Last week the RMB continued to draw market attention. After breakingthrough 6.70 one week ago, the RMB fell another 0.5% last week to 6.76against the US$, the weakest since Sep 2010. Year-to-date, the RMB hasdepreciated 4.2% against the US$. On the other front, the 6th Party Plenum(Oct 24-27) will be held in Beijing. It will focus on internal affairs of the Partyand therefore not very relevant to the market. A much more important meetingis the Central Economic Work Conference in Dec, which will set the growthtarget and strategy for the year ahead.

Quickened RMB depreciation on strong US$: The pace of depreciation hasaccelerated notably over the past two weeks. Instead of being driven by whathappened in China, the depreciation is mainly due to the broad strength of theUS$. The dollar index has been very strong entering Oct (Fig 45), as the Eurohit a 7-month low against the US$ last Friday. While falling against the US$,the RMB appreciated slightly against a basket of currencies (Fig 46).

Worsened capital outflows on depreciation expectation: Data releasedlast week showed capital outflows picked up in Sep. Net FX sales by banks,one of the best measures of outflows pressure, jumped to US$28bn in Sepfrom US$10bn in Aug. The amount is not as high as the US$54bn in Jan, butstill notable. The rise of outflows in Sep was partly due to the expectation thatthe depreciation against the US$ would quicken after the SDR entrance onOct 1. For whatever reasons, such expectation turns out to be true, whichcould further worsen the prevalent depreciation expectation.

Stable growth in 3Q16: 3Q and Sep activity data released last week werelargely in line with market expectations. Real GDP growth was flat at 6.7% in3Q16, the same as in 1Q and 2Q. If it’s too stable to be true, one could look atnominal GDP growth, which picked up to 7.8% yoy from 7.3% in 2Q, helpedby higher factory-gate prices. Such a reflation trend has supported corporateearnings recovery, as the profit growth for industrial firms could grow ataround 10% in 2016, compared with a drop of 2% in 2015. Growth momentumseems to hold up well entering 4Q16, but more headwinds would gather in1Q17. For the rest of the year, monetary policy is most likely to stay on holdand we expect no more interest rate or RRR cut.

Property cooled down in Oct on policy tightening: In Sep, home pricesincreased at a record pace (Fig 31). In response, 20+ local governments haverolled out property curbs. Last Friday, when publishing 70-city home prices inSep, the NBS also unprecedentedly released the home prices in the first halfof Oct. It shows that the price momentum has moderated entering Oct.

Looking ahead, the property market could enter a down-cycle in monthsahead with lower volume first, then followed by weaker prices. As such,growth pressure could start to build in 1H17, and the rate cutting cycle couldresume around mid-2017.

Credit growth remains accommodative: Credit data released last weekshow that credit growth beat market expectations in Sep. Mortgages remainedthe key driver for loan growth, accounting for around 45% of total new loans.

But corporate loans also accelerated after two months of weak growth.

Overall, credit growth edged up slightly in Sep (Fig 38), suggesting anaccommodative liquidity environment for now.

Last week the RMB continued to draw market attention. After breakingthrough 6.70 one week ago, the RMB fell another 0.5% last week to 6.76against the US$, the weakest since Sep 2010. Year-to-date, the RMB hasdepreciated 4.2% against the US$. On the other front, the 6th Party Plenum(Oct 24-27) will be held in Beijing. It will focus on internal affairs of the Partyand therefore not very relevant to the market. A much more important meetingis the Central Economic Work Conference in Dec, which will set the growthtarget and strategy for the year ahead.

Quickened RMB depreciation on strong US$: The pace of depreciation hasaccelerated notably over the past two weeks. Instead of being driven by whathappened in China, the depreciation is mainly due to the broad strength of theUS$. The dollar index has been very strong entering Oct (Fig 45), as the Eurohit a 7-month low against the US$ last Friday. While falling against the US$,the RMB appreciated slightly against a basket of currencies (Fig 46).

Worsened capital outflows on depreciation expectation: Data releasedlast week showed capital outflows picked up in Sep. Net FX sales by banks,one of the best measures of outflows pressure, jumped to US$28bn in Sepfrom US$10bn in Aug. The amount is not as high as the US$54bn in Jan, butstill notable. The rise of outflows in Sep was partly due to the expectation thatthe depreciation against the US$ would quicken after the SDR entrance onOct 1. For whatever reasons, such expectation turns out to be true, whichcould further worsen the prevalent depreciation expectation.

Stable growth in 3Q16: 3Q and Sep activity data released last week werelargely in line with market expectations. Real GDP growth was flat at 6.7% in3Q16, the same as in 1Q and 2Q. If it’s too stable to be true, one could look atnominal GDP growth, which picked up to 7.8% yoy from 7.3% in 2Q, helpedby higher factory-gate prices. Such a reflation trend has supported corporateearnings recovery, as the profit growth for industrial firms could grow ataround 10% in 2016, compared with a drop of 2% in 2015. Growth momentumseems to hold up well entering 4Q16, but more headwinds would gather in1Q17. For the rest of the year, monetary policy is most likely to stay on holdand we expect no more interest rate or RRR cut.

Property cooled down in Oct on policy tightening: In Sep, home pricesincreased at a record pace (Fig 31). In response, 20+ local governments haverolled out property curbs. Last Friday, when publishing 70-city home prices inSep, the NBS also unprecedentedly released the home prices in the first halfof Oct. It shows that the price momentum has moderated entering Oct.

Looking ahead, the property market could enter a down-cycle in monthsahead with lower volume first, then followed by weaker prices. As such,growth pressure could start to build in 1H17, and the rate cutting cycle couldresume around mid-2017.

Credit growth remains accommodative: Credit data released last weekshow that credit growth beat market expectations in Sep. Mortgages remainedthe key driver for loan growth, accounting for around 45% of total new loans.

But corporate loans also accelerated after two months of weak growth.

Overall, credit growth edged up slightly in Sep (Fig 38), suggesting anaccommodative liquidity environment for now.