Macro Monday:Improved growth momentum in 2Q with worrisome home price rises

Major macro themes of the past week.

A-shares rose for the second week: Last week China stocks consolidatedafter a dramatic week of battle between Beijing and market reflexivity. A-sharesclosed the week up 2.1% and ChiNext rebounded 9.8% (Fig 11). Meanwhile,H-shares moved largely sideways, with daily turnover dropping by 45% toHK$111bn (Fig 6). In the recent market turmoil, government supports provedto be pivotal. Last week, local media (Caixin Magazine) reported that ChinaSecurities Finance Corporation, which is under the CSRC, obtained RMB1.2tnfrom commercial banks through interbank lending during this period.

2Q data point to improved earnings momentum: Jun/2Q activity datasuggest the economy has stabilized in 2Q from the slump in 1Q. Real GDPgrowth beat market expectation at 7.0% yoy, flat from the previous quarter. Insequential terms, growth picked up to 1.7% qoq sa from 1.4% in 1Q. For Junealone, industrial production, the most important monthly macro indicator, alsobeat consensus by rising 6.8% yoy. To be sure, based on client feedbackafter the data release, investors are not fully convinced by these numbers,which seem too good to be true. In any case, while we don’t have strongviews on what’s the “true” underlying GDP growth, we do see the economy isunder recovery based on three factors: (1) rebounding nominal GDP growth;(2) strong home sales; (3) accelerated credit growth.

(1) Rebounding nominal GDP growth points to improved earningsgrowth: Nominal GDP growth, which is closely correlated to corporateearnings, rebounded to 7.1% yoy from 5.8% in 1Q. With a gradual pickup ininflation, we expect nominal GDP growth to improve further in 2H15, possiblyto around 8%. Such improvement could potentially lift A-share non-financialearnings growth by around 10ppt in 2H15 from the 1Q15 level.

(2) Strong home sales points to rebounding property investment: A bigdivergence happened in the property sector in 2Q15: Property salesincreased by 13% yoy after dropping 9% in 1Q15, while property investmenthowever slowed to +2% yoy from +9% in 1Q. With improved home sales, weexpect investment growth to rebound in 2H15, especially in 4Q15.

(3) Accelerated credit growth to provide support to investment: Moneyand credit data released last Tuesday shows signs of acceleration in Jun.

New bank loans recorded strong growth of RMB1.28tn in Jun (Fig 18).

Meanwhile, local government funding also improved as they net issuedRMB654bn bonds in Jun. With improved cash flows for local governments,infrastructure investment this year could hit around 20% growth, similar to thepace in 2013 and 2014. Of course, from a longer term perspective, China’sinfrastructure investment will likely exceed US$2tn this year, implying that itcould not grow like this for very long.

Home prices as the main swing factor for policy in 2H: The trend for homeprices is really worrisome. According to the 70-city index released over theweekend, National home prices rose for the second month by 2.1% qoqannualized in Jun (Fig 27), with a widening divergence in housing marketconditions across cities. Tier-1 cities saw strong price increases andShenzhen’s home prices surged 7.1% in a single month! Though we expectone rate cut in 2H, the chance is now smaller with home price rises like this.