Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

Macroeconomics

Last week we wrote that accelerating economic integration in the Greater Bay Area is  lies at the heart of China’s strategy to win the battle for economic supremacy.  It is key to China’s future economic prosperity and, directly counters America’s China containment strategy. Beijing recognises China containment will remain the lynchpin of US foreign policy. A Biden US presidency ensures that development of the GBA is only set to speed up. Companies are investing in next generation industries to meet the wants of the GBA’s tech-savvy consumers and are optimistic about revenue growth over the next three years. For investors seeking superior returns the case for investing in GBA companies has never looked stronger.

Last week we wrote that accelerating economic integration in the Greater Bay Area is  lies at the heart of China’s strategy to win the battle for economic supremacy.  It is key to China’s future economic prosperity and, directly counters America’s China containment strategy. Beijing recognises China containment will remain the lynchpin of US foreign policy. A Biden US presidency ensures that development of the GBA is only set to speed up. Companies are investing in next generation industries to meet the wants of the GBA’s tech-savvy consumers and are optimistic about revenue growth over the next three years. For investors seeking superior returns the case for investing in GBA companies has never looked stronger. 

Biden Vs. Xi - What Are Businesses Doing?

China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>China is accelerating its efforts to launch its sovereign digital currency. In October, the People’s Bank of China published a draft law that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency.</li>
<li>Pilot testing of China’s DC/EP system has rolled out recently in Shenzhen, Suzhou, Xiong’an and Chengdu. The digital currency will also feature at the Beijing Winter Olympics in 2022. In the public testing in Shenzhen, "red pockets" valued at RMB200 each have been distributed to 50,000 residents to use in 3,000 local retail stores and restaurants. The pilot program has shown 2 distinct features for DC/EP system: 1) the use of DC/EP app does not require an existed bank account, this will target to serve any non-bank customers; 2) DC/EP app uses QR code or NFC for payment, which is similar to popular Wechat or Alipay system. We believe these payment methods will facilitate the wide adoption of DC/EP system.</li>
<li>PBoC’s DC/EP is fundamentally different to crypto currencies and stablecoins. Its main function, is to partially replace paper cash (M0) and supplement retail ePayments (C2C or C2B) in China. We believe the success of pilot DC/EP system will pave way for a solution for cashless environment. China is leading the race for digital currency. </li>
</ul><div data-v-5a0444bf=""></div>


China is accelerating its efforts to launch its sovereign digital currency. In October, the People’s Bank of China published a draft law that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency.
Pilot testing of China’s DC/EP system has rolled out recently in Shenzhen, Suzhou, Xiong’an and Chengdu. The digital currency will also feature at the Beijing Winter Olympics in 2022. In the public testing in Shenzhen, "red pockets" valued at RMB200 each have been distributed to 50,000 residents to use in 3,000 local retail stores and restaurants. The pilot program has shown 2 distinct features for DC/EP system: 1) the use of DC/EP app does not require an existed bank account, this will target to serve any non-bank customers; 2) DC/EP app uses QR code or NFC for payment, which is similar to popular Wechat or Alipay system. We believe these payment methods will facilitate the wide adoption of DC/EP system.
PBoC’s DC/EP is fundamentally different to crypto currencies and stablecoins. Its main function, is to partially replace paper cash (M0) and supplement retail ePayments (C2C or C2B) in China. We believe the success of pilot DC/EP system will pave way for a solution for cashless environment. China is leading the race for digital currency. 


China A-Share Strategy: Leading the Race for Digital Currency

<ul>
<li>We expect China A-share companies' fundamental will be improved sequentially in 4Q20 and 1Q21, led by domestic consumption and cyclical sectors. Thanks to the strict control and mass virus testing, China is in a leading position to contain COVID-19 cases and will be one of the few countries that could deliver upturn growth. For example, air travel and tourism have recovered 90% and 80% respectively to pre-COVID level. </li>
<li>China's September and October total social financing (TSF) came in at RMB 3.5 trillion and 1.4 trillion respectively, which delivered 13.5% year-over-year balance growth in September and 13.7% in October . We expected a sequential downward movement of TSF balance post the peak in September-October. PBoC had injected abnormal liquidity into the system in 1st half 2020 to fight pandemic, we believe the monetary policy will be more controlled in 2021 and the growth of TSF will gradually decelerate. </li>
<li>We expect domestic consumption will pose strong growth compared with lower bases, given the total lockdown in China in early 2020. With the proliferation of mobile internet and increase of dispensable income,  we believe there are many innovations in consumption, such as new dining format, food delivery, online sale streaming and etc. This is also one of the area we observe the biggest inflow of foreign institutional funds in A-share market.</li>
</ul>


We expect China A-share companies' fundamental will be improved sequentially in 4Q20 and 1Q21, led by domestic consumption and cyclical sectors. Thanks to the strict control and mass virus testing, China is in a leading position to contain COVID-19 cases and will be one of the few countries that could deliver upturn growth. For example, air travel and tourism have recovered 90% and 80% respectively to pre-COVID level. 
China's September and October total social financing (TSF) came in at RMB 3.5 trillion and 1.4 trillion respectively, which delivered 13.5% year-over-year balance growth in September and 13.7% in October . We expected a sequential downward movement of TSF balance post the peak in September-October. PBoC had injected abnormal liquidity into the system in 1st half 2020 to fight pandemic, we believe the monetary policy will be more controlled in 2021 and the growth of TSF will gradually decelerate. 
We expect domestic consumption will pose strong growth compared with lower bases, given the total lockdown in China in early 2020. With the proliferation of mobile internet and increase of dispensable income,  we believe there are many innovations in consumption, such as new dining format, food delivery, online sale streaming and etc. This is also one of the area we observe the biggest inflow of foreign institutional funds in A-share market.


