China Insights Monthly update on Chinese markets

Transcription

1 China Insights Monthly update on Chinese markets August 2015 Summary RMB depreciated sharply as the central bank adjusted the fixing regime. An increase in volatility is likely as market forces play a bigger role in determining the fixing rate Onshore equities sold off sharply again in mid-august on concerns that the government would pare back efforts to support the stock market Offshore RMB bonds declined on a weakening currency, while onshore government bonds have been relatively resilient Hot topic: CNY may remain volatile after devaluation The decision of devaluating the CNY against the USD on 11 August has caught markets by surprise. Concerns of further depreciation is likely to trigger volatility in the currency, fixed income and equity markets. However, we do not think currency devaluation would be a key policy tool to support economic growth and it has significant ammunition of intervene in the spot market if depreciation expectations strengthen. The People s Bank of China (PBoC) devaluated the onshore RMB (CNY) exchange rate by raising the USD- CNY fixing rate 4.7% in three days from 11 August. The spot market followed suit with both CNY and CNH (offshore RMB) depreciating by 3-4% against the USD over the same period before showing signs of stabilization, and closing up the gap between the spot and fixing rates. The central bank highlighted two key reasons behind the move: (1) the strengthening of the CNY Effective Exchange Rate (EER) has somewhat deviated from market expectations; and (2) the USD-CNY daily fixing rate (the central parity rate) has deviated from the market price for a prolonged period. The fixing regime will shift towards a more market-based setting, enhancing the benchmark status of the daily fixing rate. Figure 1: RMB exchange rates USD-CNY band USD-CNY band USD-CNY spot USD-CNY fixing /10 01/11 01/12 01/13 01/14 01/15 Source: Bloomberg, data as of 11 August For illustrative purposes only and does not constitute any investment recommendation in the above mentioned currencies. (Continued on next page)

2 Average yield (%) (Continued: CNY may remain volatile after devaluation) Relief to external trade at the margin A weaker CNY could provide some relief to external trade at the margin and help stabilize inflation expectations. The CNY appreciated 3.6% on a nominal Effective Exchange Rate (EER) basis and 3.0% on a Real Effective Exchange Rate (REER) basis in H1 2015, based on the Bank for International Settlement (BIS) statistics. Exports surprised to the downside in y, while Consumer Price Index (CPI) inflation remains low and Producer Price Index (PPI) deflation deepened (see Data Watch on page 6 for more details). While we think sluggish global trade, lower commodity prices and weak Emerging Market (EM) demand were major factors behind China s export weakness, strong CNY REER has been a headwind. More importantly, we think this is a Foreign Exchange (FX) reform that aims to address some of the operational issues pointed out by the IMF in its recent SDR review report. The International Monetary Fund (IMF) had criticized the discrepancy between the daily fixing and spot rates and said it was not an appropriate reference exchange rate to be used in the Special Drawing Rights (SDR) calculation. Allowing greater FX flexibility driven by market forces could also allow People s Bank of China (PBoC) monetary policy autonomy as China accelerates capital account liberalisation. Devaluations unlikely a key policy tool The PBoC elaborated later on that there is no basis for persistent depreciation of the CNY and the exchange rate is more likely to move in both directions in the future. The PBoC will intervene in both directions if there are large fluctuations. We see the move as a step further in FX reform and we do not think currency devaluation would be a key policy tool to support economic growth. Any significant currency depreciation, while it would ease the pressure on exporters, could increase import costs and the cost of serving USD-denominated debt by corporates with high external debt, risk more capital outflows and threaten financial stability. That said, the CNY will likely experience an increase in volatility as market forces play a bigger role in determining the fixing rate. We see the risk that the move could strengthen CNY depreciation expectations in the near term, given the current weak macro outlook, equity market volatility, concerns about capital outflows and policy easing bias and ahead of the Fed interest rate hike and potential further USD strength. Should capital outflows drain liquidity and the PBoC need to further draw down FX reserves to prevent a significant depreciation of the CNY, we believe the PBoC would step in to inject liquidity, e.g. via a cut to the reserve requirement ratio or a variety of liquidity facilities/measures, such as reverse repo operations and medium-term lending facility, to prevent unintended liquidity tightening or rising volatility