Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: PPI and CPI (%)</td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/755/original/image_12185335121625973064817.png?1625973065" class="editor-image img-responsive" data-smartkarma-image-id="217755"></figure>
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li><a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a></li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
</ul>

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.



Exhibit 1: PPI and CPI (%)




Source: National Bureau of Statistics, Our analysis




Related Insights

Pork Price Rebound: What It Means for China's Inflation

China Macro: Profits Flowing Gently Down the Stream 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Financials: Silver Linings Playbook 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 


China Macro: PPI and CPI Have Reached Inflection Points

Asia L/S Equity PM/Macro/Thematic Idea Generation

Rikki Malik

<ul>
<li>Qingming holiday sending surpasses  2019 levels on an absolute and per capita basis</li>
<li>A further relaxation of housing measures spurs increased mortgage demand</li>
<li>Two steps forward, one step back -typical signs of a bottoming-out economy.</li>
</ul>


Qingming holiday sending surpasses  2019 levels on an absolute and per capita basis
A further relaxation of housing measures spurs increased mortgage demand
Two steps forward, one step back -typical signs of a bottoming-out economy.


Chinese Data Continues to Improve Incrementally

<ul>
<li>In the absence of an outright LPR cut later this month, the latest RRR move's impact on the real economy may be rather modest. </li>
<li>Assuming CNY500bn of MLFs will be withdrawn in the coming months, the net injection this time around is CNY700bn, about 40% of an average month's new loans.</li>
<li>We would watch out for a potential bubble in the onshore credit market before incremental liquidity benefits the broader economy.</li>
</ul>


In the absence of an outright LPR cut later this month, the latest RRR move's impact on the real economy may be rather modest. 
Assuming CNY500bn of MLFs will be withdrawn in the coming months, the net injection this time around is CNY700bn, about 40% of an average month's new loans.
We would watch out for a potential bubble in the onshore credit market before incremental liquidity benefits the broader economy.


China Macro: RRR Cuts' Diminishing Impact

Monthly Newsletter | Jul 2021
The PBOC's decision to relax required reserve requirements was a bit of a surprise to us in terms of the cross-section of the banking system it covered. The move came on the heels of a set of TSF numbers that were weaker than what the headlines suggest. But we believe the impact of the RRR cut is somewhat limited and we shouldn't expect the central bank to loosen again any time soon.  
The RRR cut is only mildly positive in view of the expected uses of liquidity.  A significant portion of the ~CNY1tn released will likely be used to pay down medium-term lending facilities that will fall due in 2H21. The mini-peak in tax payment in July - along with the strong pipeline of local government bond issuance - will also put a damper on new financing and crowd out funding sources available to the private sector.
Headline TSF beat expectations thanks to strong loan growth. However, net of the contraction in off-balance sheet credit - of which trust loans to property developers are a substantial part - the growth in debt financing was just around 10% y/y. The underlying trend is more or less in line with the central bank's guidance for credit expansion to match nominal GDP growth (Exhibit 1).
Robust loan data were buoyed by a surge in bills financing. Renewed demand for short-term liquidity may be attributable to the impact of elevated factory gate prices on small and medium-sized companies. The growth in long-term corporate loans that will drive capital investments and productivity gains is much less pronounced. At the same time, mortgage loans saw a significant contraction y/y as regulators try to rein in the property market boom (Exhibit 2).
Overall, we believe the PBOC's rhetoric remains unchanged. In our view, Beijing will continue to push through deleveraging measures in the real estate market and ratchet up its efforts to tame commodities prices. On the other hand, more funding will be channeled to small businesses and the services sector. That should provide some support to the next leg of the recovery, as capital-intensive industries face progressively tighter funding conditions.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 373.003px;">Exhibit 1: Key Components of New TSF (CNY bn)</td>
<td style="width: 373.003px;">Exhibit 2: Key Components of New CNY Loans (CNY bn)</td>
</tr>
<tr>
<td style="width: 373.003px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/092/original/image_681652188101626125722784.png?1626125723" class="editor-image img-responsive" data-smartkarma-image-id="218092"></figure>
Note: Off b/s items include trust loans, entrusted loans and undiscounted bills; TSF shown excludes ABS and balancing items, which are yet to be available

Source: PBOC, Our analysis
</td>
<td style="width: 373.003px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/087/original/image_2669466651626120112187.png?1626120112" class="editor-image img-responsive" data-smartkarma-image-id="218087"></figure>




Source: PBOC, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-and-cpi-have-reached-inflection-points" target="_blank" data-smartkarma-citation="insights:54261" rel="noopener">China Macro: PPI and CPI Have Reached Inflection Points</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
</ul>

