Summary: We take the mini rate hike as a tightening measure. The
MLFlending today is also much lower than it was last year. We expect
moretightening measures in H1, including further mini rate hikes, to
Summary: Investment growth slowed slightly while industrial production
and retail sales stayed resilient in May. The property cycle is cooling
but not collapsing. We expect economic growth to slow gradually in the
next few quarters. The tightening of financial regulation is likely to
continue in Q3.
China macro:Comments on PBoC’s mini rate hike and Nov macro data。Following last night’s 25 bps FED hike, the PBoC took the opportunity to
raise theseries of short term OMO rates by 5 bps. The 7D reverse repo,
28 day reverse repoand 1Y MLF (medium-term lending facility) rates were
all hiked by 5 bps, to 2.50%,2.80% and 3.25% respectively. The 5 bps
rate increase this time round is much smallerthan the hikes in 1Q (the
last time that PBoC did a wholesale OMO rate hike), when itwas 10bps
each time (for a total of +20bps in 1Q).
www.bf88.com，Credit and banking asset growth slowed further; we still prefer big
PBoC today raised interest rates in its open market operations
(OMOs) by 5bps.
Economic activities were broadly stable in May (Figure 1). Fixed
asset investment (FAI) grew by 8.6% yoy ytd, slightly lower than 8.9% in
April. Retail sales and industrial production both grew at the same pace
as in April (10.7% and 6.5% respectively). Electricity production grew
by 5% yoy in May compared to 5.4% in April.
China macro:Comments on PBoC’s mini rate hike and Nov macro data。 It should be noted that despite these rate hikes, onshore market
funding conditionremains supported going into the seasonally strong
end-year and lunar new yeardemand period, with an estimated RMB1tn net
liquidity injections in addition to aboutRMB300bn release from the
targeted reserve requirement ratio (RRR) cut of 50bpsannounced in Sep
that will take effect from 2018.
New loans of Rmb1.12tr and TSF of Rmb1.6tr notably beat consensus
for Nov2017, but we do not see this as a turning point for monetary
policy. Indeed,adjusting for municipal bonds and equity raising, system
credit growth slowedfurther to 14.4% yoy from 14.9% the prior month
(Fig. 1). Looking at banks’balance sheets, asset growth fell below 10%
yoy (Fig. 6), dragged by shrinkagein interbank funding (Fig. 9). We are
likely at most halfway through thefinancial deleveraging process. New
regulations on asset management andliquidity risks will be phased in and
more rules will probably follow. In a tighterand more coordinated
regulatory environment, we still prefer big banks.
7-day repo, 28-day repo, and 1-year MLF rates were raised to 2.5%,
2.8% and3.25%, respectively, from 2.45%, 2.75% and 3.2%. Before this
mini hike, PBoChad kept OMO rates unchanged for nine months.
The slower growth of FAI is mainly driven by infrastructure
investment, which grew at 20.9% yoy ytd in May compared to 23.3% in
April. Property investment growth also edged down to 8.8% from 9.3%,
while manufacturing investment growth rose slightly to 5.1% from 4.9%
This suggests that the 5 bps rate hike move is largely symbolic than
substantial, tosignal the central bank’s policy stance of prudent and
neutral remains unchanged andthat it remains determined to pursue its
deleveraging policy and prevention of systemicrisks by pricing higher
costs of funding. After the close of the Communist Party ofChina’s
National Congress on 24 Oct, the Chinese government has introduced a
seriesof policy measures including the setting up of the State Council
Financial Stability andDevelopment Committee, easing market access to
the nation’s banking, securities andinsurance sectors and tightening of
regulations for wealth management products(WMP).
Slowest credit growth since Aug 2015; M2 growth rebounded.
We take PBoC’s move on OMO rates as a tightening signal. While this
move wascertainly well synchronized with the Fed rate hike, Fed rate
hike in itself does notnecessitate a PBoC rate move (PBoC’s OMO rates
were unchanged during the Fedrate hike in June). The PBoC statement
today pointed out that the gap betweenpolicy rates and market rates had
already widened too much in China, hence therate hike was necessary to
narrow the gap. This statement suggests the PBoCwill likely conduct more
mini rate hikes in 2018, as 5bp only narrowed the gapslightly (Figure
1). Interest rate remains a near term risk (see our recent note
onrisks). Our rates strategist Linan Liu expects a total of 25-50 bps
increase in OMOrates between now and end 2018 (see her recent note).
