Macro Monday:The first meeting between Xi and Trump

A strong quarter for China stocks: Last week MSCI China dropped 1.2%,led by consumer staples and energy. The real estate sector slumped 4.1%,pressured by property curbs rolled out from more and more cities. That said,the past quarter was a great one for China stocks, as MSCI China rose by13.1% and the real estate sector surged by 21.2%. We see five tailwindsbehind the rally: (1) A stable RMB; (2) Strong earnings growth boosted by theongoing recovery; (3) A better-than-expected housing market; (4) The inflowsof mainland money to HK stock market; (5) A broad rally in EM currencies.

China to create a New Area in Hebei: The biggest news from China lastweek is the birth of a New Area in Hebei. Over the weekend, the governmentannounced that it would establish the Xiongan New Area, which is about 100km southwest of downtown Beijing. According to the plan, the New Area willtake over lots of jobs from Beijing and become the next Shenzhen andPudong, "a step crucial for the millennium to come." While the implication forChina’s economy as a whole is unclear, it is surely an important thematic playfor property and construction companies.

A summit ahead between Xi and Trump: This Thursday and Friday, XiJinping and Donald Trump will be meeting for the first time, in Florida. WhileTrump bashed China intensively during his campaign, it’s ironic that hispolicies so far have been quite friendly to China. For instance, he effectivelydismantled TPP, which China is deeply concerned about. He might suspendNAFTA, and it would help China in competing with Mexican goods for the USmarket. The US$ has been soft since he came into office, much easing thepressure on the RMB. That said, it’s too early to be complacent. During theirmeetings, the two leaders will surely discuss trade issues. Indeed, it’s abizarre world. While China just started trading with the world forty years agoshortly after Chairman Mao died, it now becomes the main defender of theglobal trade system.

NBS and Caixin PMI, which to believe? In March, the two PMIs sentcontradictory messages. The NBS Manufacturing PMI data rose to 51.8 inMarch, up from 51.6 in Feb. However, the Caixin PMI dropped to 51.2 from51.7. For the majority of the time, we think the NBS PMI is a better gauge ofthe economy, because it has a much larger sample size than the Caixin PMI.

But this time, we believe the Caixin PMI gives a more accurate message. Wediscussed the reasons in March PMI: Not as good as it looks. In short, theNBS PMI has seasonal adjustment issues, as historically it has never droppedin March. Stripping out the seasonal factor, the NBS PMI should see noimprovement in March. Indeed, as we discussed in the note above, while theongoing recovery is driven by 3R (reflation, restocking and real estate), thesubindices in the NBS PMI shows that reflation has started easing and therestocking cycle is close to an end.

March data preview: Robust growth with soft CPI inflation: China willrelease March and 1Q17 data over the next couple of weeks. Last week wepublished a preview on it. Overall, China’s economic growth in March still ranstable. Meanwhile, PPI inflation could fall from the peak in Feb, while CPIinflation could stay low at 1.0% yoy. 1Q17 GDP growth, to be released on 17April, could stay flat at 6.8% yoy, while nominal GDP growth could rise toaround 11%, the strongest pace in the past five years. That said, we alsoexpect 1Q17 to mark the peak of the cyclical recovery.