As we have argued lately, there are increasing signs that the Chinese economy is recovering, pulled not least by the construction sector (see Research: A turn in Chinese construction to be a game changer, 31 March). We see increasing signs that this is spilling over to commodity markets and emerging market currencies, equities and bond spreads.
In the past few days, iron ore prices have pushed higher yet again and oil prices have quickly regained pace despite the disappointment over the Doha talks on production cuts over the weekend. However, as we have previously argued, the recovery in oil prices is driven more by a lift to demand and more positive expectations for global growth than by hopes of production cuts that never seemed very likely (see Flash Comment: Oil price recovery to overlook divided OPEC, 19 April).
Chinese housing data for March showed a further increase in home sales, paving the way for a further decline in the oversupply of houses (see Chart 6). Also, as lower rates and yields work with a lag, we expect sales growth to stay strong in 2016. A reduction in the requirement for a down payment when buying a house is also underpinning sales. In our view, stronger home sales and lower inventories will continue to drive a recovery in the Chinese construction sector with positive spillover to the industries that have exposure to construction, such as the steel and cement sectors. While there is still a big oversupply in tier 3 and tier 4 cities, we believe construction will pick up in tier 1 and tier 2 cities, where supply of housing has come down and house prices have picked up.
Given our positive view on China this year, we continue to have a constructive stance on emerging market assets and commodity prices (see also After the Rally: Are emerging markets still a Buy, 20 April). While we could see a correction in Chinese manufacturing PMI in April following the very sharp increase in March, we expect the industrial and construction sectors to see a rising trend this year. We also expect the cyclical recovery in China, in combination with an upturn in US manufacturing and dovish central banks, to underpin risk assets in US and Europe in the medium term.
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