Heavyweight 89-page China report
Fiscal/investment outlook generally supportive: We have observed, since mid-2010, a 'stealth loosening' on approval and construction of investment projects. Government expenditures, particularly in transportation and utilities, appear to have picked up. The latest September growth and expenditure data corroborates this view. We expect the relatively loose fiscal policies to extend into 2011E, with a focus on areas like Western provinces development, infrastructure and social housing. Activity data in September did not show as much slowdown from energy-conservation efforts as we had feared. We anticipate some production suspension to extend to year-end but most of the restrictions to be lifted starting 1Q11E.
Monetary policies more selective but still accommodative: Monetary policies have shown a stabilization in M2 and credit growth in 3Q10, ending several quarters of rapid deceleration on the back of stimulus phase-out. The lending pace has run noticeably ahead of the usual 3:3:2:2 quarterly allocation vs. the 2010E loan quota of Rmb7.5tn - perhaps one trigger for the recent PBOC RRR hike against six selective banks. PBOC liquidity absorption has remained slow. RRR and the unexpected rate hike on October 19th do signal a slightly tighter monetary policy bias than before, but we have not seen any clear evidence of severe commercial bank lending restrictions thus far. We forecast a roughly stable loan quota for 2011E of Rmb7.5tn, which implies a slight slowdown to 16% yoy growth (vs. 19%- 20% in 2010E) due to a larger base.
Inflation pressures likely to fade out soon: Inflation has been stickier than we had expected in 2H10E so far, but we retain our view that CPI growth should peak out in October. The latest monthly data shows that non-food CPI continued to soften, and we believe food CPI was mainly driven by weather-related temporary factors. Towards yearend we expect CPI to decelerate noticeably as food CPI eases, and as the time-lag effects of slower growth in 2Q10 work their way into less CPI pressure. As highlighted in our August 5, 2010 report titled 'Higher wages have not led to higher inflation and, so far, have not impaired China's international competitiveness,' we demonstrated that the pace of productivity improvement has been fast enough to offset wage increases so there has been no clear evidence of causal effect between wage growth and inflation problems. In addition, recent monthly data has not shown any new evidence of labor costs outpacing output growth.
Eoin Treacy's view With the US mid-term elections, anticipated Fed, Bank of England and Eurozone
announcements and a heightened sense of anxiety towards the debt of peripheral
Eurozone countries, the impressive stock market performance of the Chinese mainland
indices since the mid-Autumn festival is receiving muted attention.
The headwind of increased supply in the form of bank issuance and the unlocking of non-tradable shares is lessening, valuations are attractive from an historic perspective, growth remains buoyant, inflationary pressures are being tackled and the advance of the housing market has moderated. The Shanghai A-Shares Index has been ranging for the last few weeks, allowing the short-term overbought condition to unwind and a sustained move below 3000 would be required to question scope for further medium-term upside.
This Performance Filter of the CSI300 sectors highlights the outperformance of consumer related sectors for much of the year with information technology, consumer staples and healthcare leading. Large caps representing the property and export sectors such as financials, industrials and materials have begun to play catch up and have significant medium-term recovery potential.