麥格里資本中國經濟報告：房地產和美聯儲2大支柱繼續……重申中國房地產非泡沫是錯配

1、Macro backdrop turning more volatile:China』s economy in 2017 has been

quite different from that in 2014-16. While it exhibited a one-way movement in

the past three years (down in 2014-15 and up in 2016), it has become more

volatile this year. For instance, iron ore price, a good barometer of China』s

economy, jumped 20% in Jan and Feb, slumped 40% in the next three

months, then surged 30% again. Unsurprisingly, the client enquiries we

received recently concentrate on the upside risks (also see our latest

marketing feedback: Highest sentiment in two years). However, with such a

macro backdrop, investors should be cautious in extrapolating the existing

trend, and trading opportunities often arise when markets run ahead of

fundamentals. Regarding where we are in the cycle, we believe that the

rebound since June is a short-lived one amid a broad slowdown. The

recovery has already peaked in 1Q17 even though the pace of

deceleration could vary from time to time.

2、 That said, two macro pillars of the market remain supportive for now:

The H-share market has been supported by two macro pillars: China property

and the Fed. On the domestic side, the stronger-than-expected housing

market not only made property stocks the best performer in MSCI China in

July and year-to-date (Fig 2-3 inside), but also drove the performance for

materials and consumer discretionary such as auto and home appliances. On

the external side, the Fed has been accommodative as it seems confused by

the soft CPI inflation numbers. Abundant liquidity has fuelled the rally in tech

stocks in the US market, which has led to a rerating of China tech names. At

this moment, these two pillars remain constructive. While the housing market

in tier1/2 cities is cooling, that in tier 3/4 cities still runs steady. Meanwhile, the

next FOMC meeting is 7 weeks away on Sep 19-20. Looking ahead, cooling

of China』s property market and a tightening of the Fed policy are the two

major risks for the market. And these two could happen together.

3、Eased liquidity concerns supportive to risky assets in mainland:

Regarding Onshore China, liquidity has been the single most important driver.

The correlation among stocks, bonds and commodities have risen to new

highs this year, as they are all driven by liquidity considerations. Meanwhile,

H-shares, which are driven by global instead of domestic liquidity, have vastly

outperformed A-shares. Moreover, in the A-share market, liquidity concerns

lowered the risk appetite and caused large caps to outperform small caps.

That said, such concerns have eased since June and stocks, bonds and

commodities have rebounded together. Looking ahead, we expect liquidity

conditions to improve modestly in 2H17 vs. 1H17, as policy makers have to

be more careful in tightening in the run-up to the Party Congress. However,

they would not ease too much either given the current state of the economy.

In addition, the National Financial Work Conference shows that top leaders

have a more sobering understanding on the limitation of financial reforms (see

our takeaways: Financial Work Conference: More significant than it looks).

(Please see next page for our discussions on growth, inflation, trade and

property and the July data forecasts.)

4、Expect a modest slowdown in July:GDP growth stayed flat at 6.9% yoy in 2Q17, beating consensus at 6.7%. Nominal GDP grew 11.4% yoy in 1H17, the best half since 2011. The single most important driver is the stronger-than-expected property market. The growth of industrial production (IP), the best proxy for GDP, rebounded in June after slowing for two months (Fig 15). For July, the NBS manufacturing PMI went down but the Caixin PMI went up (Fig 14). Taking into account other high-frequency data, we expect IP growth to slow to 6.9% yoy in July, but it』s still a robust reading and supportive to cyclicals. Policy makers would stay

put given the mix of data and instead they will focus on the upcoming power reshuffle.

