philippines, Taiwan, Thailand, Malaysia, and Indonesia (note, however, that in Malaysia, Thailand, and Taiwan the rise in phase 2 is still substantial). By contrast, China, Hong Kong, and Singapore, have seen a much faster rise in the bank credit to GDP ratio. India and Sri Lanka have also seen relatively brisker credit growth in phase 2, but the build-up in debt here is more muted in the regional context. Despite the gathering Eurozone crisis, Asias banks hardly paused for breath since the middle of 2011. Sure, credit growth slowed, but the expansion remains fairly brisk. Our third chart shows the annual growth rate in bank lending for the region. Hardly a collapse: credit is clearly expanding still rapidly in Asia.
Chart 3: Bank lending growth (% y-o-y)

25 20 15 10 5 0 -5 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Asia x Jn (simple average)

Source: CEIC HSBC

Asia x JN & Ch (simple av erage)

Macro Asian Economics 26 April 2012

abc

Chart 4 shows recent credit growth trends for individual markets, comparing the latest available growth rate with January of 2011. In Indonesia, Korea, the Philippines, Singapore and Sri Lanka bank lending is now expanding at a faster clip than the previous years. In China, Hong Kong, India, and Malaysia, the pace is somewhat slower, but bank lending continues to expand even here by solid double digits. Only in Taiwan and Thailand has bank lending growth slowed markedly, although in the latter at least, this may partly reflect the disruption of the floods, which temporarily choked both growth and the financial system.
Chart 4: Bank lending growth still brisk across the region (% y-o-y)
30 25 20 15 10 5 0 CH HK IN ID KR MA Jan-11
Source: CEIC, HSBC

PH Latest

SG

SL

TW

TH

How far can the process extend? Quite a bit longer, actually. Even if the regional credit to GDP ratio is back near its 1997 peak, that doesnt mean it cant rise further. In fact, one would expect it to continue to climb given that Asia is now a lot more affluent than in the mid-1990s, and richer economies can sustainably carry a higher debt burden. Moreover, virtually all Asian markets run current account surpluses nowadays (even if they are falling, especially in China), implying that leverage can still be financed through local savings, rather than capital inflows, rendering the whole process a lot more stable. Lastly, Asian banks are still awash with liquidity. Our last chart shows the regional loan to deposit ratio, which, though climbing, is nowhere near its 1997 peak. Plenty of cash to go around therefore, and leverage may continue to rise for some time. But make no mistake, at some point that process could reverse. The Wests current travails are not unique.
Chart 5: Still plenty of liquidity: loan to deposit ratio climbing in Asia, but well below 1997 peak (%)
115 110 105 100 95 90 85 80 75 Apr-90 Apr-94 Apr-98 Apr-02 Apr-06 Asia ex JN & CH (simple av g.) Apr-10

Asia ex JN (simple av g.)

Source: CEIC, HSBC

Macro Asian Economics 26 April 2012

abc

HSBC Main forecasts

___________ Real GDP (%) ____________ 2011 2012f 2013f Australia New Zealand China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Asia Asia. Ex CN Asia. Ex JP Asia. Ex. JP & CN
Source: HSBC, CEIC

___________CPI (ave, % yr ____________ 2011 2012f 2013f 3.4 4.0 5.4 5.3 8.1 5.4 -0.3 4.0 3.2 4.7 5.2 6.7 1.4 3.8 18.6 3.6 2.6 5.5 5.6 2.5 2.0 2.9 5.3 7.2 5.6 -0.4 3.4 2.6 3.5 4.1 5.9 1.3 3.4 11.0 2.5 2.2 3.9 5.0 3.2 3.0 2.6 4.8 6.7 6.3 -0.1 3.5 3.1 5.2 2.1 7.6 2.2 3.8 9.8 2.4 2.3 3.7 5.0

_________ FX vs. USD (end) __________ 2011 2012f 2013f 0.98 0.77 6.30 7.77 53.3 9,068 81 1,153 3.16 43.6 1.30 114.0 30.3 31.5 21,034 n.a. n.a. n.a. n.a. 0.95 0.73 6.18 7.80 49.0 8,850 74 1,080 2.93 41.3 1.20 125.0 28.5 29.2 21,500 n.a. n.a. n.a. n.a. 0.95 0.72 6.06 7.80 49.0 8,450 72 1,040 2.74 40.4 1.16 127.0 27.6 27.6 21,500 n.a. n.a. n.a. n.a.

