China Insights. Monthly update on Chinese markets. October Summary

Transcription

1 China Insights Monthly update on Chinese markets October 2018 Summary China to release new policies to shore up market confidence, according to PBoC advisor Ma Jun Overall retail sales rose 9.2% year-on-year in September, beating market forecast of 9% and edging up from August. The upbeat retail sales data reaffirms our confidence in domestic consumption The decline in the sales of automobiles has overshadowed the overall resilient picture in other sectors such as tourism and residential services In the broader market, growth momentum eased slightly, as the country s third quarterly GDP growth came in at.5%, a tad below the market estimate of.% Despite ongoing trade woes with the US, China s September exports rose 14.5 % from a year earlier, the fastest pace since February, beating August s 9.8% and a poll forecast of 8.9% We anticipate further loosening in the form of monetary and fiscal policies in the coming months, that could include tax cuts and further increase in local government borrowing Hot topic: Is China ready to ease further to spur growth? In a rare cohesive effort, Chinese officials from the country s central bank and its securities regulator issued statements to calm market jitters after the release of the third-quarter GDP data. Ma Jun, an advisor to the Chinese central bank, has been more explicit, saying Beijing is ready to launch a series of policy measures to shore up market confidence. In the upcoming months, investors can expect a total reduction of taxes and fees amounting to at least 1% of the 2019 GDP and policy measures to aid private-sector companies. Policymakers have already implemented one round of tax reforms in August, increasing the tax threshold from Rmb3,500 to Rmb5,000 effective from October 1. The second phase of tax reforms, which will be effective from January 2019, includes a list of tax deductible items, such as children's education and home rent. We believe the Chinese government has plenty of policy leeway to spur growth as the world s second-largest economy rebalances its economic growth model from investment-led to domestic consumption GDP QoQ% GDP target of.5% GDP YoY% This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.

2 Is consumer confidence on the wane? As we turn into the last quarter of 2018, there s growing concern among investors about whether China s spending power has been adversely impacted by a slowing economy and the ongoing trade tensions with the US. There are worries around China s consumption growth running out of steam, with household savings eaten up by home purchase in the past few years and little room for further wage increases in the near future. The slowdown in auto sales, in particular, is being viewed as alarming. Auto sales declined for a third straight month in September, as the country s auto sector faces what looks to be its first yearly decline in passenger-car sales in almost three decades. The overall auto sales fell 11.% year on year to 2.39 million units in September, reflecting fragile consumer confidence amid a stock market rout. That followed sales declines of 3.8% in August and 4% in July. The slump in car sales has been attributed to a slowing economy and a tit-for-tat increase in trade tariffs, which kept the Chinese consumers away from the showrooms. In addition, a drop in property prices dented consumer confidence. Despite this we believe, the resilience of Chinese consumers in recent months has been reassuring. China s total retail sales growth came in 9.2% year-on-year in September, beating market expectations of 9% and edging up from a growth rate of 8.9% in August, according to official figures released on October 19. Looking underneath the headline retail numbers, growth of retail sales excluding automobiles remains intact in the first nine months, rising at a healthy rate of 12% year on year for the January-September period. That s one percentage point higher than a 11% increase for the full year of 2017, assuring investors that the growth momentum in the consumption sector is still expanding. (Figure 2) Additionally, consumer spending on tourism and residential services expanded at a much faster pace in the first half of the year, growing at 35% and 32% year on year, respectively. (Figure 3) A resilient domestic consumption market has set the backdrop for the five-yearly party congress that will kick off on October 18. Investors including ourselves are expecting to get more clarity from the government officials, as the meeting will set the tone for the country s economic and political landscape for the next five years. Also in the near term, President Xi and US President Trump are slated to meet at the G20 summit in Argentina in late November, providing opportunities for both sides to work on easing the trade woes. A slowing economy means an accommodative stance At the beginning of the year, the market was very focused on Beijing s ongoing deleveraging campaign. But six months into the year, the tone has gradually changed to a more accommodative one with the pace of growth slowing. Indeed, economic activity has been slackening in the past few months prompting the PBoC to announce another cut to banks reserve requirement ratio (RRR) at the end of the golden week holiday - the fourth reduction this year. In early October, The PBoC announced 100bps RRR cut for most banks, effective as of 15th October. The RRR cut released Rmb1.2 trillion of liquidity. China s Q3 GDP growth came in at.5%, a tad below the market estimate of.% and the slowest pace of growth since the first quarter of If growth continues to moderate, we believe the Chinese government will roll out more pro-growth policies, such as stepping up infrastructure investments and lowering corporate tax rates, to shore up the economy. We believe that, on the whole, the Chinese economy has held up better than expected despite views that a clampdown on the riskier types of financing and a flurry of measures to cool heated home prices will drag on economic output. However an end to the trade dispute with the US seems distant at the moment and the drawn-out trade strife would be increasingly costly to the Chinese economy. As a result, our portfolio remain defensive, and prefer to hold Hong Kong financials and utilities over other high-beta stocks. Figure 2: Retail sales (in real terms) %oya, 3mma Total retail sales Retail sales excluding auto Source: NBS, J.P. Morgan Figure 3: %-pt, contribution, CPI adjusted Source: NBS, J.P. Morgan Residence Medical Educ. cltr. ent. Transport tele Clothing HH facilities Investment involves risks. Past performance is not indicative of future performance 2

