- Monetary conditions in China are easing dramatically.
- Chinese economic growth is slowing fairly dramatically.
- Neither the Chinese equity market nor the broader commodity complex seem to care that Chinese growth continues to slow – which, until very recently, was in stark contrast to trends across mainland credit markets.
- As such, we are increasingly of the view that the PBoC might be setting up to ease monetary policy over the intermediate term.
- All told, we aren’t yet ready to change our investment outlook for Chinese financial assets and/or consensus “China plays”. For additional color on what it means to be allocated to our LONG “New China” vs. SHORT “Old China” theme, please refer to our JAN 15 note titled, “ARE YOU LONG “NEW CHINA” AND SHORT “OLD CHINA” YET?”.
Monetary conditions are easing dramatically: One of the core tenets to our admittedly fickle, but decidedly positive bias on China in the YTD is our expectation that monetary conditions would ease as we progress through at least the first quarter. We’ve seen that play out in spades across money market rates and rates on fixed income securities – as evidenced by the demonstrable WoW improvement in repo rates, OIS and SHIBOR fixings. The MoM improvement in both ST and LT sovereign debt yields are also supportive.
With structural liquidity concerns remaining the biggest headwind to Chinese economic growth over the intermediate-to-long-term, any easing of monetary conditions is positive, at the margins, as the supply of incremental credit is both greater and cheaper. With almost half of Chinese GDP coming from fixed investment, the pace of credit creation and the cost of capital are arguably the two most important drivers of the marginal rate of change in Chinese economic activity.
Growth is slowing fairly dramatically: The aforementioned factor coupled with easy compares and GDP seasonality continue to underscore our positive growth outlook for China in 1H14E and the latest credit growth, foreign trade and FDI data is supportive of that view. That being said, however, China’s PMI data for JAN and FEB leave much to be desired in the direction of #GrowthAccelerating – at least on a sequential basis. The same goes for our favorite price-based leading indicators.
- FEB MNI Business Sentiment Indicator… G -1
- Current Conditions: 50.2 from 52.2
- Future Expectations: 50.6 from 57.9
- JAN Total Social Financing: 2.58T CNY from 1.23T… G +1
- New Loans: 1.32T CNY from 482.5B
- Non-traditional Financing: 993.4B CNY from 555.6B
- Ratio of Non-traditional Financing to Total: 38.5% from 45.1%
- JAN M2 Money Supply: 13.2% YoY from 13.6%... G -1
- JAN FDI: 16.1% YoY from 3.3% vs. a Bloomberg consensus estimate of 2.5%... G +1
- Shen Danyang, spokesman for the Ministry of Commerce, said "the double-digit growth provided the most solid and convincing response to doubts such as whether China still has a favorable investment environment and whether foreign investors are confident in China's economic prospects."
- FDI into the service sector gained 57% to a record high of $6.33B, or 58.8% of the total
- Manufacturing sector inflows dropped 21.7% to $3.47B
- FDI from 10 major Asian economies rose 22%
- FDI from the US rose 34.9%
- FDI from the EU fell 41.3%
- JAN ODI by non-financial firms increased 47.2% y/y to $7.23B - a sign more Chinese firms are investing abroad
- JAN Exports: 10.6% YoY from 4.3%... G +1
- Exports to the EU increased 19.2%, while exports to the US were up 10.7%. Exports to ASEAN were up 18.4%. Exports to Japan rose 16% and exports to the rest of the world increased 17.8%.
- The export strength was particularly surprising given softer January data from Taiwan and South Korea. While there was more discussion about over-invoicing, exports to Hong Kong did fall by more than 18%.
- Reuters cited comments from Ma Jiantang, head of the National Bureau of Statistics, who said that China will step up efforts to investigate and punish any cases of falsified statistics. He argued that when it comes to statistics, falsification can be considered as the biggest form of corruption. The article pointed out that the statistics bureau has previously vowed zero tolerance for fake data.
- JAN Imports: 10% YoY from 8.3%... G +1
- The strength in imports, driven by China's commodity demand (and particularly in copper and iron ore), was also surprising given the more sluggish domestic demand backdrop in recent months.
- JAN Trade Balance: $3.7B YoY from -$5.7B… G +1
- JAN HSBC Services PMI: 50.7 from 50.9… G -1
- JAN HSBC Manufacturing PMI: 49.5 from 50.5… G -1
- First contraction on this index in six months; below the flash reading of 49.6
- Employment sub-index below 50 for third straight month and showed quickest reduction of jobs since March 2009
- New export orders declined for second straight month
- Output lowest in four months
- JAN Official Manufacturing PMI: 50.5 from 51… G -1
- Lowest reading since JUL ‘13
- JAN Official Non-Manufacturing PMI: 53.4 from 54.6… G -1
- Lowest reading ever in the SA series (since MAR ’11)
*please note that some of the above commentary is sourced from StreetAccount
Neither the Chinese equity market nor the broader commodity complex seem to care that Chinese growth continues to slow: In spite of what we’d argue is a continued deceleration in Chinese economic growth in the YTD, both the Chinese equity market and the broad commodity complex have been absolutely melting up in recent weeks (the latter in accordance with our #InflationAccelerating theme). Historically, Chinese A-shares have tracked both the slope of reported Chinese economic growth and expectations for said growth quite well and we don’t have any reason to believe otherwise in this instance. The Shanghai Composite Index is up +6.9% MoM vs. an Asia-LatAm sample mean of -0.1% and the CRB Index is up +7.6% MoM aided by broad-based reflation across the individual markets.
The one market that seems to have been the last hold-out is the Chinese credit market, which has been aggressively deteriorating since NOV on the back of liquidity headwinds and growth concerns. It would, however, finally appear that credit spreads have finally inflected, though it’s far too early to tell if a sustainable trend is in place given the likely cash flow pressures perpetuated by the aforementioned ramp in borrowing costs.
As such, we think the PBoC is setting up to ease Chinese monetary policy: Tuesday’s surprise $8B repo aside, the PBoC dropping its “prudent” policy bias in favor of an easing bias would certainly seem to be an increasingly probable event over the intermediate term. That would certainly be in line with the broad economic policy loosening we’ve seen in recent weeks, including: issuing private banking licenses, relaxing capital requirements for SMEs, and loosening curbs on insurers investment portfolios among other things.
Moreover, the recent decision out of Beijing to accelerate capacity reductions in industries suffering from broad overcapacity might actually be a net positive in the sense that it frees up the PBoC to get looser, at the margins, without having to worry about reflating what it routinely identified as “excessive credit expansion” per its 4Q13 Report on Monetary Policy. Additionally, [purposeful] CNY strength and soft PPI trends (down YoY in JAN for a 23rd straight month – the longest period since 1997-99) should keep inflation under wraps for now, though those tailwinds are likely to be offset by increased import price pressures and easy compares by 2H14E at the very latest.
While an outright reduction in either the benchmark lending or deposit rates is unlikely over the next 3-6M (on hold since JUL ’12), we are increasingly of the view that the PBoC might be setting up to reduce reserve requirements or implement targeted LTV ratio adjustments. Also, extending and expanding the existing de facto “cap” on money market rates might be something they wish to explore in order to support China’s [relatively] fledgling economic expansion – which the PBoC agrees is not yet on “stable footing”.
All told, we aren’t yet ready to change our investment outlook for Chinese financial assets and/or consensus “China plays”: For additional color on what it means to be allocated to our LONG “New China” vs. SHORT “Old China” theme, please refer to our JAN 15 note titled, “ARE YOU LONG “NEW CHINA” AND SHORT “OLD CHINA” YET?”.
Best of luck out there,
Associate: Macro Team