in interbank rates. Impacts on fixed income and equity markets Following the devaluation, CNY depreciation expectations and the risk of more capital outflows in the near term could weigh on the offshore RMB credit market, particularly if the onshore RMB continues to depreciate vs. the USD, leading to intensified concerns about capital outflows and tighter offshore RMB liquidity. Offshore investment grade RMB credit will likely be hit harder, due to a lower yield buffer relative to high yield and a potential increase in supply from swapped issuances (mostly by foreign issuers). As a result, investors could demand higher premiums on these new issuances, putting upward pressures on bond yields. Nevertheless, any increase in yields from already good relative valuations should mean that in the medium term the relevant investments will potentially produce good relative returns. While some Chinese credits are exchange rate sensitive (for instance those which fund in USD), the exchange rate move so far has not been so great as to substantially degrade their credit quality. Figure 2: Average yield on offshore investment grade credit went up but still below the peak in March /15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 Offshore RMB investment grade bond Source: Bloomberg, data as of 19 August For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned asset class. Past performance is not indicative of future performance. Within equities, we believe sectors with high foreigncurrency debt exposure, such as airlines and paper, as well as sectors that rely on imports/demand from overseas such as oil and metal, will potentially be more negatively impacted. 2

3 In the spotlight Policy banks to play a bigger role in supporting infrastructure spending Two policy banks, China Development Bank and Agricultural Development Bank of China, will issue RMB300 billion of special bonds this year to the state-owned Postal Savings Bank of China (PSBC) to finance infrastructure investment by local governments, according to media reports. Total bond quota may be at least CNY1 trillion over the next three years. The proceeds from the bond issuances would be used to set up a construction fund with the policy banks to undertake equity investment in infrastructure projects. The Ministry of Finance would subsidize the interest payment and the People s Bank of China (PBoC) could provide liquidity support to aid PSBC s bond purchase. The news followed the previous reports of capital injections to policy banks by the PBoC. The amount of CNY300 billion or even 1 trillion looks limited compared with China s annual fixed asset investment (about CNY50 trillion in 2014) and nominal Gross Domestic Product (GDP) (CNY64 trillion in 2014). However, the move would open up another channel of low-cost and long-maturity financing for infrastructure projects, apart from municipal bonds, funding via Public-Private Partnerships (PPP), and bank lending. Funding for infrastructure projects have been under pressure this year, given weaker fiscal revenue growth amid slowdown in land sales revenue and weaker economic growth, and as the authorities controls local government funding via Local Government Financing Vehicles (LGFVs) while interests from private capital in PPP have been lacklustre. We think the policy bank bond plan should have a positive, albeit limited, impact on economic growth. Recent policy focus on infrastructure investment is not a repeat of the massive CNY4 trillion stimulus in 2009, in our view. The potential scale of the bond plan is likely to be much smaller. Policy banks instead of commercial banks are the main providers of funding for infrastructure investments this round, which could help ensure the availability of credit to the private sector (no crowding out effect). This also suggests that the central government would take a bigger responsibility in infrastructure spending to avoid adding further pressure on local government debt burden. In addition, investments will be in targeted areas, such as urban transportation, shantytown renovation, social housing, environment protection, water management and manufacturing upgrading, etc., so as not to add to the legacy problems from the 2009 stimulus (e.g. excess capacity). Inaugural win in RMB for HSBC Global Asset Management For the first time, HSBC Global Asset Management (AMG) has been awarded the Best Manager of Offshore RMB Assets by Global Finance magazine. AMG, a forerunner in RMB started its journey in 1992 when we were among the first to launch a Chinese equity product. Subsequently, to set forth our footprint in China, in 2005, we formed HSBC Jintrust headquartered in Shanghai, which allowed on-ground dedicated resources covering the local markets. Today, our global product platform has allowed us to develop a wide range of RMB offerings that deliver exposure to a full spectrum of investment opportunities across various asset classes including equity, fixed income and multi-asset. More recently, we are among the early movers to capture the opportunities of Shanghai-Hong Kong Stock Connect and Mutual Recognition of Funds (MRF) initiative. 3

