Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

In our view, the latest macro numbers are a bit light. Consensus is building around a gradual adjustment in home prices, but we still seem to be quite a ways away from the peak. What has us worried though is the cautious consumer, who remains timid in a benign inflationary environment.
Industrial production (IP) has pulled its share of the weight, but momentum may be waning. Headline IP growth was 8.8% y/y for the month of May, down from 9.8% a month earlier. Key items are tracking reasonably well. We believe monthly IP growth will settle in at the 6% y/y level in 3Q21, adjusted for the blip in 2020. The wildcard seems to be export strength going forward. We are marginally more optimistic than most on that front.
Infrastructure investments were weaker than expected last month. However, there is no reason to be alarmed. The public project pipeline is heavily weighted towards 2H21. And local governments have a CNY4.27tn war chest to spend, to be funded by a recently approved bond issuance quota. On the other hand, we were somewhat taken aback by how well property investments held up, despite tighter financing conditions.
Buoyant housing prices have not made homeowners loosen their pockets. Consumer confidence appears to be fragile. Retail sales growth ticked up only modestly last month. And the weak trend was evident in both rural and urban areas. The hospitality industry is not out of the woods yet. The situation in southern China certainly isn't helping.
We believe credit growth will largely determine how the economy will fare in the second half of the year. As we pointed out in our insight <a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a>, China's Credit Impulse is now sinking into negative territory. And the PBOC's hands are tied. If this sounds familiar, it may be because we are right back where we were before the pandemic, with concerns over China's debt problems back in the spotlight.
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-china-s-monetary-conditions-a-notch-tighter-in-may" target="_blank" data-smartkarma-citation="insights:51799" rel="noopener">Glut and Famine: China's Monetary Conditions a Notch Tighter in May</a> </li>
</ul>

In our view, the latest macro numbers are a bit light. Consensus is building around a gradual adjustment in home prices, but we still seem to be quite a ways away from the peak. What has us worried though is the cautious consumer, who remains timid in a benign inflationary environment.
Industrial production (IP) has pulled its share of the weight, but momentum may be waning. Headline IP growth was 8.8% y/y for the month of May, down from 9.8% a month earlier. Key items are tracking reasonably well. We believe monthly IP growth will settle in at the 6% y/y level in 3Q21, adjusted for the blip in 2020. The wildcard seems to be export strength going forward. We are marginally more optimistic than most on that front.
Infrastructure investments were weaker than expected last month. However, there is no reason to be alarmed. The public project pipeline is heavily weighted towards 2H21. And local governments have a CNY4.27tn war chest to spend, to be funded by a recently approved bond issuance quota. On the other hand, we were somewhat taken aback by how well property investments held up, despite tighter financing conditions.
Buoyant housing prices have not made homeowners loosen their pockets. Consumer confidence appears to be fragile. Retail sales growth ticked up only modestly last month. And the weak trend was evident in both rural and urban areas. The hospitality industry is not out of the woods yet. The situation in southern China certainly isn't helping.
We believe credit growth will largely determine how the economy will fare in the second half of the year. As we pointed out in our insight Glut and Famine: We Might See Snow in China This Summer, China's Credit Impulse is now sinking into negative territory. And the PBOC's hands are tied. If this sounds familiar, it may be because we are right back where we were before the pandemic, with concerns over China's debt problems back in the spotlight.
Related Insights


Glut and Famine: We Might See Snow in China This Summer 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 

