China: Good GDP And CPI Data

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GDP and inflation are encouraging for those wanting to buy the market.

Third Quarter GDP

Economic Time: Excess supply of money & excess demand for goods good for the stock market

I. Third quarter growth in China rose 6.7%,[1] signalling the country is in line to meet the government's projection for full-year GDP expansion of between 6.5% and 7.0%.

a. Growth was led by retail sales, which gained 10.7%, while industrial output missed estimates, with a rise of 6.1%.

b. Services industries rose 7.6% YoY.

  1. Investment spending

i. continued being led by the public sector, which lurched 21.7%. This led to a doubling of September's fiscal debt, which doubled from August;

ii. however, subdued private business investment of +2.5% reflects the issues of high debt levels.

iii. In real estate-

1. Completed investment in real estate rose by 5.8% during the first nine months of 2016, while

2. New home sales rose by an eye-popping 61% YoY.

3. This real estate boom has led to stronger output in China's steel mills.

II. This opens a window for Beijing to rein in excessive credit growth and thus racy property prices - her two growth engines.

a. Rampant credit growth has fuelled bubbly house price gains in China's largest metropolises.

b. In September,

i. Broad M2 money supply grew by 11.5% YoY

ii. Aggregate financing stood at RMB 1.72 trillion RMB (US$255 bn), snf

iii. New lending stood at RMB 1.22 trillion (US$181 bn)

  1. China's policy tug-of-war:

i. Tighten the property sector too much, and the economy nosedives; BUT

ii. Don't tighten enough, and the bubble keeps building

iii. China's credit reality is that

1. Banks need more profits

2. Corporates need more loans, and

3. Local governments need more revenues from the property sector

d. The policy bottom line is more of the same: growth must be sustained

i. The Sixth Plenum begins this Monday, 24th October. There, Party Secretary General Xi will want to solidify his legacy in the run-up to the 19th Party Congress next year

1. He must solidify his legacy as he has little personal support in the "patronage networks" as well as in the Party's highest ranks

2. Maintaining strong growth - maintaining a happy Economic Time is one key way for Mr. Xi to bolster his legacy

e. The investment implication: keep buying the market - along with Hong Kong's.

China Inflation

The good Economic Time is bolstered by gently rising inflation

1. Deflation is abating,

a. The GDP deflator rose by 0.7% in the first nine months of 2016. This is the quickest pace since 2014, and

b. For the first time since 2012, factory gate prices - producer prices - actually rose, albeit by a 0.1% YoY

2. Overcapacity will keep pricing power low for a long time

a. On a factory level, the market is worried about credit bubbles stemming from overcapacity

b. On a consumer level, China's supply is infinite, meaning that there is little scope for demand-pull inflation

  1. However, there is scope for cost-push inflation in the sense that food prices will keep rising, thanks to the clashes in the heavens, El Nino and La Nina…

3. Market Implication

a. Due to political events (6th Party Plenum this Monday and 19th Party Congress next year), Mr. Xi will want to continue solidifying his power base going into his second term. This suggests that he will want to maintain the growth engine.

b. The bottom line is that China's Economic Time - characterized by an excess supply of money and an excess demand for goods - remains for a long time. Thus, it is safe to buy the Chinese and Hong Kong markets.

[1]Real GDP growth peaked at 14.9% in 2Q07