Macro Monday:Weaker RMB,stable economy and hotter property market

Markets weighed by macro uncertainties: Last week both H- and A-shareswere largely flat. The main macro event was the hawkish FOMC minutes,which revived expectations of a summer hike. As a result, the dollar indexjumped to a 7-week high (Fig 45) while the RMB fell to an 11-week lowagainst the US$. In various financial markets, transaction volumes droppedas investors lacked the conviction to act. Sentiment has been dampened byplenty of macro uncertainties out there such as the Fed decision, oil prices,Brexit, China and US election. Indeed, this year so far is very difficult as mostmarkets have been trendless, with consensus being overthrown rather quickly.

How to read the recent RMB depreciation? To be sure, it’s mainly due tothe strength of the US$, as during this period the RMB also strengthenedagainst the currency basket (Fig 46). In 2016, the interaction between theworld’s two largest economies has never been so important (see our earlierreport: The implication of FOMC on RMB, 17 Mar 2016). Thanks to the dollarweakness, the RMB has been relatively stable after Jan and FX reservesincreased in March and April. However, stability often leads to instability. TheFOMC minutes in April showed Fed officials are less concerned aboutexternal risks than in the previous meetings, which increases the odds for arate hike in summer. Down the road, if the dollar index returns to 100(currently at 95), the RMB against dollar could depreciate to 6.8.

Chinese economy in May: Largely stable: High-frequency data suggest theeconomy might slightly decelerate in May, but fundamentals remain solid andthereby policy should stay put. Cement prices has been rising for ten weeks ina row (Fig 28), reflecting the robust demand from property and infrastructuresides. Industrial metal prices such as steel and copper continued to drop lastweek, which might reflect more on liquidity flows than the changes infundamentals. Inflation pressure has eased on falling vegetable prices andCPI inflation in May should stay at 2.3% seen in April. Meanwhile, oil pricesrose to $49 last week. If it could stay there in 2H16 as our oil team forecasts,China’s nominal GDP growth would continue to trend up even if the headlineGDP growth remains flat. It’s often overlooked that, while real GDP growth in4Q15 and 1Q16 are almost the same (6.8% vs.6.7% yoy), nominal GDPgrowth has accelerated from 6.0% to 7.2%.

Property market heating up: 70-city home prices released last week showedwidespread price rally in April. Home price jumped 13% mom annualized onaverage, up from 11% in March (Fig 31). While price pressure in tier-1 citieseased slightly, more tier-2/3 cities saw home price increase. As such, 65 outof the 70 cities saw higher home prices in April (Fig 32). Looking back, it’sinteresting to see that home prices also rise in lower-tier cities. Twelve monthsago, the mainstream view in the street was that housing oversupply in lowertiercities was so high that home prices there would never rise, unlessinventory could be cut significantly. Now we know that such a view is wrong.

The change in inventory which is needed to turn home prices from falling torising is not as big as people thought. Separately, the change in demand (orsupply) which is needed to turn most steel plants from losing money tomaking money is also not as big as people thought. These are importantlessons for China observers.