China: optimism on the rise again

From Barclays EM research team:

  • The optimism reflects upside data surprises and positive news in July: a pilot SOE reform program with more SOEs in the pipeline; CNY1trn in PSL by the PBoC; a strong “flash” PMI after better Q2 data; and an increasingly friendly policy environment in the property sector, with loosened HPRs and discounted mortgage rates.
  • In May, we expected three stages of monetary easing: 1) Targeted easing, including relending and targeted RRR cuts; 2) (Targeted) interest rate cuts; and 3) System- wide RRR cuts. Although we highlighted upside risks to growth and raised our GDP growth forecast to 7.4% in June, we continued to argue that more monetary easing would be needed to lower financing costs and to achieve c7.5% growth.
  • Where do we go from here? In H2, we look for more fiscal spending, monetary loosening or targeted interest rate cuts, and see a higher probability of an RRR cut given capital outflows. We think the long-awaited official announcement on 29 July of the investigation into Zhou Yongkang, the biggest “tiger” implicated in the recent anti-corruption drive, will be taken positively by the market.
  • We noted signs of improvement in the property sector since June. We continue to look for the decline in house prices to support a further recovery in home sales and contain the slowdown in property investment in H2. We think further upside in infrastructure investment is limited, and remain cautious on the export recovery.
  • As growth stabilises, we expect the government to shift its focus to reforms in H2. We look for more details on budget/tax reforms, Hukou reform, SOE reforms, capital account opening (QFII and RQFII quota expansion, the Shanghai-Hong Kong Stock Connect) and exchange rate reform, and further financial market liberalisation and regulations on internet finance and shadow banking.

About the Author

Ana Fuentes
Ana Fuentes is The Corner Editor-in-Chief. Currently based in Madrid, she has been a correspondent in New York, Beijing and Paris for several international media outlets such as Prisa Radio, Radio Netherlands or CNN en español. Ana holds a degree in Journalism from the Complutense University in Madrid and the Sorbonne University in Paris, and a Masters in Journalism from Spanish newspaper El País. You can contact her at: anaf[at]thecorner.eu

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