Glut and Famine: China's Monetary Conditions a Notch Tighter in May 


China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows

Monthly Newsletter | Jun 2021
Total social financing (TSF) data for May reinforce our view that China's credit impulse is set to dive deeper into negative territory. This may put a lid on the commodities rally in the coming months and we expect the PPI to edge down in 2H21.
Net TSF flow fell 40% y/y. Adjusting for the blip in 2020, the CAGR for May would have been a less alarming +6% y/y. Beijing has done its part by greenlighting CNY4.27tn of local government bond issuance in the remainder of the year. But we fear credit growth in the private sector may remain subdued.
Headline loan growth was in line with our expectation. That said, corporate loan originations might have been buoyed by the unwinding of off-balance sheet activities and delayed bond sales. Meanwhile, new mortgages have continued to fall, but perhaps still not fast enough to rein in the runaway property market.
Deposit growth saw a sharp rebound from last month, mainly from non-sticky sources. New deposits from households and corporates were close to zero. Fiscal deposits, non-bank financial institutions and the interbank made up for the difference. 
Looking ahead, we see limited room for significant monetary maneuvers by the PBOC in either direction. In our view, any incremental policy shifts will likely be targeted at small businesses and real estate. Our base case is for the loan prime rates to hold steady at 3.85% and 4.65% for one-year and five-year tenors, respectively. However, we would begin to price in an increasing probability of a rate hike on the long end as a last resort to deal with the property bubble.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: China TSF-based Credit Impulse (%)</td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/212/524/original/image_72331103621623410270234.png?1623410270" class="editor-image img-responsive" data-smartkarma-image-id="212524"></figure>
Note: Index value = 12M change in new system credit / Nominal GDP
Source: PBOC, National Bureau of Statistics, Our analysis

</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-china-s-monetary-conditions-a-notch-tighter-in-may" target="_blank" data-smartkarma-citation="insights:51799" rel="noopener">Glut and Famine: China's Monetary Conditions a Notch Tighter in May</a> </li>
</ul>

Monthly Newsletter | Jun 2021
Total social financing (TSF) data for May reinforce our view that China's credit impulse is set to dive deeper into negative territory. This may put a lid on the commodities rally in the coming months and we expect the PPI to edge down in 2H21.
Net TSF flow fell 40% y/y. Adjusting for the blip in 2020, the CAGR for May would have been a less alarming +6% y/y. Beijing has done its part by greenlighting CNY4.27tn of local government bond issuance in the remainder of the year. But we fear credit growth in the private sector may remain subdued.
Headline loan growth was in line with our expectation. That said, corporate loan originations might have been buoyed by the unwinding of off-balance sheet activities and delayed bond sales. Meanwhile, new mortgages have continued to fall, but perhaps still not fast enough to rein in the runaway property market.
Deposit growth saw a sharp rebound from last month, mainly from non-sticky sources. New deposits from households and corporates were close to zero. Fiscal deposits, non-bank financial institutions and the interbank made up for the difference. 
Looking ahead, we see limited room for significant monetary maneuvers by the PBOC in either direction. In our view, any incremental policy shifts will likely be targeted at small businesses and real estate. Our base case is for the loan prime rates to hold steady at 3.85% and 4.65% for one-year and five-year tenors, respectively. However, we would begin to price in an increasing probability of a rate hike on the long end as a last resort to deal with the property bubble.



Exhibit 1: China TSF-based Credit Impulse (%)




Note: Index value = 12M change in new system credit / Nominal GDP
Source: PBOC, National Bureau of Statistics, Our analysis





Related Insights


China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 

Glut and Famine: China's Monetary Conditions a Notch Tighter in May 


Glut and Famine: We Might See Snow in China This Summer

The divergence between China's May PPI and CPI was materially wider than expected. At 7.7%, the gap has reached a new high. Cost pressures on mid/downstream producers are mounting, although in our view, a good portion of that risk has been priced into equity valuations. Consumer prices will likely remain benign for the rest of the year, owing to subdued food prices and Beijing's tight grip on the supply chain (Exhibit 1).
The sharp bounce in PPI is reminiscent of what we saw in 2010 and 2017. But the external environment is vastly different from both monetary and geopolitical perspectives. In any case, we believe we are close to the peak in the cycle, if we are not already there.
Headline CPI was benign, putting concerns over tightening to rest for the time being. To be clear, inflation will gradually trickle down to the consumer, but the pace appears to be steady. At the current rate, we see CPI ending the year at the 2% level. We believe this scenario is supportive of a rotation into consumer cyclicals.
Overall, the new trade and inflation data reinforce our view that monetary policy will stay the course in 2H21. But we will probably see moderately tighter lending conditions through the summer and autumn. Slower credit growth may also weigh on construction activity, curbing further commodity rallies. 
With consumer prices in check, policymakers will remain focused on frothy property values. The key policy risk continues to shift to the long end of the lending curve, with marginal upward strain on the five-year loan prime rate on which mortgage pricing is based.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: China | CPI &amp; PPI % Change y/y</td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/212/158/original/image_705612152181623231380328.png?1623231381" class="editor-image img-responsive" data-smartkarma-image-id="212158"></figure>
Source: National Bureau of Statistics
</td>
</tr>
</tbody>
</table>