5、PPI inflation to rise on higher commodity prices:China』s PPI inflation peaked this Feb at 7.8%, then trended down afterwards. The trend stopped in June and PPI inflation could rebound in July. Commodity prices have been on a bull run in the past two months, thanks to low inventory and resilient final demand. Capacity cuts such as government inspection for substandard (「ground」) steel capacity also help the sentiment. That said, we view the pick-up in PPI inflation as a blip, which doesn』t change the broad trend of disinflation in the next sixmonths. For CPI inflation, it could remain low at 1.6% yoy in July (June: 1.5%). Weaker-thanexpected

CPI inflation, despite a lower unemployment rate, is one of the biggest surprises in

the global economy, not only in China. Toward the end of the year, we expect CPI inflation in China to trend up, but remain below 2%.

6、Trade growth to moderate in 2H17:China』s export growth accelerated to +9% yoy in 1H17 from -6% in 2H16, thanks to a broad recovery in the global economy as well as a low base for commodity prices. Meanwhile, import growth jumped to +19% yoy in 1H17 from -1% from 2H16. In 2H17, we expect a modest slowdown in China』s trade growth. Trade growth is largely about two components: real demand and price effect. For real demand, one signal is the OECD leading index, which turned positive YoY in November 2016, but stopped improving this May. For price effect, one signal is the CRB index, which also peaked YoY in 1Q17 (chart below). For the whole year of 2017, we expect 8% export growth and 13% import growth, the best year for China』s trade growth since 2011(see the last page of our forecasting table for this and next year).

7、RMB to be range-bound in 2H17:The RMB continued to strengthen against the US$ in July, amid the broad weakness in the US$ (page 12). Year-to-date, it has appreciated 3% against the US$, while the dollar index weakened almost 10%. In July, China』s FX reserves are almost surely to rise on a positive valuation effect, capital controls and reduced expectation on the RMB depreciation. In the near term, the RMB will continue to be driven by the US$.

While the current consensus is shorting US$, the risk for the US$ to strengthen in 2H17 is not negligible. In the remainder of this year, we expect the USDCNY to be range-bound between6.6 and 7.0. From a long-term perspective, the RMB is largely driven by capital flows as we discussed in detail in our 2017 outlook. On this regard, we are bullish on the RMB, and we see China』s onshore bond market as a sound investment for foreign investors, given thecurrent interest rate differential and the potential appreciation of the RMB.

9、房地產：最大的驚喜

is the property sector. At the beginning of this year, the market consensus vastly

underestimated the resilience of the sector, especially in lower-tier cities, by expecting lowsingle-digit investment growth and negative sales growth. It turns out that property investment growth was 9% yoy i n 1H17 (Fig 18) and national property sales grew 16% yoy (Fig 34 and 35). Looking ahead, when the financial market sentiment turns around largely depends on when the property market finally loses steam. At this moment, the sector is still holding up well. Land sales and new starts are accelerating, while inventory pressure has dropped to the level seen in 2013 on strong sales (page 9). Therefore, we expect property data in July, while

showing some moderation from June, to remain resilient in YoY terms. That said, sequentially speaking, July is a traditional off-season and developers could report weak contracted sales as they are adjusting their sales pipeline for 2H.

Looking ahead, while it』s hard to tell the tipping point, we expect the sentiment in tier 3/4 to cool this Fall, because of the rising mortgage rates, sales frontloading and policy tightening. Moreover, regarding China』s property market, one has to believe in cycles. It means that the upside risk this year simply implies the downside risk next year. Largely for this reason, our 2018 GDP growth forecast is 6.0%, which is below market consensus.

Structurally speaking, we are not pessimistic about China』s housing market, as we discussedin a thematic report written last year: China Property: Mismatch, not a Bubble. But the recentheat-up in the land market, especially in lower-tier cities, is worrisome to us, as it could recreate the oversupply problem in the future. Upside risks in the next few months could lead to downside risks next year, given the majority of lower-tier cities have small or no population inflows. Moreover, the housing market in tier-3 cities is dominated by new home sales, while that in tier-1 cities is dominated by used home sales. Once speculators start to sell, the housing market there could freeze quickly due to the lack of a used home market in those cities. In our view, the property sector, not the interbank market, is the biggest risk for the

Chinese economy in the next twelve months.

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