Feet Firmly on the Gas Pedal in GBA

By Kelvin Lau

The GBA Business Confidence Index（GBAI）， which is based on quarterly surveys of over 1，000 companies operating in the Guangdong-Hong Kong-Macau Greater Bay Area （GBA） conducted in collaboration with the Hong Kong Trade Development Council（HKTDC）， shows that business confidence was off to a strong start in Q1-2021. The GBAIs “current performance” index for business activity rose further above the 50 point neutral mark to 53.0 in Q1-2021 from 50.2 in Q4-2020. This improvement came despite a seasonal slowdown in factory production and transitory COVID-19 containment measures around Lunar New Year， plus worsening profit pressure due to rising costs. Even more encouraging was the jump in the forward-looking‘expectations index， to 62.7 from the previous 54.1. The worldwide vaccine rollout likely fueled this broad-based improvement， with all eight sub-indices moving above 60. This， in our view， gives policy makers a bigger cushion when tapering off stimulus， which could weigh on growth in H2-2021.

A detailed breakdown shows continued outperformance in “manufacturing and trading”； more surprising was “retail and wholesale” coming in second， beating IT and financial services， which hints at a broadening of Chinas service sector recovery. Shenzhen and Guangzhous more developed service sectors likely contributed to their latest outperformance among other cities， in our view adding to their edge in terms of manufacturing and technology. Our thematic questions showed that respondents were most upbeat about the vaccine rollout in China and elsewhere， and were mostly concerned about higher costs and other production challenges in 2021. Over 20% of respondents are already using Renminbi trade settlements， and another 16% plan to start doing so this year. We see room for further policy relaxation to make cross-border money movement even easier.

Detailed findings of the GBAI survey for Q1-2021

The survey was conducted between early February and mid-March， allowing us to capture not only the quick normalization in production activity after the Lunar New Year， but also the evident improvement in global growth prospects thanks to vaccine rollouts， adding to an already strong domestic recovery story.

The current performance index indicates a strong start to 2021： The GBAI current performance index for business activity rose again for a third consecutive quarter to 53.0 in Q1 from 50.2 in Q4-2020. This indicates a further pick-up in momentum， building on the strong GDP growth of 6.5% in Q4， despite seasonal drags and lingering COVID-19 disruptions around the Lunar New Year. Six out of eight GBAI sub-indices rose q/q， indicating improvements across new orders， capacity utilization， investment and financing activity. “Prices of finished goods and services” was particularly strong， jumping 9.4pts to 63.8， which is consistent with improving demand， but may possibly also be due to stronger pass-through of higher costs amid rising commodity prices and component shortages. Building cost pressure helped explain the q/q fall in the “profit” sub-index （-2.1pts）.

The other sub-index that worsened in Q1 was“production/sales”， easing to 44.8 from the 47.9 previously recorded， but we see no permanent setback. The slowdown in factory production around Lunar New Year was expected； if anything， we saw an earlier-thanusual resumption of factory production this year thanks to the governments “stay put” policy， urging workers to stay in the GBA over the holidays in order to better control the pandemic. The retail sector did well during the holidays for the same reason， despite manufacturers still lagging behind （more on this later）.

Respondents are unequivocally positive towards Q2 outlook： The GBAI expectations index for business activity shot up to 62.7 after a small dip to 54.1 in Q4-2020. The strong improvement was broad-based， with all eight of its sub-indices rising above the 60 mark. The jump in“production/sales”（+11.2pts） and “new orders” （12.7pts） was particularly impressive， supported by strong demand both domestically and globally. The global reflation story， especially fuelled by the swift rollout of vaccines and an impending fresh round of fiscal stimulus in the US， has helped lift the new export orders outlook， boosting GBAs prominent manufacturing sector alongside the strong domestic recovery.

