China Macro:Still weak but stabilized:Sep/3Q data preview

China will release Sep and 3Q data on 19 Oct. We expect 3Q GDP growth toslow to 6.8% yoy before rising to 7.2% in 4Q. Policy easing has meaningfullyaccelerated in the past few weeks and could take effect in 4Q. Indicators such asPMI and cement prices have started to signal stabilization. Though Sep datamight remain soft, the Chinese economy is likely to improve in the comingmonths, on track to a U-shaped recovery as noted in our 2H outlook publication.

Takeaways from today’s PMI data: The NBS PMI edged up to 49.8 in Sep(previous: 49.7). The Caixin PMI edged down to 47.2 (previous: 47.3) but is stillhigher than the flash reading of 47.0. At this junction, we tend to put more weighton the NBS PMI. In the past, when China’s economy was at major turning pointssuch as Sep 2012 and July 2013, the NBS PMI proved to be more accurate thanthe Caixin PMI. It’s probably because small and medium-sized enterprises,which are over-represented in the Caixin PMI, might wait longer to feel theimpact of policy easing than big firms. The upward revision of Caixin PMI from itsflash reading also suggests that industrial activity has improved since the factoryshutdown due to the parade in early Sep. New orders in the NBS PMI rose to50.2 after two months below 50, suggesting that demand is picking up.

Policy turning more expansionary: A key assumption in our 2H outlook note isthat policy makers are serious about defending the 7% growth target this year.

The slew of policy measures rolled out recently suggests they do: (1) Thegovernment lowered the 1st home down payment for most cities (other than thetop 4 cities, see David Ng’s view). (2) Purchase tax for small vehicles was cut by50% (from 10% to 5%). Note that China implemented the same purchase tax cutfor 2009-2010 (see Janet Lewis’ comment). (3) The NDRC has acceleratedprojects approvals in railway and other infrastructure projects, while over 200local government officials were punished due to unspent funds. (4) Fiscalspending growth exceeded 20% in both July and Aug. (5) Credit growth hasaccelerated since May, thanks to policy banks and local government debt swap.

RMB to remain stable in the near term: As of Oct 1, USD/CNY and USD/CNHtraded at 6.356 and 6.365. The gap between them has significantly narrowed, inline with our call on Sep 7 that “The gap has to narrow due to the presence ofarbitrage opportunities. Most likely, the CNH will move towards the CNY, as it’sclear that the PBoC is determined to stabilize the RMB in the near term.” Due tothe eased depreciation expectation and capital controls by the PBoC, capitaloutflows should moderate in Sep. Meanwhile, we expect one more RRR cut inlate Oct or early Nov to replenish liquidity in the banking system.

Sep data could remain soft: We expect Industrial production (IP) growth toslow to 5.9% yoy in Sep from 6.1% in Aug. This will bring the quarterly averageIP growth to 6.0% in 3Q, vs. 6.3% in 2Q. As such, real GDP growth could slow to6.8% yoy in 3Q from 7.0% in 2Q. On the inflation side, CPI inflation could easeto 1.9% yoy in Sep (Aug: 2.0%). Notably, the pork price rally stopped in Sep aftera 30% rebound from this March. Meanwhile, PPI deflation might dip to a six-yearlow of -6.0% yoy in Sep from 5.9% in Aug, weighed down primarily by lower oilprices since Jul. Export growth could be similar to the 6% drop in Aug, whileimport growth could dip to -20% yoy in Sep due to a high base last year.

Investment growth in Sep could still be dragged down by extremely weakproperty investment while infrastructure FAI might accelerate. Meanwhile, morenews about “Land King” has come in recently, suggesting developers are buyingmore land. As such, we expect a modest rebound of property investment in 4Q.