Macro Monday:Financial regulation weighing on property sales through rising mortgage rates

Last week, MSCI China edged up 1.5% and the IT sector surged by 5.1%,before the sharp sell-off of tech stocks in the US last Friday. Property andtech are the best performing sectors so far this year in MSCI China, both upmore than 40%. Meanwhile, A-shares rose for four days in a row from lastTuesday to Friday duo to the eased concerns on financial regulation and thehope of joining MSCI’s global indices, which would be announced on June 20.

    A-shares were rejected in the past three years but the odds seems to behigher for this year. This coming Wednesday, China will release the economicgrowth data for May (our data preview). Overall, the slowdown shouldcontinue but at a modest pace. GDP growth in on track to 6.7% yoy in 2Q17vs. 6.9% in 1Q17. But we expect it to slow to 6.6% in 3Q17.

    Rising mortgage rates on tighter liquidity: Mortgage rates have been risingrecently. While the benchmark mortgage rate has remained unchanged at4.9%, the prevailing rates have changed from 15% discount six months ago to10% premium or even more. It’s partly due to the window guidance onmortgage loans so banks have to ration credit. On the other hand, banks arefacing rising funding costs. Six months ago, banks could issue 3-monthinterbank CDs at 3% but now the cost is above 5%. Property sales have beenquite strong in Jan-April, rising by 16% yoy in terms of floor space. It’s alldriven by lower-tier cities as sales in the top-40 cities rose only 2% yoy. Givenrising mortgage rates, the headwinds for the property sector would bestronger in 2H17 and 2018. As such, while the next few weeks remain as thewindow for financial regulation, we expect that sometime in 3Q17, the focus ofpolicy would have to shift from financial regulation to supporting growth.

    Strong import data in May more a blip rather than trend: China releasedtrade data last week (our comment). Exports in May are in line with marketexpectation, rising 8.7% yoy in May (consensus: 8.0%), while imports beatconsensus by rising 14.8%. Trade balance was US$41bn, slightly down fromUS$45bn last May. The strong imports are due to an acceleration of crude oilimports (15% yoy vs. 6% in April) and the pick-up of imports from the US(27% yoy vs. 2% in April). However, with a slowing domestic economy, importgrowth is set to moderate to low single digit in 2H17.

    FX reserves up four consecutive months: FX reserves data, also releasedlast week, rose by US$24bn to US$3054bn in May. Overall, exports and FXreserves data point to a benign external environment for China and EM at thismoment, featured by the weakening US$, capital flows from DM to EM andimproved global demand.

    Continued PPI disinflation and stubbornly low CPI inflation: In May,China’s CPI inflation edged up to 1.5% yoy (consensus: 1.5%) from 1.2% inApril, while PPI inflation fell to 5.5% yoy (consensus: 5.7%) from 6.4%.

    Looking ahead, the average CPI inflation will be around 1.7% in 2H17, whilePPI inflation would continue to moderate. These data cast doubt on thecurrent global and especially the EM recovery story. In the past 18 months,China has been the major driver for global reflation, due to its impact oncommodity prices. This time, it might start leading the global disinflation cycle,which will pose significant headwinds for the EM space (our comment).