External risks are rising, and Chinese assets are becoming more attractive

External uncertainty has risen recently. On the 14th local time, the U.S. government announced that it would impose tariffs on Chinese electric vehicles and other products; On the same day, Fed Chairman Jerome Powell revealed in his speech that he lacked confidence that inflation would fall in the short term, and Fed Governor Bowman even said that "there will be no interest rate cuts this year".

However, the RMB exchange rate rose instead of falling. On the 15th, the onshore yuan closed up 182 points against the US dollar. The Hang Seng Index fell 0.22% to 19,073.71 points, and the Shanghai Composite Index fell 0.82%, still above the 3,100-point mark. After the US April CPI released on the evening of the same day Beijing time did not rise more than expected, the dollar index dived in the short term, and the dollar fell more than 300 points against the offshore yuan intraday.

It is widely believed that the overall impact of tariff hikes is not significant, and the trend of the renminbi still depends on economic fundamentals and the trend of the US dollar. With the recent slight reduction of foreign investors in the underweight of Hong Kong stocks and A-shares, the sustainability of subsequent capital inflows also depends on whether there is a change in fundamentals, especially whether the trend of declining earnings of listed companies is nearing the end.

The RMB exchange rate rose instead of falling

On the 14th local time, the United States announced that on the basis of the original 301 tariffs on China, it would further increase the tariffs on electric vehicles, lithium batteries, photovoltaic cells, critical minerals, semiconductors, steel and aluminum, port cranes, personal protective equipment and other products imported from China, and the tax rate will be increased to 25% to 100%.

Lu Ting, chief economist at Nomura China, said that although the tariff increase was significant, it only affected China's exports worth $18 billion, which was slightly lower than expected. The impact in the short term will be limited, with $18 billion worth of only 4.2 percent of total U.S. imports from China and less than 1 percent of total Chinese exports. And tariff increases on certain products will take effect in 2025 or 2026, and these products may be exported ahead of schedule, as they did in 2018 and 2019, as exporters want to minimize the impact of tariffs.

The U.S. is also not a major destination for China's new energy vehicle exports. According to CCTV, data from the General Administration of Customs shows that in 2022, China's exports of pure electric vehicles to the United States will exceed 10,000, and the export value will not exceed 460 million US dollars. According to U.S. data, Chinese-made pure electric and hybrid vehicles account for only 2% of the total number of new energy vehicles imported by the United States, which is far less than that of Germany, South Korea and Japan.

"The actual impact of the tariffs is inherently small, and the market has expected it for a long time, but now it is the boots that have landed and the benefits are exhausted." Liu Yang, a foreign exchange expert and general manager of the financial market business department of Zheshang Zhongtuo Group, told reporters.

On the 15th, the RMB exchange rate rose sharply, as of 16:30 on the same day, the US dollar closed at 7.2195 against the onshore yuan, the RMB exchange rate rose 182 points from the previous trading day, and the offshore RMB against the US dollar was around 7.22. The dollar index weakened over hawkish signals from the Federal Reserve, trading near 104.7, after briefly approaching 106.

In the evening of the same day, the US CPI for April rose by 3.4% year-on-year, estimated at 3.4%, and the previous value was 3.5%; CPI rose 0.3% m/m in April, with an estimate of 0.4% and a previous reading of 0.4%. The CPI report raised expectations for the Fed to cut interest rates, and the dollar index dived in the short term, hitting a new low since April 10 to 104.41, down more than 0.5% in the day.

For the RMB, the US dollar will remain one of the dominant factors in the future. Recently, due to the high inflation in the United States, some Fed members continue to adhere to the mainstream view of "keeping high interest rates for longer", and Powell called for "more patience to let high interest rates work" in his previous speech.

"In the medium to long term, the trend of manufacturing returning to the United States, the persistence of high prices in the service sector, and the recent recovery in energy prices have increased the risk of inflation. The U.S. PPI in April released on Tuesday (14th) increased by 0.5% month-on-month, higher than the expected 0.3%. Jerry Chen, a senior analyst at Jiasheng Group, told reporters that the interest rate market is currently betting on a 35bp interest rate cut throughout the year, that is, less than twice, which is significantly smaller than the 6~7 times expected by the market at the beginning of the year and the 3 times predicted by the Fed's dot plot in March. The first rate cut is expected to be in September, but the probability is only about 50%.

Even though the pressure of the strong dollar is still there, due to the recent stabilization of a series of economic data in China, international funds have flowed back to China's capital market, which has also led to the stabilization of the RMB exchange rate. The central bank's willingness to maintain exchange rate stability is still strong, and since April, the central parity of the renminbi has strengthened by more than 1,000 points compared with the market price, and the fluctuation of the renminbi spot exchange rate has approached the upper limit of 2%.

A number of institutional analysts told reporters that the boosting factors of economic fundamentals are particularly critical. Last week, China released data on exports, inflation and social finance for April. Export growth turned positive, despite the background of a low base, but the European and American economies are shifting from destocking to replenishing inventory, the maintenance of the momentum of external demand recovery has led to the strengthening of China's exports, and at the same time, the growth of imports is stronger than exports. The property market policy tone has been adjusted to "digest the stock and optimize the increment", and the first and second-tier cities have successively relaxed the property market policy, including "exchanging the old for the new", fully liberalizing the purchase restrictions, and purchasing part of the stock housing for affordable housing, etc., and the property market is expected to improve. A number of investment managers of foreign-funded institutions mentioned to reporters that "digesting stocks" is one of the matters that foreign investors are most concerned about.