The property cycle shows sign of a gradual slowdown. New housing
starts grew at 9.2% yoy 3mma, compared to 11.1% in April (Figure 3).
Property sales grew at 18.6% yoy ytd in terms of value, and 14.3% in
volume, slower than 20.1% in value and 15.7% in volume in April (Figure
4), though on monthly basis it actually rebounded to 14.1% from 10.0% in
value, and to 10.2% from 7.7% in volume. As mortgage rates rise, we see
the property cycle to cool off in the next few quarters, but at a
At the same time, raising domestic rates also helps to keep interest
rate spread withUS rates in line, thereby lowering risks of capital
outflows and formation of RMBdepreciation expectations.
Adjusted credit growth (including municipal bonds) of 14.4% yoy this
monthwas the slowest in the past 27 months. Looking at the breakdown,
loangrowth accelerated to 13.3% yoy (vs. 13.0% in Oct), while shadow
bankingand corporate bond financing remained muted. Shadow banking
components(entrusted loans, trust loans and undiscounted bills) made up
only 11% of NovTSF versus 22% in 1H17. This suggests that following a
series of tighteningrules, banks are bringing off-BS shadow banking into
on-BS. By de-leveringshadow credit and cutting off financing layers, M2
growth actually reboundedfrom a historical low of 8.8% yoy in Oct to
9.1% yoy. We calculate M2/GDPstayed flattish mom at 207% versus a record
high of 210% in March.
PBoC liquidity injections have also reduced compared to last year.
Net liquidityinjection from MLF was only 170bn so far in Q4, compared to
1,500bn in Q4 2016(Figure 2). The MLF shortfall was only partially
offset by 500bn more liquidityinjection from repos. The overall
reduction in liquidity injection and the shorteningof liquidity
injection durations both suggest tighter monetary conditions. We
thinkthis is appropriate given the policy priority of financial
Other leading indicators show mixed signals. The funds available for
FAI grew by -0.1% yoy ytd. While this improved from -1.4% in April and
-2.9% in March, it is still in negative territory. Planned investment
for new projects grew by -5.6% yoy ytd, only marginally better than
-5.9% in April (Figure 5).
In its statement, the PBoC said that the rates increase will narrow
the gap betweenmoney-market rates and the open market operation (OMO)
rates and is in reaction tothe US Fed rate increase a day earlier.
Recently, there have been concerns that FEDmonetary normalization and a
tax cut in the US will increase pressure on capitaloutflows from China.
The PBoC will continue to watch policy moves in the US but rapidinterest
rate increase in China is unlikely given slowing growth. We expect the
PBoC toguide OMO rates gradually higher across a series of micro moves
which means thatthere is likely more to come. As a result, the 1M
interbank repo rate is now back up atthe high for the year at 5.50%.
Who is borrowing? Corporates levered up while household moderated.
Monetary developments are in line with the broader policy picture.
UnderPresident Xi’s second term, policy focus will be more on
sustainability andquality, and less on speed. The Politburo meeting last
Friday, which set the tonefor economic policy in 2018, put “control
risks and lower leverage” as the topchallenge for 2018, followed by
fighting poverty and reducing pollution. Weexpect next week’s Central
Economic Work Conference to firm up this overallpolicy message and
provide more details on fiscal and monetary stances for 2018.
Inflation was stable in May. CPI rose by 1.5% yoy and -0.1% mom in
May, compared to 1.2% and 0.1% in April (Figure 6). PPI rose by 5.5% yoy
and -0.3% in May, compared to 6.4% and -0.4% in April. We expect CPI
inflation will be on an upward trend in H2 and rise above 3% in Q1 2018.
We think PPI inflation will drop moderately as growth slow in H2.
Also worth noting is that China’s 3- day annual Central Economic
Work Conference willkick off next Mon (18 Dec). The economic plans for
2018 will likely focus on curbingfinancial risks, poverty reduction,
fighting pollution and reform of the property market ashighlighted
during the Politburo meeting last week.
