Weak Economic Performance Calls for Further Loosening of the Monetary Policy

13 September 2015 Please read the special disclaimer on the last page - i - Securities Research Report China’s Economy Weak Economic Performance Calls for Further Loosening of the Monetary Policy China's Economy Weekly Latest views of Everbright Securities Frequent data shows that weak production continues while a warm-up trend maintains in demand. Frequent data shows that no significant stabiliza-tion was achieved in production under the growth-stabilizing policies while indus-trial production activities slowed down somewhat. YoY power generation growth continued to shrink, with a single-week decline widening to over 5%, while the production capacity utilization stabilized at a low level. Loose monetary policy facilitated real estate sales area to continue to warm up, maintaining a growth pace of over 20%. Driven by interest rate and RRR cuts and real estate-friendly policies, single-week growth of real estate sales recovered once again. Real economy remains weak, while the foundation for demand recovery is still unsta-ble, as a result, a continuous recovery of economic growth needs to be safe-guarded by loosening monetary policies. Policymakers continue to keep close attention to economic decline. The Aug economic data continues to exhibit a weak tendency, a capital bottleneck which continues to restrain economic stabilization, and a situation that growth-stabilizing policies do not yet drive demand to obviously stabilize and recover. Policymakers continue to keep close attention to economic decline. The Chinese Ministry of Finance stated that, China still faces a higher pressure from economic decline, and more forceful financial policies will be carried out in the next step, and efforts will be made to speed up the promotion of the PPP model. In the future, growth-stabilizing policies are expected to continue to work, and exert its key roles in growth stabilization through driving steady pick-up of in-vestment growth by means of increasing sources of capital for infrastructure in-vestments, such as expansion of local government debt capacity and accelerated issuance of special-purpose financial bonds and urban construction investment bonds. Improved capital dimension will drive economic stabilization and pick-up. Total credit and social financing continued to edge up since Jun, driving an im-provement in the capital dimension of real economy. The Jul capital in place for fixed-asset investments has picked up at a pace equivalent to that of investment growth on a YoY basis, reflecting a situation that the problem of “difficulty in fi-nancing” for real economy has been relieved effectively. In the future, monetary policy will focus its efforts on guiding capital to enter the real economy, by, for example, adopting multiple instruments to guide surplus capital in financial mar-kets to enter the real economy. Under the backdrop of a loose monetary policy and relatively weak stock market performance, “difficulty in financing” for real economy is expected to be further relieved. Meanwhile, efforts will be made to achieve the goal of economic growth stabilization by driving continuous pick-up of investment growth, especially the growth of capital construction investment as a major means for economic growth stabilization. As the deposit interest rate has already reduced to a level below the inflation rate, a further interest rate cut will produce a serious depressing effect to banks’ earnings, while the effect of lo-Contact: Yewei Yang 010-58452024 yangyewei@ebscn.com Analyst: Gao Xu 010-58452002 gaoxu@ebscn.com Practice license number: S0930512080004 Chengzhe Xiao and Yue Yuan also made contribu-tions to this Report. Weekly data tracker This week Last week WoW change in food prices (%) 1/ 0.1 0.6 WoW change in input prices (%) -0.3 -0.3 Net open market injec-tion (Rmb100mn) 80 -150 7-day repo (%) 2.39 2.44 RMB/USD central parity 6.372 6.362 RMB appreci-ation – last close against central parity (%) 0.048 -0.095 Source: CEIC, Wind Follow Everbright ma-croeconomic research Follow economic pulses 13 September 2015 China's Economy Weekly Please read the special disclaimer on the last page - ii - Securities Research Report wering financing interest rate decreases progressively on a marginal basis, as such, the possibility of interest rate cut is limited in the future. However, under a pressure from capital outflows, RRR is likely to be reduced continuously in the future. We forecast that measures of RRR cut might be launched once again in Sep. Views on Capital Markets Capital markets continue to hold a relatively pessimistic attitude towards economic prospect. Ever-bright Securities’ Macro-economic Confidence Index was -0.13% last week, indicating