Data from China rebounded broadly in March. Industrial production (IP) rose6.8% yoy in Mar (Jan-Feb 5.4% yoy) while power generation rose 4.0% yoy(Jan-Feb: 0.3%). Property, investment and consumption data all improved.
GDP growth in 1Q16 came in line with expectation at 6.7% yoy, slightly below6.8% in 4Q15 but way better than the gloomy views held not long ago.
Encouragingly, nominal GDP growth accelerated to 7.2% yoy in 1Q16 from6.0% in 4Q15, boding well for corporate earnings and consumption growth.
A macro sweet spot at this moment: The left table shows an idealcombination of macro data in March. The PMI moved above 50 for the firsttime since last July. Economic growth in terms of IP, investment and tradebeat consensus while inflation is weaker than expected. Moreover, theproperty sector rebounded sharply in 1Q16, with investment, sales and newstarts up 6%, 33% and 19% yoy, respectively. Policy wise, monetary policy isaccommodative (M2 up 13.4% yoy) while fiscal policy is quite expansionary(infrastructure FAI up 22%). Capital flows also improved in March, as RMBappreciated 1.2% against US$ and FX reserves increased by US$10bn.
Why the rebound and how long can it last? March data are in line with ourview that the weak data in Jan-Feb were misleadingly weak and the economywill improve in March (Takeaways from the recent data release, 14 March).
The timing of the Chinese New Year holiday was important, causing anupward bias for data in March (for example, exports rose 12% yoy in Marchbut fell 25% in Feb.) Moreover, policy easing, property investment andinventory restocking all played a role. That said, we see the recent rebound asanother mini up-cycle as seen in Sep 2012 or July 2013, which means that itis only likely to last for around 3 months.
Headwinds might come back soon: We see three reasons why the reboundis temporary. First, as we discussed above, the strong data in March is partlydue to the low base. Even the parts due to inventory restocking and policystimulus will not last long. Second, the top two challenges facing the Chineseeconomy have not really been fixed: lack of growth engines other thaninvestment and weak global economy. Third, the external risk is still there. USdollar has weakened after G20 and provides a benign environment for EMincluding China, but stability could easily lead to instability. If improved marketsentiment and better data prompt the Fed to consider hikes again, the USdollar would likely strengthen and put pressure on the RMB again.
The top theme in 2016: Political business-cycle As discussed in our 2016Outlook, the over-arching theme this year is power transition in 2017.
Therefore, policy makers both at the central and local levels will do whatever ittakes to deliver a stable economic and social backdrop. That’s why we stick toour positive views during the market downturn and refute gloomy views suchas a hard landing, capital flight and sharp RMB depreciation. That said, wealso don’t think that top leaders will over-stimulate because they will run thecountry for another six years. If growth stabilises, the focus will shift fromdemand-side stimulus to so-called supply-supply structural reform, which aimsto boost long-term growth potential. Of course, if growth slows again, thefocus will change as well. Such fine-tuning of economic policy will be the normfor this year, in our view. Not surprisingly, Premier Li said recently that the firstthing he does every morning is to go through two spreadsheets which containhundreds of macro datapoints.
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