No Poverty on the 5th, No Bankruptcy on the 6th, and a Great 'Turnaround' in July!

"No Poverty on the 5th, No Bankruptcy on the 6th, and a Great 'Turnaround' in July!"

In July, the Greater China stock markets continued their upward trend. Taiwan's Weighted Index rose by 6.9%, the CSI 300 A-share Index gained 4.3%, the Hang Seng Index increased by 3.1%, and the MSCI China A-H Investable Market Index climbed 5.0% this month.

As the deadline for Trump’s "reciprocal tariff" truce was approaching, China-US economic and trade talks were held in Sweden. The two sides agreed to extend the tariff truce agreement—set to expire on August 12—by another 90 days. It is possible that the Chinese and US presidents will meet around the APEC Summit in South Korea at the end of October, and both sides will strive to create a favorable atmosphere beforehand. For Taiwan, the Trump administration decided on a new "reciprocal tariff" rate of 20%. Though this rate may be "temporary," it is significantly higher than the 15% rate granted to Japan and South Korea. Coupled with the 12% appreciation of the New Taiwan Dollar (TWD) against the US Dollar (USD), Taiwan’s export enterprises now face a substantial increase in overall cost burdens and severe challenges. Beyond this, two uncertainties remain noteworthy: first, tariffs on the pharmaceutical industry; second, tariffs on the semiconductor industry.

Against the backdrop that the real estate market is no longer a major driver of China’s economic growth, proactive fiscal policies have continued to gain momentum. This month, the downstream hydropower project on the Yarlung Zangbo River—with a total investment of 1.2 trillion RMB—was approved and commenced construction, boosting sectors such as hydropower, cement, and excavators. Meanwhile, the state will provide a childcare subsidy of 3,600 RMB per year for children aged 0-3, which is expected to benefit over 20 million families annually, corresponding to a fiscal expenditure of approximately 100 billion RMB. The government will also gradually promote free preschool education, involving around 400 billion RMB in fiscal spending. In recent years, many cities have rolled out their own subsidy policies. For instance, Hohhot in the Inner Mongolia Autonomous Region made national headlines in March by offering a 50,000 RMB subsidy to families with a second child and a 100,000 RMB subsidy to families with three or more children. In 2023, Tianmen City in Hubei Province began providing over 90,000 RMB in subsidies to families with a second child, with even more substantial subsidies—including cash subsidies, childcare subsidies, and housing support—for families with a third child. In 2024, the number of newborns in Tianmen increased by 17% compared to the previous year. Such measures, including subsidies for children and free preschool education, have further supported family welfare.

China’s GDP grew by 5.3% year-on-year in the first half of the year, exceeding expectations, while the negative impact of tariffs on economic growth was smaller than anticipated. In terms of investment, fixed asset investment nationwide rose by 2.8% year-on-year; in terms of consumption, total retail sales of consumer goods increased by 5% year-on-year; and in terms of industry, the added value of industrial enterprises above the designated size grew by 6.8% year-on-year. Domestic demand has become the main driver of economic growth. In the second quarter, final consumption expenditure, capital formation, and net exports contributed 52.3%, 24.7%, and 23% to economic growth, respectively. However, real estate investment remained weak: from January to June, real estate investment fell by 11.2% year-on-year, with residential investment dropping by 10.4%. Deflationary pressures also persisted: in June, the Consumer Price Index (CPI) rose by 0.1% year-on-year, while the decline in the Producer Price Index (PPI) widened to 3.6%. Manufacturing activity remained in the contraction zone: the official Manufacturing Purchasing Managers’ Index (PMI) stood at 49.3 in July, down from 49.7 in the previous month; the Non-Manufacturing Activity Index fell to 50.1 from 50.5 in the prior month.

The Political Bureau of the Communist Party of China (CPC) Central Committee set the tone for policies in the second half of the year, focusing on boosting consumption and breaking "involution," while sending a signal of rebalancing the economy. Although some investors viewed the meeting as underwhelming due to the lack of additional stimulus policies, the logic and direction of the policies have become very clear. It is expected that policies will remain stable in the third quarter (3Q) and may gain momentum again in the fourth quarter (4Q).

Additionally, insurance regulatory authorities in both Mainland China and Taiwan have taken measures to ease the financial pressure on insurance companies. In Mainland China, the 10-year government bond yield stands at 1.99%, and the benchmark interest rate for 5-year fixed deposits is 1.3%—both at historically low levels. In this low-interest-rate environment, insurance companies face significant asset-liability matching pressure, particularly the risk of interest rate spread losses between rigid liability costs and returns on the asset side. The regulator has cut the guaranteed interest rates of different types of insurance products by 25-50 basis points, which will help insurance companies better respond to interest rate fluctuations and improve their asset-liability management capabilities. In Taiwan, Taiwan’s life insurance industry holds a large amount of US dollar-denominated assets (accounting for approximately 70% of its total investment scale), so exchange rate fluctuations have a significant impact on its financial condition. To address the financial pressure on the life insurance industry caused by sharp fluctuations in the TWD exchange rate, Taiwan’s Financial Supervisory Commission (FSC) has further relaxed the rules on the use of foreign exchange price fluctuation reserves, providing short-term relief for the financial strain of life insurance companies. We believe that the stocks of insurance companies on both sides of the Taiwan Strait will have upward opportunities in the short term.

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