China A-Share Strategy: Strong Fundamental Recovery and Decelerated Liquidity Growth

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

With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021.   China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China.

With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021.   China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China. 

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel &amp; aluminium output, and exports were merely stagnant in April-May. But the surge in public FAI (+18.1% YoY in May) is only adding to excess infrastructure. As the rest of the world restarts production, anti-dumping actions against China will accelerate. Labour market slack will keep consumer spending weak. We recommend taking advantage of near-term strength in China equities to take profit over the next month, as the Chinese economy likely deteriorates in 2H 2020 as demand drivers evaporate. Despite a spectacular gusher of new total social financing (TSF), which has already risen this year by RMB17.36 trillion (+57.8% YoY faster than in Jan-May 2019, and almost equal to all new TSF in the whole of 2018), retail sales still declined 2.8% YoY in May 2020, and were down 13.5% YoY in the year-to-date.  But surging TSF has enabled FAI to expand 7.1% YoY in April and 9.7% YoY in May 2020, with public (government-linked) FAI surging 18.1% YoY in May. FAI cannot be sustained at this pace, and will likely lose MoM momentum in 2H 2020. Consumer spending too will likely stay sluggish. And BRI partners will continue to face debt-related constraints, eroding all the main sources of potential incremental demand, going forward. The supply side of China's economy has rebounded quite handsomely, with industrial output growing 3.9% and 4.4% YoY in the last two months. Among the 5 main industries afflicted by over-capacity in China (in most of which China has "globalized" over-capacity by expanding to more than half global production of steel, aluminium, cement and a third of autos and chemicals), China has actually increased steel and aluminium production this year (while global output of both slumped). Given that it isn't possible to export by sea, China has been obliged to reduce cement output in the past 3 years. The same decline has happened in autos and chemicals (because of a global glut), but China's auto output has begun rebounding in the past two months. As the US, India and (perhaps) the EU begin restricting China's exports, the domestic output glut will worsen sharply. Increasingly, non-Asian markets are likely to seek to restrict China's exports ("dumping") of steel and aluminium, while product-relocation strategies gather pace, reducing additional sources of demand for China's output. Excess capacity will worsen, especially in the September-December period, and into 2021. We recommend using the next month of good results for 2Q to take profits in China equities, and switch to other emerging markets.

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel &amp; aluminium output, and exports were merely stagnant in April-May. But the surge in public FAI (+18.1% YoY in May) is only adding to excess infrastructure. As the rest of the world restarts production, anti-dumping actions against China will accelerate. Labour market slack will keep consumer spending weak. We recommend taking advantage of near-term strength in China equities to take profit over the next month, as the Chinese economy likely deteriorates in 2H 2020 as demand drivers evaporate. Despite a spectacular gusher of new total social financing (TSF), which has already risen this year by RMB17.36 trillion (+57.8% YoY faster than in Jan-May 2019, and almost equal to all new TSF in the whole of 2018), retail sales still declined 2.8% YoY in May 2020, and were down 13.5% YoY in the year-to-date.  But surging TSF has enabled FAI to expand 7.1% YoY in April and 9.7% YoY in May 2020, with public (government-linked) FAI surging 18.1% YoY in May. FAI cannot be sustained at this pace, and will likely lose MoM momentum in 2H 2020. Consumer spending too will likely stay sluggish. And BRI partners will continue to face debt-related constraints, eroding all the main sources of potential incremental demand, going forward. The supply side of China's economy has rebounded quite handsomely, with industrial output growing 3.9% and 4.4% YoY in the last two months. Among the 5 main industries afflicted by over-capacity in China (in most of which China has "globalized" over-capacity by expanding to more than half global production of steel, aluminium, cement and a third of autos and chemicals), China has actually increased steel and aluminium production this year (while global output of both slumped). Given that it isn't possible to export by sea, China has been obliged to reduce cement output in the past 3 years. The same decline has happened in autos and chemicals (because of a global glut), but China's auto output has begun rebounding in the past two months. As the US, India and (perhaps) the EU begin restricting China's exports, the domestic output glut will worsen sharply. Increasingly, non-Asian markets are likely to seek to restrict China's exports ("dumping") of steel and aluminium, while product-relocation strategies gather pace, reducing additional sources of demand for China's output. Excess capacity will worsen, especially in the September-December period, and into 2021. We recommend using the next month of good results for 2Q to take profits in China equities, and switch to other emerging markets.    

Supply Side Recovering, but Sluggish Demand Will Exacerbate Excess Capacity

China

The MSCI China Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1992.

MSCI China Index (MXCN INDEX)

Biden Vs. Xi - What Are Businesses Doing?

The case for investing in GBA companies has never looked stronger. Companies are investing in next generation industries and are optimistic about...

Sharmila Whelan

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

China's total social financing has increased by

Prasenjit K. Basu

Supply Side Recovering, but Sluggish Demand Will Exacerbate Excess Capacity

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel & aluminium...

Prasenjit K. Basu

Biden Vs. Xi - What Are Businesses Doing?

The case for investing in GBA companies has never looked stronger. Companies are investing in next generation industries and are optimistic about...

Sharmila Whelan

China A-Share Strategy: Leading the Race for Digital Currency

We believe the success of pilot DC/EP system will pave way for a solution for cashless environment. China is leading the race for digital currency.

Roger Xie

China A-Share Strategy: Strong Fundamental Recovery and Decelerated Liquidity Growth

We expect China A-share companies' fundamental will be improved sequentially in 4Q20 and 1Q21, but the growth of liquidity will gradually decelerate.

Roger Xie

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

China's total social financing has increased by

Prasenjit K. Basu

Supply Side Recovering, but Sluggish Demand Will Exacerbate Excess Capacity

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel & aluminium...

Prasenjit K. Basu