Moderated growth in June: The current mini-cycle peaked in March and hasslowly moderated since then. For June, industrial production (IP) growth couldslow to 5.6% yoy from 6.0% in May. China will also release GDP growth for2Q16, which could come in flat at 6.7% yoy. That said, nominal GDP growth,which accelerated to 7.2% in 1Q16from 6.0% in 4Q15, could edge up oneasing deflation. Since the economy still looks steady, policy should stay put fornow. But given the current trend, it’s likely that policy might turn expansionaryagain in summer (see side table for forecasts).
RMB under pressure on Brexit: While we expect Brexit to have a very limitedimpact on the Chinese economy (link), the impact is likely to be concentrated inRMB, which could depreciate to 6.8/US$1in the next couple of months. Thatsaid, we are comfortable with our year-end forecast of 6.6as our house viewsexpects the Fed to delay rate hikes to December. In the near term, China’scapital outflow pressure could also intensify again but we think it ismanageable. We expect FX reserves to drop US$20bn in June and probablymore in July. Thus, the PBoC might cut the RRR again in late July.
FAI growth to slow: We expect Fixed Asset Investment (FAI) growth to slow to9.0% for Jan-May from 9.6% in Jan-Apr. Two things are worth watching inJune’s investment data. First, property investment growth fell from 10% in Aprilto 7% yoy in May. It is important to see whether it can stabilise at the currentpace. Second, private investment, which accounts for over 60% of total FAI,saw no growth in May. So the question is whether it will continue to worsen. Inour view, the major reasons for disappointing private investment are the hugepolitical and economic uncertainties faced by non-SOEs and their poor accessto credit.
Easing CPI inflation and PPI deflation: For June, we expect CPI inflation toease to 1.7% yoy from 2.0% in May, thanks to lower food prices. The fearearlier this year about runaway inflation has largely gone. For the rest of theyear, the prospects for CPI inflation exceeding 2% are small. Meanwhile, weexpect PPI deflation to narrow further to -2.5% yoy in June from -2.8% in May,thanks to higher commodity prices. Of course, after the Brexit, one potential riskis that Brexit might pose new deflationary pressure through lower commodityprices.
Steady credit growth: We expect new bank loans to be RMB1tn in June,lower than RMB1.3tn in June last year. However, total social financing (TSF)likely remain subdued, after rising only RMB660bn in May, due to shadowbanking regulations and weak bond financing. Unlike 2H15when financialinstitutions rushed to leverage up on the booming bond market, currently theyare under pressure from regulators to rein in the expansion of balance sheets.For M2growth, we expect it to moderate further to 11.1% yoy in June from11.8% in May. Overall, credit growth remained steady in June.
External demand remains subdued: Exports/imports could drop 6% and 10%yoy in June on subdued external demand. The trade surplus should be aroundUS$50bn, which is similar to May. In Jan-May 2016, China’s export growth was-7% yoy, vs. +1% over the same period last year. By breakdown, exports to theEU outperformed those to the US and Emerging Markets, pointing to someunderlying improvement in Europe this year. The negative impact from Brexiton Europe might take longer to play out.
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