China - Market Strategy 06 (Jul 24 - Dec 26)

[winston]

U.S. Investors Are Buying These Stocks at a Record Pace

by Brett Eversole

China is trying to reawaken animal spirits both at home and abroad. That’s what needs to happen for the current rally to last. And judging by the cash flowing into these major China ETFs, the policies appear to be working.

This is a good sign. We want to see more and more investors get excited about the opportunity in China… That’s what will drive the next leg of the boom.

Source: DailyWealth.com

https://dailytradealert.com/2024/10/25/ ... cord-pace/

[behappyalways]

China sees the biggest outflow from equity funds since June of 2015. This is what happens when the Chinese government promises larger stimulus, but doesn't deliver in the size investors want to see. I imagine that their government will give it another go, with larger size soon.
https://x.com/Mayhem4Markets/status/1850173800224010571

[winston]

Goldman Sachs’ 35 meetings in 5 days show China is back on radar after fund purge

What has happened is that Beijing has activated the ‘policy put’, or whatever it takes to rescue the market, Goldman says

Chinese stocks, once indispensable to global funds and later deemed uninvestable by others, are back on the radar of investors after years of being ignored.

While caution remains, optimism abounds after a US$4.5 trillion rally in the past month.

That is the assessment of Kinger Lau, a managing director in Hong Kong and chief China equity strategist at Goldman Sachs. He has been “running around the world” over the past four weeks, fielding questions since China unleashed its surprise stimulus package on September 24.

“I have been getting a lot of emails, with 60 or 70 per cent [of them] starting with the phrase ‘long time, no talk, no see’,” he said in an interview.

“For some investors who haven’t really looked at China over the past one to two years, certainly, the interest level has picked up a lot.”

Source: SCMP

https://www.scmp.com/business/banking-f ... pe=article

[behappyalways]

#China's "National Team" investors boosted A-share holdings by 400 bn yuan in Q3, bought over 200 bn yuan ETFs
https://x.com/YuanTalks/status/1852331043749089768

[winston]

Does the China rally still have legs?

By Kuek Ser Kwang Zhe

Many reckon that September’s stimulus package was insufficient to address China’s economic challenges, with some estimating the appropriate size at RMB10 trillion (US$1.4 billion or RM6.1 billion). The announcement also did not provide enough details on how that money would be disbursed.

The market is too hung up on near-term economic performance, such as whether China can achieve its 5% gross domestic product (GDP) growth this year.

The government is providing a floor value to its real estate sector.

Property accounts for 60% of Chinese household assets, as opposed to 37% in Japan and 25% in the US.

Property accounts for almost 30% of the nation’s GDP, by far the highest among large economies. The figure is 17% in the US, 15% in South Korea, and around 20% in the UK and France.

The package addresses the two biggest risks in the Chinese economy, which is local government debt and the property market slump.

China’s MoF announced that the government still has RMB2.3 trillion available for use this year, not including the RMB400 billion additional government debt issuance. In total, RMB2.7 trillion can be deployed immediately in 2024.

Source: The Edge Malaysia

https://theedgemalaysia.com/node/732229

[winston]

China Strategy: What to expect from the NPC session?

The highly anticipated National People’s Congress (NPC) standing committee meeting will be held on 4-8 November.

The media has widely reported that the NPC standing committee may announced a CNY10t fiscal package, including:
i) CNY6t government bonds to address local government debt resolution over three years, which should be in-line with the MOF guidance; and
ii) CNY4t local government special bonds (LGSB) to purchase idle land and for housing inventory destocking in the next five years.

In addition, the media has reported that CNY1t special central government bonds (CGB) could be issued for state-owned (SOE) banks recapitalisation, and this should be well anticipated.

All these have yet to be confirmed and the market will wait for the details to be announced post NPC standing committee.

In addition to the fiscal stimulus headline numbers, we believe details, such as, time horizon, how the local government debt resolution will be implemented, whether it will be an incremental new debt addition or mainly debt swap etc.

Given the market expectations that have built up over the past month, we believe it would be challenging to beat expectations massively.

One of the potential surprises could be domestic consumption given that the MOF press conference did not place much emphasis on this area.

Also, we believe in the event that Tump wins the US presidential election, China could step up fiscal stimulus measures to counteract the 60% universal tariff on Chinese products and the Central Economic Work Conference (CEWC) in December would be the key government policy event to assess potential impact and set policy tone for next year.

As valuations of HK and China equities markets have “normalised”, we expect the focus will be back to fundamentals while assessing the potential impact of a fiscal stimulus and US presidential election, and therefore we expect market volatility to stay high.

We reiterate our barbell strategy in focusing on
i) large-cap, index-heavy internet and platform companies and market leaders that posted better-than-expected results; and
ii) quality yield stocks to cushion market volatility. .

For income-oriented investors, we believe the periodic relative underperformance of quality yield stocks offer opportunities to accumulate.

Source: OCBC

[winston]

Services growth sparks big A-shares rally

by Cici Cao

The rallies came amid news that China's Caixin services purchasing managers' index rose to 52 in October from 50.3 in September, and at the fastest pace since July.

It is a sign consumer demand may be on the mend after Beijing moved to shore up growth with a barrage of stimulus measures.

However, the Wall Street Journal reported that China will not roll out big stimuli - at least not this year - to boost the economy as the meeting of the Standing Committee of National People's Congress is ongoing.

Source: The Standard

https://www.thestandard.com.hk/section- ... ares-rally

[winston]

China Strategy: US election impact

With a Trump win at the US Presidential Elections, Hong Kong (HK) and China equity markets are likely to see higher volatility in the near-term.

