Macro Monday:Tough time and green shoots might appear in September

Major macro themes of the past week

Very weak market sentiment: Last week, A-shares pulled back after threeweeks of recovery, closing the week down 10%. ChiNext slumped 12%, givingback most of the gains in the previous two weeks (Fig 11). H-shares werealso dragged down by 5%. We were in mainland China last week and metclients there. Overall, we feel that the sentiment was very weak, as investorsare concerned about potential exit of rescue measures, soft economic growthand the lack of clear themes to play at this stage. The low sentiment wasreflected in weak transaction volume, as A-share average daily turnoverdropped 15% WoW to US$190bn last week (Fig 6). Another sign of weaksentiment is the high popularity of pessimistic stories, such as “US$500-600bn” capital outflows. These stories don’t make sense to most professionalChina economists – we published a rebuttal last Monday. But we are familiarwith these stories, as they resurface some time every year when sentimentdrifts to the low point.

Green shoots might appear in Sep: The most important drag for theeconomy in 2Q15 is property investment, which slowed to 2% yoy. However,we expect property investment to see some improvement, especially in 4Q15.Property sales, which tend to lead investment by 1-2 quarters, reboundedstrongly in 2Q. Meanwhile, land sales also started to recover at tier1-2 cities,pointing to higher property investment later this year. Soufun 100-city homeprice data released over the weekend showed national home prices rose forthe third straight month in July. Importantly, more and more lower-tier citiesstarted to see higher home prices, suggesting an improved inventory situationthere. A useful indicator to watch is how cement prices move in Sep (Fig 24).

Politburo called for proactive fiscal policy: In the Politburo meeting on 30July, China’s top policymakers vowed to keep “proactive” fiscal policy andappropriate” monetary stimulus. Our interpretation: for monetary policy, weexpect easing to continue in 2H, but not as intensive as in 1H15. We expect 1rate cut and 2 RRR cuts in 2H15 (vs. 3 rate cuts and 3 RRR cuts in 1H15).We even expect some moderate depreciation of CNY to support exports.Meanwhile, we expect fiscal policy to stay accommodative in 2H15. As such,after the stumble in 2Q15, we expect infrastructure FAI to grow around 20% in2H15 (Fig 21). Policy banks played an important role in supporting growth in1H15, as the CDB’s share in new loans rose from 6% to 11%. With recentcapital injection from the PBoC, policy banks would continue to play the keyrole in channelling liquidity from the interbank market to the real economy.

Preview of July’s data: The policy-led recovery remains on a fragile footing.Jul NBS PMI released over the weekend softened to 50.0 from 50.2 in Jun, inline with the message from Caixin Flash PMI. We expect industrial productiongrowth to moderate to 6.5% yoy in July after the surprisingly strong 6.8%growth in Jun. Pork prices have become a concern recently, but as wediscussed last week, we don’t see it as a serious threat to inflation. Meanwhile,given the recent weakness in commodity prices, we expect PPI deflation toworsen to 5.0% yoy in Jul from 4.8% in Jun. Export growth could weaken dueto the high base while FAI and retail sales remain largely stable (See the lefttable for our data forecasts for July).