Well it’s the end of what has been a very interesting year. In Chinese culture 2016 was the Year of the Monkey, which interestingly enough is an animal associated with changeability – we certainly got that! So it’s likewise interesting to note that 2017 will bring the Year of the Rooster, which is associated with constancy. Something to ponder.
Anyway, we have just put out our 2016 End of Year Special report (which looks at our best (and worst) charts, and ones to watch in 2017). This article looks at the China charts from this report – the common theme is one of stimulus and recovery.
1. The stimulus chart
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This chart showed the substantial and coordinated monetary and fiscal policy stimulus effort in China. Albeit this chart doesn’t even include some of the non-standard monetary easing measures, or the macro-prudential easing for property, or the mass approvals of infrastructure projects. The key point though is that there was a clear and forceful stimulus. This makes sense as China’s economy had been facing considerable structural and cyclical headwinds, and with 2017 a key (5 year) leadership transition for China, things need to be going right for Xi Jinping to smoothly continue to his second term.
2. Property and PPI rebound
The second chart shows the impact of the above – i.e. the stimulus worked. They successfully reignited the property price bubble, and along with factors such as the rebound in commodities (which by the way was helped by China’s stimulus efforts), and currency movement, has lead China’s producer prices to go from deflation to rising inflation. This marks an important change in the macro backdrop for China and is a trend that will remain relevant in 2016 as emerging markets often benefit from stronger producer price inflation in China, and it will also create a more supportive backdrop for China’s often significantly indebted corporates.
3. The PPI surprise
A related chart, this one shows just how much of a surprise the turnaround in PPI inflation was – it took most forecasters by surprise, with the actual beating consensus more often than not in 2016 and by a substantial amount. It goes to show how people continue to be too negative on China and can easily get blind-sided by a change in the macro, in this case the result of policy changes.
4. The Renminbi devaluation
Relative monetary policy has been steering the ship for the USDCNY and that could mean more devaluation pressure in 2017 if the Fed’s hiking plans go to schedule. But it’s worth noting that the PBOC will probably not be cutting rates again any time soon – particularly with the backdrop of rising inflation alluded to above. So it may be a case of a more gradual pace of depreciation against the USD. Either way this chart highlights the risk for China if the Fed becomes more aggressive in its rate hiking cycle.
The key charts for China in 2016 were all about stimulus, inflation, and the Renminbi. In 2017 it’s likely these charts will continue to be important, but we’d expect less stimulus and maybe even tightening if inflation (property and producer prices) heat up too much, and it’s likely that China will continue to surprise against often slow moving and too negative/skeptical expectations. The Renminbi remains a risk, but the outlook is more complex following a substantial move. With the leadership transition on the agenda, the focus of policy makers will remain on maintaining stable growth. So overall from an investing perspective China should be a positive force in 2017.
Bottom line: The charts that mattered for China in 2016 were about stimulus, inflation, and the Renminbi; These will also be the charts to watch for 2017.
This article first appeared as a submission at Seeking Alpha