4 Cumulative total return Fwd price-to-earnings (x) Equity market Onshore market Onshore equities sold off sharply again in mid-august on concerns that the government would pare back efforts to support the stock market, after rebounding by around 7% earlier in the month in the aftermath of the market turmoil in June and y. CSI 300 Index was up 1.8% as of 19 August after tumbling by 14.7% in the previous month. All sectors gained except financials (-2.3%). Recent volatility in Chinese equity markets had led to a raft of policy responses to support the market. These support measures suggest that policymakers see the urgent need to stabilize market sentiment and contain the potential ripple effect from a prolonged or disorderly market correction on economic growth, corporate earnings and financial stability risks. Should the decline in the equity market continue, the likelihood of more monetary policy easing and/or more market rescue plans being rolled out would rise. Offshore market Offshore equities fell by 4.4% (as of 19 August as measured by MSCI China Index) after losing 10.9% in y, led by financials (-5.7%) and utilities (-5.1%), while materials gained by 3.0%. The weak investment appetite in A-shares and soft economic growth appear to be the key hurdles for the near-term performance of H-shares. On earnings outlook, we expect to see positive earnings surprises from many State-Owned Enterprises (SOEs) in the upcoming interim results season due to their big cost cutting efforts. Over a mid-term horizon, we see the following market drivers still remain intact: (1) Low valuation relative to global and A-share markets; (2) ADR s inclusion into MSCI China; (3) Further capital account liberalisation to channel liquidity into the Hong Kong market; (4) the 13th five-year plan and the top level SOE reform design to be unfolded in 2H. Volatility remains in Chinese equity markets 140% 120% 100% 80% 60% 40% 20% 0% -20% Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Sector views Sector CSI 300 Comment MSCI China Consumer Discretionary Cautious on the sector on the back of concerns around demand slowdown and industry competition Rich valuation offers little upside to share price, while fiercer price competition and sales headwinds will threaten Consumer Staples the outlook of the sector Oversupply in coal markets is putting pressure on coal mining stocks Energy Positive on refining & petrochemical margin; weak oil price and regional capacity cut drive an upcycle Positive on the property sector given the monetary policies and property easing measures, and particularly those with significant exposure to tier-1 cities given the strong demand and potential undersupply Financials We also like banks for their defensive quality in the current market environment: attractive valuations with good dividend yield We are selective on the sector and prefer names with valuable network, proprietary products and strong Healthcare Research & Development (R&D) capability Looking into opportunities within the sector as we expect pro-growth policy related to construction/infrastructure may potentially be released in 2H15. We like logistics companies that benefit from the acceleration in e- commerce business Industrials Airlines may be negatively impacted by RMB devaluation due to their higher exposure to USD/HKD denominated debts, while fewer tourists may travel abroad, especially to Hong Kong, Korea and Japan, on the back of a weaker CNY We are neutral at present. Within the sector, we are positive on companies that have a sound business strategy Information Technology model that could potentially generate sustainable profitability. The inclusion of US-listed Chinese companies into MSCI index may also benefit the sector Global macro uncertainty poses risks to commodity prices Materials Paper firms may also be negatively impacted by RMB devaluation for their higher exposure to hard currency debts and bulk purchase of raw materials settled in the USD We see opportunities within the telecommunication service sector, given the alleviated industry competition, Telecommunication potential for upward earnings revisions and relatively defensive characteristics amid recent market volatility Positive on renewable/environmental names (solar/wind operators, water treatment) given rising public Utilities environmental conscientiousness and strong policy support. We are also increasing exposure in Independent Power Producers (IPPs) as falling coal price will lead to earnings upside. Source: HSBC Global Asset Management, as of 24 August For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned sectors Aug Jun-13 Jun-15 CSI 300 MSCI China Source: Bloomberg, HSBC Global Asset Management, as of 19 August Total return in local currency terms. For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned indices. Investment involves risks. Past performance is not indicative of future performance.