Monthly Newsletter | Jul 2021
The PBOC's decision to relax required reserve requirements was a bit of a surprise to us in terms of the cross-section of the banking system it covered. The move came on the heels of a set of TSF numbers that were weaker than what the headlines suggest. But we believe the impact of the RRR cut is somewhat limited and we shouldn't expect the central bank to loosen again any time soon.  
The RRR cut is only mildly positive in view of the expected uses of liquidity.  A significant portion of the ~CNY1tn released will likely be used to pay down medium-term lending facilities that will fall due in 2H21. The mini-peak in tax payment in July - along with the strong pipeline of local government bond issuance - will also put a damper on new financing and crowd out funding sources available to the private sector.
Headline TSF beat expectations thanks to strong loan growth. However, net of the contraction in off-balance sheet credit - of which trust loans to property developers are a substantial part - the growth in debt financing was just around 10% y/y. The underlying trend is more or less in line with the central bank's guidance for credit expansion to match nominal GDP growth (Exhibit 1).
Robust loan data were buoyed by a surge in bills financing. Renewed demand for short-term liquidity may be attributable to the impact of elevated factory gate prices on small and medium-sized companies. The growth in long-term corporate loans that will drive capital investments and productivity gains is much less pronounced. At the same time, mortgage loans saw a significant contraction y/y as regulators try to rein in the property market boom (Exhibit 2).
Overall, we believe the PBOC's rhetoric remains unchanged. In our view, Beijing will continue to push through deleveraging measures in the real estate market and ratchet up its efforts to tame commodities prices. On the other hand, more funding will be channeled to small businesses and the services sector. That should provide some support to the next leg of the recovery, as capital-intensive industries face progressively tighter funding conditions.



Exhibit 1: Key Components of New TSF (CNY bn)
Exhibit 2: Key Components of New CNY Loans (CNY bn)




Note: Off b/s items include trust loans, entrusted loans and undiscounted bills; TSF shown excludes ABS and balancing items, which are yet to be available

Source: PBOC, Our analysis







Source: PBOC, Our analysis




Related Insights


China Macro: PPI and CPI Have Reached Inflection Points 

Pork Price Rebound: What It Means for China's Inflation 

China Macro: Profits Flowing Gently Down the Stream 

China Macro: Operation Twist | The Deposit Version 

China Financials: Silver Linings Playbook 


Glut and Famine: Jul '21 | Don't Expect a Bazooka from the PBOC

Thematic (Sector/Industry)

For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).
The Debt-Fueled Supercycle. The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.
The Inventory Drawdown. Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.
The Insatiable Demand. The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.
The Aggressive Developers. The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 746px;">Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)</td>
</tr>
<tr>
<td style="width: 746px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/144/original/image_45072834061624549646155.png?1624549646" class="editor-image img-responsive" data-smartkarma-image-id="215144"></figure>
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </li>
</ul>

For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).
The Debt-Fueled Supercycle. The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.
The Inventory Drawdown. Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.
The Insatiable Demand. The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.
The Aggressive Developers. The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.



Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)




Source: National Bureau of Statistics, Our analysis




Related Insights


China Financials: Silver Linings Playbook 

Glut and Famine: We Might See Snow in China This Summer 

China Macro: Operation Twist | The Deposit Version 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 


China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

China

Shenzhen Composite Index is an actual market-cap weighted index (no free float factor) that tracks the stock performance of all the A-share and B-share lists on Shenzhen Stock Exchange. The index was developed on April 3, 1991 with a base price of 100. 

Shenzhen Stock Exchange Composite Index (SZCOMP INDEX)

Shenzhen Stock Exchange Composite Index (SZCOMP INDEX)

China Macro: PPI and CPI Have Reached Inflection Points

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In the absence of an LPR cut, the impact of the latest RRR move may be limited. We estimate that net of MLF maturities, the liquidity boost is...

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Glut and Famine: Jul '21 | Don't Expect a Bazooka from the PBOC

The RRR cut was a bit of a surprise, but its impact is limited. The PBOC’s rhetoric is unchanged and the June aggregate financing data continue to...

Stanley Tsai, CFA

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Housing FAI in May continued a secular trend that may make or break China's recovery. Inventory drawdowns may afford developers some breathing...

Stanley Tsai, CFA

China Macro: PPI and CPI Have Reached Inflection Points

The spread between China’s PPI and CPI will likely begin to mean-revert, following a steep rise over the past 12 months. The shape of this...

Stanley Tsai, CFA

Chinese Data Continues to Improve Incrementally

Chinese consumer confidence rising as ​Qingming holiday spending surpasses 2019 levels, and increased mortgage demand seen due to housing measures...

Rikki Malik

China Macro: RRR Cuts' Diminishing Impact

In the absence of an LPR cut, the impact of the latest RRR move may be limited. We estimate that net of MLF maturities, the liquidity boost is...

Stanley Tsai, CFA

Glut and Famine: Jul '21 | Don't Expect a Bazooka from the PBOC

The RRR cut was a bit of a surprise, but its impact is limited. The PBOC’s rhetoric is unchanged and the June aggregate financing data continue to...

Stanley Tsai, CFA

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Housing FAI in May continued a secular trend that may make or break China's recovery. Inventory drawdowns may afford developers some breathing...

Stanley Tsai, CFA

Chinese consumer confidence rising as Qingming holiday spending surpasses 2019 levels, and increased mortgage demand seen due to housing measures...