EFTA01146583.pdf

From: US GIO <us.gio®jpmorgan.com> To: Undisclosed recipients:; Subject: J.P. Morgan Macro Skinny: China: this is not what a hard landing looks like Date: Thu, 13 Sep 2012 11:07:24 +0000 Attachments: 2012-09-12_China-pdf.zip Inline-Images: image003.png; image004.png; image005.png; image006.png; image007.png; image008.png; image002.jpg September 12, 2012 China: this is not what a hard landing looks like I/ Chinese activity seems to be stabilizing at weak levels, but not free-falling. Yet most of the street is still assigning a relatively high probability of a hard landing scenario, predicated on a severe real estate bubble collapse. The housing market has admittedly lost steam since late last year, but more recently, momentum has turned positive again. Indeed residential prices and home sales are pointing up (left chart), while cement and steel production are far from suggesting a free-fall scenario (right chart). Importantly, housing momentum is turning without any direct fiscal or monetary help. When true bubbles (like the US, Spanish and Irish ones) were 'ready to explode', nothing could stop them from doing so. The stabilization in Chinese housing markets rejects the bubble hypothesis and the hard landing case along with it. EFTA01146583  Housing prices and sales stabilizing Sq. meters, YoY % change 70-city index 110 100 Secondary 80 market real estate prices 60 105 40 20 100 0 -20 Sales transaction volume -40 95 2005 2006 2007 2008 2009 2010 2011 Source: CNBS, CEIC, J.P. Morgan Private Bank. Data as of August. Show me the freefall mn tons produced, seasonally-adjusted (both axes) 200 Cement 180 160 140 120 Meet Forced steel plant shutdowns 100 "re--- Lehman shock 80 2006 2007 2008 2009 2010 2011 2012 Source: CNBS, J.P. Morgan Private Bank. Data as of August. 2/ Recent announcements of several infrastructure projects totaling I tm RMB, and the urgency in which these policies were communicated, are a clear indication that the government is willing to use fiscal policy to put a floor on economic growth'. Infrastructure investment growth is already showing up in the data (left chart) and the recent improvement in bank credit suggests that more spending in this area is underway (right chart)2. More infrastructure investment won't help the ongoing imbalance between investment and consumption, but more importantly for financial markets, it will support the medium-term growth outlook. Monetary policy also has more room to ease, although the authorities will likely move more slowly on this front. On balance, while fiscal and monetary policy won't ease as aggressively as in the past, we anticipate the easing will be sufficient to stabilize growth at a 7%-handle. EFTA01146584  Fiscal policy lifting infrastructure investment... YoY % change, 3-month moving average 60 50 40 30 20 10 0 -10 2005 2006 2007 2008 2009 2010 2011 2012 Sou ce: China National Bureau of Statistics, J.P. Morgan Private Bank. 'Infrastructure is defined as power, gas, water, andtransportation. As of Aug consistent with a pickup in credit growth YoY % change in RMB loans 20 20 19 19 18 18 17 17 16 16 15 Jun-2010 Dec-2010 Jun-2011 Dec-2011 Jun-2012 Source: People's Bank of China. Data as of August. 3/ With the housing market stabilizing, the bears are now using the manufacturing slowdown as 'new evidence' for the hard landing case. But this is misleading: China's recent manufacturing slowdown was largely triggered by weakness in Europe, not by domestic forces. Indeed, a closer look at the data shows that the services sector has done better than manufacturing, and within manufacturing, export-related industries worsened more than housing-related industries (left chart). Now that the ECB is getting better at managing the European crisis, we expect global manufacturing sentiment to improve from here, including in China (right chart). EFTA01146585  Renewed export demand, a boost to China's 'light' industries? Real gross value added.YoY % change 20 18 Heavy industry 16 (housing-related) 14 12 10 8 Mar-2010 Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012 Source: China National Bureau of Statistics. Data as of August. Manufacturing activity in developed markets is stabilizing Manufacturing PMI, 50+=expansion 62 60 58 56 54 52 50 48 46 44 42 2010 2011 2012 Source: ISM, Markit. Data as of August 4/ The household sector is another area where stabilization is apparent. Aside from the pickup in housing demand, retail sales growth has stabilized, thanks to a moderate rebound in auto sales. The resilience of the labor market is another sign that household activity is not falling off the cliff. This is partly because service sector hiring was strong enough to offset the weakness in manufacturing-related employment. Consumer spending is by no means strong, but here too, activity is forming a bottom. 5/ To be sure, structural impediments are pulling China's trend growth gradually lower. But the policy agenda for the new generation of leaders is likely to be bold - especially in labor, product and financial markets' Importantly, the new leadership is realizing that the reform dividends from the past 29 years have been largely exhausted and that new supply-side reforms are needed, over and above the current `band-aid' of fiscal and monetary stimulus. 6/ Despite the apparent stabilization in economic activity, equity markets (both on-shore and off-shore) are still assigning a very high probability of a bad outcome. The Shanghai A share market, which has the longest trading history, is trading at its lowest valuation ever, lower even than in 2008-09 (measured by trailing price to book). We believe the divergence between markets and the real economy will likely narrow over the next year or so as the eventuality of a soft landing becomes clearer. Michael Vaknin Chief Economist, J.P. Morgan Private Bank Fan Jiang Chief Investment Strategist - Asia, J.P. Morgan Private Bank Dong Chen China Economist, J.P. Morgan Private Bank EFTA01146586 [I] Some of these projects (highways, subways and energy-saving projects) were already brought up in the past, but a lot more items were added and the news was boldly telegraphed and timed just before President Hu's speech on infrastructure, which by itself, is an odd topic for the president. All of these signals stress the urgency of the government to stave off downside growth risks from here. [2] Infrastructure spending is likely to overshoot as Chinese municipalities still have much to catch up on beyond these programs. The recent flood in Beijing showed how underdeveloped the sewage system is even