Horizon Insights

China macro / National People's Congress analysis

Conference call with Charles Su

Charles was already expecting that there would be no explicit GDP growth target at the NPC meeting and this was what played out. The soft target is now to maintain normal functioning of society given the huge hit to the economy. Leadership is cautious about stimulus that encourages a rise in macro leverage levels such as the one back in 20089 and is also recognising the drop in China’s trendline growth rate and is therefore less focused on keeping growth unrealistically high. Charles would not be surprised to see China drop away from giving GDP targets permanently going forward. The headline GDP measure does not capture the quality of the growth, which is the focus from now on. The PBOC did not lower the LPR rate or repo rate this month, as the economy is rebounding from the low and the rebound is quite solid. The high frequency data such as power output YoY is close to 5% in the first 3 weeks of May. Charles would expect to see 6-8tn yuan (after leverage applied to the official stimulus number) of extra spend on regional infrastructure. So far, the loosening of credit has been concentrated mostly in infrastructure sectors and now we are seeing infrastructure growth this year will be up 1-2% thanks to stimulus. But the infrastructure multiplier effect has usually been lower than in the property sector. When people buy homes, they often buy home appliances and autos. Without stimulating property, the multiplier effect is going to be smaller. There is a chance that at some point the govt will decide to ease via the property sector, but it does not seem that they are feeling compelled to do this right now. Given several trillion yuan of extra loan issuance this year, it implies that the major banks may have to raise around 1.5tn yuan in capital this year or next. In the absence of further escalation of US/China tensions, you may have expected to see RMB appreciate against USD, but it now seems wise for the next 6 months to expect the Trump campaign to keep up anti-China pressure, which may lead to a weaker RMB. The RMB has depreciated by more than 1% in the last few weeks and in light of the HK situation, it seems possible to see RMB drop to 7.3 to 7.5 range if the US follows through with countermeasures following the passing of the new HK security law. Charles views the FX depreciation as an orderly process that China has allowed to occur in order to offset some of the tariff impact and something that would probably only accelerate further as a deliberate countermeasure if the US brought much more punitive tariffs. In the medium/longer term, despite high debt to GDP at over 300%, the GDP growth rates can likely remain around the 4-5% level thanks to some large regional transformation programmes, as well as the investment in domestic technology supply chain self-sufficiency.