The divergence between China's May PPI and CPI was materially wider than expected. At 7.7%, the gap has reached a new high. Cost pressures on mid/downstream producers are mounting, although in our view, a good portion of that risk has been priced into equity valuations. Consumer prices will likely remain benign for the rest of the year, owing to subdued food prices and Beijing's tight grip on the supply chain (Exhibit 1).
The sharp bounce in PPI is reminiscent of what we saw in 2010 and 2017. But the external environment is vastly different from both monetary and geopolitical perspectives. In any case, we believe we are close to the peak in the cycle, if we are not already there.
Headline CPI was benign, putting concerns over tightening to rest for the time being. To be clear, inflation will gradually trickle down to the consumer, but the pace appears to be steady. At the current rate, we see CPI ending the year at the 2% level. We believe this scenario is supportive of a rotation into consumer cyclicals.
Overall, the new trade and inflation data reinforce our view that monetary policy will stay the course in 2H21. But we will probably see moderately tighter lending conditions through the summer and autumn. Slower credit growth may also weigh on construction activity, curbing further commodity rallies. 
With consumer prices in check, policymakers will remain focused on frothy property values. The key policy risk continues to shift to the long end of the lending curve, with marginal upward strain on the five-year loan prime rate on which mortgage pricing is based.



Exhibit 1: China | CPI &amp; PPI % Change y/y




Source: National Bureau of Statistics





China Macro: PPI Peaks, While CPI Eases Tightening Fears

May export data were considerably weaker than expected, but in our view, it's still much too early to call an inflection point.
Exports surprised on the downside. In dollar terms, exports were up 27.9% y/y, shy of the 30+% level the market expected.  The weakness came primarily from textile, home electronics and medical equipment. Even if we exclude the impact of higher demand for pandemic-related goods in May 2020, the numbers still look weak across the board, with momentum retreating amongst China's major trading partners.
On the other hand, imports remained robust. Imports were up 51.1% y/y, ahead of expectations. Inflation, transitory or not, continued to drive import prices higher. Unsurprisingly, fuels, metals and soy were the key components of the story here.
China's trade surplus rose to USD45.5bn, an increase of 5.2% y/y or 6.3% m/m, after adjusting for the 2020 anomalies. Meanwhile, the country's FX reserve reached a recent high of USD3.22tn, up 3.9% y/y or 0.7% m/m, thanks to the weak USD. We see USD/CNY testing the 6.3 level in the coming months.
Looking ahead, we see reasons to remain optimistic about export growth in the next few quarters, but the mix will likely change. Despite the worrying situations in India, Singapore and Taiwan, retail activity has picked up noticeably in many parts of the world. Google Mobility provides a useful alternative dataset to gauge the reopening progress. In our opinion, these figures point to continued support for mid/downstream sectors (Exhibit 1).
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 726.047px;">Exhibit 1: % Change in Visits to Retail &amp; Recreational Spots | Trends</td>
</tr>
<tr>
<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/211/860/original/image_26179632271623124889068.png?1623124890" class="editor-image img-responsive" data-smartkarma-image-id="211860"></figure>
Source: Google; Our analysis
</td>
</tr>
</tbody>
</table>

