Why Q1 is best investment time in Chinese market

Inflation may jump above 3% in Q2.

According to OCBC, China’s January economic data came in stronger than expected. There are five key takeaways from the set of January data including better than expected trade data, rising demand for medium to long tem loan, record high total social financing, stronger than expected money supply growth and rising CPI in sequential basis.

The stronger than expected import data and rising demand for medium to long term loan suggested that the Chinese recovery is firm. In particular, consumer demand for medium to long term loan hit a record high of CNY268bn in January, reflecting rising consumer confidence in anticipation of improving economic outlook.

Here's more from OCBC:

China’s CPI rose 2.0% yoy in January, down from 2.5% yoy in December. However, in the sequential base, the consumer prices rose 1.0% mom, up from 0.8% in December. The divergence between yoy reading and mom reading was mainly due to base effect.

Meanwhile, China’s total social financing hit a record high of CNY2.54tn in January. Another surprise came from China’s money supply data with both M1 and M2 beat market expectation. The recent spike in M1 growth, in particular, may imply rising inflationary risk given M1 usually leads CPI by six months in China based on historical experience.

It may still be too early to worry that Chinese central bank may have to shift its policy tone from easing to tightening given that the headline inflation reading remains low. Nevertheless, the recent data suggested that the impact of easing policy has started to take effect in China. As such, we suggest investors should pay more attention to China’s inflation data rather than GDP for the next few months.

We think Q1 is still the best time to invest in Chinese market, given its recovery is on track and policy is still on easing camp. Nevertheless, should inflation overshoot above 3% in Q2, the concern on policy tightening in the second half will emerge, which may dampen market sentiment in China in our view.