UBS Lays Out 3 Things to Break China Calm, 2 of 3 Underway

ZH: These Are The Three Things That Will Break The "China Calm" According To UBS
1. Property developers have lagged on investment in new real estate projects despite the rebound in sales of existing properties. Many believe the lack of new investment is a sign that property developers see a slow down in 2H16. Despite the strong double-digit growth prints in YTD sales (26%y/y) and new starts (14%y/y), YTD construction and investment have expanded only by around 5%, with little sign of more pipeline momentum to come. Soft property developer sentiment and caution over the longevity of the sales rebound is partly to blame, as is a still sizeable inventory overhang and sharp land price rally so far this year.
From Chinese Real Estate Sector Has Turned, Economy to Follow:
real estate investment as a share of GDP, falling and then picking up. In 2015, real estate investment slowed to 1 percent and in 2016, it is slowing a again, down to 5.3 percent YTD. Real estate investment grew faster than GDP at the start of 2016 though, to reach its highest share of GDP since 2013. This propped up Chinese GDP in the first half, but a downturn is already underway.
Real estate investment growth in each of the past four months through July: 9.7 percent, 6.6 percent, 3.5 percent, 1.4 percent. The money supply boomlet is over and a slip into contraction looks inevitable right now.

Next up:
2. While noting that China has been able to manage a modest RMB depreciation while stabilizing FX reserves in recent months UBS points out there is risk of greater market pressures on capital outflows and the currency – due to sudden expectation shifts on US Fed moves or USD strength, and/or concerns for China's domestic economy or asset markets. Such pressures may lead to higher global investor risk aversion, a revival of China macro concerns and further FX reserve losses, which could negatively impact China's capital markets before the end of 2016.
I've maintained the U.S. dollar is driving the yuan market. If the U.S. dollar rallies, the yuan goes down. If the dollar slides or holds steady, USDCNY will be steady too.

3. Third, UBS points out that credit spreads have recovered since the April selloff and primary issuance has rebounded but sees further upside in bonds capped by current money market rates while fundamental downside risks remain relative to China's continued restructuring of SOEs. A sudden liquidity squeeze or temporary credit crunch could be triggered by an unexpected rise in defaults, or a sudden tightening of regulations. The former could arise from the further worsening of issuer asset quality, or SOE restructuring and excess capacity reduction events.
This is always possible and probable. See China Worries About Tight Money and China Tightens More Credit: P2P Lending Cap and Adios Easy Money, China Slowdown Coming

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