Economic Acumen China s economy and market prospect. In Brief. January 5, Commentary by CEBI Research Team

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1 gg January 5, 2017 Economic Acumen Commentary by CEBI Research Team In Brief We expect China s 2016E GDP growth to be 6.7%. For 2017E, we expect growth to slow to 6.5% to reflect the impacts of structural reforms and monetary normalization in the U.S. We believe the government will continue its ambitious reforms in 2017 to transform China into a moderately prosperous society. An accommodative stance in fiscal and monetary measures will be maintained. The Hong Kong market has been downgraded partly on slower EPS growth in With the market concerns diminishing and corporate earnings improving in 2017, we estimate the HSI and HSCEI to reach 24,138 and 10,238 by end-2017e, equivalent to a 12.0x and 8.0x 2017E P/E. Banny Lam Head of Research banny.lam@cebi.com.hk (852) Frank Liu Analyst frank.liu@cebi.com.hk (852) China s economy and market prospect In 2016, China has shown unmistakable signs of moderation, with growths in investment and consumption showing clear signs of softening in the first three quarters. Lethargic growth indicates a longer-than-expected economic rebalancing. Nonetheless, we believe the government will continue to implement ambitious reforms in 2017 to transform China into a moderately prosperous society. An accommodative stance in fiscal and monetary measures will be maintained. Despite the mild inflation, depreciation of RMB, and headwinds facing exports, China s economic growth stabilized in 3Q16 and forward-looking economic indicators point to a modest acceleration in domestic demand. We remain bullish on equity markets in Hong Kong and China. Economy will settle into a new normal. China s major economic indicators have largely stabilized in 3Q16. With growth in major GDP drivers recovering and CPI steadying, the government will maintain an accommodative policy stance. We forecast GDP growth for 2016E will reach 6.7%. For 2017E, we expect China s economy growth to slow to 6.5% to reflect the impacts of structural reforms and monetary normalization in the U.S. In our view, a hard landing of the Chinese economy is highly unlikely. China will continue to fine-tune its economic policies. Fluctuation of the world s economy and slowdown of China s economy was the focus of global market in Despite the mild inflation, depreciation of RMB, and headwinds facing exports, China s forward-looking economic indicators point to a modest acceleration in domestic demand. Concurring with the country s structural rebalancing goals, China s policy is characterized by prudent monetary easing and aggressive fiscal expansion. The People Bank of China (PBOC) will continue to deploy monetary easing measures to support economic recovery while keeping inflation in the range of 2%-3%. Meanwhile, both the central and the local governments will put in place more fiscal policies to boost investment and development in infrastructure and new strategic industrial sectors. Regional and rural infrastructure, investment in utilities, as well as subsidized housing construction will continue to be supported by government funding and bank lending. In sum, China will continue to fine-tune its existing accommodative macroeconomic policies to promote growth in

2 Entering a new era of investment cycle. Increased optimism on China s economic recovery, together with the growing apprehension over Brexit and stagnation in Europe, will encourage investors to shift their investment to Asia for higher returns. The Hong Kong market has been downgraded partly on slower EPS growth in With the market concerns diminishing and corporate earnings improving in 2017, we estimate the HSI and HSCEI to reach 24,138 and 10,238 by end-2017e, equivalent to a 12.0x and 8.0x 2017E P/E. 2

3 Fig. 1: China GDP growth YoY% 16% 14% 12% 8% 6% 4% 2% Fig. 2: FAI (YTD YoY%) 35% 3 25% 2 15% 5% Fig. 3: New Loans (RMB trillion) Fig. 4: M2 (YoY%) 2 19% 18% 17% 16% 15% 14% 13% 12% E 2017E 11% E 2017E Fig. 5: China retail sales (YoY%) Fig. 6: China external trade (YoY%) 25% 2 15% 5% 5% -5% - -15% E 2017E 2018E Total trade (RMB) Exports RMB Imports RMB 3