2.0 1.4 9.2 5.0 6.7 6.5 -0.7 3.6 5.1 3.7 5.0 8.3 4.0 0.1 5.9 4.6 2.0 7.3 5.0

3.3 2.4 8.6 3.3 7.5 6.1 1.0 3.1 3.7 4.4 2.6 6.5 2.4 5.5 5.7 5.0 3.0 7.0 5.1

3.5 3.4 8.8 5.2 8.2 6.5 0.5 3.7 5.3 5.2 5.8 7.4 5.7 4.5 6.1 5.2 3.2 7.5 6.1

Chart 1: Real GDP (% y-o-y, nominal USD weights)

Chart 2: CPI (% y-o-y, simple averages)

12 8 4 0 -4 -8 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Asia Asia x J Asia x C Asia x C& J

Chart 3: Exports (% y-o-y, nominal USD weights)

15 10 5 0 00 01 02 03 04 05 06 07 08 09 10 11 12 Asia x J ASEAN NIEs

Chart 4: Asia x Japan (simple averages)

40 20 0 -20 -40 00 01 02 03 04 05 06 07 08 09 10 11 12 Asia x J Asia x C Asia x C&J

Source: HSBC, CEIC

20 15 10 5 0

10 8 6 4 00 01 02 03 04 05 06 07 08 09 10 11 12 M2 supply (% y r, LHS) Policy rate (% RHS)

Source: HSBC, CEIC

HSBC Policy rate forecasts (% end)

4Q-11 Australia New Zealand China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Sri Lanka Taiwan Thailand Vietnam
Source: HSBC, CEIC

HSBC Asia equity market recommendations

3Q-12f 4.00 2.75 6.31 0.50 7.75 5.75 0.05 3.25 3.00 4.00 0.40 9.75 1.875 3.00 11.00 4Q-12f 4.00 3.00 6.31 0.50 7.75 5.75 0.05 3.50 3.00 4.00 0.40 9.75 2.000 3.25 10.00 1Q-13f 4.25 3.25 6.31 0.50 7.75 6.25 0.05 3.50 3.25 4.25 0.40 10.00 2.125 3.50 9.00 Market China Korea Taiwan Hong Kong India Singapore Malaysia Indonesia Thailand Philippines Current HSBC Previous HSBC Rel 3M End-2012 recommendation recommendation Performance target Over Neutral Over Neutral Over Under Neutral Under Under Under Over Under Over Neutral Neutral Over Neutral Neutral Under Under -2.5% 2.5% -0.4% 2.0% -2.6% 3.5% -0.6% -7.7% 8.2% 6.6% 68 2,150 9,100 24,000 19,300 3,100 1,700 4,300 1,200 4,700

1Q-12 4.25 2.50 6.56 0.50 8.50 5.75 0.05 3.25 3.00 4.00 0.40 9.00 1.875 3.00 13.00

2Q-12f 4.00 2.50 6.31 0.50 8.00 5.75 0.05 3.25 3.00 4.00 0.40 9.75 1.875 3.00 12.00

4.25 2.50 6.56 0.50 8.50 6.00 0.05 3.25 3.00 4.50 0.39 8.50 1.875 3.25 14.00

Note: Relative performance w.r.t. MSCI Asia ex Japan index. Rel 3M and 12 M perf as of 19 Apr 2012. Source: HSBC, Datastream

Macro Asian Economics 26 April 2012

abc

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Frederic Neumann

Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 2 3 This report is dated as at 26 April 2012. All market data included in this report are dated as at close 25 April 2012, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

