Michael J. Howell

Cross-Asset Liquidity Strategist

CrossBorder Capital

Implementing Research Using Alt Data & AI

Cross Asset Strategy

<ul>
<li>Investors are overly pessimistic, but China may already be a contrarian ‘buy’ 
</li>
<li>Latest economic data show positive surprises. GDP momentum is rising but investor positioning data evidence another big cut in exposure to China</li>
<li>Monetary policy stable and supportive. No sign of credit bust, or boom. Great potential for policy ‘pivot’ later in 2022
</li>
</ul>

Stanley Tsai, CFA

Financials Specialist

Macroeconomics

China's inflation moderated in June, but there was still a significant gap between the PPI and CPI. This has prompted the central bank to ease earlier than the market expected, in a bid to shore up small businesses that have suffered from a margin squeeze amid relatively weak consumer demand.
The PPI has come off its peak, as we anticipated last month. However, the differentials between resource extraction, materials and processing PPIs remained uncomfortably wide. Factory gate prices for coal and ferrous metals continued to accelerate, while midstream price volatilities were less pronounced. Downstream sectors saw a much more benign environment, with the exception of metal products.
The CPI was a touch lower than our expectation. Lower pork prices drove the food CPI basket back into negative territory. In contrast, non-food CPI's upward trend gained further traction, as prices begin to normalize from a low base. 
Looking ahead, we expect the gap between the PPI and CPI to narrow. From a record high of 7.7%, the spread will likely start to mean-revert as commodities prices soften and consumer demand strengthens towards the end of the year.
We would watch pork prices closely in the coming months. The NDRC's recent intervention in the pork market may have been a symbolic gesture, but we believe conditions are ripe for a recovery in live hog prices. If they overshoot the CNY18-20/kg level in the near term, CPI may rise faster than what the market would like to see.
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<td style="width: 100%;">Exhibit 1: PPI and CPI (%)</td>
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<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/755/original/image_12185335121625973064817.png?1625973065" class="editor-image img-responsive" data-smartkarma-image-id="217755"></figure>
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li><a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a></li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
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<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
</ul>

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Technical Analysis

<a target="_blank">China’s markets are again on the rise and showing a strong breakout this week . Furthermore, the ratio verses the S&amp;P 500 suggests it (China) is likely to outperform in the near term.</a>Hong Kong’s Hang Seng is showing a setup that may provide a platform for a rally to the tune of 9% from current levelsOverall, instead of a worrying September, Asian markets are presenting opportunities. There seems to be a rotation of sorts from the Far West, where markets had outperformed for much of this year, to the Far East where markets had underperformed and where sentiment (especially regarding China) seems too negatively stretched.

Joe Jasper

Technical Analyst

Vermilion Research

Technical and Quantitative Research

While there are always exceptions at the individual stock level, MSCI Emerging Markets (EEM-US) and Japan (TOPIX, TOPIX Small) have been some of the weaker areas to invest throughout 2021. We now see early signs of positive change and we recommend adding exposure to emerging markets and Japan.

<ul>
<li>In the absence of an outright LPR cut later this month, the latest RRR move's impact on the real economy may be rather modest. </li>
<li>Assuming CNY500bn of MLFs will be withdrawn in the coming months, the net injection this time around is CNY700bn, about 40% of an average month's new loans.</li>
<li>We would watch out for a potential bubble in the onshore credit market before incremental liquidity benefits the broader economy.</li>
</ul>

China

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100. 

Shanghai Stock Exchange Composite Index - SHCOMP INDEX

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