Macro Monday-China cut RRR on Sunday:Major macro themes of the past week

Investors on roller coaster over the weekend: Last week H-sharesadvanced 3.9% while A-shares were up 6.3%, rising for the sixth straightweek; even though the incoming economic data was broadly weaker thanexpected. To cool down the exuberance, the CSRC announced on Fridaynight a tightening of margin financing. Stock exchanges also expanded the listof eligible stocks for short selling. Such moves caused the FTSE China A50Index to slump 6% on Friday night. As investors got bearish and anticipated abig correction on Monday, the CSRC backed down on Saturday by saying thatit was not meant to “hit the market”. To make things more dramatic, the PBoCannounced a 100bp RRR cut on Sunday afternoon. Below are our thoughtson the RRR cut, the CSRC and the recent macro data.

RRR cut more aggressive than expected: The market expected a 50bpRRR cut after the poor 1Q15 data. Instead, policy makers cut 100bp all atonce on Sunday afternoon, releasing about RMB1.5tn to the banking system.

We expect more easing to come including one interest rate cut in May,accelerated infrastructure spending and property policy relaxation. With thesemeasures, we expect 1Q15 to be the darkest moment of this year and theeconomy to improve from 2Q15, albeit at a modest pace. Meanwhile, weexpect one more 50bp RRR cut in the remainder of this year, and expectChina to cut RRR 20 times in the next five years for structural reasons. On thecurrency front, we continue to see a stable RMB after those cuts. In aninterview with FT on 31 Mar, Premier Li Keqiang reaffirmed that “we don’twant to see further devaluation of the Chinese currency”. Back in Jan, wemade an out-of-consensus call: Don’t worry about RMB, in which wediscussed in detail why policy makers want a stable currency.

CSRC backed down on Saturday: This weekend is a replay of whathappened three months ago, when the CSRC rolled out margin financingcurbs on Friday, markets slumped the next Monday, then the CSRC backeddown Monday night; A-shares have risen 27% since then. It’s not toosurprising though, as policy makers need equity markets more than ever.

They don’t want to see the index rise too fast, as the market would be likely tocollapse in the future. But they don’t want to see market collapse right noweither. These noises aside, as we discussed in Where tsunamis are formed, arise of direct financing (equity and bond) will likely be the next macro trend inChina, like exports/ manufacturing in 2001-2008 as well as property/infrastructure in 2009-2014. So we remain constructive on the market.

Economy even weaker than the headline number: 1Q15 GDP growth,released last Wednesday, slowed to 7.0% yoy as expected. However,nominal GDP growth, which is more relevant to corporate revenue andearnings, slumped to 5.8% yoy in 1Q15 from 7.7% in 4Q14. Therefore, webelieve the true economic condition could be weaker than the headline GDPgrowth suggests. Credit growth decelerated in March due to shadow bankingcontraction and capital flows. External demand didn’t lend much help, asexports growth remained lacklustre at 4.6% yoy in 1Q15. Property sectorremained weak but on the mend. Home sales (in volume), a leading indicatorof the sector, fell 1.6% yoy in Mar (Jan-Feb: -16.3%). Weekly sales in the top-30 cities rose 22% yoy in the first two weeks of Apr (Fig 24). Home prices fell2.0% mom annualized, narrowing from a 5.3% decline in Feb (Fig 21).