China has had a wild summer.
It started with a massive sell-off in equity market before a combination of confusing public policies, yuan devaluation, and forecasts of economic slowdown sent investors running for the hills.
Things didn't look up after China missed expectations on several economic indicators in August. These included a dip in fixed-asset investment, and a drop in the purchasing managers' index (PMI).
Another round of economic data for September is due to be released starting tomorrow and market pessimism persists.
But two economists at Deutsche Bank think markets have got China all wrong.
In a note late last week, Chief Economist Zhiwei Zhang and Economist Li Zeng outlined three popular views on China they believe are mistaken.
1. Slowdown of growth in 2015: The drop in August Caixin PMI, which is based on enterprises in the manufacturing industry, caused jitters in the market. But the number left out positive performances of local government financing vehicles (LGFV) - direct beneficiaries of fiscal stimulus - and property developers in recent months. LGFVs are economic entities established by local Chinese governments to finance public investments.
Property and land sales, which contribute to government revenue, are expected to continue improving after China lowered down payment on first home mortgages provided by commercial banks to 25 percent in cities that do not have house purchase restrictions. "This new policy will help the property market, which has been strong in recent months, to sustain its momentum," the note said.
2. Further devaluation of the Renminbi: In August, Bloomberg reported some Chinese agencies believed the Chinese yuan will weaken to as much as 7 against the U.S. dollar by the end of the year. This had many investors on edge but Deutsche Bank thinks this unlikely to materialize as Beijing's stand is against persistent depreciation. To calm global investors, the People's Bank of China (PBOC) cut interest rates and required rate of return (RRR) in August, to cushion the impact of the yuan devaluation. "The PBOC will likely re-peg the RMB and keep it stable for the rest of the year," the note said.
3. Ineffective policy stimulus and fear of government losing control: Effects of policy stimulus usually lag by one to two quarters and significant fiscal policy easing only started in May this year. But there are signs of the stimulus starting to work - such as more funds being made available for investment from state budget since June. "Investors frequently ask us if the government will launch another round of fiscal stimulus. Our answer is: the fiscal stimulus is well underway," the note said.
The Chinese government's confusing policies during the equity market rout left many investors worried if Beijing is losing control. "Handling margin financing is something new to the government," wrote Zhang and Zeng. "But this does not mean the government is losing control on economic policies."
The economists forecast China's gross domestic product (GDP) to grow at 7 percent for Q3, 7.2 percent for Q4, and overall yearly growth to remain at 7.