EFTA01146588.pdf

I Macro Skinny J.P. Morgan September 12, 2012 China: this is not what a hard landing looks like 1/ 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. Housing prices end sales stabilizing Show me the Wean Sq. meters, YoY %change 70-city index mn tons produced.seasonally-adjusted (both axes) 110 200 Cement 65 100 Secondary 60 180 60 market real estate prices 55 60 105 160 • tre°11Z4 50 40 140 45 20 Steel Forced steel 100 120 plant shutdowns 4D 0 100 35 -20 Sales transaction volume Lehman shock -40 95 80 30 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2038 2009 2010 2011 Source: CNBS.CEIC.E. Morgan Private Bank. Data as olAugust. Settee:CMS,. Morgan PnvateBank Data as of August. 2/ Recent announcements of several infrastructure projects totaling ltm 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. EFTA01146588  Fiscal policy lifting infrastructure investment... consistent with a pickup in credit growth MY V. change.3-month moving average YoY % change in RMB loans 60 20 50 n 20 19 40 19 30 18 18 20 17 10 17 0 16 16 -10 15 2005 2006 2007 2008 2009 2010 2011 2012 Jun-2010 Dec-2010 Jun-2011 Dec-2011 Jun-20I2 Source:ChInaNatkoal Bureau of Statistes.M Morgan Pnvate Bank 'InfrastructureIs delned as poner.gas water. and transportaton . As of Aug Source. PeoplesBank otChna. Dataas 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). Renewedexport demand, a boost to CNna's light' industries? Manufacturing activity In developed markets is stabilizing Real gross value added. YoY % change Manufacturing PMI.50+4expansion 20 62 60 16 Heavy industry 58 16 (housing-related) 56 54 14 52 50 12 Light industry 48 (export•related) 10 46 44 8 42 Mar-2010 Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012 2010 2011 2012 Source:ChinaNational Bureauof Siabsigs. Data as of Aug um. Source: ISM.Marka. Dataas 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 markets3. 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. EFTA01146589 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,.. Morgan Private Bank Fan Jiang Chief Investment Strategist - Asia, Morgan Private Bank Dong Chen China Economist,.. Morgan Private Bank [1I 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. [21Infrastructure 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. [31For 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: JPAforgan Chase & Co. and its affiliates do not provide tax advice. Accordingly. any discussion of U.S. tax 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 una rliated with !Mown Chase & Co. of any of the matters addressed herein orfor the purpose of avoiding U.S. tax-related penalties. Note that Morgan is not a licensed insurance provider. The material containedherein is intended as a general market commentary. Opinions expressed herein are those ofMichael Vaknin and,nay differfrom those ofother.. Morgan employees and affiliates. This information in no way constitutes. Morgan research and should not be treated as such. Further. the views expressedherein may d¶erfrom that contained in. Morgan research reports. The above summary/prices/quotes/statistics have been obtainedfrom sources deemed to be reliable. bur we do not guarantee their accuracy or completeness. any yield referenced is indicative and subject to change. Past performance is not a guarantee cituture results. References to the performance or character of ourportfolios generally refer to our Balanced Model Portfolios constructed by. Morgan. It is a may for client perfonnance 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 ofeach client and is serviced through distinct legal entities licensedfor specific activities. Bank. trust and investment management services are providedby JP Morgan Chase Bank.. and its affiliates. Securities are offered through. Morgan Securities LLC (JPMS). Member NYSE FINRA and SIPC. and its affiliates globally as local legislation permits. Securities products purchased or sold through !PAIS are not insured by the Federal Deposit Insurance Corporation ("FDIC"): are nor deposits or other obligations ofits bank or thrift affiliates and are not guaranteed by its bank or thrift affiliates: and are subject to investment risks. including possible loss ofthe principal invested. Nor aft investment ideas referenced are suitable for all investors. Speak with )rour.. Morgan Representative concerning your personal situation. This material is not intended as an offer or solicitationfor the purchase or sale ofany financial instrument. Private Investments may engage in leveraging and other speculative practices that may increase the risk ofinvestment loss. can be highly illiquid. are not required to provide periodic pricing or valuations to investors and may involve complex tax structures and delays EFTA01146590 in distributing important tax infirrmation. Typically such investment ideas can only be offered to suitable inirstors through a confidential offering memorandum whichfully describes all terms. conditions. and risks. This material is distributed with the understanding that. Morgan is not rendering accounting. legal or tar advice. You should consult with your independent advisors concerning such matters. In the United Kingdom. this material is approved by. Morgan International Bank Limited (JPM1B1with the registered office located at 25 Bank Street. Canary Wharf: London E14 5JP. registered in EnglandNo. 03838766 and is authorised and regulated by the Financial Services Authority. In addition. this material may be distributedby: JPMorgan Chase Bank. el (JPMCB) Paris branch. which is regulated by the French banking authorities Autorite de Contrale Prudentiel andAmorist; des Marches Financiers:. Morgan (Suisse) SA. regulated by the Swiss Financial Market Supervisory Authority: JPMCB Bahrain branch. licensed as a conventional wholesale bank by the Central Bank of Bahrain (for professional clients only): JPMCB Dubai branch. regulated by the Dubai Financial Services Authority. In Hong Kong. this material is distributedby JPMorgan Chase Bank.. (JPMCB) Hong Kong branch except to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than privatefunds such as primate equity and hedgefunds) in which case it is distributedby. Morgan Securities (Asia Pacific) Limited (JPMSAPL). Both JPMCB Hong Kong branch and MISAPL are regulated by the Hong Kong Monetary Authority. In Singapore. this material is distributed by JPMCB Singapore branch except to recipients having an account at .IPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than private finds such as a private equity and hedge funds) in which case it is distributed by. Morgan (SEA.) Limited(JPMSEAL). Both JPMCB Singapore branch and JPMSEAL are regulated by the Monetary Authority ofSingapore. This message has lien repared by personnel in the (Sales and Trading Departments)of one or more affiliates of. Morgan Chase & Co. and is not the product of. Morgan's Research Department. It is not a research report and is not intended as such. This material is for the general information ofour clients and is a "solicitation" only as that tennis used within CFTC Rule 1.71 (a)(9)(v) and 23.605(a)(9)(v) promulgated under 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 ofthe transactions describedherein and may 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 tar strategy provided to such recipient by JPMorgan Chase & Co. and its subsidiaries. Should you have any questions regarding the information contained in this material or about.. Morgan products and services. please contact yourfl Morgan private banking representative. Additional information is available upon request Morgan" is the mantes namefor JPMorgan Chase & Co. andits subsidiaries and affiliates worldwide. This materialmay nor be reproduced or circulated without.. Morgan's authority. 132012 JPMorgan Chase & Co. All rights reserved. EFTA01146591