5 USD/CNY Cumulative total return Yield (%) Fixed income In August, offshore RMB bonds reversed its upwards trend to decline 0.74% (as of 14 August), as the PBoC unexpectedly adjusted the USD-CNY fixing rate 1.9% higher. Onshore government bonds have been relatively resilient and are down 0.27% in the same period. Offshore market We are currently not overly concerned about the RMB devaluation s impact on RMB bonds, as bond liquidity continues to be the asset class most important driver. Market liquidity remains loose and the government will likely ensure such conditions prevail. The currency has stabilized quite quickly after the one-off adjustment and the 3% depreciation seen so far is not significant enough to deteriorate the credit market. However, if a clear longer term depreciation trend becomes apparent (which is currently not the case), we could see increased pressure in the bond market. Our offshore RMB bond strategy remains broadly unchanged. We continue to favor corporate bonds over government bonds, as they offer relatively attractive yield carry. Onshore market The debt swap programme continues to be a success, as municipal bond issuances attract strong demand. Strong demand means that the issuance yield levels have been close to government bond yields; hence, we don t find municipal bonds especially attractive. It is however a positive development for the overall market, as it removes uncertainty surrounding the issue of LGFVs. Onshore bonds have been relatively shielded from RMB devaluation concerns due to the market s low level of foreign investor participation. The event has indirectly raised concerns over slowing economic growth and as such, we continue to extend duration in our onshore RMB bond portfolios, as longer duration bonds offer more attractive yields and could benefit from lower economic and inflation expectations. Offshore RMB bonds retreat in early August 10% 8% 6% 4% 2% 0% -2% Aug-14 Nov-14 Feb-15 May-15 Aug Aug-05 Jan Jan-13 Jun-15 Currency ChinaBond Composite HSBC CNH Bond Following the PBoC s one-off adjustment to the fixing and the daily fixing mechanism for USD-CNY exchange rate on 11 August, the fixing rate was weakened by 4.7% during August, while the CNY and CNH depreciated against the USD by 3.0% and 4.1%, respectively. Since then, the market spot rate has traded close to the fixing rate/mid-point of the trading band, although the gap between the onshore and offshore exchange rates remained. Based on JP Morgan Effective Exchange Rates (EER), the CNY nominal EER weakened 2.7% during August. The adjustment was very small vs. 15.3% appreciation since y 2014 (till 10 August) or 20% since The PBoC said there is no basis for persistent depreciation of the CNY and the exchange rate is more likely to move in both directions in the future. The PBoC will intervene in both directions if there are large fluctuations HSBC China Asian Local Govt Bond Currency performance (USD/CNY) HSBC CNH Govt Bond Source: Bloomberg, HSBC Global Asset Management, as of 19 August For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned bond or indices. Investment involves risks. Past performance is not indicative of future performance Aug-12 Mar-13 Oct-13 Jun-14 Jan-15 Aug-15 Source: Bloomberg, HSBC Global Asset Management, as of 19 August For illustrative purposes only and does not constitute any investment recommendation in the above-mentioned currencies. Investment involves risks. Past performance is not indicative of future performance. We think the CNY/CNH could face some near-term depreciation pressure if USD strength is maintained (and other major currencies weaken vs. the USD) as Fed liftoff looms. Concerns about China s growth outlook and China s policy easing bias could keep RMB depreciation expectations and concerns about capital outflows alive. However, there are some fundamental supports for the RMB, i.e. sustained current account surplus, relative low external debt as well as its large FX reserves and status as a creditor to the rest of the world. We believe the PBoC has significant ammunition to intervene in the FX market to support the RMB. We expect modest CNY depreciation in the near term and greater two-way flexibility in the RMB exchange rate going forward. 5

6 Data watch Indicator Industrial production (IP) Fixed asset investment (FAI) (year-todate, yoy) Retail sales Exports (USD) Imports (USD) Trade Balance (USD) Consumer Price Index (CPI) inflation Producer Price Index (PPI) inflation Manufacturing Purchasing Managers Index (PMI) (Official) Nonmanufacturing PMI (Official) Total social financing (TSF) (RMB) New yuan loans (RMB) Data as of Actual Consensus Prior Analysis 6.0% 6.6% 6.8% The slower IP growth was mainly due to weaker manufacturing and utilities output and reflected still soft external demand and domestic investment demand. Power production fell 2.0% yoy. Steel, non-ferrous metals and cement output declined. We expect more policy easing to stabilize growth, while a rebound in property sales and accelerated infrastructure spending should help a gradual recovery in industrial activity 11.2% 11.5% 11.4% Manufacturing and real estate FAI growth weakened further, while infrastructure FAI also decelerated, despite policy efforts