A meaningful helping of China’s JUL high-frequency economic data was reported overnight/over the past few days. The key takeaways are highlighted in the bullets and tables below.
First the bad news:
- A continued deceleration in capital flows fueled a pullback in deposit growth that caused both traditional (i.e. CNY bank loans) and nontraditional (i.e. “shadow” credit) financing to slow meaningfully. Specifically, new CNY bank loans decelerated to 385.2B MoM from 1.08T prior, while shadow credit decelerated to -309.9B MoM from 535B prior. These deltas caused the total social financing figure of 273.1B CNY MoM to come in at the slowest pace of credit expansion since OCT ’08.
- Key headline indicators such as fixed asset investment, industrial production and retail sales all slowed MoM, in addition to generally exhibiting negative deviations vs. their respective 3M, 6M and 12M trends.
- On a rolling monthly basis, the PBoC has now drained a net 20B CNY from the money market, which is a dramatic reversal from inputting a net 105B into the financial system in the previous 1M period and the trailing 3M average of 87.3B in net liquidity provision.
And now the good news:
- China’s manufacturing PMI data showed considerable strength in JUL, accelerating to 51.7, which was the strongest print since APR ’12. Every sub-index accelerated MoM except gauges for supplier delivery times and employment.
- On the heels of waning commodity price pressures (click HERE and HERE for more details), CPI came in flat MoM, with headline, food and non-food inflation measures exhibiting negative deviations vs. their respective 3M and 12M trends.
- Amid a broad-based rollback of macroprudential measures at the local government level, property market stabilization continued for a second month in JUL, highlighted by the sequential acceleration in credit availability and the sequential and trend-based improvement in both land speculation and housing starts – the two key leading indicators for construction activity.
On the flip side of the aforementioned positive developments in China’s property market, we continue to see slowing growth in both current construction and completions, contracting and slowing growth in demand, slowing home price appreciation and waning readings of general market conditions.
In light of these dour trends, it remains our view that until China’s property market has regained sound footing, Chinese policymakers will continue to ease, at the margins. From a timing perspective, that’s at least 2-3M of continued loosening which should provide a boon to 3Q GDP growth alongside decelerating inflation.
On balance, this outlook for a continued 1-2 punch of “proactive” fiscal policy and “relatively loose” monetary policy should provide a meaningful tailwind to the high-beta Chinese equity market – particularly those industries exposed to fixed asset investment (i.e. “Old China”).
Simply put, in order for the Communist Party to implement its targeted structural reforms, we think it must first show face on the low-hanging fruit (i.e. the State Council’s GDP, CPI and M2 targets). While said guidance clearly does not represent “hard” targets, any material downside deviations in the context of a widespread perception of financial instability would risk undermining the party’s credibility, in our opinion.
In that light, we continue to like the iShares China Large-Cap ETF (FXI) on the long side, which has appreciated +3.4% since our 7/24 note recommending it on the long side. This compares to a sample mean of -0.7% across the 24 country-level ETFs we track across the EM space and is demonstrably outpacing the -2.7% decline for the S&P 500 SPDR ETF Trust (SPY). Looking to our Tactical Asset Class Rotation Model (details HERE), the China style factor remains the best looking secondary asset class in the global macro universe, accounting for 11 of the top 20 VAMDMI readings.
All that being said, China has by no means turned the corner from a longer-term perspective, so we are reticent to make this a best idea until we can get the first signs of confirmation that perceived tail risk is receding. Specifically, neither valuation nor sentiment are in “layup” territory, so it’s tough to “back the truck up” on Chinese shares here:
- We look at EV/TTM EBITDA ratios at the index level to account for varying levels of private sector indebtednesses across the various economies; on this metric the MSCI China Index is more-or-less fairly valued versus the MSCI US Index, while being slightly overvalued vs. the MSCI Europe Index and fairly overvalued versus the MSCI EM and MSCI Japan indices.
- In a JUL ’14 Bloomberg poll of 550+ global investors, 19% of respondents saw China as being the economy offering the best returns over the NTM. That was fourth-highest total among the eight specific economies listed.
Don’t be shy with questions if you want to dig into anything highlighted above. Have a great evening,
Associate: Macro Team