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State of China’s economy:Feedback from recent marketing,Sentiment turning even better

类型:宏观经济  机构:麦格理证券股份有限公司   研究员:麦格理证券研究所  日期:2017-12-07
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Over the past three weeks, we met with investors in Europe and Asia todiscuss China macro and markets. The sentiment is even better than sixmonths ago when we did the previous round of global marketing (ourtakeaways back then: Highest sentiment in two years). Investors are nolonger concerned about traditional risks such as debt, property, currency andcapital outflows. Instead the key interests include the macro outlook for 2018(the consensus is a gradual and modest slowdown), the ongoing financialtightening, the risk of inflation and rate hike, also the medium-term outlookafter the Party Congress. The note covers the main topics of conversation.

    Sentiment: Turning even better

    Sentiment is upbeat now as investors cited various reasons to stay bullish: theglobal economy is recovering in a synchronized way; The rally so far is drivenby EPS growth, so valuation is higher but not crazy; The breadth of rally is solimited that there is room for chasing laggards; The rally has concentrated onsector leaders and junk stocks haven’t moved much. The valuation for Chinafinancials and SOEs are much lower compared with their global peers; globalEM funds still underweight China and more southbound money from mainland

    China will come to HK next year…

    Interestingly, during the trip, the amount of time we spent on debt is probablythe least since 2011. The views expressed in our note, China’s Debt: Mythsand Realities, which used to be quite controversial, have become theconsensus. Also our positive RMB view, which used to receive close to 100%pushback 12months ago, has also become the consensus.

    Overall, our impression as economists is that while the consensus used to beoverly pessimistic toward China, now it is starting to turn a bit too optimistic.But we could be too sobering as the sentiment is still far from being extremeand could move even higher. Toward the year end, financials is a consensusbuy to park the cash, due to reasonable valuation and solid earnings, whilesome look to rotate into late-cycle names such as utility and consumerstaples, or even small caps at some point next year.

    Economy: What the market could miss

    Consensus at year-end often gets wrong the most important thing for the yearahead. At the end of 2015, the consensus was expecting a further slowdownor even a hard landing for China. But it turns out that at that time China wasjust under recovery with a new earnings up-cycle ahead. At the end of 2016,the consensus was expecting further depreciation of the RMB against theUS$. But it turns out that the RMB has strengthened against the US$ in 2017.The reversal underpins the EM bull run this year as the RMB is the anchor ofthe whole EM currency space.

    At this point, what could the consensus miss? In our view, the most likelycandidate is the downside risk from infrastructure investment, which grewmuch faster than other investments in the past five years. Back in 2012,infrastructure investment was 60% of manufacture investment and 80% ofproperty investment. In 2017, it’s 90% of manufacturing investment and 20%larger than property investment. (To be continued on the next page)

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