China: Is the capital market recovery correlated with economic prospects?

PODCAST: Should the US currently engage in trade confrontation with China?

In this Sunday's PODCAST, Steve and Dan return to the topics:

- Are the unexpected changes in the US economy last week concerning?

- Is the competence of US economic policymakers really good?

- How is the latest bank bailout program?

- Is the US economy in a position for trade confrontation with China?

- What does the recent earnings season indicate for large corporations?

Hong Kong stocks have had the longest winning streak in the past 2 weeks since 2018.

• Hang Seng rises 9 consecutive sessions, surpassing the “overbought” level - despite Mainland having a half-week holiday.

  

Last week, net investment into Chinese stocks also rose to the highest level in 2 months.

Everything that happens has its reasons. On the occasion of the significant improvement in the Hong Kong exchange, this week's Macro Economics section of Viet Hustler will return to China to analyze the improvement in both the stock market and the economy from 2 perspectives:

• Micro perspective: Where does investor demand in the Hong Kong market come from?

• Macro perspective: Does this demand substantially come from China's recent policies and macroeconomic data?

Micro perspective: Investor demand returning to the Hong Kong exchange

The strong rally in Hong Kong stocks is said to come from the push of southbound.

• FYI: Since the Hong Kong - Shanghai stock exchanges were linked (and later Hong Kong - Shenzhen): 

  • Trading where Mainland investors buy Hong Kong stocks is called Southbound trading.

  • Trading where Hong Kong and international investors buy Mainland bonds (through the Hong Kong exchange) is called Northbound trading,

• Technical analysts also say that Asia's one of the most dynamic stock markets: Hong Kong may have hit bottom and is reversing. 

The recovery of Hong Kong stocks is summarized by GS Research through 3 reasons:

(1) Positive shifts from the macro situation bring more optimism to investors:

• PBOC's policy/liquidity easing moves + comprehensive and strong bailout packages from the government

• Economic stimulus measures have focused on the consumer demand side

  • FYI from Xinhua: predicted about 270 million tourist trips by Chinese people during the 5-day Labor Day holiday…

    —> positive impact on consumption and economic growth.

  

• Policies supporting private enterprises.

• Government fully supports the real estate market and stock market.

• US-China economic relations have many improvements

Details on these policies: China's strong moves to stabilize the market from February 2024.

(2) The new “9 measures” guideline to promote the capital market has increased investor confidence in regulators

December 4: China issues new guidelines to promote the financial market to 2035, including many strict regulations to supervise the capital market.

• Shift from Healthy Development (healthy development) in the capital market to High-Quality Development (high-quality capital market development).

GS Research believes the above promotion policy leans towards protecting shareholder profits, improving corporate governance standards, and ownership rights of institutional investors.

(3) Changes in the positioning of investment institutions

Previously, institutional investors were net short and underweight Chinese stocks, 

But after the positive policy shift from early February, FOMO (fear of missing out) psychology has caused investment institutions to reverse their short positions and go long on more TQ stocks:

• Hedge funds are net buying Chinese stocks at a moderate level (+0.5 SD) in April and have now maintained net buying positions for 4/5 recent months.

  • In particular, the long trading volume in Chinese stocks has exceeded the short volume (ratio 5:1)

    —> indicating this is not just hedging short positions but belief in the growth of the Hongkong market.

  

  • However, they only allocate ~5-7% of their portfolio to Chinese stocks – lower than previous periods.

    

• Mutual funds have also taken similar actions: they only allocate ~5.2% to Chinese stocks as of end of March.

  

  • However, Asian and European mutual funds have returned to weighting Chinese stocks more heavily than the rest of the world.

    

Meanwhile, according to Viet Hustler's assessment, the changes in the stock market mainly come from quite positive changes in China's economic policies (although the economic situation has not shown much clear improvement)!

Macro perspective: China's economy under the impact of stimulus policies and geopolitical pressures 

China's interest rate policy will soon change: what impact on the US?

Politburo (04/30) announced it will introduce measures to address the Real Estate (RE) issue and revealed the possibility of cutting interest rates after the Central Committee meeting in July.

Viet Hustler’s opinion

Notably in this statement is the possibility of PBOC cutting interest rates and when it will cut (after July):

• Note, right at the time when Chinese stocks were continuously falling at the end of 01/2024: PBOC decided not to cut interest rates!

  • Although economists all wanted PBOC to cut interest rates, PBOC at that time only increased liquidity in the market through: loosening bank reserve requirements + buying bonds and stocks of the National Team.

• Why is China considering cutting interest rates at this time?

  • Only when ECB is about to cut interest rates and the possibility that Fed will soon cut rates as the labor market worsens.

    • Related articles: Signs of cooling in the US labor market

• Simply because previously China wanted to protect the CNY: not letting the Yuan depreciate like the Yen last week - due to interest rate policy differential with the West.

