Author: kltrader | Publish date: Mon, 23 May 2016, 09:31 AM
In a report released today, Macquarie Equities Research (MQ Research) highlight that China’s nominal GDP growth has accelerated from 6.0% to 7.2% in 4Q15 and 1Q16 and home prices jumped in April. However, this has been dampened by the likely hood of a Fed hike in June, resulting in a weakening RMB. Read more below…
- Markets weighed by macro uncertainties: Last week both H- and A-shares were largely flat. The main macro event was the hawkish FOMC minutes, which revived expectations of a summer hike. As a result, the dollar index jumped to a 7-week high (Fig 45) while the RMB fell to an 11-week low against the US$. In various financial markets, transaction volumes dropped as investors lacked the conviction to act. Sentiment has been dampened by plenty of macro uncertainties out there such as the Fed decision, oil prices, Brexit, China and US election. Indeed, this year so far is very difficult as most markets have been trendless, with consensus being overthrown rather quickly.
- How to read the recent RMB depreciation? To be sure, it’s mainly due to the strength of the US$, as during this period the RMB also strengthened against the currency basket (Fig 46). In 2016, the interaction between the world’s two largest economies has never been so important (see our earlier report: The implication of FOMC on RMB, 17 Mar 2016). Thanks to the dollar weakness, the RMB has been relatively stable after Jan and FX reserves increased in March and April. However, stability often leads to instability. The FOMC minutes in April showed Fed officials are less concerned about external risks than in the previous meetings, which increases the odds for a rate hike in summer. Down the road, if the dollar index returns to 100 (currently at 95), the RMB against dollar could depreciate to 6.8.
- Chinese economy in May: Largely stable : High-frequency data suggest the economy might slightly decelerate in May, but fundamentals remain solid and thereby policy should stay put. Cement prices has been rising for ten weeks in a row (Fig 28), reflecting the robust demand from property and infrastructure sides. Industrial metal prices such as steel and copper continued to drop last week, which might reflect more on liquidity flows than the changes in fundamentals. Inflation pressure has eased on falling vegetable prices and CPI inflation in May should stay at 2.3% seen in April. Meanwhile, oil prices rose to $49 last week. If it could stay there in 2H16 as MQ Research’s oil team forecasts, China’s nominal GDP growth would continue to trend up even if the headline GDP growth remains flat. It’s often overlooked that, while real GDP growth in 4Q15 and 1Q16 are almost the same (6.8% vs.6.7% yoy), nominal GDP growth has accelerated from 6.0% to 7.2%.
- Property market heating up: 70-city home prices released last week showed widespread price rally in April. Home price jumped 13% mom annualized on average, up from 11% in March (Fig 31). While price pressure in tier-1 cities eased slightly, more tier-2/3 cities saw home price increase. As such, 65 out of the 70 cities saw higher home prices in April (Fig 32). Looking back, it’s interesting to see that home prices also rise in lower-tier cities. Twelve months ago, the mainstream view in the street was that housing oversupply in lower-tier cities was so high that home prices there would never rise, unless inventory could be cut significantly. Now MQ Research knows that such a view is wrong. The change in inventory which is needed to turn home prices from falling to rising is not as big as people thought. Separately, the change in demand (or supply) which is needed to turn most steel plants from losing money to making money is also not as big as people thought. These are important lessons for China observers.
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