Asia Economic Weekly: China: resilient labor market puts a ceiling on further policy easing

BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 21 to 23. Analyst Certification on page 20. Valuation & Risk on page 16. 11604134Asia Economic Weekly China: resilient labor market puts a ceiling on further policy easing19 February 2016 Things to Watch Next Week Focus will be on 4Q 2015 GDP data releases by Singapore and Hong Kong. Singapore’s 4Q 2015 GDP was probably cut sharply to 1.3% yoy from flash estimate of 2.0% yoy; GDP for full-2015 likely slowed to 2.0% yoy from 2.9% yoy in 2014 (Wednesday). Hong Kong’s 2015 GDP likely stayed at 2.4% yoy (Wednesday). Malaysia’s CPI inflation likely jumped to 3.7% in Jan from 2.7% in Dec, largely due to price adjustments caused by subsidy rationalization and GST implementation last year (Wednesday). While Singapore’s CPI inflation probably stayed in negative territory on lower fuel prices (Tuesday), industrial production likely contracted 4.8% yoy in Jan, lower than the 7.9% decline in Dec (Friday). China: resilient labor market puts a ceiling on further policy easing In our view, policy makers will moderately step up counter-cyclical policy adjustments to help supplement excess capacity reduction they are promoting. The likelihood of a 2008-style policy intervention program with a substantial boost to investment remains limited, at best. We see two reasons against such a stimulus program: 1) aggregate demand growth is stabilizing at low levels; and 2) the bottom line of policy makers remains critically hinged on labor market and social stability. Our assessment is labor market has held up relatively well despite some initial evidence of slower wage growth. (H. Qiao; S. Sheng; X, Zhi; page 2) News and Views China’s Jan CPI inflation increased to 1.8% yoy from 1.6% in Dec, in line with our forecast. Bank Indonesia (BI) cut the policy rate by 25bp to 7%, as widely expected, and reserve requirements by 100bp to 6.5%. Malaysia’s 4Q GDP slowed to 4.5%, but was better than expected. (page 5) Today’s Market Movers It will be a quiet day in Asia with no major data releases. Data releases, key events EST Country Data/Event For BofAMLe Cons. Previous - - - - - - - Source: BofA Merrill Lynch Global Research, Bloomberg GEM Fixed Income Strategy & EconomicsAsia Table of Contents In Focus 2 News and Views 5 Data Preview 6 Macro Forecasts 7 Key Economic and Financial Forecasts 8 Central Bank Monitor 9 Global FX Forecasts 10 Global Rates Forecasts 11 EXD Views 12 GEM TradeBook 13 Research Analysts 24 Helen Qiao China & Asia Economist Merrill Lynch (Hong Kong) helen.qiao@baml.com Sylvia Sheng China Economist Merrill Lynch (Hong Kong) sylvia.sheng@baml.com Xiaojia Zhi China Economist Merrill Lynch (Hong Kong)xiaojia.zhi@baml.com Asia FI Strategy & EconomicsMerrill Lynch (Singapore) Alberto Ades GEM FI/FX Strategy, Economist MLPF&S alberto.ades@baml.com See Team Page for Full List of Contributors
    
        

    This is a redacted copy of the report under the same name published on Feb 19, 2016. 2 Asia Economic Weekly | 19 February 2016 In Focus Helen Qiao Sylvia Sheng Xiaojia Zhi +852 3508 3961 +852 3508 3419 +852 3508 7815 China: resilient labor market puts a ceiling on further policy easing The upside surprise in Jan credit extension and the 8-ministry suggestion on financial support for industrial sectors issued on 16 Feb prompted more questions on if China is launching (or on the way to launch) a significant policy easing package, featuring significant monetary loosening. In our view, policy makers will moderately step up counter-cyclical policy adjustments to help supplement excess capacity reduction they are promoting. We believe the likelihood of a 2008-style policy intervention program with a substantial boost to investment remains limited, at best. We see two reasons against such a stimulus program: 1) aggregate demand growth is stabilizing at low levels. China BAML ACT, our proprietary indicator, shows that growth has recovered from the trough in mid-2015 towards the end of last year on the back of a much-expected-but-delayed policy-driven mini-cycle (see report: BofAML China-ACT moderated mainly on weak electricity production, 22 Jan 2016). To warrant a major policy easing package, we believe the current data on growth would have to deteriorate further. 2) The bottom line of policy makers remains critically hinged on labor market and social stability. Our assessment is labor market has held up relatively well despite some initial evidence of slower wage growth. Before more signs of st