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Recovery of Capital Expenditure and Global Trade is Good News for the Chinese Economy

The US stocks rebounded last Friday, but after a very volatile week, the three major indexes still cumulatively fell by 5%. However, thanks to the Chinese regulators’ act of not issuing new shares, the Chinese stock market became stabilized with a red plate; Shanghai Stock Exchange and the SSE 50 Index bottomed out; and the SME Index and Growth Enterprise Index rebounded.
How will the market develop in the future? According to the expert interviewed by the reporter of China Economic Times, the fall in three major indexes of the American stock market initiated a volatility of global stock market, because the market is digesting the influence of FED’s Chairman change on the policies. Besides, too much rise in the American stock market also contributed to the retracement. And the asset price re-evaluation arising from the rise in long-end interest rate is one of the risks requiring attention in the capital market of 2018, and in such a context, the adjustment of US stocks seems to be unavoidable. The recovery of capital expenditure and global trade are expected to make the Chinese economy in 2018 grow steadily, and the short-term adjustment in the stock market shall not be alarming.Asset Reevaluation Led to Adjustment of US Stocks On February 12, the US stock index futures rose; Asia Pacific stock markets rebounded modestly; Hang Seng Index bottomed out; the Korean stock market opened with a high quotation which kept rising; and such bulk commodities as gold and oil rose. IMF’s President Christine Lagarde said the drastic fluctuations in the global financial market in the last few days were not worrying because the economic growth was strong, but reform was required to avoid future crisis. “The fall in the American stock market initiated a volatility of global stock market, because the change in the decision-making meeting remains to be seen after the FED’s Chairman was changed. And it is also because the American stock market rose too much previously”, said Wu Qing, chief economist of China Orient Asset Management Co., Ltd. (“COAMC”) to the reporter of China Economic Times.Zhu Jianfang, chief economist of CITIC Securities told the reporter of China Economic Times that since 2018, as the Treasury yield rapidly exceeded the high point since 2014, the adjustment of risk assets, like US stocks, started, and that the asset price re-evaluation arising from the rise in long-end interest rate was the fundamental reason for the slump of US stocks for several days.“Since the beginning of this year, there has been no significant change in the overseas economic fundamentals, and in the future, attention should be paid to the impact of liquidity crunch on the real economy. The high point of the American economy in this cycle might have appeared in 2014-2015, and now, it is at the middle and later stage of economic expansion”, said Zhu Jianfang. The high point of European and Japanese economic growth might appear in 2017- 2018. Export is not the only reason for the upward economic trend of this cycle, and the endogenous growth strengthens the tenacity of economic expansion, which makes monetary policy turn inevitable. The economic fundamentals of developed economies will expand in the next two years.According to CITIC Securities’ Annual Outlook Report, in 2016-2017, the synchronized recovery of global economic fundamentals led to the relative change in money flow, which is that the flow to America became the flow to non-American assets. In 2018 – 2019, the change in global liquidity might be more reflected by the broad liquidity crunch.Zhu Jianfang said attention should be paid to the risk of four increases in the interest rate by FED within the year, and that more attention should be paid to the Fed meeting in March. “If the American stock market continues to make sharp adjustment, FED may delay the increase in interest rate in March in order to maintain the stability of financial market. But this doesn’t mean the end of tightening trend of increase in interest rate, because the upward pressure of salary and core inflation doesn’t support FED’s constantly dovish behavior.” As far as Zhu Jianfang is concerned, the Treasury yield is more probably a bear market. The upward trend of the American stock market and bulk commodities might not end, but the upward possibility of long-end interest rate may mean the substantive end of the previous era of global low-interest rates, whose influence on the asset price is noteworthy. This is the greatest difference from the 2014-2017 asset price trend. Besides, the US dollar index may have a staged bounce in Q2, but in the long term, there will still be a bearish mood about US dollar.
The Chinese Economy is Expected to Grow Steadily, and the Short-term Adjustment of the Stock Market isn't Necessarily Alarming

Most of the organizations are optimistic about the Chinese macro-economy. Zhu Jianfang said the recovery of capital expenditure and global trade is expected to make the Chinese economy in 2018 grow steadily. The recovery of capital expenditure will lead to the rapid recovery of fixed-asset investment in such cyclical industries as mining industry and manufacturing industry. In 2018, the pull effect of fixed capital on GPD is expected to rise, and that of net export on GDP is expected to expand. If in 2018, RMB exchange rate Index is still stable, the recovery of global trade will drive the recovery of the Chinese export, which means that the pull effect of net export on GDP in 2018 will reach 0.4-0.5%.

When it comes to monetary policy, Wu Qing said the Chinese monetary policy would continue to keep steady and neutral, but the following two issues might lead to the result of mildly tight policy. First, strong regulation, strict regulation and financial risk resolution may drive up the interest rate level of the Chinese financial market. Second, there is a relatively serious distortion in the Chinese financial market, so the calculation of money supply may be biased, as a result of which the monetary policy actually executed is mildly tight. On the whole, no big problem will appear in the Chinese financial market; the US dollars are quite liquid and the foreign capital inflow is open, so there will be no problem in the domestic liquidity in 2018. If the monetary policy actually executed in China is really mildly tight, some foreign capital will flow to China to offset the imbalance between the domestic and foreign markets. This may result in RMB appreciation.

In Zhu Jianfang's opinion, the liquidity conditions in 2018 are still friendly, and it is estimated that there will be not the situation of unexpected tight monetary policy. Inflation pickup has become a trend, but it will not pose a threat to the monetary policy. As the global demands increase, the global inflation pickup has become a trend, and it is estimated that in 2018 China's CPI will pick up by 2.5%-3.0%. But the inflation environment in China in 2018 is still relatively mild, and there is no possibility of hyperinflation; and in the context of balanced economic growth and mildly tight monetary conditions, it is unlikely that the inflation is much more than expected.
The inflation level in 2018 will not pose a great threat to the monetary policy.

At the same time, Zhu Jianfang thought the liquidity was at a relatively "tight" level, and that it was unlikely to be greatly tightened in the future. At present, the 10-year bond yield reaches about 4%, and in the future, the bond yield is very unlikely to sharply rise. And the difference between money supply and financing demands measured based on the difference between the growth rate of M2 and the growth rate of nominal GDP is at a very low historical level at present, and in the future, it is very unlikely to drop sharply. In 2018, the Chinese economy will face some pressure from economic downturn, and the downturn of real estate cycle and local government debt risk will pose a certain pressure on the Chinese economy.

"The Chinese economic growth prospect in the future is not pessimistic. The economic growth momentum restoration and inflation pickup will be typical features of the Chinese economy in 2018. The liquidity conditions will be still friendly, and the profitability of the listed companies is still expected to expand at a speed of 10%-12%", said Zhu Jianfang. The macroeconomic environment in 2018 is good news for the stock market but bad news for the bond market. The current adjustment of A-shares is not necessarily alarming.

Source: China Economic Times

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