Barclays on Chinese activity data and its thoughts on the PBoC

Activity data showed a broad-based moderation in August, for a second consecutive month. We think this reflects softer export growth, the impact from factory closures amid stricter environmental inspections in eight provinces, and fading quasi-fiscal support, while the housing market remains resilient (Figures 1-2). In contrast to a strong rebound in manufacturing PMIs and imports, industrial production growth declined to this year’s low of 6.0% y/y in August, from 6.4% in July, and FAI growth was weaker than expected, slowing to 7.8% y/y YTD from 8.3% in July. Given the average IP growth for July-August of 6.2% and a likely rebound in September activity following the conclusion of environmental inspections in eight provinces, we continue to expect a gradual slowdown in growth; we forecast GDP growth to moderate from 6.9% q/q saar in Q2 to 6.5% in Q3 and 6.3% in Q4. Continued strong excavator equipment sales of c.100 % y/y in Jun-Aug also point to strength in investment demand. That said, we expect pollution control measures implemented this year (e.g. the government set a hard target for pollution controls during the 'heating' season of Nov 2017 – Mar 2018)  to be stricter than in previous years,  which could be a swing factor for Q4 17-Q1 18 growth. 


We expect the PBoC to maintain its monetary and regulatory tightening bias, given that deleveraging and preventing risks will continue to be its top priority in the coming quarters. Despite the broad-based moderation in data, we still expect full-year GDP growth to be able to meet the government's target, and see no immediate need for policy makers to reverse their stance. We think the softening in the PBoC's tightening bias since late May appeared to encourage a rebound in leveraging in June-July, which led the central bank to revert to a tightening bias in August. Notably, the PBoC resumed OMO 28d operations on 6 September (for the first time since June), which we think confirmed its stance to maintain elevated short-term policy rates through the release of longer-tenor liquidity. Looking ahead, we think soft inflation (we still expect CPI inflation to stay below 2% in H2 despite a rebound in August), moderating growth momentum, and reduced CNY depreciation pressures suggest that the central bank likely will maintain a prudent monetary stance with a tightening bias, while enhancing fine-tuning to balance between preventing risks and ensuring growth stability. Risks to our view include changes in economic fundamentals such as a sharper-than-expected slowdown in growth, much stronger inflation, or renewed CNY depreciation pressures.

14 Sep 2017 - 10:44- Fixed IncomeData- Source: Barclays

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