From "China Macro Flash:More Rational Liquidity Growth " by Ken Peng, Citigroup China economist, May 11:
The pace of credit expansion slowed in April to just short of RMB600 billion. This would have been a big number in any other year, especially as M2 is leaping ahead at 26% y/y, but since new lending averaged RMB1.5 trillion per month in 1Q, April looked like a slowdown. We believe that credit expansion could continue at a historically robust pace… as authorities maintain loose monetary policy to ensure a durable recovery…The recovery will continue, but that the improvement in China’s economy will not be as clear… This pause in sequential improvement should be temporary given that stimulus continues to show its effect on domestic demand. The external environment may be stabilizing, but remains the largest potential drag. Authorities may be inclined to step up fiscal boost if this pause extends too long… On balance, slower credit growth diffuses the risk for credit tightening later. Further moderation is likely if the economy could stay on a recovery trend and authorities no longer have the incentive to push for lending. However, the revival of private sector demand would be a crucial test of the durability of credit growth, as well as broader economic repair.
From "Sinology: Interpreting April’s Data" by Andy Rothman, CLSA China macro strategist, May 12:
The headline CPI was -1.5% in April, down from -1.2% in March. Much of this reflects the fact that inflation was very high a year ago… Prices for many goods have fallen, including consumer durables and clothes, but the biggest factor has been a steep decline in food prices, to -1.3% from +22.1% a year ago. We don’t expect this pattern of falling prices to continue… We also expect to see some upward pressure on prices in 2H09 from two sources. First, the huge flood of liquidity over the last five months. Second, rising demand, as signalled by our PMI data and strengthening retail sales and home buying… The purchasing price index for industrial inputs (PPI) also continued to fall last month, to -9.6% from -8.9% in March. This is a sharp decline from +11.8% one year ago. While the pace of decline in the PPI should also slow, because these inputs… largely reflect global conditions we don’t expect a substantial rise in 2H09. As domestic demand continues to improve in 2H09, low input costs should enable well-managed Chinese firms… to raise operating margins.
From "Who is getting a lift from China’s bounce?" by Frank Gong and Qian Wang, J.P. Morgan economists, May 18
We believe for the near term… China would have to continue to be a net buyer of US Treasury bonds and US dollar assets, although the amount of the net buying would continue to decline, reflecting China’s efforts in FX reserve diversification… Overseas strategic investments in crucial sectors of national interest, including energy and resources, have become a key focus of China’s FX reserve diversification… However, the amount China can buy is still small compared to the huge FX reserves. [Since] 2003, China’s holding of gold has gradually increased from 600 tons to 1,054 tons recently, but its weight in total FX reserves has [fallen] from 1.9% to 1.4%. One alternative is to acquire equity stakes. The Chinese authorities could also sell more forex reserves (or US dollars) to the state-owned enterprises (or lend US dollars to the SOEs), and encourage its SOEs to increase their strategic acquisitions of resource/commodity companies in the offshore market.
From "China Question of the Week: What is up in the property sector?" by Wang Tao, UBS senior China economist, May 14:
We expect investment and construction in the low end… and mass market segments to pick up strongly, to more than offset the continued weakness in the existing high-end property construction… We believe that there is no oversupply at the aggregate level… fundamental demand from the upper middle income urban population is strong; the recent property boom was not fueled by a credit bubble and both household and banking sector exposures to property-related loans are limited; and finally, the government would adopt and has adopted a series of policies trying to stimulate both property demand and investment… The most important policies have included increasing public spending on low end housing, lowering home buyers’ costs (cuts in interest rates, mortgage payments and taxes), and relaxing credit and other policy restrictions on developers. We think these policies will help to push investment in the low-end and middle market segments to rise in 2H09, while the relative over supply in the high-end market continues to weigh on new investments there.