4 China Economic Indicators Q2016 2Q2016 3Q2016 Real GDP PMI Manufacturing (%) PMI Non-Manufacturing (%) Exports (RMB YoY %) (4.2) Imports (RMB YoY %) (0.5) (8.2) (1.2) 1.9 Trade Balance (RMB/bn) Exports (USD YoY %) (9.6) (4.3) (6.3) Imports (USD YoY %) (13.5) (6.8) (4.7) Trade Balance (USD/bn) CPI (YoY %) PPI (YoY %) (1.7) (1.9) (1.9) (4.8) (2.9) (0.8) FAI (YTD/ YOY %) Real Estate Investment (YTD YoY %) Industrial Production (YoY %) Retail Sales (YoY%) New Lending (RMB/bn) M2 (YoY %) Aggregate Financing (RMB bn) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Real GDP PMI Manufacturing (%) PMI- Non-manufacturing (%) Exports (RMB YoY %) (6.6) (20.6) (5.6) (3.2) 5.9 Imports (RMB YoY %) (14.4) (8.0) (1.7) (5.7) 5.1 (2.3) (5.7) Trade Balance (RMB/bn) Export (USD YoY %) (11.4) (25.3) 11.5 (1.8) (4.1) (4.8) (4.4) (2.8) (10.0) (7.3) 0.1 Import (USD YoY %) (19.0) (13.8) (7.6) (10.9) (0.4) (8.4) (12.5) 1.5 (1.9) (1.4) 6.7 Trade Balance (USD/bn) CPI (YoY %) PPI (YoY %) (5.3) (4.9) (4.3) (3.4) (2.8) (2.6) (1.7) (0.8) FAI (YTD/ YOY %) Real Estate Investment (YTD/ YoY %) Industrial Production (YoY %) Retail Sales Growth New Lending (RMB/bn) M2 (YoY %) Aggregate Financing (RMB bn)

5 World Economic/Financial Indicators Global Indices Money market Index Closing P/E WTD Yield (%) WTD chg(%) Price chg(%) U.S. US Fed Fund Rate DJIA 19, US Prime Rate S&P 500 2, US Discount Window NASDAQ 5, ECB Rate (Refinancing) EUR BOJ Policy Rate FTSE 100 7, US Treasury (1 Mth) DAX 11, US Treasury (1 Yr) CAC40S 4, US Treasury (5 Yr) STOXX EUR US Treasury (10 Yr) Asia US Treasury (30 Yr) HSI 22, Japan 1-Yr Gov. Bond HSCEI 9, Japan 10-Yr Gov. Bond CSI300 3, German 1-Yr Gov. Bond SSE Composite 3, German 10-Yr Gov. Bond SZSE Composite 2, China 1-Yr Gov. Bond NIKKEI , China 5-Yr Gov. Bond KOSPI 2, China 10-Yr Gov. Bond TWSE 9, mth LIBOR S&P/ASX 200 5, mth LIBOR MSCI Index O/N SHIBOR MSCI WORLD 1, mth SHIBOR MSCI DEVELOPED O/N HIBOR MSCI EMERGING mth HIBOR MSCI US 2, O/N CNH HIBOR MSCI UK 2, mth CNH HIBOR MSCI France MSCI Germany MSCI China Corporate Bonds (Moody s) MSCI Hong Kong 12, Aaa MSCI Japan Baa * As of 5/1/2017 closing for Asian markets, previous closing for other markets Global Commodities Currency market Unit Price WTD chg(%) Spot Rate WTD chg(%) Energy US Dollar Index NYMEX WTI USD/bbl Euro/USD ICE Brent Oil USD/bbl GBP/USD NYMEX NatGas USD/MMBtu AUD/USD Basic Metals USD/CAD LME Alum.Cash USD/MT 1, USD/JPY CMX Cop.Active USD/lb USD/CHF LME Steel Cash USD/MT USD/CNY Midpoint LME Lead Cash USD/MT 2, USD/CNY Precious Metals USD/CNY NDF CMX Gold USD/KRW 1, mth Spot pr Gold Futures USD/KRW 1, USD/CNH CMX Silverbn USD/KRW USD/HKD NYMEX Platinum USD/T. oz CNY/HKD Agri, Products CNH/HKD CBOT Corn USD/bu USD/KRW 1, CBOT Wheat USD/bu USD/TWD NYB-ICE Sugar USD/lb USD/SGD CBOT Soybeans USD/bu. 1, USD/INR All data sources: Bloomberg, CEBI, NBS 5

6 Disclosures Analyst Certification We, LAM Chiu Kei, Banny and LIU, Frank, being the persons primarily responsible for the content of this research report, in whole or in part, hereby certify that all of the views expressed in this report accurately reflect our personal view about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. We and/or our associates have no financial interests in relation to any listed company (ies) covered in this report, and we and/or our associates do not serve as officer(s) of any listed company (ies) covered in this report. Disclaimer This report is for our clients only and is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expresses or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. CEB International Capital Corporation Limited is under no obligation to update or keep current the information contained herein. CEB International Capital Corporation Limited relies on information barriers to control the flow of information contained in one or more areas within CEB International Capital Corporation Limited, into other areas, units, groups or affiliates of CEB International Capital Corporation Limited. The compensation of the analyst who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of CEB International Capital Corporation Limited as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither CEB International Capital Corporation Limited nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. Additional information will be made available upon request. Copyright 2017 CEB International Capital Corporation Limited No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of CEB International Capital Corporation Limited. Office address: CEB International Capital Corporation Limited, 22/F AIA Central, 1 Connaught Road Central, Hong Kong. Tel: (852)