2014-08-15

Minsheng: 4 Concerns About Chinese Economy

Via wallstreetcn.com, a report from Minsheng Securities.

The 4 concerns are as follows:

1. Can the real estate market stabilize? Property market slowdown worse than in 2011 and 2008. Included are the following two charts. The first shows inventory in blue bars (floor space for sale divided by 12-month average sales) versus cumulative real estate investment. The second shows developer capital (blue bars) versus average mortgage rates.


2. Can infrastructure investment continue to grow rapidly? Here is a chart of government land sale revenue (blue) and planned sales (red). Land sales fund infrastructure development at the local level.

3. Can the micro-stimulus be repeated? This was a concern of mine since it was reported that some governments started projects in Q2 instead of later this year, pulling forward spending. This chart shows the surplus money from the first half (blue bar). There is not enough money to repeat the micro stimulus in Q3 and Q4, assuming credit doesn't ease.

4. Can Chinese exports recover?

Chinese Containerized Freight Index (CCFI) and Baltic Dri Index (BDI). Minsheng does not see export growth continuing due to rising costs and weak growth in developed markets.




报告:中国经济存在四大隐忧 楼市问题比前2次更严重
Sometimes, the market is the most rational. But sometimes, the market seems to be the most emotional, that consensus will often become consistent misjudgment, often about the difference between the expected market performance. The fourth quarter of last year, most people expect the Chinese economy steady for the better, the results of the first quarter of this year's economic stall down. In the second quarter of this year, most people also expect China's economy will slump, the result of economic growth contrarian rebound. Now, we also expect the economy will speed up the recovery in the second half, which seems to have overly optimistic too. Both from internal and external environment, the economic recovery in the second half hidden faces at least four points, the market may be expected in the first half from a negative difference (excessive pessimism) toward positive expectations difference (overly optimistic).

1, the first big worry: real estate is really stabilized yet?

Since mid-July, with the local government to relax the restriction action escalating real estate sales indeed there have been some signs of improvement, but the effect is not obvious, persistent doubt. From the perspective of buyers, mortgage environment is still tight in the second quarter of individual housing loan interest rate from 6.70% to 6.93% rise further, a new record high since 2012 cuts, just to be, and speculative demand will be suppressed. From the developers' point of view, the pressure also increase. First, the inventory pressure, this pressure is not limited to short-term, but long-term problems. Since 2010, four trillion investment during the gradual completion, resulting in continued supply of real estate faster than sales, inventory constantly backlog, the current real estate inventory / sales ratio rose to 2.3 from 5.1 in 2010, at a high level since 2003, the future destocking likely to continue for several years, followed by investment down. Second, funding pressures, non-standard tightening, banks increasingly cautious on real estate projects, foreign capital inflows slowed superimposed short-term real estate financing is still not optimistic. Since last November, the growth rate of real estate investment funds in place a continuous decline from 27.6% to 3%.



Minsheng Macro: China's economy in the second half of the four major worries

Figure

Compared with 2008 and 2011 of two real estate adjustment cycle, this problem is more serious:

1) The first two are mainly real estate adjustment of monetary policy tightening, or by the purchase of the policy impact of external factors such as overweight, and a decline in sales this year, real estate investment is the high mortgage rates and high prices under endogenous shrinkage, and therefore sensitive to policy lowered.

2) Comparison of three easing, twice before and both times RRR cuts this strong stimulus, along with a large discount mortgage rates, but this year the situation is, although the central bank's window guidance, but the bank debt The system increases the cost of lifting mortgage rates rigidity, the second quarter of this year, mortgage rates rise, not fall.

3) the current restriction policy loosening of the city, the higher the per capita housing ownership, investment property was therefore under no appreciable increase in the rate expected contribution to the demand for the purchase of a limited release.

4) Real estate stocks rose again to historic highs.

On the whole, sales stabilized yet firm, investment pressure is also increasing. If the policy is to maintain the current state of the real estate hardly changed during the year, which will be upstream of the manufacturing sector, and local revenues, consumer and other related industrial chain direct impact, dragging down economic recovery.

2, the second largest concerns: high growth in investment in infrastructure will continue to outshine it?

