Good news! Sentiment in the A-share market may be about to touch a rebound
Original Dai Xianfeng Understand the economy 2023-06-14 17:51 Posted in the United States
Author|Dai Xianfeng
Overseas macro hedge fund manager, APP expert (TA has settled in to understand APP applet)
A. Summary
It's a hard way to judge, but I think the market sentiment in China may have bottomed out. Coupled with potential easing, the market is likely to stabilize.
China's post-pandemic recovery was lower than expected. The services sector maintained growth, but manufacturing faltered. There are some long-term issues here, such as overexpansion of the real estate market, high leverage in the economic system, and related problems with local government financing vehicles. Exports have also fallen recently.
Insufficient demand has led to a decline in CPI inflation. The producer price index is mired in deep deflation.
Internally, consumer confidence is at an all-time low. Both the stock market and the renminbi fell. Market sentiment is depressed. But the government is ready to lower interest rates.
Externally, there appears to be an effort to defuse tensions.
Building on these potentially positive developments, the market is likely to stabilize.
B. China's recovery is lower than expected
The downward trend in China's economic growth has been going on for years. In 2023, the OECD China leading indicator continues to decline.
As expected, the services sector led the post-pandemic recovery this year.
But the manufacturing recovery faltered, well below expectations. China's manufacturing PMI fell below 50 in April. In May, the index fell further.
Exports also fell, reflecting weaker external demand. China's exports grew by -7% year-on-year in May, a sharp decline.
C. The real estate market is a drag
Home sales have been declining over the past few years, while home inventory is increasing.
Long-term household loans (mainly for housing) fell, while household savings rose. An increase in deposits indicates a weakening of consumers' risk appetite. At present, everyone is comparing it with Japan. Consumers in Japan have a strong willingness to pay down debts when their balance sheets are in recession, rather than borrowing money to spend.
D. The market is worried about deflation
China's CPI inflation was 0.1% in April, raising fears of deflation. The consumer price index edged up to 0.2% in May.
After 8 consecutive months of negative values, the PPI has fallen into deep deflation.
E. Depressed mood
Consumer confidence has been at historic lows.
Consumer confidence fell sharply in early 2022 and never recovered to its previous lows.
The renminbi (real effective exchange rate and exchange rate against the US dollar) fell.
China's A-share market fell, reflecting a faltering recovery.
F. The central bank may cut interest rates
Falling inflation provides room for rate cuts. There are media reports that the government is encouraging banks to lower deposit rates. The central bank is expected to cut its benchmark interest rate (one-year LPR).
G. The market is likely to stabilize
If the domestic or international situation improves, China's A-share market may stabilize – financial markets reflect marginal changes, not levels.
There are several metrics worth paying attention to.
The A-share market is correlated with purchasing managers' indices. PMI is an indicator of China's domestic economic strength.
The A-share market is often correlated with producer price index inflation.
In the past, China's A-share market has also been associated with export growth and the German stock market. This reflects the importance of exports to the Chinese economy and the close links between China and the German economy.
China's A-share market is also closely related to the REER of RMB. The exchange rate of China's currency reflects China's economic strength both domestically and internationally.
The government is likely to implement more pro-growth policies. This has the potential to improve the PMI and thus stabilize the A-share market.
The improvement in producer price index inflation may also stabilize the A-share market. This happened in 2015. At that time, "supply-side reforms" were implemented to cope with the decline in the producer price index.
The global economy is not yet in recession. The current weakness in demand is the result of the Fed's tightening policy. The Fed will pause interest rate hikes in June, a move that could provide some relief measures for the U.S. economy. There is also the possibility of improvement, if only temporarily, in Sino-US relations. China's export growth may be able to stabilize and thus stabilize the A-share market.
German equities performed strongly, while China's A-share market performed weakly. To close this gap, either the German stock market needs to fall or the A-share market needs to rise (or both).
The REER exchange rate of the Chinese yuan has fallen to its lowest level since 2015. The renminbi may stabilize due to economic stability or government intervention, thereby stabilizing the A-share market. However, if China's central bank decides to cut interest rates, the yuan may still have some weakness in the short term.
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