“Profit” expectations remained upbeat （62.7）， despite still-evident cost pressure based on the elevated ‘prices of finished goods/services expectations sub-index （63.6）. This is possibly a reflection of respondents confidence in passing on higher costs to customers， which is encouraging as we see Chinas monthly PPIpeaking only at c.5% y/y in Q3 （from 1.7% in February） and likely staying elevated in Q4. A robust Q2 could also make an inevitable growth normalization in H2-2021 even more pronounced； we expect Q4 growth to slow to 4-5% y/y partly due to a high base in Q4-2020， as well as clear policy intentions to taper monetary and fiscal stimulus in order to stabilize debt. We believe our GBAI prints will start converging back towards the 50 neutral mark when the global reflation story stabilizes and domestic policy tapering hits.

Financial conditions remain neutral on balance： The GBAI current performance index for credit changed little at 49.8 versus 49.6 prior. Opposing forces between the bottoming out of borrowing costs （both bank and non-bank sub-indices further dipped below 50） and easing cashflow stress （as reflected in improvements inthe willingness to lend by banks， surplus cash and receivables turnover sub-indices） largely canceled each other out， keeping the headline credit index close to the 50 point neutral mark. Our expectations index for credit， which rebounded to 53.7 from the previous 50.8， suggests that potential relief from improving cash positions（especially with the jump in the “surplus cash” expectations sub-index to 60.4） will become more pronounced in Q2， more than offsetting a likely continued rise in financing costs. Looking ahead， the breakdown shows manufacturing and financial respondents expecting a more evident rise in borrowing costs in Q2， while retail and technology respondents expect the biggest improvement in their own cash positions.

Retailers are catching up， while manufacturers remain strong： “Manufacturing and trading” was once again the clear outperformer， with the highest prints for both current performance （54.0） and expectations （63.9） among key sectors. In particular， manufacturing respondents came out on top in five of the eight current performance sub-indices， and seven of the eight expectations sub-indices， including key indices such as “production/sales”，“new orders”， “fixed assets investment”and “profit”. We have acknowledged that industrial production has been spearheading Chinas strong post-COVID recovery， and the latest GBAI confirms that factory production could remain strong in Q2 as exports benefit from the vaccine rollout elsewhere. The GBA， being Chinas manufacturing powerhouse， is well-positioned to capture a pick-up in the global recovery， in our view.

More surprising was the strong q/q increase in the “retail and wholesale” sub-index for current performance（+7.5pts） and expectations （+11.4）， making it the second-best industrial group that we tracked. The “stay put” policy over the Lunar New Year holiday likely kept migrant workers spending power in town； still， retailers strong GBAI performance is at odds with what official data for January-February suggested –that it was primarily the IT， financial services and real-estate sectors driving the service sector recovery， while consumer-related activity in the retail sector （alongside hospitality and transportation） continued to face headwinds from capacity restriction requirements. The latest GBAI readings suggest that the service sector recovery could become more broad-based in Q2 and beyond.

Shenzhen and Guangzhou retake the lead： The last time Shenzhen and Guangzhou had the highest headline scores was back in Q2-2020， when we first launched the GBAI and when Chinas post-COVID rebound was still in its nascent stages. Both cities have regained their top spot， probably reflecting the bigger cities natural competitiveness now that smaller cities are done catching up after the slower start to their recovery last year， and their inherent advantages in benefiting from the vaccine-induced export recovery and， more importantly， a broadening of the service sector rebound.

In comparison， Foshan was the clear underperformer among the mainland GBA cities after a very strong showing in Q4-2020 （albeit not as weak as Hong Kong）. The recent announcement by the Foshan government to offer financial support to tech start-ups（up to CNY 20million in funding for eligible companies） and lure talent from neighboring GBA cities is a reminder of the challenges faced by non-core GBA cities to stand out from the GBA crowd and stay competitive when attracting the right kind of companies and talent over time. In the end， Foshan is not the only GBA city that has plans to focus on developing industries such as highend equipment manufacturing， blockchain and quantum information， new energy， biomedicine and health care.

Meanwhile， Hong Kong finally showed early signs of improvement， despite remaining the worst performer in the region. While Hong Kongs current performance index for business activity remained below 40 for a fourth straight quarter， its expectations index jumped to 50.7 – consistent with economic expansion – from 38.3 prior. We believe a shallow recovery is underway. Externally， we expect Hong Kong to benefit from the improving global outlook； domestically， the unwinding of social-distancing measures since February should provide some relief. The vaccine rollout is set to pick up pace after a slow start， thanks to the recent expansion of eligibility for more age groups. We， however， expect the momentum to pick up only in H2， as headwinds from a still-rising unemployment rate could linger in the coming months.

