Macro Monday:July’s growth and credit are OK so policy will stay on hold

China markets continued to recover: Last week MSCI China rose by 5%.

Sentiments are boosted by the speculation on the SZ-HK Stock Connect, andalso by the fact that H-share is still lagging behind most EM peers. Interestrates continued to drift lower in China as 10-year Treasury yield fell to a 14-year low at 2.67%. On the currency front, USD/CNY ended the week flat at6.63. Last week is also the one-year anniversary of Aug 11. Although last Aug11’s sudden devaluation caused huge panic at that time, CNY has onlydepreciated 3.2% against the US$ since the market open on last Aug 12.

July data shows no clear direction: Last week, China released July’s macrodata. Growth, investment and credit data are weaker than expected, whiletrade and inflation are largely in line (see the left table for an overview of thedata). The main issue for the Chinese economy remains the same as the pastthree months. That is the very weak confidence (or high level of uncertainty)for the private sector. As such, the government has to offset the slack inprivate investment by public investment. While infrastructure FAI growthslumped to a 31-month low of 12% yoy in July (June: 22%), it should recoverin the months ahead on accelerated project approval. “Planned Investment inNew Projects”, a leading indicator for FAI, rebounded in July after slowingdown for 4 months. Overall, the downside risk for 3Q16 seems limited despitethe weaker-than-expected July growth and investment data.

Taking grains of salt on weak credit growth: New loans were RMB464bnin July, compared with RMB1.5tn last July. At first glance it looks quitedisappointing, but several caveats are there. First, last July’s RMB1.5tn loansinclude the RMB900bn “bailout” money. Second, local government debt swapcould always distort the loan data. Third, corporate loans were also impactedby tightened regulations to lower corporate leverage. Therefore, we don’t thinkJuly’s new loans are that bad. To be sure, loan demand remains sluggish, butit doesn’t seem to have worsened notably in July.

Property investment weighed on by soaring land prices: In July, propertyinvestment slowed to 1% yoy, after growing 7% in 1H16. The issue is that inthis round of property up-cycle, the majority of large developers only want toenter a dozen of tier-1 and tier-2 cities. As the result, land prices in thosecities are soaring, causing potential land bidders to back down. Moreover, theself-enforcing upswings in land prices and home prices have clearly increasedthe risks of asset bubbles, which was a major topic in the Politburo meetingjust two weeks ago. As a result, local government officials are under pressureto cool down the market. All these have weighed on new starts and propertyinvestment. Ideally, local governments in those cities should ramp up landsupply to meet the demand, but their ability to do so is constrained by thecurrent land system. Unfortunately, the current land-supply system is way toodifficult to be included into the ongoing supply-side reform.

Policy to stay on hold: July’s weaker-than-expected data would raise themarket concerns on the risk of deceleration as well as the expectations onfurther policy easing. In our view, both are premature. China’s economydoesn’t show clear direction at this moment and policy will continue to stay onhold. So far in Aug the economy looks fairly stable as well. To have a clearerpicture on the Chinese economy, we might need to wait till the nextconstruction “peak season” which will start in Sep.