China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>China domestic activity indicators are weakening and missed expectations in August. Retail sales growth decelerated sharply to 2.5% year-over-year, vs 8.5% in July. Industrial production also slowed to 5.3% year-over-year, vs 6.4% in July. The most concerning development is in the property market. After housing activity turned significantly more negative from June to July, August registered another sequential declines in housing starts and property sales . <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> has retreated around 23% from its peak in February 2021. China market performance has been subdued given the resurge of COVID-19 cases, some property developers' credit risk and the uncertainty on policies.</li>
<li>We expect there will be some monetary stimulus policies to stabilize the economy.  Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people. The magnitude of policy change on these sectors is unprecedent. And the visibility of these changes remains clouded. But for short-term efforts, monetary tools, such as MLF (medium-term lending facility), could be utilized to inject liquidity into the market. </li>
<li>On financial innovation front, we have observed some breakthrough activities. 1) The long-awaited China A-share Index future finally received approval from regulators. The to-be-launched MSCI China A50 Connect Index will be a game changer for <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> derivative business as investors' increasing exposure in China A-share cash equity market and index future. 2) China also announced that a new stock exchange will soon be launched in Beijing. The new exchange will initially be formed by a subset of National Equity Exchange and Quotations (China OTC market) which has been in place since 2013. But Beijing Stock Exchange has ambition to grow into a venue for high-tech and high-growth companies.  </li>
</ul>


China domestic activity indicators are weakening and missed expectations in August. Retail sales growth decelerated sharply to 2.5% year-over-year, vs 8.5% in July. Industrial production also slowed to 5.3% year-over-year, vs 6.4% in July. The most concerning development is in the property market. After housing activity turned significantly more negative from June to July, August registered another sequential declines in housing starts and property sales . Hong Kong Hang Seng Index (HSI INDEX) has retreated around 23% from its peak in February 2021. China market performance has been subdued given the resurge of COVID-19 cases, some property developers' credit risk and the uncertainty on policies.
We expect there will be some monetary stimulus policies to stabilize the economy.  Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people. The magnitude of policy change on these sectors is unprecedent. And the visibility of these changes remains clouded. But for short-term efforts, monetary tools, such as MLF (medium-term lending facility), could be utilized to inject liquidity into the market. 
On financial innovation front, we have observed some breakthrough activities. 1) The long-awaited China A-share Index future finally received approval from regulators. The to-be-launched MSCI China A50 Connect Index will be a game changer for HKEX (388 HK) derivative business as investors' increasing exposure in China A-share cash equity market and index future. 2) China also announced that a new stock exchange will soon be launched in Beijing. The new exchange will initially be formed by a subset of National Equity Exchange and Quotations (China OTC market) which has been in place since 2013. But Beijing Stock Exchange has ambition to grow into a venue for high-tech and high-growth companies.  


China Equity Strategy: Growth Slowdown Risk, Potential Monetary Stimulus

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

FAI (fixed asset investment) declined in 2Q 2021, a sensible response to China's massive industrial overcapacity. Net exports and consumption were the key drivers of 7.9% YoY real GDP growth in 2Q 2021, which took 1H 2021 growth to 12.7% YoY. TSF (total social financing) did decelerate in January-May 2021, but began re-accelerating in June 2021 as the PBOC turned more dovish, following through with an RRR cut (effective 15 July 2021). With China's monetary conditions easing, at a time when US monetary policy is gradually hardening, the RMB will depreciate further, continuing the trend depreciation that began at the start of June 2021. Even during the period of a strengthening RMB, China was experiencing large capital flight: in 1H 2021, China's foreign reserves declined (by a marginal US$3 billion) even as the trade surplus remained elevated at US$255 billion. Despite the persistence of capital controls, China's capital flight is likely to accelerate in the rest of 2021 as monetary policy eases. With limited support from easier monetary policy, FAI will continue to decline marginally, and private consumption will decelerate (as the underlying social causes of high savings remain). Net exports will be less helpful, as the impact of de-globalization and reshoring of manufacturing reduces the demand for China's exports. So real GDP will likely decelerate to 6.7% YoY in 3Q 2021, and to 5% YoY in 4Q 2021. Overcapacity issues will begin to exert a significant drag on bank asset quality by 4Q 2021. We would recommend being mildly underweight China equities, as political risk factors begin rising further.