The first-order direct earnings impact on the MSCI China Index from a potential 60% tariff hike by the US is relatively limited, given that overseas revenue accounted for about 4% of MSCI China earnings in 2023.

That said, the second-order impact from the hit to GDP, from a CNY depreciation and negative sentiment could be potentially more meaningful. Considering the second-order impact, it is estimated the earnings impact could be in the range of 3-5%.

Chinese easing policy is expected to step up should the US implement a 60% tariff hike. We believe the Central Economic Work Conference (CEWC) in December would be the key government policy event to assess potential impact of the universal 60% tariff on Chinese imports and set the policy tone for next year.

We expect the onshore A-share equity market to relative outperform the offshore ones in the near-term in light of the support from the “national team” and the latest PBOC’s swap and relending facilities.

At the sector level, domestic-focused industries and companies and quality yield stocks are likely to outperform whereas exporters are likely to underperform in the near-term.

Export-focused industries and those with higher US revenue exposure (such as, auto parts, battery, cross-border e-commerce, home appliance, healthcare, personal computers (PC) and smartphone, and solar) are likely to face headwinds from higher tariffs under Trump’s Presidency.

With the uncertainties and the changing dynamics in US tariff hikes, geopolitical tension, and China policy response, we reiterate our barbell strategy in focusing on
i) large-cap, index-heavy internet and platform companies (with most of them have limited US revenue exposure except those with sizeable cross-border e-commerce) and market leaders that posted better-than-expected results;
ii) quality yield stocks to cushion market volatility, and
iii) policy beneficiaries.

While we view the quality yield stocks will be defensive plays, the expectation of higher US inflation and fiscal deficits has driven 10Y US Treasury (UST) yields up.

Our economist expects 10Y UST yields are likely to trade in a higher range over the next year and could even rise to around 5.00% levels.

Dividend yield is likely to edge up to adjust for the expectation of narrowing yield spreads before stabilising, and we believe any pullback in share price of quality yields plays would be opportunities to accumulate.

Source: OCBC

[winston]

China Strategy: The NPC session unveiled a fiscal package focusing on local government debt swap

The highly anticipated National People’s Congress (NPC) standing committee meeting concluded on last Friday, and a CNY12t package focusing on local government debt swap was unveiled.

On the positive front, policymakers announced a CNY12t local government debt swap program, which is higher than market expectation of the CNY6t local government debt swap over three years.

The CNY12t program comprises of
i) a CNY6t increase in local government debt ceiling for hidden debt swap for three years (2024-26),
ii) another CNY4t for local government debt swap by allocating of CNY800b from the local government special bond (LGSB) quota each year for five years (2024-28), and
iii) CNY2t for shantytown debt repayment from 2029 as scheduled.

The announced local government debt swap program could save a total of CNY600b in interest payments over the next five years. That said, the amount is relatively modest given it represents less than 0.1% of GDP per year.

However, the disappointment came from the lack of discussion regarding
i) fiscal support for the purchase of idle land and housing inventory de-stocking,
ii) bank re-capitalisation via increasing central government bond (CGB) issuance, and
iii) no budget expansion.

The MoF did provide forward guidance and is committed to increase the official deficit, expand the issuance quota and usage of LGSBs, further supporting equipment upgrades and consumer goods trade-in, and ramping up central transfers to local governments to increase basic social welfare spending.

We have been highlighting that the Central Economic Work Conference (CEWC) in December will be the venue for policymakers to assess the potential impact of higher US tariffs and set the policy tone for next year, with the potential for more measures to be announced at the NPC in March 2025 and later in the year when more details of the higher US tariffs are available.

With valuations of HK and China equities markets have “normalised”, we expect markets will focus back on fundamentals and market volatility to stay high.

We prefer the onshore A-share equity market to offshore and expect the former to relative outperform the offshore ones in the near-term in light of the support from the “national team” and the latest PBOC’s swap and relending facilities.

At the sector level, we prefer domestic-focused and quality yield stocks to cushion volatility, whereas exporters with high US revenue exposure are least preferred on the back of potential tariff hikes.

In light of the changing dynamics in US tariff hikes, geopolitical tension, and China policy response, we advocate a barbell strategy in focusing on
i) large-cap, index-heavy internet and platform companies (with most of them having limited US revenue exposure except those with sizeable cross-border e-commerce) and market leaders that posted better-than-expected results;
ii) quality yield stocks to cushion market volatility, and
iii) policy beneficiaries.

Source: OCBC

[winston]

China investors digest another letdown from big tech earnings

Just over the past week, the five biggest tech firms erased US$41 billion in market value.

The business environment “is not only much worse than five years ago, it’s worse than even when China started the Covid Zero policy in 2022”.

PDD Holdings executives boasted about their cheap hairy crabs instead of offering reassurance for disappointing earnings.

Tencent went through its usual pitch about building and sustaining “evergreen” games, without promising any imminent new blockbusters.

Alibaba executives spent their time justifying elevated spending to ward off intense competition.

Even Baidu, the frontrunner in artificial intelligence development, failed to wow with any exciting new projects.

Baidu: “We have not observed a notable improvement in advertisers’ spending patterns, and consumer spending remains subdued”.

The parade of ho-hum numbers, vague comments about fiscal policy and warnings contrasted sharply with the pre-Covid era, when Alibaba and Tencent each approached US$1 trillion in market value and analysts talked about the threat they posed to US rivals.

Source: Business Times

https://www.businesstimes.com.sg/intern ... h-earnings