Key takeaways from our thematic questions

Our thematic questions this time focused on： （1） how respondents see various opportunities and challenges in 2021； and （2） what their plans are for Renminbi trade redenomination and their views on the easing of crossborder money movement. We have listed our key findings below：

Opportunities on the horizon： Our first question was about the impact of various events on respondents businesses in 2021. Unsurprisingly， almost 70% of respondents see either very positive or somewhat positive implications from the large-scale vaccination rollout in China. This helps to explain the leap in the GBAI expectations indices， as the U.S. is currently on track （and China is striving） to achieve herd immunity（with avaccination rate of over 70%） by the end of this year， making border reopening and international travel a real possibility on the horizon.

Next was the E.U.-China Comprehensive Agreement on Investment（CAI， with a total of 41% positive responses）， reflecting the importance for both sides to continue pushing the deal forward after the European Union Parliament recently canceled its review meeting on the agreement. Respondents were similarly positive towards the signing of the Regional Comprehensive Economic Partnership （RCEP， 36%）， and Chinas launch of the dual circulation strategy under its 14th Five Year Plan （35%）. More uncertain was their view on what the new Biden administration will bring （26%）， with the highest share of respondents saying it was “too early to tell” （16%）. While we believe that the U.S. still views China as an economic competitor and there still may be clashes on issues such as technology and human rights， the hope is that a more multilateral U.S. approach should increase the predictability compared with that in the Trump era.

Rising costs and other supply-side challenges： The majority of respondents expressed concern about various production challenges in 2021. Those that are either very worried or somewhat worried account for over 60% of respondents， be it towards cost increases， supply shortages， labor market tightness or CNY appreciation. Interestingly， CNY appreciation not only had a higher share of “very worried“responses （22%）， but also “not worried”ones （36%）， reflecting a more varied view on the impact of currency volatility.

Median USD-CNY forecast ranges between 6.4-6.6： Speaking of the CNY， over 40% of respondents see USDCNY staying within the current range of 6.4-6.6， both by mid-2021 and the end of the year. The second highest was 6.2-6.4， with 27% predicting this for mid-2021 and 25% for the end of 2021. This slight neutral-to-appreciation bias is consistent with our view that the CNY is likely to continue to be supported by Chinas solid growth and persistent capital inflows driven by global QE and index inclusions.

Warming up to Renminbi internationalization： Our proprietary tracker for Renminbi internationalization showed a strong start to the year， reflecting broad-based improvements in the Chinese currencys usage fuelled by CNY appreciation， and more importantly， the renewed policy push from Beijing amid lingering US-China tensions. It is against this promising backdrop that we asked respondents their plans for Renminbi us- age in international trade settlements this year. 21% of respondents said they were already using Renminbi trade settlements； this beats nation-wide official data， which showed c.15% of Chinas total goods trade were settled in Renminbi in 2M-2021. Within that 21% of respondents， just over half of them expect an increase in its usage in 2021， while the majority of the rest said they expect no change. Another 16% of the total number of respondents are currently not using Renminbi invoicing for international trade， but plan to start doing so in 2021； this supports our call for a likely evident pick-up in Renminbi globalization in the coming quarters.

We also asked respondents how easy it is for them to move money into and out of mainland China. 29.6% of respondents said it was either very easy or quite easy to move money into the mainland， versus 19.3% for moving money out； this slight inbound bias matches the general perception that China has favored facilitating inflows over outflows in recent years to avoid CNY depreciation pressure. However， in both cases， more respondents see moving money across borders as being difficult than those considering it easy， and that on balance it has become more difficult， rather than easier， compared to a year ago. This reflects the plentiful room for further policy relaxation： respondents would like to see more cross-border channels （37%）， more quotas （35%）， simpler account structure requirements （23%）， and streamlined settlement processes （21%）.