FAI (fixed asset investment) declined in 2Q 2021, a sensible response to China's massive industrial overcapacity. Net exports and consumption were the key drivers of 7.9% YoY real GDP growth in 2Q 2021, which took 1H 2021 growth to 12.7% YoY. TSF (total social financing) did decelerate in January-May 2021, but began re-accelerating in June 2021 as the PBOC turned more dovish, following through with an RRR cut (effective 15 July 2021). With China's monetary conditions easing, at a time when US monetary policy is gradually hardening, the RMB will depreciate further, continuing the trend depreciation that began at the start of June 2021. Even during the period of a strengthening RMB, China was experiencing large capital flight: in 1H 2021, China's foreign reserves declined (by a marginal US$3 billion) even as the trade surplus remained elevated at US$255 billion. Despite the persistence of capital controls, China's capital flight is likely to accelerate in the rest of 2021 as monetary policy eases. With limited support from easier monetary policy, FAI will continue to decline marginally, and private consumption will decelerate (as the underlying social causes of high savings remain). Net exports will be less helpful, as the impact of de-globalization and reshoring of manufacturing reduces the demand for China's exports. So real GDP will likely decelerate to 6.7% YoY in 3Q 2021, and to 5% YoY in 4Q 2021. Overcapacity issues will begin to exert a significant drag on bank asset quality by 4Q 2021. We would recommend being mildly underweight China equities, as political risk factors begin rising further.  

China to Decelerate: Overcapacity Weakens FAI, Capital Flight Limits Monetary Ease

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Credit

Here, we have wrapped-up the recent fear on the Chinese debt bubble with our new periodical called “The Chinese Credit Chronicle (CCC)”. China is a bicycle economy which will fall down when the economy stops growing at a certain rate, in our view. We believe the minimum real GDP growth rate is c.5%. China’s real GDP growth was 2.3% in 2020, according to China’s National Bureau of Statistics. The 2.3% GDP growth achieved with the effective control of COVID-19 and without much government stimulus remains impressive, in our view, only if we believe this GDP growth is authentic.
Now comes the core of the problem. We have seen leverage in China being extended because of cheap funding costs rather than borrowers’ repayment capability.  Not to mention a shadow banking sector which the China Banking and Insurance Regulatory Commission (CBIRC) once estimated at RMB84.8trn in 2019 or 29% of total banking assets in 2019, leverage was injected officially into ineffective and poorly-managed borrowers such as local government financing vehicles (LGFV). In addition, with China’s urbanization, the demand for residential and commercial properties has risen in tandem with leverage of the Chinese property sector, hence concentrating the leverage in the sector.
Many market participants in China seem to have gambled that China’s growth music will continue playing and when loan growth continues, non-performing loans may not be a big problem. We believe the music has stopped and the Chinese government seems to have agreed with us.
Here, we have raised three anecdotes on the Chinese debt bubble and how we see the situation going this year: China Evergrande (<a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> , <a href="https://www.smartkarma.com/entities/hna-group-co-ltd" target="_blank" data-smartkarma-citation="entities:25987:1" rel="noopener">HNA Group (HNAGRZ CH)</a> , and <a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">China Huarong Asset Management (2799 HK)</a> .

Here, we have wrapped-up the recent fear on the Chinese debt bubble with our new periodical called “The Chinese Credit Chronicle (CCC)”. China is a bicycle economy which will fall down when the economy stops growing at a certain rate, in our view. We believe the minimum real GDP growth rate is c.5%. China’s real GDP growth was 2.3% in 2020, according to China’s National Bureau of Statistics. The 2.3% GDP growth achieved with the effective control of COVID-19 and without much government stimulus remains impressive, in our view, only if we believe this GDP growth is authentic.
Now comes the core of the problem. We have seen leverage in China being extended because of cheap funding costs rather than borrowers’ repayment capability.  Not to mention a shadow banking sector which the China Banking and Insurance Regulatory Commission (CBIRC) once estimated at RMB84.8trn in 2019 or 29% of total banking assets in 2019, leverage was injected officially into ineffective and poorly-managed borrowers such as local government financing vehicles (LGFV). In addition, with China’s urbanization, the demand for residential and commercial properties has risen in tandem with leverage of the Chinese property sector, hence concentrating the leverage in the sector.
Many market participants in China seem to have gambled that China’s growth music will continue playing and when loan growth continues, non-performing loans may not be a big problem. We believe the music has stopped and the Chinese government seems to have agreed with us.
Here, we have raised three anecdotes on the Chinese debt bubble and how we see the situation going this year: China Evergrande (Evergrande Real Estate Group (3333 HK) , HNA Group (HNAGRZ CH) , and China Huarong Asset Management (2799 HK) .

The Chinese Credit Chronicle: The CCC Danger

China

CHINAGOV CDS USD SR 5Y D14 (CCHIN1U5 CORP)

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CHINAGOV CDS USD SR 5Y D14 (CCHIN1U5 CORP)

China Equity Strategy: Growth Slowdown Risk, Potential Monetary Stimulus

China activity indicators are weakening and missed expectations in August. We expect there will be some monetary stimulus to stabilize the economic...

Roger Xie

China to Decelerate: Overcapacity Weakens FAI, Capital Flight Limits Monetary Ease

Real GDP to decelerate to 5% YoY growth by 4Q 2021, as FAI (already down in 2Q2021) weakens further, and rising capital flight limits the PBOC's...

Prasenjit K. Basu

The Chinese Credit Chronicle: The CCC Danger

Here is our first Chinese Credit Chronicle (CCC) to track the debt bubble in China. China Huarong could be the first domino to fall.

Bondcritic

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