China maintained a steady but suppressed growth rate in recent years; we expect an inflexion may happen soon.
As we observed, many of China’s macro indicators showed a three-year cycle. For example, every three years, the nominal GDP growth goes through a cycle of recovery before decelerating. At the same time, the inventory of manufactured goods in industrial enterprises also mimics a similar pattern (Figure 1).
By comparing the nominal GDP growth and RRR (Figure 2), we believe that the three-year cycle of China’s economy coincides with changes in the policy cycle, especially in monetary policy.
We pay more attention to monetary policy because the transmission of monetary policy needs a certain process and time before the real economy (especially those favoured by fiscal policy) benefits with additional financing (Figure 3).
In this way, the monetary index can be seen as a leading indicator for China’s economy. In figure 4, the blue line represents the growth rate of social financing, while the red line is the growth rate of nominal GDP. We find that the inflexion point of social financing tends to be ahead of the inflexion point of GDP growth by approximately two quarters. We believe with the rebound of the social financing in 2Q19, the inflexion of China’s economy may happen soon.
In 2018 and 2019, we observed that China’s government urged its local government to speed up the bond issuance process to boost infrastructure investment.
According to the latest China official figures, local governments issued RMB 3.04tn of new bonds in the first nine months of this year, collectively using up 98.6% of the total new bond quota for 2019.
With the enormous amount of fund issuance by the local government, we saw a rapid increase in government fund trust in 2Q19 (Figure 6), which will provide enough capital for the infrastructure project. We expect infrastructure investment growth will pick up in 4Q19.
On July 2019, the China government announced that local governments could utilise the special bond as equity capital for major infrastructure projects. They were required to fund the minimum equity ratio requirement, usually 20% to 30% of total investment in the project.
By the end of August, new special bonds of around RMB 1590.2bn had been arranged for use, accounting for about 80% of the new special bonds issued in 2018.
Among the newly allocated special bond funds, RMB 157.9bn (9.9%) were used for railway, highway and other transportation infrastructure, RMB 118.6bn (7.5%) for municipal construction, RMB 623.8bn (39.2%) for shelter reform, RMB 52.6bn (3.3%) for people’s livelihood, science, education, culture and health, and RMB 26.3bn (17%) for agriculture, forestry and water conservancy.
We believe a lower restriction in the use of special bond by local governments will give the market, particularly in infrastructure-related sectors and companies, some support. Figure 7 shows some of China’s Infrastructure companies.
We are OVERWEIGHT on the China Infrastructure Sector mainly because of the recovery economic and enormous government investment in the sector.