The chief economist of Founder Securities Ren Zeping expects both the Chinese economy as well as its stock market to see a dual L-shaped recovery across a considerable period into the future, and its exports to receive a boost from a shift in overseas leverage cycles.
In his 2017 mid-year macro-outlook, Ren said that after three decades of high level growth China’s reform and population dividends are now receding, and as a consequence the economy will continue to see a tepid performance with little upwards or downwards leeway.
For Ren this means that there will be neither a bear nor a bull market for stocks, and that volatility and turbulence will remain at low levels.
“In 2015 we forecast that the Chinese economy was about to bottom out and enter an L-shape, after hitting the first bottom in 2016 – 2017 Q1, we expect the second bottom to be reached in mid-2017 to 2018,” said Ren.
“Our general assessment is that we are at the peak of the inventory, real estate and financial cycle, and at the bottom of the capacity and reform cycle (start a new cycle).
“Following falls in demand and prices, in 2017 Q2 active inventory restocking shifted to passive inventory restocking, and it is expected that the inventory cycle will continue to decline until the end of 2018.
“Following an upgrade in real estate policy controls and a tightening of the money supply, real estate sales saw a peak in Q1, and investment will fall in the third and fourth quarters.
“Based on prior experience with an 18 month-rise 18-month adjustment (cycle), the real estate cycle will hit a bottom in the second half of 2018”
Ren said that China is currently at the peak of the financial leverage cycle after three periods of rising leverage in 2009, 2010 – 2013 and 2014 – 2016, and has now entered the deleveraging phase.
China will benefit, however, from a shift in leveraging cycles across advanced economic regions that will help to boost exports.
“The US passed through a financial deleveraging phase from 2008 – 2011 after the sub-prime mortgage crisis, and Europe passed through a financial delivering phase from 2011 – 2016 after the sovereign debt crisis, and have now entered a leverage increase cycle,” said Ren. “The US and EU cycle of financial leveraging, equipment expansion and active inventory restocking will revive Chinese exports.”
With respect to China’s broader economic prospects, Ren notes that reform are at a “historic cross roads,” and that “whether or not reforms will be relaunched and [China] escape the middle income trap will decide whether prosperity will be exhausted or a new cycle will be launched.”
Ren expects that inventories and real estate will see a cyclical bottom in the second half of 2018 and a “new start” in 2019.
With regard to the Chinese stock market, Ren said that 2017 has seen a shift “from liquidity drivers to performance drivers” amidst the ongoing deleveraging campaign by financial regulators, and that investors should focus on blue chip companies given a widening divergence in the performance of listed concerns.
“Rises in the risk-free interest rates lead to capital outflows,” said Ren. “Future market turbulence could come from changes to risk appetite and risk-free interest rates, and will be determined by the progress of financial deleveraging, the expectations of the start of a new political cycle with the 19th National CCP Congress, and whether monetary policy will take the lead in withdrawal from tightening during the second half.”
