H-shares rose on data and flows: Last week H-shares rebounded 1.4% onbetter-than-expected PMI data and strong fund flows from mainland China.
Year-to-date, the return to HSCEI is largely flat, still lagging behind the 6% forHSI and 13% for the whole EM space. However, big China banks, a basketcase for a long time, rose 10-15% this year as their valuations (5-6x PE) anddividend yields (4-5% div yield) are attractive to domestic investors, which arekeen to allocate more money abroad on the RMB depreciation expectations.
Last Tuesday, a senior official from the CSRC stated that the SZ-HK StockConnect would be launched in mid to late Nov. On the currency front, theRMB was quite stable last week, which is not surprising given the HangzhouG20 summit over the weekend. Meanwhile, the US non-farm payroll datacame in weaker than expected, lowering the chance for a Sep rate hike. Itshould help ease some depreciation pressure on the RMB in the near term.
Stepped-up property tightening: No doubt that at this moment, the realestate sector is the hot spot in China. Also released last week, the Soufun100-city home prices showed the fastest growth ever recorded, jumping 2.2%in August. No wonder more local governments are under pressure to tightenproperty policy. Last week, Xiamen reintroduced home purchase restrictions,and Wuhan also tightened mortgage policy. These came after a few landauctions in Shanghai were suspended. The fast-rising home prices not onlyworsen the wealth distribution, but also pose significant financial risks for thefuture. As such, the property sector has already become the biggestconstraint for monetary policy. A cut of RRR/interest rate seems to be unlikelyin the near term. That said, the property sector looks likely to fall into a newdown-cycle in 1H17, as the strong sales this year (up 26% yoy in Jan-July)means that demand has been frontloaded.
Better-than-expected Aug PMI: August NBS manufacturing PMI releasedlast week rose to the 22-month high of 50.4 (Fig 13). Meanwhile, the Caixinmanufacturing PMI softened from 50.6 in Jul to 50.0 in Aug, which is still thesecond-highest reading since Feb 2015. It should help lower the recessionfears after the weak July macro data, which are due to a few one-off factors,in our view (July’s growth’s growth and credit are OK so policy will stay onhold, 15 Aug 2016). Indeed, our channel checks suggest that while macronumbers remain soft, in general, companies feel that life is much easier thanlast year, thanks to the supply cuts, the reflation forces and the rising demandfrom the property sector. That said, their confidence for the future is still weak,as few expect the current recovery could last long. Meanwhile, the widely heldexpectations on the RMB depreciation also lower the incentive to invest inChina.
Data to be released this week: In the week ahead, China will release AugFX reserves, inflation and foreign trade data (see our data preview for moredetails). We expect a modest decline in FX reserves by around US$10bn.
Capital outflow pressure has stabilized recently, with FX reserves falling justUS$12bn in the four months from April to July, vs. US$118bn in 1Q16 andUS$513bn in 2015. The pace of outflows could pick up if the Fed rate hikedominates market attention again, but the impact should be manageable.
Meanwhile, the reflationary trend will continue, as PPI deflation could narrowto -1.0% yoy in Aug, a far cry from -6% one year ago. Trade data should alsoshow some improvement after falling 13% yoy in July. Notably, import growthcould turn positive in Aug due to two more working days.
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