Chinese growth model welcomes back an old friend
Central bank monetary easing and the knowledge that China has aggressively returned to its investment-led growth model are set to buoy markets today. While Chinese data weakened over the weekend, fixed asset investment and the real estate sector are benefitting from big government spending. The Chinese data release is likely to support materials and real estate sectors with China exposure, as well as commodity currencies like the Aussie dollar.
It is a delicate time in global markets as we witness a potentially significant change in major central bank dynamics. The ECB meeting last week moved away from targeting the currency into targeting credit growth and financial conditions, resulting in a huge move higher in the euro. The Fed and the BOJ have meetings this week as well, and it will be very interesting to see if some sort of secret “Shanghai Accord” at the G20 may have been reached that de-emphasized currency devaluations by central banks.
Concerns about a Chinese currency devaluation have grown significantly as the ECB and BOJ pursued competitive devaluations themselves. There is also a growing question as to whether central banks have decided to pull back on this to ease the devaluation pressures on China. This would also restrain USD strength, easing pressure on the US manufacturing sector. This could potentially be a huge recalculation for global flows, particularly given that long USD is still basically the most crowded trade in the world.
Nonetheless, in the short term there is a high likelihood that the Fed may choose a significantly more hawkish tone this week, as they want markets to be awake to the potential for another rate rise in June or July.
Stability in China, a potential bottoming in commodities and restraint in the USD all bode well for the Aussie dollar over the next few months.
China’s 2016 growth target entirely reliant on the property sector (again)?
Chinese data out over the weekend showed further weakening across the board, but it is clear that government spending and a recovery in the real estate market are helping hold up growth. China looks to be returning to a very familiar investment and real estate-driven growth pattern, somewhat at odds with their claims of economic rebalancing. PBOC governor Zhou Xiaochuan’s speech over the weekend emphasized that he did not foresee a major monetary expansion to hit the growth target.
While steady monetary easing throughout the year is likely, heavy fiscal spending will be necessary to underwrite the 6.5-7% growth target, putting a real upside risk to the 3% fiscal deficit target.
Retail sales and industrial production both came in below consensus estimates. But fixed asset investment held up much better than expected at 10.2% YTD YoY. Property sector data all surged in January and February release. This clearly shows you where January’s huge increase in Total Social Financing is going, giving further credence to the rebound we have seen in commodity prices.
China property starts turned positive for the first time since 2013, growing 13.6% YTD YoY. But growth in completions and sales also bounced to multi-year highs. Whilst very impressive, it’s difficult to see such an upswing in property construction continuing throughout the year. On Friday the PBOC also announced a new debt-equity swap for banks to clean up their non-performing loans, but a return to real estate investment driven growth this year will only add new NPLs to this growing pile.
The huge bounce in property indices looks unlikely to be sustained throughout the year:
The surge in credit growth looks to be focused on the real estate sector - a positive for commodities prices, but not for the rebalancing of the Chinese economy:
