Macro Monday:A macro sweet spot
End of the V-shaped 1Q16: Last week H-shares gained 1.6% while A-sharesadvanced 1.0%. The RMB strengthened to a 3.5-month high against the US$.
Meanwhile, short-term liquidity tightened last Friday due to quarter-end cashdemand, which weighed on the stock market. The past 1Q16 will beremembered as a dramatic V-shaped recovery. The first six weeks wereharsh, but markets have rebounded since then. The RMB ended the quarterrising 1% against the US$, despite its depreciation in the 1st week of 2016which shocked the global markets.
A macro sweet spot: For China, this moment is a macro sweet spotregarding the economy and currency. At the year-beginning, the fear was thata hard landing had already happened and currency depreciation wouldaccelerate. As such, street analysts rushed to cut their GDP and RMBforecasts. Over the past couple of weeks, the tide has turned and analystsstarted revising up forecasts. What has happened and how long will it last?Economy: A mini up-cycle: As we discussed in our 2016 outlook, theoverarching theme this year is the power transition in 2017. As such, 2016 willbe another year of mini-cycle and policy makers would do whatever it takes todeliver this year’s growth target. The growth headwinds were indeed strong atthe beginning of the year and thereby the policy stimulus was ramped up in ashort time. As a result, incoming data have started showing signs ofstabilization. Last Friday, NBS manufacturing PMI jumped to 50.2 (Feb: 49.0),above 50 for the first time since last July. Other macro data for March wouldimprove as well, not only due to policy but also to a low base (data preview).
Notably, coal consumption at major IPPs has rebounded sharply (Fig 17),boding well for a recovery in industrial sector growth.
How long could the recovery last? Our view is that the current recovery ismore like a temporary uptick like 4Q12 or 3Q13, rather than a V-shapedrecovery like 2009. Policy makers will unlikely over-stimulate this time. In2009, they doubled the M2 growth in 12 months but this time, they willcarefully contain the M2 growth in a narrow range of 13-14%. Moreover, therecovery in the past months seems to be more driven by inventory restockinginstead of real demand. Although steel prices have rallied, cement prices,which are less subject to inventory stocking, have been much weaker thanthat. As such, we expect 1Q16 GDP growth (due on 15 April) to come in at6.7% yoy. For 2Q16, most likely China will continue to grow 6.7%. It might notsound too exciting, but it’s probably still better than what the markets havepriced in at this moment. While the S&P has fully recovered the losses, Hsharesare still 8% lower than at the beginning of the year.
Currency and capital flows: We see the trajectory of RMB mainly dependson the strength of the US$. In 1Q16, the dollar index weakened, which helpedease the depreciation pressure for the RMB. Looking ahead, if the dollarregains strength, the RMB will depreciate again. While acknowledging theuncertainty for currency, we expect the fear on China’s capital outflows toease in quarters ahead. The reason is simple: hot money is not unlimited.
Seven quarters have passed since China saw capital outflows in 3Q14. If hotmoney is really “hot”, it should have left already. For example, Chinaborrowed $345bn loans between 1Q09 and 2Q14, but repaid $278bn between3Q14 and 4Q15. As such, the momentum for outflows would ease down theroad.