Macro Asian Economics 26 April 2012

abc

Disclaimer
* Legal entities as at 04 March 2011 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation The Hongkong and Shanghai Banking Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC Securities (Canada) Corporation Limited Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; Level 19, 1 Queen's Road Central 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; Hong Kong SAR JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Telephone: +852 2843 9111 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telex: 75100 CAPEL HX Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Fax: +852 2801 4138 Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC Securities SA, Athens; HSBC Bank plc, Website: www.research.hsbc.com London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch The Hongkong and Shanghai Banking Corporation Limited (HSBC) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (FSCMA). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In the UK this material may only be distributed to institutional and professional customers and is not intended for private customers. It is not to be distributed or passed on, directly or indirectly, to any other person. HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC is authorized and regulated by Secretara de Hacienda y Crdito Pblico and Comisin Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisin Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreo, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). Any recommendations contained in it are intended for the professional investors to whom it is distributed. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of HSBC only and are subject to change without notice. The decision and responsibility on whether or not to invest must be taken by the reader. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of any companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform banking or underwriting services for or relating to those companies. This material may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. (070905) Copyright 2012, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 038/04/2012, MICA (P) 040/04/2011 and MICA (P) 206/01/2012

abc

Global Economics Research Team

Global
Stephen King Global Head of Economics +44 20 7991 6700 stephen.king@hsbcib.com Karen Ward Senior Global Economist +44 20 7991 3692 karen.ward@hsbcib.com Madhur Jha +44 20 7991 6755 madhur.jha@hsbcib.com

Global Emerging Markets

Pablo Goldberg Head of Global EM Research +1 212 525 8729 pablo.a.goldberg@hsbc.com Bertrand Delgado EM Strategist +1 212 525 0745

bertrand.j.delgado@us.hsbc.com

Emerging Europe and Sub-Saharan Africa

Murat Ulgen Chief Economist, Central & Eastern Europe and sub-Saharan Africa +44 20 7991 6782 muratulgen@hsbc.com Alexander Morozov Chief Economist, Russia and CIS +7 495 783 8855 alexander.morozov@hsbc.com Artem Biryukov Economist, Russia and CIS +7 495 721 1515 artem.biryukov@hsbc.com Agata Urbanska Economist, CEE +44 20 7992 2774 Melis Metiner Economist, Turkey +90 212 376 4618

Europe & United Kingdom

Janet Henry Chief European Economist +44 20 7991 6711 janet.henry@hsbcib.com Simon Wells Chief UK Economist +44 20 7991 6718 simon.wells@hsbcib.com Astrid Schilo +44 20 7991 6708 Germany Lothar Hessler +49 21 1910 2906 France Mathilde Lemoine +33 1 4070 3266 astrid.schilo@hsbcib.com

lothar.hessler@hsbc.de

agata.urbanska@hsbcib.com

mathilde.lemoine@hsbc.fr

melismetiner@hsbc.com.tr

North America
Kevin Logan Chief US Economist +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang +1 212 525 3181 ryan.wang@us.hsbc.com

Middle East and North Africa

Simon Williams Chief Economist +971 4 423 6925 Liz Martins Senior Economist +971 4 423 6928

simon.williams@hsbc.com

liz.martins@hsbc.com

Asia Pacific
Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.com.au Donna Kwok +852 2996 6621 Trinh Nguyen +852 2822 6975 Ronald Man +852 2996 6743 Luke Hartigan +612 9255 2635 Sun Junwei +86 10 5999 8234 Sophia Ma +86 10 5999 8232 donnahjkwok@hsbc.com.hk trinhdnguyen@hsbc.com.hk ronaldman@hsbc.com.hk lukehartigan@hsbc.com.au junweisun@hsbc.com.cn xiaopingma@hsbc.com.cn

Latin America
Andre Loes Chief Economist, Latin America +55 11 3371 8184 andre.a.loes@hsbc.com.br Argentina Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Ramiro D Blazquez Senior Economist +54 11 4348 5759 Jorge Morgenstern Senior Economist +54 11 4130 9229 Brazil Constantin Jancso Senior Economist +55 11 3371 8183 Mexico Sergio Martin Chief Economist +52 55 5721 2164 Claudia Navarrete Economist +52 55 5721 2422 Central America Lorena Dominguez Economist +52 55 5721 2172

ramiro.blazquez@hsbc.com.ar

jorge.morgenstern@hsbc.com.ar

constantin.c.jancso@hsbc.com.br

sergio.martinm@hsbc.com.mx

claudia.navarrete@hsbc.com.mx

lorena.dominguez@hsbc.com.mx