to ease local government funding pressures and accelerate fiscal spending. On the positive side, the housing sector continued to recover. Both home sales and residential FAI growth went up, although housing starts and land purchases continued to contract year-on-year 10.5% 10.6% 10.6% The moderation in retail sales growth was mainly driven by weaker auto and fuel sales, but consumption has been holding up reasonably well -8.3% -8.1% -1.5% -8.0% 2.8% -6.1% The fall in exports reflected weak external demand and partly a high base, while a strong CNY in effective exchange rate terms (EER) was a headwind. CNY EER depreciation following a oneoff adjustment to the USD-CNY fixing rate and daily fixing mechanism could provide some relief to exporters, but the impact is likely to be limited given the modest depreciation bn 43.03bn 46.54bn While import volume of a number of major commodities picked up for a second straight month, that was helped by a lower comparison base. Continued import contraction reflected weak commodity prices and domestic demand 1.6% -5.4% 1.5% -5.0% 1.4% -4.8% The pickup in CPI inflation was driven by food prices which rose to 2.7% from 1.9%, particularly pork prices (+16.7%). We think the impact of pork prices on the broad CPI should be limited, given still low non-food price inflation, weakness in commodity prices and sluggish domestic demand. The deepened PPI deflation reflected lower commodity/raw material prices, a higher base effect, industrial overcapacity and weak demand The sluggish forward-looking demand indicators (e.g. the new orders sub-index) highlights sluggish industrial demand outlook. The government also attributed adverse weather conditions, some temporary factory maintenance and the decline in oil and commodity prices to the weakness in the manufacturing PMI The service sector has maintained relatively solid momentum, reflecting an ongoing economic rebalancing. However, GDP data suggest that service-sector strength in H1 was narrowly based on financial industry; many other services sectors slowed 718.8bn 1,480bn 1,006.7bn 750bn 1,833.4bn 1,279.1bn New CNY loans and money-supply M2 growth surged (M % yoy in y vs % in June), mainly reflecting the distortion of stock market intervention. Meanwhile, weaker TSF could be due to seasonal effects and the local government debt swap programme. While liquidity and monetary conditions have improved amid monetary easing since November 2014, policy transmission on stimulating domestic demand remains weak and further policy support is needed to stabilise the economy 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 Note: yoy= year-on-year. Source: Bloomberg, HSBC Global Asset Management, data as at 19 August For illustrative purposes only. 6

7 This document is prepared for general information purposes only and the opinions expressed are subject to change without notice. The opinions expressed herein should not be considered to be a recommendation by HSBC Global Asset Management (Singapore) Limited to any reader of this material to buy or sell securities, commodities, currencies or other investments referred to herein. It is published for information only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. This document does not constitute an offering document. Investors should not invest in the Fund solely based on the information provided in this document and should read the offering document of the Fund for details. Investors may wish to seek advice from a financial adviser before purchasing units in the fund. In the event that the investor chooses not to seek advice from a financial adviser, he should consider whether the fund in question is suitable for him. Investment involves risk. The past performance of any fund and the manager and any economic and market trends/forecasts are not necessarily indicative of the future or likely performance of the fund. The value of investments and units may go down as well as up, and the investor may not get back the original sum invested. Investors and potential investors should read the Singapore prospectus (including the risk warnings) which is available at HSBC Global Asset Management (Singapore) Limited or its authorised distributors, before investing. Changes in rates of currency exchange may affect significantly the value of the investment. HSBC Holdings plc, its subsidiaries and other associated companies which are its subsidiaries, and including without limitation HSBC Global Asset Management (Singapore) Limited (collectively, the HSBC Group ), affiliates and clients of the HSBC Group, and directors and/or staff of any of the foregoing may, at any time, have a position in the markets referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. HSBC Global Asset Management (Singapore) Limited has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. Care has been taken to ensure the accuracy and completeness of this presentation but HSBC Global Asset Management (Singapore) Limited and HSBC Group accept no responsibility or liability for any errors or omissions contained therein. HSBC Global Asset Management (Singapore) Limited 21 Collyer Quay #06-01 HSBC Building Singapore Telephone: (65) Facsimile: (65) Website: Company Registration No R 7 7