Macro Monday:How to interpret ‘L-shaped growth’

Market consolidation continued: Last week H-shares retreated 2% while Asharesfell 3%. Sentiments were dampened by the ‘L-shaped growth’comments by the ‘authoritative person’ in Monday’s People’s Daily. Tradingvolumes for both H- and A-shares dropped to multi-month lows (Fig 6 & 12).Commodity prices continued to correct, with steel prices falling another 10%last week (Fig 26).

How to interpret ‘L-shaped’ recovery: Does it mean that the economy isfacing significant downside risk We don’t think so. In our view, ‘L-shaped’just means that the policy goal is growth stability with few downside or upsidesurprises. As we highlighted in our 2016 Outlook published last Dec, theoverarching theme this and next year is the political power reshuffle.Therefore, policy makers just want a stable macro environment so that theycould spend more time on consolidating power. Growth stabilization as thebottom line means policy makers would swing between supply side reformand demand-side stimulus. If growth faces downside risks like early this year,they would play demand side stimulus by pumping more money intoinfrastructure investment. If growth stabilizes, like now, they would then spendmore time on supply-side reform such as cutting over-capacity and cleaningup bad loans. Indeed, that’s why in the Outlook piece above, we set ourannual GDP growth forecast at 6.7% with a flattish quarterly pattern. Does itmean that the year of 2016 is a boring year No. In our view, the top twothemes in 2016 are the escape from deflation and the property recovery.

Escape from deflation: Inflation data released last week shows that PPIdropped 3.4% yoy in April, a far cry from -6% in 2H15. Looking ahead, barringa sharp drop in oil prices, PPI deflation would continue to narrow due to alower base. While the headline real GDP growth barely changed from 4Q15 to1Q16, nominal GDP growth rebounded from 6.0% yoy to 7.2%. Most likely, itwill accelerate further in 2Q16. Meanwhile, we see limited upside for CPIinflation, which is unlikely to prompt a strong policy reaction this year.

Property sector continued strong recovery: The property recovery lookssurprisingly strong in April. Property sales (in floor space) jumped by 44% yoywhile new starts surged 26% (Fig 33 & 34). As such, property investmentgrowth held up flat at 9.7% yoy in Apr, rising for the fourth straight month.Moreover, land sales also recovered, growing 8% yoy in April after rising 5%in March. To be sure, the recent rebound in sales and new starts are just waytoo strong to be sustainable. However, even if slowing down, for the wholeyear of 2016, they should still be much stronger than last year.

§ Activity data pulled back: Not surprisingly, April activity data released onSaturday showed a broad-based retreat from the strong March readings.Industrial production growth eased to 6.0% yoy (Mar: 6.8%), while fixed assetinvestment growth softened to 10.1% (Mar: 11.1%). As we discussed after theMarch data release, the strong readings then were biased upward by baseeffects and set to moderate. Credit growth also slowed after theembarrassingly strong growth in 1Q16 (Fig 19), with RMB loans only risingRMB556bn (last Apr: RMB708bn). M2 growth eased to 12.8% yoy in Apr (Mar:13.4%). Of course, these numbers are not as exciting as we saw in the pastfew months. But they are good enough and more sustainable. Overall, policymakers should feel quite comfortable with April’s data, which shows a steadymacro environment with risks largely balanced.