Markets swept by reflation expectation: Last week H-shares fell 0.6% whileA-shares gained 2.3%. After the initial knee-jerk reaction post the unexpectedUS election result, risk assets surged hard but bonds suffered a heavy sell-off.
Driven by reflation expectations and price momentum, commodities such ascopper and iron ore staged a strong rally. However, fundamentals don’t seemto be supportive, as China’s property and auto sales started to slow down inOct. Meanwhile, the USD/CNY weakened to 6.82 last Friday as the dollarindex stood above 99, the level seen this Feb.
Huge uncertainty around Trump’s impact on China: At this stage, it’sdifficult to accurately evaluate such impact, as it’s hard to tell what would beactual policies instead of just campaign rhetoric. Regarding trade, ifprotectionism does escalate globally, China might retaliate by allowing forbigger RMB depreciation. It would be a trade war and hurt everyone. It’s notour baseline though, in which we expect China’s exports to grow by low-singledigit in 2017. But the risk is clearly there. Meanwhile, the impact on the RMBis also highly uncertain. On one hand, if trade barriers are eventually erectedas promised by the President-elect, the USD’s reserve status might be hurtand cause flight into other reserve currencies such as Euro and Yen. On theother hand, the prospect of a more expansive fiscal policy under Trump’sregime could lead to a spike in US bond yields, which could strengthen the USD.
USD/CNY broke 6.8 last week: The depreciation of the RMB has acceleratednotably since Oct. USD/CNY broke 6.70 on Oct 10 and 6.80 on Nov 11. To besure, the dollar index increased from 95 to 99 during this period. But givensuch a fast pace, the depreciation expectation has surely become moreentrenched and Chinese residents are set to demand more dollar assets inmonths ahead. In our view, it’s dangerous for the PBoC to tolerate or evenhelp foster such expectation that “the RMB would fall 5% against US$ everyyear”. This kind of mild depreciation could not help much on exports, butwould certainly force capital controls to escalate and the RMBinternationalization to reverse.
Inflation edging up in Oct: Inflation inched up further in Oct, with CPI up2.1% yoy and PPI jumping more than expected to 1.2%. At the beginning ofthe year, the biggest market concern for China was deflation and liquidity trap,but now the major concern has shifted to inflation. We do see a higherinflation rate in 2017 than in 2016, but the chance for runaway inflation is low.
The current round of PPI rise is mostly driven by upstream commodity prices.
The room for further increases in commodity prices is limited, given theChinese economy starts to slow. We expect the current reflation trend to peakin 2Q17 due to a higher base and weaker economy then.
Stable credit growth: Oct money and credit data came in line withexpectations, with new loans at RMB651bn (consensus: RMB672bn) and M2growth rising 12.6% yoy. The drop in new loans from Sep was mainly due toseasonality and thereby not too worrisome (Fig 19). However, 75% of the newloans still came from mortgages. As home sales are slowing (Fig 35),mortgage loans are set to moderate in coming months. Meanwhile, consistentwith the recent politburo meeting (comment), the PBoC’s 3Q16 MonetaryPolicy Report released last week struck a cautious tone against high homeprices and financial risks, effectively ruling out RRR/IR cut in the rest of thisyear. But a rate hike is also unlikely given the coming property down-cycleand rising global uncertainties after the US election last week.
首页
微信公众号
证券之星APP
