Macro Monday:Trump government and the RMB

sentiment on cyclical uptrend: Last week, the H-share marketrose for the third straight week by 0.6%, while A-shares rallied by 1.6%. Mostinvestors and corporates we talked to in the past two weeks are positive onthe market. The latest steel survey done by our commodity team shows that“market sentiment towards the outlook for the steel market is at extremelyelevated levels…our survey respondents are the most bullish they’ve been inover five years”. In our recent discussions with clients (US marketingfeedback: 9 questions), we also agree that the earnings growth would reach anew high in 1Q17, but in our view it’s also likely to peak in the same quarter.

Mixed signals from the US on China as a currency manipulator: WhileTrump promised in his presidential campaign to declare China a currencymanipulator on his first day in office, last Thursday the new Treasurysecretary Steven Mnuchin said that the US Treasury will follow the normalprocess to review this issue. In other words, the result might not beannounced until mid-April. According to the last review in Oct 2016, the USTreasury has three criteria for that: (1) Trade surplus above US$20bn with theUS; (2) Current Account surplus above 3% of GDP; and (3) Net purchase ofUS$ above 2% of GDP. Currently China only meets the first one whilecountries like Germany, Japan and Korea meet two of them. Especially, Chinais net selling US$ to make the RMB stronger, not weaker. It seems more likelythat this April the US Treasury will retain China in the monitoring list instead ofdeclaring it as a currency manipulator. But on other hand, the threat of a tradewar from the US also limits the room for the Chinese government to allow forfurther RMB depreciation, supporting our anti-consensus call that the periodof one-way depreciation has ended.

Two Assemblies to start: Next week (March 3), China will kick off the TwoAssemblies, i.e. the National People’s Congress (NPC) and the People'sPolitical Consultative Conference (CPPCC). During the meeting, policymakers would announce this year’s GDP growth target as well as other majorpolicy targets. We expect the GDP growth target to be 6.5%, compared with6.5-7.0% last year. For those not familiar with China’s political system, theNPC is the national legislature and has the highest state power according tothe Constitution. That said, the 19th Communist Party Congress to be held thisFall is the time for power transition. Based on the personnel changes this Fall,the NPC next year will oversee a change in the State Council, which isChina’s central government. During the normal time, Two Assemblies servemore like a forum for various social classes to express their views than aplace to make market-moving decisions.

Property market cooling down: 70-city home prices data released last weekshowed the property market was cooling down further (Fig 31 and 32), as theannualised sequential growth weakened to 2.9% in Jan (vs. 3.1% in Dec and7.3% in Nov). Both T1 and T2 cities posted 0% sequential growth, whilelower-tier cities outperformed. In Jan-Feb, top 30 cities we track (Fig 35) couldsee a decline of around 20% yoy or more in sales. However, both price andanecdotal evidences suggest that lower tier cities are holding up better.According to the past experiences, lower-tier cities are also overwhelmed by anational property cycle, so we expect the market there to cool down as welllater this year. For 2017, our forecasts for growth of new home sales and newstarts are down 10% and 5%, after rising 22% and 8% in 2016.