The correlation with the Japanese yen has increased

In addition to focusing on changes in economic fundamentals and a strong US dollar, the correlation between the RMB and the yen exchange rate is increasingly attracting institutional attention.

Liu Yang told reporters that at present, the US dollar is a high-interest currency, and the RMB is a low-interest currency, so the latter is increasingly becoming the financing currency of enterprises, that is, integrating RMB and investing in other high-interest currency assets such as US dollars. "In the onshore market bank-operated carry trade, the renminbi has become the financing currency, and the underlying logic of research and trading has changed."

The yen has been a long-established financing currency for many years with a low interest rate policy, and in the carry trade, investors integrate into the yen and invest in US dollar assets. "The long-term downward trend of RMB interest rates seems to have formed some market consensus, and foreign investors are more sensitive to this change, so the RMB has become the target of the carry trade together with the yen and the South Korean won. This is also the reason why the trend of the RMB exchange rate in the past two years is highly similar to that of the yen. Liu Yang believes that in the future, in addition to paying attention to the Fed's policy, we should also focus on the trend of the yen.

Recently, the U.S. dollar has been trading around 155 against the yen, and the yen has temporarily ended its unilateral decline. The yen plunged to around 160 during May Day, triggering a suspected intervention by the Bank of Japan (BOJ) due to the rapid decline.

On the 13th, the Bank of Japan made a rare reduction in bond purchases, reducing the purchase amount of 5~10-year Japanese government bonds from 475 billion yen to 425 billion yen, which was interpreted by the market as "abandoning bonds to protect foreign exchange". Japanese bond yields rose, and the yen recovered against the dollar.

Yang Aozheng, chief Chinese market analyst at FXTM, told reporters: "Recently, the Bank of Japan's laissez-faire attitude has finally changed. Bank of Japan Governor Kazuo Ueda said after meeting with Prime Minister Fumio Kishida that the exchange rate will have a significant impact on the economy and inflation, and depending on these fluctuations, monetary policy responses may be required. Although there was no direct interest rate hike in the rhetoric, the Bank of Japan has not made a statement in the past while by responding to changes in the exchange rate with monetary policy. ”

Whether the return of foreign capital in the stock market can be sustained

External risks also have little impact on A-shares and Hong Kong stocks.

The 15th is a public holiday in Hong Kong, so there is no trading of northbound funds. On the 10th ~ 14th, the northbound funds flowed out of 6.304 billion yuan, 4.591 billion yuan and 6.67 billion yuan respectively. However, since the beginning of this year, the cumulative net inflow has still been 67.825 billion yuan, exceeding the level of last year, and the inflow momentum has intensified significantly since late February.

At the same time, southbound funds have poured into Hong Kong stocks this year, with a total of 233.547 billion yuan. In addition to mainland funds, overseas funds have also begun to flow back to Hong Kong stocks, especially hedge funds and quantitative funds, and some global mutual funds have begun to reduce their underweight to the overall Chinese stock market.

On the 13th, Hong Kong's Hang Seng Index broke through the 19,000-point mark and closed at 19,115.06 points, an increase of 0.8%, hitting a new high. Since the end of January, Hong Kong stocks have rebounded from the bottom by more than 25%, entering a technical bull market. "This shows that the willingness of funds to increase the allocation of Hong Kong stocks or reduce the degree of underallocation of Hong Kong stocks is very strong." An international investment bank strategist mentioned in a conference call with clients that "many hedge funds have increased their allocation to Hong Kong stocks, and some European long-term funds, even if they have not yet acted, have obviously increased their willingness to understand the Chinese market recently." ”

Goldman Sachs and UBS previously upgraded their ratings on the Chinese market. Morgan Stanley believes that considering that China's stock market earnings in the first quarter of this year once again fell short of expectations, foreign long-term holding funds have not become the main contributors to the recent rebound in A-shares and Hong Kong stocks. The main buyers of Hong Kong stocks are hedge funds or quantitative funds, which tend to move faster and are better at taking advantage of speculative opportunities. The agency also said that whether the trend of declining earnings levels is nearing the end will determine whether the inflow of funds will continue.

More institutions believe that after this round of sharp rise, the market may need to be more selective in the future. For example, Ali and Tencent, the two major heavyweights of the Hang Seng Index, released their financial reports on the 15th, and Tencent's operating profit in the first quarter still increased by 38% year-on-year, while Ali fell by 3%. Alibaba's core domestic e-commerce business has slowed, with revenue from Taobao and Tmall platforms growing by only 4% in the first quarter. Alibaba's international e-commerce business sales rose 45% year-on-year in the last quarter, but the business is still in the red. Tencent's ability to achieve profit growth despite slowing revenues, coupled with a more international layout, has made it more resilient in the face of pressure.

Some institutions tend to favor high-dividend sectors. A recent report by Goldman Sachs shows that if the dividend tax on Hong Kong Stock Connect is expected to be reduced, the flow of funds may further benefit individual stocks with high dividends and high shareholder returns. Among the sectors with a dividend payout ratio of more than 5%, southbound funds account for 60% of the holdings.

(This article is from Yicai)