Macro Monday:Better-than-expected activity data in Nov but headwinds still strong

Major macro themes of the past week

China stocks retreated ahead of Fed decision: Last week H-shares slid 5.4%while A-shares fell 2.6%. Energy stocks led the retreat (Fig 1) as oil pricesslumped to a 7-year low after the OPEC meeting (Fig 26). Last week, theonshore RMB recorded the largest weekly loss against the USD since Aug,dropping 0.8% to 6.455. The week ahead is quite eventful. China could wrap upthe annual Central Economic Work Conference. In the meeting, China’s leaderswould decide next year’s growth target, which will be officially announced nextMarch. On Dec 16, all eyes will be on the Fed’s rate decision and theconsensus is a 25bp rate hike.

Better-than-expected activity data in Nov: Nov activity data released over theweekend came in better than expected. Industrial production (IP), the mostimportant monthly data, improved to 6.2% yoy in Nov from 5.6% in Oct(consensus: 5.7%). The rebound is partly helped by a low base. Moreimportantly, it was due to policy supports, as infrastructure investment surgedby 23% yoy in Nov from 13% in Oct. The bad news is that the property sectorremains disappointed, as property investment fell 5% yoy (Fig 21) and newstarts contracted 21% in Nov. Overall, we see the economy on track to 7% GDPgrowth in 4Q15. That said, given the weakness in the property sector and therecent slump in commodity prices, China’s growth could decelerate further in1Q16, when policy supports would weaken due to cold weather and theChinese New Year holidays.

Steady but not inspiring credit growth: China also released Nov credit datalast Friday. Due to distortions from local government debt swap, interbanklending and various regulations, China’s money and credit data have becomevery difficult to interpret in recent months. In any case, after taking all thesedistortions into account, it seems that the overall credit growth is steady but nottoo inspiring. Corporate cash position does seem to have improved a lotrecently thanks to local government debt swap. But the key issue is weakbusiness confidence and a lack of good investment opportunities, which has ledcorporates to prefer hoarding cash to stepping up investment.

The new CFETS RMB index not a game changer: Last Friday, China ForeignExchange Trade System, a subsidiary of the PBoC, published a new tradeweightedRMB index. However, we don’t see it as a game changer as it will notchange the three principles held by the PBoC in managing the RMB: (1) Themost important reason why the PBoC cares about currency value is due tocapital flows, which impact China’s domestic liquidity. In this regard, theUSD/CNY is much more important than other pairs. If capital outflows intensify,the PBoC will step up intervention in the USD/CNY. If capital outflows stabilize,the PBoC will give the market more freedom. (2) The PBoC desires to introducehigher volatility for the USD/CNY, but under the condition that capital outflowsare within its tolerance range. (3) The broad strength of the USD remains asthe most important driver for the USD/CNY. In 2015, the dollar index hasstrengthened about 10% and CNY weakened around 4% against the USD. In2016, if the dollar index rises another 10%, the CNY could weaken 3-5%against the USD. Of course, currency is notoriously hard to forecast. If, say, thedollar index drops in 2016, we would not be surprised to see the CNYappreciate against the USD.