State of China’s economy:Feedback from recent marketing,Sen

2019-09-19 作者:科创板   |   浏览(67)

Over the past three weeks, we met with investors in Europe and Asia todiscuss China macro and markets. The sentiment is even better than sixmonths ago when we did the previous round of global marketing (ourtakeaways back then: Highest sentiment in two years). Investors are nolonger concerned about traditional risks such as debt, property, currency andcapital outflows. Instead the key interests include the macro outlook for 2018(the consensus is a gradual and modest slowdown), the ongoing financialtightening, the risk of inflation and rate hike, also the medium-term outlookafter the Party Congress. The note covers the main topics of conversation.

The note includes our updated macro views, Aug data forecasts and amonthly macro chartbook.

    Sentiment: Turning even better

    We maintain the view that China’s economy is at the late-cycle, asdiscussed in last month’s State of China’s economy, after receiving the Julydata (China’s economy in 15 charts), as well as the high-frequency data inAug. Nominal GDP growth bottomed in 4Q15, after we called the U-shapedrecovery in Aug 15. The subsequent recovery peaked in 1Q17 and has had avery slow slowdown since then, thanks to the property sector and the externaldemand. Over the process, expectations have been much more volatile thanfundamentals, as shown by the roller coaster in iron ore price (Fig 25 inside).

    Sentiment is upbeat now as investors cited various reasons to stay bullish: theglobal economy is recovering in a synchronized way; The rally so far is drivenby EPS growth, so valuation is higher but not crazy; The breadth of rally is solimited that there is room for chasing laggards; The rally has concentrated onsector leaders and junk stocks haven’t moved much. The valuation for Chinafinancials and SOEs are much lower compared with their global peers; globalEM funds still underweight China and more southbound money from mainland

    For next year, we are more cautious than consensus, expecting China’s GDPgrowth to slow to 6.0% in 2018 from 6.8% in 2017.

    China will come to HK next year…

    For Aug, we expect the growth data to remain steady and both the CPIand PPI inflation to edge higher. Before the 19th Party Congress which willstart from 18 Oct, policy makers will do whatever it takes to maintain stability.

    Interestingly, during the trip, the amount of time we spent on debt is probablythe least since 2011. The views expressed in our note, China’s Debt: Mythsand Realities, which used to be quite controversial, have become theconsensus. Also our positive RMB view, which used to receive close to 100%pushback 12months ago, has also become the consensus.

    However, entering September, the uncertainties from the global side couldrise, including the Germany election, the US debt ceiling, the FOMC meeting,the ECB meeting as well as the ever-lingering geopolitical risk from NorthKorea. As such, the market volatility could rise after the summer lull.

    Overall, our impression as economists is that while the consensus used to beoverly pessimistic toward China, now it is starting to turn a bit too optimistic.But we could be too sobering as the sentiment is still far from being extremeand could move even higher. Toward the year end, financials is a consensusbuy to park the cash, due to reasonable valuation and solid earnings, whilesome look to rotate into late-cycle names such as utility and consumerstaples, or even small caps at some point next year.

    Limited near-term risks from China… Overall, the macro backdrop forChina remains supportive near-term. Unsurprisingly, earnings data for 1H17looks great, as this period coincides with the peak of this round of recovery.

    Economy: What the market could miss

    Banks look good for now, as their earnings growth, which bottomed in 4Q16,lags one year behind the recovery. Moreover, improved corporate earningsand cash flows lower the concerns on asset quality and bad debt. All thesemake the rally this time much healthier compared with the one in 2015. As theParty Congress approaches, policy makers refrain from staging another roundof regulatory storm like the one this spring. With the eased liquidity pressure,the A-shares market had its best month of this year by rising 3% in Aug. Oneconcern from investors is that Rmb2.3tn of interbank CD is to mature in Sep.

    Consensus at year-end often gets wrong the most important thing for the yearahead. At the end of 2015, the consensus was expecting a further slowdownor even a hard landing for China. But it turns out that at that time China wasjust under recovery with a new earnings up-cycle ahead. At the end of 2016,the consensus was expecting further depreciation of the RMB against theUS$. But it turns out that the RMB has strengthened against the US$ in 2017.The reversal underpins the EM bull run this year as the RMB is the anchor ofthe whole EM currency space.

    But it is not very likely to cause too much market turbulence, as the PBoCwould try its best to maintain a stable liquidity environment.

    At this point, what could the consensus miss? In our view, the most likelycandidate is the downside risk from infrastructure investment, which grewmuch faster than other investments in the past five years. Back in 2012,infrastructure investment was 60% of manufacture investment and 80% ofproperty investment. In 2017, it’s 90% of manufacturing investment and 20%larger than property investment. (To be continued on the next page)

    … but substantial medium-term risks: On one hand, the economy couldcontinue to slow in the next 12 months as we mentioned above. Moreimportantly, after the Party Congress, this round of political business cycle,which has supported growth in the past two years, will end and the economywill enter uncharted waters. The market has been very familiar with the minicyclemode since 2012, but it’s unclear whether it will continue for the nextfive years. The first signal should come from the Central Economic WorkConference this Dec, which would set the growth target for the next year.

    Positive outlook for the RMB: While we are cautious about the economy,we are positive on the RMB. The RMB has strengthened 4.5% against theUS$ in the past three months, thanks to the weak US$ and the new “countercyclical”factor. We see uncertainties in the near term as the US$ seems oversold.

    But for the next 12 months, we remain positive toward the RMB, mainlydue to eased depreciation expectations and improved capital flows. We justpublished a note titled Will Yuan hit 6.4 against US$, in which we discussedour outlook for the RMB. (Please see next page for Aug data preview)

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