Yuan rally continues amidst signs that economic problems are bottoming out

KEY DEVELOPMENTS

Chinese administrators fear that the ongoing property slump will continue to worsen the financial position of the banking sector, and there are indications that this is being privately addressed. Two local insurance companies announced a fund to support local equity markets in one move. Purchasing Managers Index (PM) data gave mixed signals last week. While official government data for the country suggested continuing weakness, the unofficial Caixin data (reflecting more vibrant coastal regions and export businesses) showed an unexpected rebound in November. Nonetheless, international agencies downgraded next year's GDP growth to 5.2% and 5.4%. The decline in industrial profits for Chinese businesses slowed, and revenue rose in data for October.

Market participants arecautious about China’s November export data and consumer purchasing index due this week, and economists’ polls suggested that they are unlikely to provide any positive signals. The US announced new restricting rules, attempting to exclude EV battery components that are manufactured or assembled in China starting in 2024. This would be another hit on China’s EV industry, which is one of the most important sources of economic growth for the country. 

GLOBAL IMPACT

China is managing the linked problems of a weak property sector, dismal consumer confidence, and slowing economic growth with a mix of public spending and private persuasion. The strengthening yuan continues to reflect confidence that it will succeed, even if helped by local currency support, but the stock market still needs to be convinced, with China a laggard in global equities.

MARKETS

• Chinese stock markets were mixed last week, with the Shenzhen Composite Index off 0.5% while the Shanghai Composite Index was unchanged. A rally at the start of last week was not sustained. On Monday, the Shanghai Composite Index slid by 0.29%, while the Shenzhen Composite Index dropped by 0.62% from the previous close.

• The offshore yuan continued to rally, with traders crediting ongoing intervention by the People's Bank of China, rising 0.3% versus the dollar from $/CNH 7.1486 to $/CNH 7.1256, a four-month high. On Monday, the yuan moved sideways.

MAJOR NEWS

Economy

Unofficial PMI rebounds in November

• China's unofficial Caixin Manufacturing PMI surprisingly rebounded to 50.7 in November from 49.5 in October, the highest in three months, above the market consensus of 49.
• Compared to the official survey, the Caixin PMI focuses on export-oriented enterprises and small and medium-sized enterprises in the country's coastal region.
• Caixin's survey suggested that in November, factories received the most rapid increase in new orders since June.
• However, the Caixin new export order index hit 49, contracting for the fifth month and indicating prolonged challenges from shrinking export orders.

Official PMI falls in November and has continued to fall since April

• China's official manufacturing PMI fell to 49.4 in November, down from 49.5 in October, missing market expectations of 49.7
• The new orders index fell to 49.4 in November, down from 49.5 last month.
• The new export orders index fell to 46.3, down from 46.8 last month.
• The non-manufacturing service PMI fell to 50.2 in November from 50.6 last month.
• The construction index was up from 53.5 to 55, supported by a new round of infrastructure construction.

Industrial profits improved in October

• China's industrial profits continued to improve in October, with profit declines slowing to a 7.8% decline, better than the -9.0% in September.
• Annual revenue growth of surveyed enterprises in the same period rose 0.3%
• Foreign businesses reported the worst profits outturn, falling 10.2% annually.

Global agencies lower GDP forecasts

• The OECD cut China's GDP growth forecast to 4.7% next year after 5.2% growth this year.
• S&P Global Ratings predicted China's economy would grow by 4.6% in 2024, slowing from 5.4% this year
• China's annual Central Economic Work Conference will set the tone for next year's economic targets, policies, and priorities when it meets in December.
• Analysts expect it to set more realistic targets for between 4.5%-5% for next year.

Politics

Respiratory infection outbreaks spark Covid fears 

• Several Chinese cities released data about the recent respiratory infection spikes, officially credited to a known influenza virus.
• One reason for the surge in cases is the low level of antibodies among the population due to the past 3-year Covid-19 pandemic.
• The WHO and foreign observers pressed Chinese authorities for more information after the way the previous Covid outbreak was handled.
• China's CDC said the COVID-19 variant has not been a top cause of the surging cases, and there was no evidence suggesting it is a severe outbreak comparable to COVID-19.

Xi targets the development of the Yangtze River Delta

• President Xi Jinping is targeting the economic development of the Yangtze River Delta (YRD). This region connects three neighboring provinces surrounding Shanghai with a population of 240 million, making up a quarter of China's economy.
• Xi will command local officials to speed up collaboration to drive faster growth in the YRD.

Xi supports legal support for foreign enterprises

• In another speech, Xi emphasized strengthening the rule of law in foreign affairs to reflect overseas citizens and interests, deepening international cooperation on law enforcement, and guiding public and enterprises in legal compliance, including US accusations against Tencent, Alibaba, and the TikTok app.

China offers visa-free entry for citizens of five European countries

• Visitors from France, Germany, Italy, the Netherlands, Spain, and Malaysia don't need visas to enter China in a move designed to encourage foreign travelers.
• A recent finding from an international non-profit think tank showed that confidence among multinational companies in China has sharply deteriorated in the past half-year. On a 100-point score measuring the CEO's opinions, confidence in China fell from 72 to 54 in six months.
• The think tank pointed out that China's slower-than-expected economic recovery and lingering geopolitical uncertainty led to a negative outlook for capital investment and recruitment. 
• Among Chinese CEOs, 71% said that demand in their industry remained below pre-Covid levels, and the employment outlook in China also dropped sharply.

Business

Banks meet troubled real estate firms

• Chinese urgent bank meetings with real estate enterprises last week reflect the authorities' response to a broader financial crisis caused by the decline in the property sector and the fear that problems are worse than have been admitted.
• China Index Academy, an industrial agency targeting real estate, said property sales in the top hundred developers extended declines in November, falling 0.6% from October. 
• They added that sales in the first 11 months were 14.7%, down from last year.

Insurance companies buy Chinese equities

• Two state-backed Chinese insurance firms, New China Life Insurance and China Life Insurance, unveiled a 50-billion-yuan ($7 billion) fund to invest in domestic equities last week.
• Policymakers try to persuade financial institutions to make long-term investments to prop up a struggling stock market.
• China's benchmark CSI 300 Index was the worst-performing global index this year, falling 10%.

E-commerce platforms present mixed outlooks for consumer spending

• China's local service and food delivery giant Meituan warned about softening customer spending in the last quarter and declining food delivery orders. 
• Meituan shares fell 10% last week to a two-year-a-half low.
• Pinduoduo, now the world's fifth-biggest e-commerce platform, beat revenue and earnings forecasts with an optimistic outlook for future demand.
• Pinduoduo offers lower-priced goods, so its robust performance might reflect customer's "downgrading" trend.

Car sales boom

• China is exporting regular gas cars in addition to its dominance in EV vehicles.
• Chinese car sales in Mexico rose 51% in the first ten months of the year, according to data from the Mexican Association of Automotive Distributors (AMDA).
• According to Bloomberg, the JAC Frison T8, made by China's Anhui Jianghuai Automobile Group, sold at 468,000 pesos ($27,317) in late October, selling at $10,000 less than similar trucks from Chevrolet, Ford, and Toyota.