3 Equity market In a bid to boost confidence, Liu He, vice premier and a top economic adviser to President Xi Jinping, said the valuations of Chinese stocks have reached historical lows, offering opportunities to long-term institutional investors Chinese stocks have extended losses in October (month-to-date), with the MSCI China Index (USD terms) and the CSI 300 Index retreating 11% and 11.5% month-to-date (as of 18 October) respectively. This follows a 1.4% drop in the MSCI China Index and a 3.2% increase for the CSI 300 Index in September. Escalating US-China trade tensions, a rising US dollar and emerging market risks have continued to weight on market sentiment Valuations continue to be attractive, with MSCI China now trading at 10.4 forward P/E and 1.4 P/B, which are around their long term averages Global index provider MSCI said it will consider increasing the weighting of Chinese large-cap stocks in its global benchmarks next year, a move that could attract $ billion of fresh capital into China s domestic A-share market. The proposed change will potentially increase the weighting from 5% to 20% and take place in two phases coinciding with MSCI s index reviews in May and August 2019 Separately, Chinese-listed stocks will soon be added to FTSE Russell's global indexes, in yet another recognition of the country's efforts to open up and internationalise its markets Battered by poor market sentiment, the Northbound trade through the Stock Connect scheme reverted from net buying to net selling over the course of the past month. Investors in Hong Kong sold USD2. billion worth of mainland-traded shares, compared with a net purchase of USD2.5 billion in September. On a brighter note, mainland investors continued snapping up Hong Kong-traded stocks, with a net buying of USD8.2 billion worth of shares. Following the Stock Connect trading links between Hong Kong and Shanghai and Shenzhen, the London Stock Exchange and Shanghai Stock Exchange are planning to link their bourses, in a push to further integrate Chinese markets into the global financial markets and promote RMB. The latest connect scheme may kick off as early as December, according to media reports. Recent RMB weakness may attract some inflows from investors seeking a currency hedge. However, the still wide A/H premium, 29% on market-cap weighted basis, and asset diversification should remain the key drivers for southbound investments in longer run Overall, we think the correction in Chinese equities reflects investors immediate concerns, but disregards the promising long term outlook for China. We believe bottom-up selection is key, with a focus on alpha generating opportunities rather than taking aggressive directional beta bets in the near term. As such, we prefer Hong Kong financials and utilities over high beta names such as technology stocks After the release of the third-quarterly economic data, vice Premier Liu He, a top economic adviser to President Xi Jinping, said the valuations of Chinese stocks have reached historical lows, offering opportunities to long-term institutional investors In our opinion, the Chinese government still has plenty of policy leeway to boost growth, through measures such as a reduction in value-added tax for corporates Investment involves risks. Past performance is not indicative of future performance 3

