China Macro:Jan data preview;A hard landing or a policy misstep
As in the past, China has entered a period of data vacuum due to the ChineseNew Year holidays. Important data, such as industrial production and propertyinvestment, will not be available until mid-March. For data to be released inFeb, the most closely watched one would be new bank loans, which is likelyto be very strong at RMB1.9tn (last Jan: RMB1.5tn). For the whole economy,we reckon that the industrial sector is stabilizing, while the service sectorespecially the financial industry is slowing down. Overall, the Chineseeconomy could slow to 6.6% yoy in 1Q16 from 6.8% in 4Q15.
Hard landing debate surfacing again: In the past five years, every yearthere was a point when pundits would claim that “China is having a hardlanding now.” Now the markets are under a new round of “hard landing”worries. For us, rather than attributing the recent stock rout to the economywhich is weak but shows little signs of sharp slowdown, in our view, theconfusion and disappointment toward policy is a more important factor.
A U-turn in RMB policy: In the first week of Jan, the PBoC sent out strongsignals for RMB depreciation. Then shocked by surging market volatility andcapital outflows, from the second week, the PBoC took a U-turn as its prioritysuddenly switched to RMB stability. For the sake of RMB, the PBoC evenrefrains from cutting RRR/rate, which was previously expected by markets asa positive near-term catalyst. Such a fast shift in policy has clearly confusedand spooked the markets. That said, in the past two weeks, the PBoC hassent strong signals for RMB stabilization, by setting daily fixing stronger thanthe previous closing (left chart 1). The rise of FX reserves last Oct suggeststhat, a stable RMB could help reduce capital outflows and provide a morebenign macro backdrop for months ahead (left chart 2).
Oil prices and dollar index as the two major drivers: At this moment, otherthan RMB, we also pay close attention to oil and dollar. First, slumping oilprices have caused a huge divergence in the Chinese economy. According toChina’s industrial profits data in 2015 (see the sector breakdown in the nextpage), the upstream sectors had a hard landing already, but the downstreamsectors benefited from lower commodity prices. However, the gain is notenough to offset the loss. As such, whether oil prices could rebound later thisyear would be pivotal to China’s corporate earnings growth. Second, strongdollar is another risk. One concern is that the dollar index could pick upmomentum in 2Q16 before a potential Fed hike in June. In the case, RMBwould face renewed depreciation pressure.
Strong credit growth in Jan: For Jan, we expect new bank loans to surge toRMB1.9tn. Part of the rise could go to local government platforms for a moreexpansionary fiscal policy. Partly it’s due to corporate paying down their USDdebt while refinancing with RMB loan. Due to strong credit growth, we expectM2 growth to pick up to 13.4% yoy in Jan from 13.3% in Dec despite capitaloutflows. Data from the past few months suggest that the industrial sector hasstabilized so the NBS manufacturing PMI could edge down just slightly to 49.6in Jan (Dec: 49.7). For inflation, thanks to a low base, we expect PPI deflationto narrow to -5.5% yoy in Jan and CPI inflation could pick up to 1.8% yoy. Fortrade data, we view the strong performance in Dec as a blip, expectingexports to weaken again in Jan (see left table for the detailed forecasts).
