China Macro:September data preview,Recovery on reflation and real estate

Recovery continued in September: China will release September and 3Qdata on October 19. Thanks to the property market and price reflation, theeconomy continues to improve. For September, industrial production (IP)growth could be stable at around 6.3% YoY. We expect real GDP to grow6.7% YoY in 3Q16, the same as in the previous two quarters. But nominalGDP growth, which improved to 7.2% YoY in 1H16 from 6.4% in 2015, is setto pick up further in 2H16. As such, monetary policy will likely stay put, andthe focus of policy makers is now on the property market. (See side table fordetailed September forecasts.)54 months of deflation come close to an end: PPI reflation is well on trackin September, thanks to stable commodity prices and a low base. China’s PPIis likely to drop only 0.3% YoY in September, and it could turn positive in4Q16 for the first time since February 2012 (Fig 1). As we highlighted inThoughts on earnings cycle: A new start? (April 27, 2016), corporate earningswould benefit from the escape of deflation. Indeed, China’s industrial profitsjumped 20% YoY in August, the fastest growth since 2013.

Policy to stay put: Earlier this month, the markets were talking about a newround of stimulus. But as we discussed in Is China stimulating again?(September 12, 2016), it doesn’t make sense to stimulate now. In August,China just saw the fastest growth in national home prices since January 2010.

So the focus of policy makers is the cooling down of the property market. Tobe sure, this round of property up-cycle is hardly a national phenomenon. Inthe past 12 months, 48 out of the 70 biggest cities had home price growthlower than 5%. As such, tightening monetary policy at the national leveldoesn’t make sense either. Instead, Beijing will rely more on localgovernments to curb property frenzy within their own territories.

Flattish activity growth in September: High frequency data such as poweroutput and commodity prices currently point to steady growth. We expectactivity indicators such as PMI and industrial production to stay largelyunchanged in September. Meanwhile, we expect investment growth toaccelerate in September. We note the widely watched private investmentgrowth turned positive in August after falling for two straight months. Ascorporate earnings and final demand are improving, it could pick up further inSeptember.

Trade growth to weaken in September: Trade growth rebounded in August,but it was largely due to two more working days. So trade growth will likelyretreat in September, when exports and import growth could weaken to -5% and-2% YoY, respectively. But overall, China’s trade growth seems to be improvingmodestly. Given the stabilized global economy (measured by OECD leadingindicators) and the 9% depreciation against the US$ since last August, China’sexport growth could rebound to low single-digit growth in 2017.

Stable credit growth and FX reserves: We expect RMB1,150bn of newloans in September, vs RMB1,050bn in September of last year. Householdloans should remain as the main driver. M2 growth could pick up to 11.6%YoY in September from 11.4% in August. Capital outflows are muted, soChina’s FX reserves should remain largely flattish in September given thefavourable valuation effect. However, for the PBoC to win the war of RMBinternationalization, just controlling capital outflows is inadequate. In the next12 months, we believe it needs to turn around the prevalent depreciationexpectation (The next battle for the PBoC [September 26, 2016]).