Among the first half of the investment, infrastructure investment of the fastest growing (22.8% of total investment), is one of the main driving force in real estate investment hedge downside (stimulating investment picked up 0.9 percentage points), but it is difficult to continue in the second half. Historically, investment in infrastructure and state budget funds are basically the same trend, which is slightly ahead of the former, in June by the state budget funds from the 19.7 percent growth rate last month fell sharply to 15.5% is not a favorable signal. In addition, another source of government funds of funds investment in infrastructure is stretched, which are mainly non-tax revenue land and some extra-budgetary revenue. Dragged down by the real estate downturn, the local government land transfer revenue growth from 44.6% down to 26.3% last year, significantly, the corresponding spending growth fell to 24.8 percent from 41.9 percent. The extra non-tax revenue was also significantly affected by the eight provisions, resulting in overall growth of government funds fell to 23.3 percent from 39.2 percent. The real estate market downturn will reduce the willingness to invest in real estate, land revenue future is still facing great pressure, which will become the body of the shackles of investment in infrastructure.

Minsheng Macro: China's economy in the second half of the four major worries

Figure

3, the third major worry: "Micro stimulus" will further upgrade?

Recovery in the second quarter, largely benefited from the "micro-stimulus" policies. Fiscal policy, the State Department since April almost every executive will be launched steady growth policies, including the expansion of railway investment, expanding export tax rebates, tax cuts and other small and micro enterprises, driven by expenditure breakdown recovery. Monetary policy, quasi-continuous take directional drop, refinancing, PSL, such as easing measures to maintain a relatively ample liquidity environment. But look at the second half, the intensity of policy easing may be difficult to increase.

Monetary policy will gradually return to neutral from easing. The central bank released a clear signal in the second quarter monetary policy report and a recent seminar: First dilute the economic growth, the expression of the need to decrease the total amount of loose; Second stressed debt risk, expression is the total amount of loose effectiveness weakened; third is worried about inflation, easing the expression of total operating space is smaller risks. Overall, the total amount of loose possibility can be ignored. A quarterly report on the central bank believes that the total amount of money and credit and financial community is "reasonable steady growth", the total money supply is "slightly down", and the second quarter of the central bank believes the total amount of money and credit and financial community is "rapid growth" , the total money supply is "clearly picked up." This change can also be seen from the central bank that the current liquidity environment has been more abundant, not the total problem. For targeted easing "Reflection" also means that future orientation loose very difficult to have increments. In addition, with the impact of natural disasters pig cycle and gradually revealed, or touching 3% by the end of inflation, which the central bank will also further easing constraints.

Fiscal policy has also been ahead of overdraft, insufficient loose space in the second half. Fiscal spending this year and previous years is different, because the government began to accelerate progress in fiscal spending, there has been a phenomenon spend half assault, the cumulative surplus in the first half only 548.4 billion, lower than last year's 339.3 billion, leaving a deficit in the second half from the second quarter space accounted for 140% current deficit of less than 196 percent of the historical average, which makes the phenomenon of money by the end of the assault will be weakened.

Minsheng Macro: China's economy in the second half of the four major worries

Figure

4, the fourth major worry: exports has ended seven-year itch yet?

The case of weak domestic demand, external demand in the second quarter improved to become an important driving force of economic stabilization. This stabilization is the result of short-term positive resonance: From the outside, the global economy out of the United States arctic weather shocks, usher in a bottoming out; Internally, the high base of false trade caused disturbances disappeared after May, the government also continuous the introduction of expanded export tax rebates, customs clearance facilitation "steady trade" measures, while the sharp depreciation of RMB real effective exchange rate, exports also have some stimulating effect.

July exports surged to 14.5 percent, but the reason is likely to be caused by fluctuations in exchange rates and production time dislocation related to the declaration, should not be interpreted as a significant boost external demand. July import data did not significantly rebound in Europe, and European PMI continued to decline, China's export container index is flat to down, these signs are difficult to predict the second half of export growth has further improved, is expected to fluctuate between 5-10% , ring down from contributions. In the long run, China's exports obvious ceiling. First, rising labor costs, resulting in export competitiveness bottlenecks. The second is to leverage the global economy has yet to emerge after the crisis, the future, as the savings rate to rise in developed countries, their savings - investment gap will tend to narrow, followed by a trade deficit narrowed or even reversed. I'm afraid to pick up the short-term and long-term low growth will not change, and expect export-than-expected recovery in view also debatable.

