State of China’s economy:Growth steady at the late-cycle phase

The note includes our updated macro views, Aug data forecasts and amonthly macro chartbook.

We maintain the view that China’s economy is at the late-cycle, asdiscussed in last month’s State of China’s economy, after receiving the Julydata (China’s economy in 15 charts), as well as the high-frequency data inAug. Nominal GDP growth bottomed in 4Q15, after we called the U-shapedrecovery in Aug 15. The subsequent recovery peaked in 1Q17 and has had avery slow slowdown since then, thanks to the property sector and the externaldemand. Over the process, expectations have been much more volatile thanfundamentals, as shown by the roller coaster in iron ore price (Fig 25 inside).

For next year, we are more cautious than consensus, expecting China’s GDPgrowth to slow to 6.0% in 2018 from 6.8% in 2017.

For Aug, we expect the growth data to remain steady and both the CPIand PPI inflation to edge higher. Before the 19th Party Congress which willstart from 18 Oct, policy makers will do whatever it takes to maintain stability.

However, entering September, the uncertainties from the global side couldrise, including the Germany election, the US debt ceiling, the FOMC meeting,the ECB meeting as well as the ever-lingering geopolitical risk from NorthKorea. As such, the market volatility could rise after the summer lull.

Limited near-term risks from China… Overall, the macro backdrop forChina remains supportive near-term. Unsurprisingly, earnings data for 1H17looks great, as this period coincides with the peak of this round of recovery.

Banks look good for now, as their earnings growth, which bottomed in 4Q16,lags one year behind the recovery. Moreover, improved corporate earningsand cash flows lower the concerns on asset quality and bad debt. All thesemake the rally this time much healthier compared with the one in 2015. As theParty Congress approaches, policy makers refrain from staging another roundof regulatory storm like the one this spring. With the eased liquidity pressure,the A-shares market had its best month of this year by rising 3% in Aug. Oneconcern from investors is that Rmb2.3tn of interbank CD is to mature in Sep.

But it is not very likely to cause too much market turbulence, as the PBoCwould try its best to maintain a stable liquidity environment.

… but substantial medium-term risks: On one hand, the economy couldcontinue to slow in the next 12 months as we mentioned above. Moreimportantly, after the Party Congress, this round of political business cycle,which has supported growth in the past two years, will end and the economywill enter uncharted waters. The market has been very familiar with the minicyclemode since 2012, but it’s unclear whether it will continue for the nextfive years. The first signal should come from the Central Economic WorkConference this Dec, which would set the growth target for the next year.

Positive outlook for the RMB: While we are cautious about the economy,we are positive on the RMB. The RMB has strengthened 4.5% against theUS$ in the past three months, thanks to the weak US$ and the new “countercyclical”factor. We see uncertainties in the near term as the US$ seems oversold.

But for the next 12 months, we remain positive toward the RMB, mainlydue to eased depreciation expectations and improved capital flows. We justpublished a note titled Will Yuan hit 6.4 against US$, in which we discussedour outlook for the RMB. (Please see next page for Aug data preview)