A breakdown by borrowers suggests that corporates have levered up
whilehousehold moderated in November, with their new credit making up
38%/28%of the new system credit (30%/29% in Oct); government borrowing
narrowedto 30% of the total new credit. For households, monthly new
short-term retailloans normalized to Rmb203bn in November 2017 against
an average volumeof Rmb162bn in 10M17. Elsewhere, mortgage loan growth
slowed to 23.2%yoy in November (Oct: 24.4%).
Economic activity indicators released today suggest continued modest
growthin Nov. Fixed asset investment (FAI) growth dropped by another
0.1ppts to 7.2%yoy ytd. Industrial production growth edged down to 6.1%
from 6.2%. Retail sales growth rebounded to 10.2% from 10%, thanks to
seasonal online sales events,but slightly fell short of market
expectations of 10.3% (Figure 3).
The monetary and fiscal policy stance will likely stay unchanged in
the next few months. The policy makers are likely comfortable with the
current economic condition, as growth and inflation are both stable.
Financial regulation remains to be the focus of policy makers. We think
the regulators are aware of the potential liquidity risk as we get
closer to the mid of the year. They may be cautious in June and avoid
tightening financial regulation excessively. But we think they will keep
financial regulation tight in Q3 until we see clear sign of economic
slowdown. We expect it to happen by the end of Q3 with PMI dropping
below 50. The policy stance will likely loosen from there.
Who is lending? Asset growth decelerated across the board.
Fiscal support to growth is fading. On-budget fiscal revenue growth
turnednegative in Nov (-1.4% yoy), compared to 5.4% in Oct. The revenue
shortfall islargely owing to a 12.5% decline in property sales related
taxes (Figure 4). Fiscalspending growth fell further to -9% yoy in Nov,
after turning negative in Oct.
China’s banking assets growth further slowed to 9.4% yoy in Oct (vs.
15.7% in2016). Banks have scaled back interbank borrowing and NCDs due
to risingfunding costs. This has led to the unwinding of interbank
lending. By lenders,asset growth was mainly dragged down by smaller
banks. Total asset growthof joint-stock and city/rural banks (44% of
total banking assets) decelerated to10.3% yoy in Oct from 19% in 2016.
Meanwhile, the Big Five banks’ (36% oftotal banking assets) asset growth
decelerated to 7.2% yoy in Oct (Sept: 8.5%).
On monetary front, total social financing growth fell to 12.5% from
13%, whileM2 growth rebounded to 9.1% in Nov from 8.8% in Oct (Figure
5). This suggestthat credit to the real economy remained modest; higher
bank loans are likely dueto banks bringing off-balance-sheet shadow
banking assets back to their balancesheet, and should not be interpreted
as rebound in real lending activities.
Policy outlook – smaller banks suffer from continual tightening.
As a surprise on the upside, property market rebounded in Nov.
Property salesgrew 13% in Nov from -1.7% in Oct (Figure 6). Housing new
starts rebounded to5% 3mma yoy from 0.7%. Government land sales revenue
also grew by 23% yoy.
Under the “dual-pillar” monetary framework discussed by President Xi
at theparty congress, we expect a combination of neutralized monetary
policy andtightening macro-prudential policy in the coming quarters, as
the goal ofdeleveraging has not been achieved and economic conditions
These developments added some uncertainty to the property market
outlook. Ourbaseline remains that the property market will cool down in
the next 6 months, asprices moderate, policy continues to tighten in
tier 3 cities, and mortgage ratesincrease.
Big banks should benefit from elevated market rates, while smaller
banks’funding pressure is mounting with interbank CD rates shooting
above 5%. Westill prefer big banks. Top picks: BOC, ABC and CCB.
Overall, Nov data is in line with our expectations that the economy
is slowingdown in Q4. We maintain our GDP forecast of 6.6% for Q4.
Growth willslow further to 6.3% in 2018, driven by tightened macro
policies and financialdeleveraging, downward property cycle, as well as
longer term structural trends(see our 2018 Outlook for more details).