From Macquarie:
Macquarie’s China economist, Larry Hu, notes that nominal GDP growth accelerated to 7.2% YoY in 1Q16 from 6.0% in 4Q15, boding well for corporate earnings and consumption growth…In Larry’s view, there are three reasons why the rebound should be considered temporary. First, the comparison of data with the weakness at the turn of the year is somewhat false. Even the elements due to inventory restocking and policy stimulus will not last long. Secondly, the top two challenges facing the Chinese economy have not really been fixed: lack of growth engines other than investment and a weak global economy. Finally, external risk remains. US dollar weakening provides a benign environment for EM including China, but stability could easily lead to instability. If improved market sentiment and better data prompt the Fed to consider hikes again, the US dollar would likely strengthen and put pressure on the RMB once more.
As discussed in Larry’s 2016 Outlook for the Chinese economy, the over-arching theme this year is power transition in 2017. Therefore, policy makers both at the central and local levels will do whatever it takes to deliver a stable economic and social backdrop. That said, we also do not think that top leaders will overstimulate because they have to run the country for another six years. If growth stabilises, as now seems apparent, the focus will shift from demand-side stimulus back towards supply-side reform, which aims to boost long-term growth potential and avoid systemic financial risk. Of course, if growth slows again, the focus will change as well. What now for metals and bulk commodities?
