THE BAD NEWS IS OUT OF THE WAY IN CHINA

Takeaway: While this latest round of tightening measures is definitely impactful, they are not nearly as negative as we initially feared.

SUMMARY CONCLUSIONS:

 

  • China’s official Manufacturing PMI report was particularly bad “underneath the hood” (New Orders, New Export Orders and Purchasing of Inputs all down over 1ppt). As we have mentioned many times before, however, any sequential readings in Chinese (and, by extension, Asian) growth data from JAN to FEB will be distorted by the timing of the Lunar New Year festival, which was entirely in FEB this year after being a JAN event last year. We reiterate that the MAR growth figures will be the first true test of our Asian #GrowthStabilizing thesis (click here for the latest update).
  • Also announced overnight was the central government’s official response to the momentum of property price appreciation in China. On balance, this latest round of macroprudential tightening measures is definitely impactful, but not nearly as aggressive as the “hammer” we feared in our worst-case scenario.
  • All told, we still like Chinese equities on the long side w/ respect to the intermediate-term TREND duration. Encouragingly, our TREND and TAIL quantitative support levels are still intact after the recent round of policy-induced weakness. A recapture of the Shanghai Composite’s immediate-term TRADE line (2,385) would be an explicit signal that we’re going to continue to be right on China.
  • If you don’t want to take our word for it, that’s fine; Australia (both equities and currency) and CAT are two short ideas you can use to hedge, or to outright express any bearish view on China from here – which we obviously would be on the other side of (email us for our latest work on either).

 

PMI DATA DISAPPOINTS, BUT DOESN’T MATTER

This morning brought forth a great deal of PMI data out of Asia, obviously headlined by China’s manufacturing indices: FEB NFLP Manufacturing PMI: 50.1 from 50.4 vs. Bloomberg Consensus of 50.5; and FEB HSBC Manufacturing PMI: 50.4 from 52.3 vs. Bloomberg Consensus of 50.6.

 

China’s official Manufacturing PMI report was particularly bad “underneath the hood” (New Orders, New Export Orders and Purchasing of Inputs all down over 1ppt). As we have mentioned many times before, however, any sequential readings in Chinese (and, by extension, Asian) growth data from JAN to FEB will be distorted by the timing of the Lunar New Year festival, which was entirely in FEB this year after being a JAN event last year. We reiterate that the MAR growth figures will be the first true test of our Asian #GrowthStabilizing thesis (click here for the latest update).

 

THE BAD NEWS IS OUT OF THE WAY IN CHINA - 1

 

HOUSING’S “HAMMER”?

According to data from SouFun Holdings Ltd., the country’s largest real estate brokerage, Chinese home prices rose for the ninth consecutive month in FEB: +0.8% MoM from +1% MoM in JAN. This string of sequential  momentum is generally consistent with the property price data we track that comes out on a lag.

 

Also announced overnight was the central government’s official response to the momentum of property price appreciation in China:

 

  1. Increase down-payment requirements and interest rates for second-home mortgages in cities with “excessively fast” price gains;
  2. Ban real estate companies found to be engaged in hoarding land or collaborating to push up home prices from getting new development loans or raising funds from the capital markets;
  3. Implement a 20% capital gains tax whenever the original purchase price is available; and
  4. “Quicken” the expansion of the nationwide property-tax trials (authorities also imposed a property tax for the first time in the cities of Shanghai and Chongqing).

 

The first two measures are not particularly corrective and generally target only the obvious and unwanted speculative activity in the market. The second two measures, however, are indeed punitive in the sense that they may ultimately impact first-time homebuyers. Relative to our expectations as outlined on Wednesday’s Best Ideas call (email us for the replay info), this confluence of macroprudential tightening measures is somewhat aggressive.

 

They could’ve been far, far worse, however; any further outright restrictions on sales and purchases would’ve slowed overall construction-related activity and would have been very bearish for prices in the sense that price-insensitive buyers would’ve been incrementally forced out of the market(s).

 

Moreover, on the bright side of the property tax implementation, an expedient rollout backed by “unswerving” enforcement may help shore up local government finances to the extent they are still facing cash flow difficulties – which is among the core tenets of the stale China-bear thesis. Per the latest Ministry of Finance analysis, 53% of LGFV debt – which totaled 9.2 trillion CNY at the end of 2012 – will come due by year’s end. If 2012 was an indication, however, loans will continue to be rolled over. Trust us – Chinese state banks know exactly where their bread is buttered.

 

All told, we still like Chinese equities on the long side w/ respect to the intermediate-term TREND duration. Encouragingly, our TREND and TAIL quantitative support levels are still intact after the recent round of policy-induced weakness. A recapture of the Shanghai Composite’s immediate-term TRADE line (2,385) would be an explicit signal that we’re going to continue to be right on China. If you don’t want to take our word for it, that’s fine; Australia (both equities and currency) and CAT are two short ideas you can use to hedge or to outright express any bearish view on China from here – which we obviously would be on the other side of (email us for our latest work on either).

 

THE BAD NEWS IS OUT OF THE WAY IN CHINA - 2

 

As a reminder, the 12th National People’s Congress commences on MAR 5. Moreover, we expect to see a fair amount of positive headlines in the way of meaningful economic reforms. For the associated prep notes, please refer to our 2/26 note titled: “RISK MANAGING CHINA”.

 

Darius Dale

Senior Analyst


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