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.