Growth appears stable going into 2017, and holiday consumption remainsrobust. Reflation continued in Jan, while new loans could be pretty strong.
Trade growth in Jan could be quite upbeat, but mainly due to the low base.
We also expect FX reserves to stay largely flat in Jan (vs down US$41bn inDec) thanks to weaker US$ and tightened capital controls.
Premature to call new hiking cycle: Last Friday, the first trading day afterthe CNY holiday, the PBoC hiked 7-day reverse repo rates by 10bp. This isthe first time the PBoC changed it—the most important interbank rate—sinceOct 2015. But it would be premature to say China has entered a new hikingcycle. In our view, the hike is meant to deleverage the bond market, not tocool an overheated economy. Rather, the outlook for the economy remainsuncertain and future direction of the monetary policy depends on how theeconomy goes. That’s why policy makers moved the interbank rates but leftbenchmark rates unchanged.
Inflation tick up in Jan: CPI inflation may have risen to a 32-month high of2.4% yoy in Jan (Dec: 2.1%). To be sure, the uptick was mainly due to thetiming of the CNY (Jan 28 this year vs Feb 8 last year). CPI inflation could fallto ~1% yoy in Feb from a high base, before recovering to 2% in subsequentmonths. Meanwhile, PPI inflation may have risen to 6.7% yoy in Jan (Dec:5.5%), continuing to benefit from a low base. That said, we believe PPIreflation trend is near its peak, given the recent stabilization in commodityprices and fading out of the low base. Indeed, latest PMI data shows growth ininput prices has eased. Barring another surge in commodities, we expect PPIinflation to peak in 1Q17 at ~6.5% and trend down gradually. Consequently,corporate earnings growth could start moderating from 2Q17 as well.
Strong new loans and trade numbers in Jan: We expect another strongprint of new loans for Jan at RMB2.5tn, as banks have strong incentive tomake loans at the start of the year. The strong loan numbers in Dec alsosuggest that long-term corporate loan demand is robust. Meanwhile, exportscould grow 3% yoy in Jan (Dec: -6%) and imports rise 12% (Dec: 3%), mostlyowing to a low base. In any case, Jan/Feb trade data should be taken with agrain of salt, as it tends to be highly volatile due to the holiday distortion.
FX reserves remain flat: China’s FX reserves could come in flat in Jan, afterfalling US$41bn in Dec, largely due to favourable valuation effects. Moreover,tightened capital controls should also help on the margin. Overall, the currentsituation looks much better vs Jan 2016, when FX reserves dropped byUS$99bn in a month. Broadly speaking, while the most important thing for thePBoC in 2016 was to put capital outflows under control, the key issue for 2017is how to better manage, or even reverse, the depreciation expectation.
Holiday spending remains robust: NBS PMI in Jan came in fine at 51.3previous: 51.4), but key activity indicators such as industrial production andinvestment will not be reported for Jan. The market should have a bettersense of China’s economy in early March when Jan-Feb combined data areavailable. Meanwhile, according to the government data, retail sales duringthe past golden week grew 11.4% from the comparable period last year, upfrom 11.2% in 2016. The tourism market also registered strong growth duringthe golden week, with tourism revenue rising 15.9% (2016: 16.3%).
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