in the most "urbanized" case. [3] For example, under the new chairman of CSRC (China's SEC), there have been more deregulation and market friendly regulation measures in the past 6 months than the past 5 years. China is also gradually, but consistently, deregulating oil prices -- China just raised oil prices again this week. Acronyms: CNBS — China National Bureau of Statistics CSRC — China Securities Regulatory Commission ECB — European Central Bank ISM - Institute for Supply Management PMI — Purchasing Manager's Index RMB — Renminbi/Chinese Yuan IRS Circular 230 Disclosure: JPAlorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly any discussion ofU.S tar matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion. marketing or recommendation by anyone unaffiliated with JPAlorgan Chase & Co. ofany ofthe matters addressed herein orfor the purpose ofavoiding U.S. tar-relatedpenalties. Note that J.P. Morgan is not a licensed insurance provider. The material containedherein is intended as a generalmarket commentary. Opinions expressed herein are those ofMichael Vaknin and may differfrom those ofother J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differfrom that contained in JP. Morgan research reports. The above summaryroricesrquoteskoadmics have been obtainedfrom sources deemed to be reliable, but we do not guarantee their accuracy or completeness. any yield referenced is indicative and subject to change. Past performance is not a guarantee offuture results. References to the performance or character ofour portfolios generally refer to our Balanced Model Portfolios constructed by J.P Morgan. It is a proxyfor client performance and may not represent actual transactions or investments in client accounts. The modelportfolio can be implemented across brokerage or managed accounts depending on the unique objectives (Oath client and is serviced through distinct legal entities licensed for. pecific activities. Bank. trust and investment management services are provided by JP Morgan Chase Bank N.A. and its affiliates. Securities are offered through JP. Morgan Securities LLC (JPMS), Member NYSE, FINRA and SIPC and its affiliates globally as local legislation permits. Securities products purchased or. old through JPAIS are not insured by the Federal Deposit Insurance Corporation ("FDIC,: are not deposits or other obligations nfits bank or thrift affiliates and are not guaranteed by its bank or thrift affiliates; and are subject to investment risks. including possible lass ofthe principal invested. Not all investment ideas referenced are. uitablefor all investors. Speak with your J.P. Morgan Representative concerning your personal situation. This material is not intended as an offer or solicitationfor the purchase or sale ofanyfinancial instrument. Private Investments may engage in leveraging and other speculative practices that may increase the risk ofinvestment loss. can be highly illiquid, arenot required to provide periodic pricing or valuations to investors and may involve complex tea structures and delays in distributing important tar information. Typically such investment ideas can only be offered to suitable investors through a confidential afferent memorandum which fully describes all terms, conditions. and risks. This material is distributed with the understanding that.I.P Morgan is not rendering accounting, legalor tax advice. You. hould consult with your independent advisors concerning such matters. In the UnitedKingdom, this material is approved by J.P. Morgan International Bank Limited (JPAIIB) with the registered office located at 25 Bank Street. Canary Wharf London Elf 5JP, registered in England No. 03838766 andis authorised and regulated by the FinancialSemites Atakora)! In addition. this material may be distributed by: JP/dawn Chase Bank, N.A. (JPMCB) Paris branch, which is regulated by the French banking authorities Autorite de Controle Prudentiel and Autorite des Marches Financiers; J.P. Morgan (Suisse) SA, regulated by the Slats Financial Market Supervisory Authority; JPMCB Bahrain branch, licensed as a conventional wholesale bank by the CentralBank ofBahrain (for professional clients only): JPMCB Dubai branch. regulated by the DubaiFinancial Services Authority. In Hong Kong, this material is distributed by JPAlorgan Chase Bank, N.A. (JPMCB) Hong Kong branch except to recipients having an account at JAMB Singapore branch and where this material relates to a Collective Investment Scheme (other than privatefunds such as private equity and hedgefunds) in which case it is distributed by J.P. Morgan Securities (Asia Pacific) Limited (JPAISAPL). Both JPMCB Hong Kong branch andJPMSAPL are regulated by the Hong Kong Monetary Authority. In Singapore, this materialis distributed by JPMCB Singapore branch except to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than private funds such as a private equity and hedge fiords) in which case it is distributed by J.P. Morgan (SEA.) Limited (JPAISEAL). Both JPMCB Singapore branch and JPAISEAL are regulated by the Monetary Author* ofSingapore. This message has been preparedby personnel in the (Sales and Trading Departmems)ofone or more affiliates ofJ.P. Morgan Chase & Co. and is not the product ofJ.P. Morgank Research Department Iris not a research report and is not intended as such. This material isfor the general information ofour clients and is a "solicitation" only as that term is used within CFTC Rule 1.71 (a)(9)(v) and 23.605(a)(9)(v) promulgatedunder the U.S. Commodity Exchange Act. Each recipient ofthis presentation. and each agent thereof may disclose to any person. without limitation, the US income andfranchise tax treatment and tax structure of the transactions described herein andmay disclose all materials ofany kind (including opinions or other tax analyses) provided to each recipient insofar as the materials relate to a US income orfranchise tax strategyprovided to such recipient by JPAIorgan Chase & Co. andits subsidiaries. Shouldyou have any questions regarding the information contained in this material or about J.P. Morgan products and. ervices. please contact your J.P. Morgan private banking representative. Additional information is available upon request "J.P. Morgan" is the marketing namefor JPAlorgan Chase & Co. and its subsidiaries and affiliates worldwide. This material may not be reproduced or circulated without J.P. Morgans authority. o 2012 JPAIorgan Chase & Co. All rights reserved. This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, available at http://wwwjpmorgan.corn/pages/disclosures/email. EFTA01146587