4 Chinese equities have turned more attractive after recent correction 1-year cumulative total return Forward price to earnings ratio (x) 20% 10% 0% -10% -20% -30% 10/17 1/18 4/18 7/18 10/18 MSCI China CSI /13 11/14 11/15 11/1 11/17 MSCI China CSI 300 Source: Bloomberg, HSBC Global Asset Management, as of 23 October Total return in local currency terms. Investment involves risks. Past performance is not indicative of future performance Sector Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Property Telecommunic ation Utilities Comment We are UW consumer discretionary sector. Policies such as tariff cuts and relaxation of foreign ownership has dented the outlook for the auto sector. RMB weakness may negatively impact Macau gaming, HK retail and tourism industry in China. We are selective in the education space as demand for high quality education service should be a secular story in China. We are selective in consumer staple sector as the trends of premiumisation on the back of rising income underpins higher pricing power and margin expansion capability of select companies We are overweight energy in light of their compelling valuations and attractive yields. Continued strength in oil price also underpins our positive view on these companies We are OW Chinese banks as loan growth may pick up in 2H18 on the back of more relaxed monetary policies and continued crackdown on shadow banking. We are selective on insurance. We also favour Hong Kong banking sector as it will benefit from the rising rate cycle in the city We are UW the healthcare space in light of increasing imports of foreign drugs and stretched valuations Overall we are underweight the sector but OW the capital goods industry as favourable government policies suggest higher capex on industrial equipment We are UW on the IT sector as the latest government policies are not favourable to the online gaming industry. We also avoid technology hardware as these companies could be impacted by the US-China trade conflicts We are underweight this sector as softness in fixed asset investment activities suggests slowing demand for commodities We are underweight property, as the effect of high land cost will kick-in soon and price ceiling imposed by the government has capped developers margins. Tightened credit environment is also unfavorable to the sector We are overweight telecom stocks because of their defensiveness amid the current volatile environment We are overweight utilities because of its defensiveness amid the current volatile environment Source: Bloomberg, HSBC Global Asset Management, as of October 2018 For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies. The views and opinions expressed herein are subject to change at any time. 4

5 Fixed income Onshore and offshore bonds diverged month-to-date (as of 19 October), delivering 0.5% and -0.1% in local currency terms, respectively Given the external and internal needs to keep funding cost low, we believe monetary policies will remain favourable to bonds in the near term Short-end onshore yield continued to soften as liquidity remains abundant. To mitigate impact from escalating trade tensions, PBoC has announced further cut in required reserve ratio by 1%, effectively injecting RMB750 billion liquidity after accounting for the maturing MLF. Outstanding MLF has risen to RMB5.4 trillion in order to facilitate refinancing. Given the external and internal need to keep funding costs low, we believe monetary policies will remain favourable to bonds in the near term and we prefer issues from policy banks given yield and tax advantages Money supply growth continued to contract amidst ongoing deleveraging efforts. Growth of total social financing has stabilised at 10% yoy and its shadow banking components have seen shrinkage for the sixth consecutive month despite the marginal relaxation in AMP rules. While we expect funding for private sector to stay loose, regulatory grip should remain tight in areas, such as the property market in light of still elevated household loans Counter cyclical factor and PBoC FX sales have worked to prevent the currency from depreciating much further RMB has slightly weakened against USD over the past few weeks amidst still heightened trade tensions and on-track rate hike cycle in the US. However, we think the Chinese currency will remain stable in the near term. Both counter cyclical factor and PBoC FX sales have worked to prevent the currency from depreciating much further. Optimism over trade talks in November and recent assurance from the officials to support the economy could be beneficial to both Chinese assets and the currency In the offshore CNH space, bond issuance remains limited, but yields edged up slightly in October, reflecting tighter funding condition in CNH market amidst higher US yields. We continue to prefer CNH government bonds, which offer a yield premium over onshore issues. On a relative basis, short term investment grade credit also provides better value than high yield issues given a flat credit curve. In the USD space, high yield credit has turned more attractive after spread widening Performance of onshore and offshore bonds diverge 1-year cumulative return % 5% 4% 3% 2% 1% 0% -1% 10/17 1/18 4/18 7/18 10/18 ChinaBond New Composite Markit iboxx ALBI China Offshore Source: Bloomberg, data as of 19 October Total return in local currency terms. For illustrative purposes only and does not constitute any investment recommendation in the above mentioned asset classes, indices or currencies. The views and opinions expressed herein are subject to change at any time. Investment involves risks. Past performance is not indicative of future performance % CNH Yld - CNY Yld (RHS) CNH 10Y Govt Yld CNY 10Y Govt Yld 0 bps

