Investors were closely watching the words of China’s top leaders last week. Investors were thrilled by Premier Li Keqiang’s comments that China should maintain the “bottom line” of economic growth and employment. The market interpreted the “bottom line” as a 7.5% growth target and speculated a round of “moderate stimulus” especially after disappointing trade numbers in June (exports -3.1% YoY, imports -0.7%).

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Macquarie Group Defining China’s Bottom-Line Growth

According to Macquarie Group, the definition of China’s bottom-line growth remains ambiguous and is biased to the downside. Minister of Finance Lou Jiwei was quoted as saying that China could achieve 7% (rather than 7.5%) growth in 2013 at the China-US Strategic and Economic Dialogue, although the quote was later corrected by official media; CBRC’ ex-chairman Liu Minkang estimated 2013 GDP growth at 7-7.5%.

China’s Tighter Liquidity Remains Detrimental to Growth

Macquarie’s China economist has recently cut Chinese growth forecasts to 7.3% from 7.8% for 2013, and to 6.9% from 7.5% for 2014, to factor in downside risks resulting from structural problems in China. Although June monetary data suggested some desired impacts of the liquidity squeeze have been realized on the banks’ off-balance-sheet business, they do not expect any near-term loosening and think tighter liquidity would thus remain detrimental to growth.

Macquarie also quoted Mr. Liu Minkang as saying that “currently the crucial economic policy target for the government is to solve overcapacity and environmental pollution problems; and monetary policies should serve these goals.” Apparently China plans to address overcapacity issues by domestic consumption, overseas transfer, M&A and elimination of capacities. In terms of the the first approach, policymakers were said to have agreed to continue developing railways to absorb some capacity domestically.

Upward Trading Channels Confirmed

Macquarie noted a recovery trend as the index jumped above the short-term resistance of 55 after last Thursday’s rally. RSI rapidly improved and is about to enter the bullish zone. Near-term resistance is now 56; before 58 and support 54. Similarly, HSI just corrected from a short-term resistance of 21,500 and is following a steady recovering trend – 21,000 is the support and 22,000 the next resistance level. Meanwhile, CSI300 broke out the consolidation at low levels. While short-term correction is likely, analysts think the index could be supported at 2,250 and the next resistance would be 2,400.

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