Minsheng Macro: China's economy in the second half of the four major worries

Figure

Minsheng macro judgment of the market:

1, the stock market: short-term optimism, cautious interim partial

Short-term cautiously optimistic, but the limited market upside. The following reasons: 1) short-term optimism, real estate, Hong Kong and Shanghai Tong, monetary and other policies warming is expected to continue to support the market; reported pre-disclosure situation is better in the second quarter, a slight improvement relative to the previous quarter. 2) mid-cautious side, mainly because, first, the policy is difficult to transfer to the fundamentals of real estate, 100 city price index, real estate PMI values ​​are not optimistic; Second, money was not much room to improve the environment, the implementation of the report of the central bank in the second quarter to see increased focus on debt risk, and the cost of commercial bank liabilities side of the rigid structural relaxation difficult decision to reduce financing costs; 3) results from the second half was not much room for further improvement in market fundamentals. Before six months of industrial enterprises profit growth bounced back, net profit margin improved, but is still in decline in gross margin channel, showing a rebound rate of interest rate reduction, mainly from the contribution of the cost, taking into account the economic chain growth peaked in the third quarter, corporate profits continuing poor improvement.

2, the bond market: three-quarter interest rate debt within a narrow range, credit debt re-coupon convertible bonds Bo rebound

Third-quarter interest rate debt within a narrow range, the current valuation configuration value is better, but space is limited trading; heavy coupon credit debt, light industry, heavy city voted bonds (low rating). The following reasons:

A) a strong rebound in June financial data, economic chain accumulating momentum is expected to continue in the future will remain wide credit 1,2 months of the third quarter, the growth rate is still higher than that enhance risk appetite, the bond bull market significantly weaken the foundation; 2) more difficult to see the total amount of loose, shifting probability increases interest rates on money the central slightly; 3) In the short term, entered in August, raising interest rates in July reserve funds to repay a substantial corporate tax, IPO and other factors significantly weakened , funds rate down to normal; 4) Although we do not believe that the second half of the community can effectively reduce the cost of financing, but similar repo interest rate cuts and other useful attempt to remain stable or even improve the financial side expected, the risk of short-term debt interest rate adjustment is unlikely. 5) poor corporate earnings continued to rebound in the second half industrial debt default risk continues to rise.

3, bank stocks: the future of space is not

This round of bank stock market is easing, the economy stabilized, incremental funding logic has nothing to do with the fundamentals (bad generation rate did not decline), the future of these three catalytic weakened based on: 1) the possibility of relaxing the policy to continue in the fall. Release from the purchase of real estate, mortgage back 95 fold point of view, has experienced a never relax to relax expected, a significant weakening of the marginal effect of future price stimuli; From the monetary point of view, the second half relative to the first half of the tightening is determined; 2) three quarters of the economy is difficult to be better than the second quarter, PMI and other indicators that may occur since the high point of stimulus; 3) Hong Kong and Shanghai through just a short theme, is good for the entire market, not just for blue chips (valuation based on the risk-free interest rate based on different markets, which determines the A / H price difference can not be eliminated), the latter will return to the small hot ticket.

This rally is similar to October 2010, with the first half of the financial, resource and other large-cap stocks pull index broke, the segment index climbed slowly, mainly small ticket performance, I think it has now entered the posterior segment, the bank little room for upward (space may be around the plate up 5%), the share price can be sustained at a high level to near the end of August (the reported end).

4, non-silver: August gradually turn empty

Bearish August, mainly due to the original bullish factors July Quotes are changing. July economic upturn, steady force policy, but in August: a) policy, 16:00 comments submitted are relevant high-level discussions, keynote steady growth in desalination, focus on reforms. 2) the economic front, where the situation is very bad microscopic investigation, the absence of any improvement in local government bonds, the more excess capacity to more land increasingly frail; do not think the economy is better than the third quarter, the second quarter. About 7.3 percent throughout the year. So basically do not think the market up space, non-silver plate as it is difficult to follow the market a chance.

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