WWRR Vol.2.015

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Christopher Wood christopher.wood@clsa.com +852 2600 8516 Figure 8 Home price change (%MoM) at CRR-tracked projects in 40 tier 2-3 cities 5% (%MoM) %MoM price change at CRR-tracked projects 4% 3% 2% 1% 0% -1% Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Source: China Reality research (CRR) Figure 9 YoY sales in four tier-1 cities and 14 tier-2 cities tracked by CRR 200 (%YoY) Tier 1 Tier 2 150 100 50 0 (50) (100) Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-Feb Jun 18 Oct 18 Source: Local Housing Bureaus, CREIS, CRR Still it will be important to remember if the trend turns too negative that Beijing always has the option to ease policy on property aggressively given the extensive tightening measures now in place, though, as with the deleveraging campaign, it will want to avoid a return to extreme stimulus. There are now 114 mainland cities with property tightening measures. But that stance is much easier to maintain if the trade issues with America are resolved without excessive acrimony. In this respect, China had already begun its campaign to address the shadow banking excesses before Trump was elected president in November 2016. This is important because, as also noted by Haixu in his report, China would now be much more vulnerable to the Trump administration’s more aggressive stance on trade reflected in the tariff increases if the shadow banking excesses had not been addressed. In this respect, China’s macro position is not as vulnerable as the hardliners in Washington seem to think it is. But that is not to say that life would be a lot more comfortable for Beijing right now if Hillary Clinton had been elected president. Returning to America, the major business news of the week has been General Motors’ decision to shut two Michigan plants as well as five plants in Ohio, Maryland and overseas and to cut 14,000 jobs in North America. This has raised two risks for the Donald regardless of his combative response Thursday, 29 November 2018 Page 6
Christopher Wood christopher.wood@clsa.com +852 2600 8516 to the news in terms of his threat to cut all GM’s “subsidies”. First, the move risks drawing attention to the negative consequences of tariffs given the tariff increases have cost GM an estimated US$1bn increase in its raw material costs, though General Motors was diplomatic enough not to mention that in its statement. Second, it draws attention to more classic interest-rate sensitive sectors which are vulnerable to monetary tightening. In this respect, GREED & fear’s meetings this week have confirmed GREED & fear’s base case, namely that US cyclical momentum has peaked after the sugar rush of tax reform and there is now growing evidence of higher interest rates beginning to bite, most particularly in the housing sector. GREED & fear has found many investors focused on the weakening trend in housing as former hot markets such as Dallas turn soft. The expectation is that the recent weakening trend in housing is set to continue. US existing home sales have declined year-on-year for eight straight months, falling by 5.1% YoY in October, while new home sales declined by 12% YoY to an annualised 544,000 units in October, the lowest level since March 2016 (see Figure 10). Figure 10 US new and existing home sales 7,500(thousand, saar) (thousand, saar) 7,000 US existing home sales 6,500 US new home sales (RHS) 6,000 5,500 5,000 4,500 4,000 3,500 3,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: US Census Bureau, National Association of Realtors, Datastream 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 This in turn raises the issue of Federal Reserve policy, which has become more politicised with Trump’s Jerome Powell-focused tweets. In this respect, Powell’s comment in a speech at the Economic Club of New York on Wednesday that interest rates remain “just below the broad range of estimates of the level that would be neutral for the economy” has, not surprisingly, been interpreted as doveish by the markets. This is why current market expectations of only two more rate hikes (including December) by the end of 2019 look quite plausible to GREED & fear (see Figure 11). Still a truce on the January tariff increase, or better a trade deal, is likely to precipitate a year-end equity rally led by Asia which would probably have the practical effect of delaying the end of monetary tightening. By contrast, no deal and the resulting imposition of the threatened tariff increases in January is likely to accelerate “risk off” action in markets thereby fast forwarding the end of monetary tightening. This is because, as discussed here last week (see GREED & fear - Identity theft and private equity, 22 November 2018), in the post-quanto easing world asset prices drive economies and not the other way round. Thursday, 29 November 2018 Page 7
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07 th December 2018 What We Are Rea
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Prudent Policy Mix Is the Anchor of
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Steady Growth Expected in F2020 We
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Exhibit 15: Saving Less Investment
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Risks: Skewed to the Downside, Main
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2019 Global Economic and Market Out
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