May export data were considerably weaker than expected, but in our view, it's still much too early to call an inflection point.
Exports surprised on the downside. In dollar terms, exports were up 27.9% y/y, shy of the 30+% level the market expected.  The weakness came primarily from textile, home electronics and medical equipment. Even if we exclude the impact of higher demand for pandemic-related goods in May 2020, the numbers still look weak across the board, with momentum retreating amongst China's major trading partners.
On the other hand, imports remained robust. Imports were up 51.1% y/y, ahead of expectations. Inflation, transitory or not, continued to drive import prices higher. Unsurprisingly, fuels, metals and soy were the key components of the story here.
China's trade surplus rose to USD45.5bn, an increase of 5.2% y/y or 6.3% m/m, after adjusting for the 2020 anomalies. Meanwhile, the country's FX reserve reached a recent high of USD3.22tn, up 3.9% y/y or 0.7% m/m, thanks to the weak USD. We see USD/CNY testing the 6.3 level in the coming months.
Looking ahead, we see reasons to remain optimistic about export growth in the next few quarters, but the mix will likely change. Despite the worrying situations in India, Singapore and Taiwan, retail activity has picked up noticeably in many parts of the world. Google Mobility provides a useful alternative dataset to gauge the reopening progress. In our opinion, these figures point to continued support for mid/downstream sectors (Exhibit 1).



Exhibit 1: % Change in Visits to Retail &amp; Recreational Spots | Trends




Source: Google; Our analysis





China Macro: Exports Disappoint, but It's Still Early in the Game

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a> consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.There were 21 changes to the index at the June review, and we expect up to 24 changes in the December review. Estimated one-way turnover is 4.06% and there are 4 inclusions and 11 deletions that could have more than 1 day of ADV to trade.With passive tracking products holding around US$28bn of AUM, plus another US$35bn in open interest on the listed futures, there could be significant moves in the inclusion/exclusion names ahead of the rebalance announcement. There will only be 9-10 trading days between the announcement of the changes and the implementation, so having a pre-position should pay off.

The Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.There were 21 changes to the index at the June review, and we expect up to 24 changes in the December review. Estimated one-way turnover is 4.06% and there are 4 inclusions and 11 deletions that could have more than 1 day of ADV to trade.With passive tracking products holding around US$28bn of AUM, plus another US$35bn in open interest on the listed futures, there could be significant moves in the inclusion/exclusion names ahead of the rebalance announcement. There will only be 9-10 trading days between the announcement of the changes and the implementation, so having a pre-position should pay off.

CSI300 Index Rebalance Preview: 21 Changes in June, Could Be 24 in December

China

Shenzhen Composite Index is an actual market-cap weighted index (no free float factor) that tracks the stock performance of all the A-share and B-share lists on Shenzhen Stock Exchange. The index was developed on April 3, 1991 with a base price of 100. 

Shenzhen Stock Exchange Composite Index (SZCOMP INDEX)

Shenzhen Stock Exchange Composite Index (SZCOMP INDEX)

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows

China's latest macro data are uninspiring. We are particularly concerned about weak consumer spending. The other domestic GDP components also point...

Stanley Tsai, CFA

Glut and Famine: We Might See Snow in China This Summer

TSF data for May reinforce our view that China's credit impulse is set to dive deeper into negative territory. This may put a lid on the...

Stanley Tsai, CFA

China Macro: PPI Peaks, While CPI Eases Tightening Fears

In our view, China's PPI has likely peaked, while CPI will remain benign. The current trajectory suggests limited room for monetary maneuvers. And...

Stanley Tsai, CFA

China Macro: Exports Disappoint, but It's Still Early in the Game

May export data were considerably weaker than expected, but in our view, it's still much too early to call an inflection point.

Stanley Tsai, CFA

CSI300 Index Rebalance Preview: 21 Changes in June, Could Be 24 in December

There could be 24 changes to the CSI300 index at the December review with an estimated one-way turnover of 4.06%. 4 inclusions and 11 deletions are...

Brian Freitas