AM Notes: China Spotlight

(ING) The high GDP growth in 1Q21 will not persist over the rest of the year.

Most quarters should experience moderate growth because without base effects to swell the comparison, “super-high” growth will be very hard to repeat.

Quarter on quarter growth rates should continue to stabilise between 1% to 2%.

Domestic consumption will continue to be the stabiliser of the economy, and digital infrastructure investment will be the backbone of future growth.

China-US relations will be critical for China's economic growth, mostly in technology development.

It is likely that the US will continue to put more pressure on China on this topic.

Concern about chip shortages is becoming a practical issue for businesses, from investment to production to exports and domestic sales.

How long this bottleneck will take to clear is unclear.

We don't think there will be any tightening of monetary policy.

The central government has restarted deleveraging reform focusing on the weak cash flow of real estate property developers.

So, there is room for a relaxation of monetary policy.

Moreover, as the economy is recovering, too relaxed a monetary policy stance could induce asset bubbles rather than boosting investment in the real economy.

Average new home prices in China's 70 major cities rose by 4.6 percent year-on-year in March 2021, accelerating from a 4.3 percent rise in the previous month. This was the steepest pace of growth in new home prices since September last year, as government cooling measures were largely offset by strong demand for property in some major cities.

On a monthly basis, new home prices went up by 0.5 percent in March, the most in seven months, after a 0.4 percent gain in February.

Moody's Investors Service and Fitch Ratings on Tuesday announced that they will review their ratings of China Huarong for a possible downgrade.

S&P Global Ratings made a similar statement last week.

All three agencies rate it as investment grade now.

Gavekal analysts Wei He and Xiaoxi Zhang point to Baoshang’s experience, when the People’s Bank of China imposed an average haircut on large institutional investors of about 10%.

To remind institutional investors that offshore bonds don’t have a formal backstop, international investors may be required to bear a somewhat bigger loss, though not so big that it inflicts longer term damage to investor confidence, the Gavekal analysts write.

Nomura's Yap believes there is 10% chance of authorities opting to "teach investors a lesson for enabling the previous chairman's bad behavior," by imposing a 30% haircut on these offshore bonds.

However, his base-case scenario remains that the offshore obligations will be honored.

“If you decide to exit such a policy, you have to take the markets by surprise,”

“An accidental break of the floor would have been more serious for SNB credibility,”