Macro Monday China:You can still feel happy about the first batch of data in 2017

Quiet market ahead of the CNY holidays: Last week, H-shares advanced1.8%, rising for the 3rd straight week while A-shares retreated 1.3%. Dec’strade, inflation and credit data released last week still look positive for thereflation trade. Meanwhile, the CNY gained 0.3% against the US$ as thedollar weakened and the offshore CNH remained stronger than the onshoreCNY (Fig 44). Last week, we published our 2017outlook: What couldsurprise, which lays out our views on China’s economy, currency, liquidity,policy and important sectors such as property in 2017.

PPI reflation well under way: PPI inflation again surprised on the upside,rising 5.5% yoy in Dec from 3.3% in Nov. The strong uptick was driven by thebroad commodity prices rally. We expect PPI inflation to rise above 6% in1Q17but start to moderate afterwards on a higher base and a weakereconomy. As such, both nominal GDP growth and corporate earnings upcycleshould peak in 1H17. Meanwhile, CPI inflation eased slightly to 2.1%yoy in Dec, in line with expectation. CPI inflation could jump above 2.5% inJan but drop below 2% again in Feb due to the Chinese New Year. For 2017,we expect CPI inflation to average 2.4%, vs. 2.0% in 2016.

Underlying trade growth better than headline numbers: Headline tradegrowth slowed in Dec, as exports fell 6% yoy (Nov: +0.1%) while imports grew3% (Nov: +7%). And yet the slowdown was mainly driven by one fewerworking day and a high base a year ago. The underlying trend remainedhealthy, suggesting that the export outlook is improving amid better globaldemand and price reflation. As highlighted by our global team, the improvingOECD Leading Indicator points to a global recovery. Meanwhile, importgrowth continued to benefit from higher commodity prices and inventoryrestocking. After two years of contraction, we expect both exports and importsto grow at low-single digits in 2017. To be sure, a likelihood of a trade warwith the US poses uncertainties on our baseline forecasts.

New loans stronger than expected in Dec: New loans came in well aheadof expectation at RMB1,040bn in Dec, compared to RMB598bn in Dec 2015(Fig 19). The strong growth was driven by a rebound in long-term corporateloans. However, local government debt issuance was much weaker in Decdue to the bond market turbulence so the actual credit demand is not asstrong as the loan data would suggest. Meanwhile, household loansmoderated slightly in Dec albeit still sizable at RMB497bn. In 2016, householdloans increased by RMB6.3tn vs RMB3.9tn in 2015. Looking ahead,household loans are set to slow in 2017amid the property down-cycle.

Policy makers pondering the land supply issue: Last week, the Minister ofLand and Resources vowed to increase land supply in big cities whilereducing land supply in tier-3/4cities with high housing inventory. This is inline with our thematic report on China’s housing market, which argued that thefundamental problem in China’s property market is a mismatch of land supplyacross various cities. Overall, we expect China’s property market to enter adown-cycle in 2017. National home prices could start falling in 2H17, and GFAproperty sales could drop 10% this year after rising 22% in 2016. Propertyinvestment growth should also slow to 2% in 2017from 7% in 2016.