Chinese equity markets rally on hopes for official support

KEY DEVELOPMENTS

China’s economy increasingly relies on domestic consumption as the main driver, but there has been little good news. The service sector remains gloomy, and businesses are dealing with low profitability.  China’s Purchasing Managers Index (PMI) for Services and Manufacturing cast doubt over its nascent economic recovery. Consumer spending contributed 83.2% to GDP growth in the first three quarters of the year, so the weaker services PMI was worrying. The unexpected decline in the manufacturing PMI suggested that the economic recovery remained vulnerable as China grappled with shrinking exports. Chinese equity and currency markets rallied strongly at the end of last week.

GLOBAL IMPACT

Traders believe a dovish stance by the US Fed will bring liquidity back to the Chinese stocks, with additional support from bargain-hunting. Moreover, they speculated that further monetary easing and looser fiscal policy announcements would be needed to boost the economy. The net impact could be further yuan weakness and a strong equity market.

MARKETS

• Chinese stock markets were a bit stronger last week but lagged the strong rally in global markets, with the Shenzhen and Shanghai exchanges up 1.1% and 0.6%, respectively.  The rally continued on Monday, with the indices up 0.9% and 2.1%.
• The offshore yuan rallied at the end of the week, benefitting from dollar weakness, falling from $/CNH 7.33 to $/CNH 7.30, but it rallied strongly to $/CNH 7.2793 on Monday.

MAJOR NEWS

ECONOMICS

China’s Services sector confidence edges higher

• China’s Caixin service Purchasing Managers Index (PMI) was slightly up to 50.4 in October from 50.2 in September
• This reading wasn’t encouraging, as it included the eight-day National holiday holiday boom
• A weaker services sector is bad news for consumption

China’s manufacturing confidence falls

• China’s official manufacturing PMI fell to 49.5, while the market expected expansion, and was down from 50.2 in September,
• The non-manufacturing PMI was 50.6 in October, also undershooting expectations and sharply down from 51.7 in September and the lowest since March
• The new orders index fell to 49.5 from 50.5 last month
• New orders for export fell more steeply to 46.8 from 47.8 in September

Central government might bail out the property sector

• China’s top-level financial work conference, held every five years, concluded last week
• Market participants were eager to know how the policymakers would tackle the two significant challenges facing China’s economy: the housing market and local government debt
• The meeting called for the establishment of mechanisms to resolve local debt risks, perhaps substituting local government funding with central government debt
• The meeting also signaled possible reforms for the housing market, but details remained unknown
• Some analysts suggested learning from Singapore’s model, where the government buys unsold housing projects from cash-strapped house developers, offering affordable flats to households

Yuan Internationalization advances slowly

• China’s Central Bank’s Yuan Internationalization Report released last week emphasized Hong Kong’s important role in yuan globalization
• Hong Kong is the largest offshore yuan hub in the world, handling 75% of offshore yuan’s transactions
• Despite the Chinese yuan’s rapid growth in global payment in recent years, the offshore yuan processed in Hong Kong was reportedly merely above 1 trillion yuan ($137 billion) by the end of 2022
• Total yuan cross-border payments reached 38.9 trillion yuan ($5.42 trillion), an increase of 24% year-on-year in the first three quarters of this year
• China is actively establishing yuan clearing centers in Laos, Kazakhstan, Pakistan, and Brazil to optimize the yuan’s overseas adoption

FINANCE

Significant increase in Panda bonds

• Yuan-based bonds issued by foreign investors in mainland China, so-called Panda bonds, rose 46% year-on-year in the first three-quarters of the yea
• Yuan-based bonds issued by foreign investors in Hong Kong, the largest offshore yuan hub, surged 179% year-on-year in the same period
• Total issuance was a modest 273 billion yuan ($37.3 billion), a long way from the globalization of the yuan desired by the Chinese government

Banks under pressure, reporting modest profit growth

• S&P Global Ratings estimated China’s small regional banks could suffer a capital shortfall of 2.2 trillion yuan ($301 billion) from a deepening local government debt crisis
• The IMF estimated that China’s special property vehicles (LGFV's) debt has ballooned to 66 trillion yuan ($9 trillion), almost half of the country's GDP
• The six largest Chinese state-owned banks reported modest net profit growth in the first nine months, with combined profits gaining by 2.5% year-on-year
• Their bad loans ratio was a modest 1.4%, with no visible increase from last year – a silver lining

China’s property market will suffer pain longer without extra aid

• We are not yet close to a point of systematic crisis, but the flagging property is a constant challenge for China's financial system
• China’s top 100 real estate companies’ sales barely increased, up just 0.6% in October versus September, and were 27.5% lower compared with the same period of last year
• The total sales value of surveyed companies fell by 12.8% year-on-year between January and October

China increases energy cooperation with Russia

• Russia and China agreed to design and build another gas pipeline connecting to Northeast China’s bordering Province, Heilongjiang – diverting gas which would have previously gone to Europe
• China, Russia, and Mongolia are advancing the construction of the ‘Power of Siberia 2 pipeline, increasing Russian gas supply to China to reach 48 billion cubic meters (bcm) by 2030, from 10 bcm per year in 2022
• China is also under construction of other strategic corridors for natural gas resources from Central Asia and Myanmar
• China and Russia have operated only one land-based natural gas pipeline, the ‘Power of Siberia 1’, since 2019

New free trade zone

• China will build a free trade zone (FTZ) in Northwest China’s Xinjiang region, the westernmost Province bordering eight Central Asia countries
• This would be a strategic move aiming to boost economic and trade integration with the Central Asia region and will foster China’s Belt and Road Initiative (BRI) in that region, including collaborations in trade, finance, logistics, and cultural exchanges
• Moves like this accelerate the yuan’s adoption in global payments and as a potential replacement for the US dollar

CORPORATES

Build Your Dream (BYD) EV sales surge

• BYD, China’s leading EVs maker, reported record third-quarter results, with revenue rising 36% year-on-year and profit surging 83% year-on-year
• BYD has enhanced its capability to control the supply chain to cut costs, making it a stronger competitor to Tesla
• Well-known “value investor” Warren Buffett's Berkshire Hathaway continued to sell its stake in BYD, reflecting foreign investors' wariness of Chinese assets
• Observers are nonetheless bullish about China’s EV prospects, estimating it could expand its global market share from 17% in 2022 to 33% by 2030

Apple’s Chinese iPhone sales decline

• Apple reported a 6% decline in its iPhone 15 sales in China, compared with the iPhone 14 over the same period last year, further evidence that deteriorating US-China relations have undermined bilateral business
• Chinese rival Huawei is winning market shares, aided by the Chinese government banning officials from using iPhones
• China was Apple’s second-largest market and the main assembly hub for Apple’s products
• Janet Yellen stressed the US’s plans to deepen its ties with India and Vietnam at the Asia Society in Washington on Thursday
• India was growing fast to replace China as Apple’s producing hub, and more than 2.5 million iPhones were made in the country in the last quarter, 34% higher than last year

Renewable energy dominates new capacity

• Renewable energy capacity rose 93% year-on-year in the first three quarters of this year, the National Energy Administration reported
• Three-quarters of all newly installed energy capacity was renewable energy this year, with solar power installation surging 145% year-on-year
• Energy investment in China grew in the period, with total investment in crucial energy projects within the year reaching nearly 1.5 trillion yuan ($205 billion) during the first eight months, up 21% compared with the same period last year