6 Data watch Indicator Industrial production (IP) Fixed Asset Investment (FAI) (ytd, yoy) Retail Sales Data as of Actual Cons ensus Prior Analysis Sep 5.8%.0%.1% Sep 5.4% 5.3% 5.3% Sep 9.2% 9.0% 9.0% Exports (USD) Sep 14.5% 8.2% 9.1% Imports (USD) Sep 14.3% 15.3% 19.9% Trade Balance (USD) CPI Inflation PPI Inflation Total Social Financing (TSF) (RMB) New yuan loans (RMB) Sep Sep 2.5% 2.5% 2.3% Sep 3.% 3.5% 4.1% Sep 2,205 Sep 1,380 NA 1,359 1,929 1,280 Real GDP growth moderated to.5% yoy in Q3 from.7% in Q2 on lower growth in industrial and construction activities, as the previous tightening of financial conditions/regulations still weighed, while the recent policy has yet to show a material effect on the real economy. The impact of US tariffs on trade flows and growth has yet to surface, though business sentiment is being dimmed by heightened US-China trade conflicts and consumer confidence by financial market volatility/weakness. Policy/credit transmission remains weak, with the lack of coherent policy making or effective policy communication also a risk. Overall, the economy still looks on course to meet the government s 2018 growth target of about.5%. Any further weakening of economic growth data will likely prompt more policy loosening. Fiscal policy has been focused on acceleration in infrastructure project funding and spending as well as tax/fee cuts. Weakness in infrastructure FAI remained a drag, but its yoy contraction narrowed in September. We expect infrastructure investment to pick up moderately toward yearend, amid policy efforts to improve local government finance and the conclusion of the PPP cleanup. Manufacturing FAI growth accelerated, partly due to the base effect, but the sustainability remains uncertain amid growth headwinds. Property FAI, new housing starts and developers land purchases softened from the recent strength, while property sales slowed and property price inflation moderated. Policies remain key to the property market outlook (e.g. tighter financing conditions for property developers with tightening policies currently in place especially in top tier cities; incremental benefit from monetary easing and relatively low interest rates; the scale-back in cash subsidies for shantytown redevelopment projects in lower-tier cities; looser household registration to help attract talented people at some cities; the potential ban on or changes to the presale system; and rental housing development, etc.). Inventory in months of sales increased modestly recently on the back of slower property sales, though the absolute inventory levels stayed relatively low. The rise in nominal retail sales growth was due to the price effect. Real retail sales growth fell to.4% yoy from.% in August. Auto sales declined yoy for a fifth straight month. Household income growth remained slower than GDP growth, while weakness in the equity market may have weighed, while household debt burdens and tax payments have risen. However, the personal tax cut will likely help and the social security tax overhang has been resolved. Further measures to promote consumption (upgrade) are expected. We also note that the NBS retail sales data do not cover any consumer services a fast growing segment beyond dining out. Front-loading of shipments on concerns over more severe tariff hikes from the US may have continued to boost China's exports, while there was yet clear evidence of a notable slowdown in external demand, with improved demand especially from Japan and EU. The recent export tax rebate increase and RMB deprecation as well as delivery of new mobile phone-related products likely also supported exports. However, China s exports are likely face more downward pressure particularly into 2019, as the US plans to increase the additional tariff on USD200 of Chinese goods from 10% to 25% and once the frontloading of exports starts to reverse. Global demand will likely also ease. Meanwhile, import growth of major commodities decelerated, especially autos, despite the strength in high-tech imports. We expect policy easing to step up to cushion negative trade shocks, including efforts to diversify China's export markets outside the US. The combination of rising trade tensions, China s policy to reduce import tariffs and expand imports, and domestic policy easing points to further deterioration in the trade/current account balance. Core, services and non-food CPI inflation eased while headline CPI continued to accelerate, driven by food prices reflecting weather disruptions and holiday demand. Fuel prices rose and residence costs/rents picked up, while healthcare costs continued to moderate on base effects. Food prices will likely remain a concern for the near-term inflation outlook, as well as import tariff hikes on US goods (especially of agricultural products), higher oil prices, a weaker RMB, policy stimulus, supply constraints (environment still a focus), and the lagged feed-through of higher property prices. Yet, some of these factors could be transitory and will likely have limited impact on broader inflation. Inflation should remain manageable and not constrain policy easing. The PBoC revised the definition of TSF again in September to include local government special bond issuance after adding asset-backed securities issued by banks and loan write-offs in July. The TSF stock under the new definition rose 10.% yoy in September vs. 10.8% in August. Offbalance sheet credits continued to contract while corporate bond issuance slowed, offsetting still solid bank loan growth. Ongoing monetary easing and relaxation in financial regulations (on shadow banking) should eventually help a modest rebound in TSF growth. Policy focus will likely be on improving policy transmission (e.g. to improve banks capacity and willingness to lend). Indicates improved data on month-on-month/quarter-on-quarter/year-on-year basis Indicates worsened data on month-on-month/quarter-on-quarter/year-on-year basis Indicates no change in data on month-on-month/quarter-on-quarter/year-on-year basis Source: Bloomberg, HSBC Global Asset Management, as of August 2018

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