Below is an excerpt from an institutional research note written by Hedgeye Senior Macro analyst Darius Dale on 4/25. In it, Dale explains why Beijing is pulling back on monetary and fiscal easing that stoked a property bubble. As a result, we see continued deceleration in "Chinese economic growth over the next 2-3 quarters."
*If you're an institutional investor email sales@hedgeye.com to read this entire research note.
KEY TAKEAWAYS:
- Our models continue to signal deceleration with respect to Chinese economic growth over the next 2-3 quarters.
- Despite this, we continue to see little-to-no risk of a so-called “hard landing” over the intermediate term as a function of recent policy developments.
- That being said, however, China’s economic acceleration was a major driver of reflation over the past ~5 quarters and transitioning from an overwhelmingly positive contributing factor to merely neutral is unequivocally bearish in our framework.
We continue to view the balance of risks surrounding Chinese economic growth as overwhelmingly skewed to the downside with respect to the intermediate term. That being said, however, risk of a “hard landing” appears rather limited from our purview – a view we’ve wholeheartedly maintained for many, many years.
Beijing created what we continue to view as an “un-comp-able comp” with the onslaught of fiscal and monetary easing it implemented throughout 2016. We will continue to cite the ongoing property bubble and reduced GDP target as the #1 and #2 reasons for the Beijing’s curtailed desired to stimulate in 2017.
With respect to the former, house price appreciation in first and second tier cities is tracking up +16.9% YoY and +13.2% YoY, respectively, as of MAR. While down from their 2016 peaks of +31.5% YoY and +14.6% YoY, respectively, those readings are in still in the 82nd and 94th percentile of historical readings (trailing 10Y) and, more importantly, far outpacing urban disposable personal income growth of +6.3% YoY.
The second such reason is secular in nature. Because Beijing appropriately took advantage of the Federal Reserve’s dovish policy pivot(s) last year by unleashing tremendous amounts of fiscal and monetary easing into the mainland economy over such a compressed period of time, much of that stimulus naturally flowed back into “Old China” sectors and this is something that we continue to see in the data with nominal GDP growth in China’s secondary industries accelerating in a straight line from a secular trough of +0.9% YoY in 4Q15 to an unsustainable +14.2% YoY in 1Q17.
Indeed, China’s fixed investment and manufacturing economy accounted for an equally unsustainable 45.4% of China’s nominal GDP growth on a trailing four-quarter basis – the highest rate since 3Q11.
Our models continue to signal deceleration with respect to Chinese economic growth over the next 2-3 quarters. Despite this, we continue to see little-to-no risk of a so-called “hard landing” over the intermediate term as a function of recent policy developments.
That being said, however, China’s economic acceleration was a major driver of reflation over the past ~5 quarters and transitioning from an overwhelmingly positive contributing factor to merely neutral is unequivocally bearish in our framework – especially considering China's outsized demand for raw materials.
*If you're an institutional investor email sales@hedgeye.com to read this entire research note.