  • Related articles: BOJ - Calm at heart amid stormy markets

• Because China's position differs from Japan: Japan is an ally of the West, but China leads the de-dollarization movement! 

  • Related articles: "In God We Trust" - faith in the USD's position

In addition, Bloomberg warns that the huge amount of US bonds China is holding could become a “hostage” threatening the USD's value: 

• i.e. if PBOC lowers interest rates too low, causing a large differential with US rates => CNY depreciates: China may be ready to sell USD on the open market. 

  

Upcoming notable event: Third Plenum of the Central Committee (closed meeting of 24 CCP members) will take place this July.

• This conference will directly set long-term direction for China's economy.

  

Policies to improve the real estate and housing market: quite slow impact

Besides many policies summarized by Viet Hustler in February, China continues to further loosen restrictions on home purchases in non-core areas:

• Including Beijing allowing households at purchase limits to buy additional homes outside the central ring road.

  

• FYI: Downpayment ratio for the first home was also reduced to 20% from 09/2023, a major change…

  

• Chengdu (Chengdu) is even bolder, abolishing most buyer qualification reviews in the housing market. 

  

  • However, not every city should loosen home purchase conditions, especially Chengdu's golden land area — China's healthiest housing market due to excessively high demand.

    • Lifting purchase restrictions there could create a new real estate bubble in the area

  

• However, Chengdu's announcement has caused Chinese real estate sector stocks to surge and market confidence shows signs of returning.

  

US-EU-China geopolitical relations: both tense and conciliatory

Recent US - EU - China geopolitical relations (mainly trade-related) can be summed up in 6 words: both tense and conciliatory.

Events that increase tension include:

• EU launches investigation into China's medical device market + UK and Germany announce suspects accused of spying for China.

  

• EU investigates trade competition issues related to China's subsidies for clean technology businesses.

• Biden signs bill forcing TikTok to divest from Chinese ownership within 270 days, or face a ban in the US. 

• Huawei's new Pura 70 phone uses advanced chips made in China — highlighting its 7-nanometer chip production capability despite US technology restrictions.

  

  • Meanwhile, Bloomberg reports Huawei is still secretly funding advanced research at US universities including Harvard, MIT…

    

Conciliatory events include

• Retaliation: Beijing criticizes actions such as tariffs on steel from China, TikTok ban, US election campaign, EU polls/investigations… as quite weak.

  

• Liu Zhenmin (China's climate envoy) will visit Washington in May to negotiate with the US on Chinese green technology products.

  

• Xi Jinping will also visit France, Serbia, and Hungary - amid EU following the US in taking a tougher stance on China. 

  

• Elon Musk also just ended his Beijing visit with major wins: cooperation with Baidu in exchange for selling autonomous electric vehicles in China.

  

So how is the current economic situation in China evolving?

In reality, China's economy, under the positive impact of economic stimulus policies and easing geopolitical tensions, has shown some weak signs of recovery:

• Factory production activity continues to improve in recent months

  

• Improved PMI also led to China's Q1/2024 GDP growth reaching +5.3% Q/Q - far exceeding forecasts (+4.8% Q/Q)

  

• Chinese companies are investing abroad at the fastest pace in 8 years:

  • Investment value reaches USD 33.5 billion with a series of overseas processing factories being built.

  

  • This could help reduce trade tensions by creating jobs in host countries

  • And it's also a way to circumvent rules for China to continue exporting to the US and Europe via Southeast Asia without tariff barriers.

    

• Inflation in China has also surpassed deflation levels in the last 2 months – but remains in the low inflation zone.

  • Consumer demand is still quite weak – especially as PBOC has not yet cut interest rates.

  

Nevertheless, the real estate sector is still dragging down China's economy:

• Aggregate sales of China's top 100 leading real estate developers fell -44.9% Y/Y (down to 312.17 billion CNY in April)…

  • …despite all support policies from the government.

  

• And although industrial production in China is growing again, industrial profits have declined:

  

CONCLUSION

In reality, the Hong Kong stock market is quite dynamic — attracting more investor confidence than the Mainland (Southbound trading dominates Northbound). But this also shows changes in orientation towards investors and China's capital markets, accompanied by positive macro policies, have brought demand back to the market.

From a macro perspective, it can be said that China's fiscal policies aimed at stimulating consumption have shown many improvements, bringing inflation out of negative growth territory (deflation) — however, consumption remains quite weak.

Meanwhile, monetary policies aimed at businesses have helped industrial output grow. However, China's problem is not output growth but demand: if output increases but demand does not, industry will soon enter recession. In fact, industrial profits have declined in the recent period.

China's big issue is protecting the Yuan, which makes China unwilling to cut interest rates. While a low interest rate environment is a prerequisite to boost consumer spending - and create conditions to reduce business costs. Against the backdrop of the global macroeconomy where ECB is preparing to cut rates and Fed may also become less hawkish, hopes that PBOC can cut rates after the Central Committee meeting in July to revive the economy.