Turning point!
In May, the A-share market traded sideways, with the CSI 300 index falling 0.5 per cent despite gains in coal and property sectors; The Hang Seng index rose 2.5 per cent after retreating from highs; Taiwan, which has a high correlation with the Nasdaq, jumped 3.8 per cent to a record high. The MSCI index of investable markets in Shanghai, Shenzhen and Hong Kong was flat this month.
This month, the biggest boost to market sentiment has been the shift in policy stance on property, which has moved towards full relaxation. Government departments have become more active in easing real estate policies, with most first - and second-tier cities lifting restrictions on housing purchases, the central bank reducing the down payment ratio for first and second home mortgages and removing the interest rate floor, planning to provide low-interest refinancing and PSL to state-owned banks, and supporting local state-owned enterprises to buy unsalable commercial housing into affordable housing to absorb housing inventory. In the short term, the most immediate beneficiaries will be property brokers, which will benefit from the uptick in housing transactions. Second, better-quality property developers, especially local state-owned developers, will get more credit and acquisition opportunities; In the long run, the removal of hukou restrictions in most cities along with the removal of purchase restrictions will be a major contribution to social progress.
China's economic growth slowed in April, but policy support increased. The consumer price index (CPI) rose 0.3 per cent from a year earlier, staying in positive territory for the third straight month. Producer prices fell 2.5 per cent from a year earlier, extending their decline. The figures show that deflationary pressures remain a threat to China's economy. Some of the rise in consumer prices may be due to local governments raising utility prices and high-speed rail fares in recent months. At present, more than 130 counties and cities have announced increases in residential gas prices and water bills, and electricity prices are expected to rise soon. We expect inflation to rise quarter-by-quarter in the second half of the year. In May, the manufacturing PMI and non-manufacturing business activity indexes were 49.5% and 51.1%, respectively, down 0.9 and 0.1 percentage points from the previous month. In May, the average marginal decline in the manufacturing and non-manufacturing industries, although there is the impact of the dislocation of holiday days, but also reflects that the economic quarter-on-quarter repair by the seasonal disturbance is relatively large, and the sustainability of the repair needs to be improved.
Profits at China's largest industrial companies rose 4 per cent in April from a year earlier, reversing a decline in March. The government's encouragement of large-scale equipment renewal and strong exports of high-end equipment are the main drivers. Strong exports may escalate frictions with major trading partners, and the country's manufacturers will face further external risks. The United States and the European Union - two of China's largest export markets - accuse China of building excess capacity through state subsidies. They will inhibit the sales of key products such as Chinese electric vehicles in the United States and Europe by increasing import tariffs, and the negative impact on China's electric vehicle industry chain deserves our attention.
During the May Day holiday, an average of 270 million trips were made nationwide, an increase of 24 percent compared with 2019. Outbound/inbound passenger volume has rebounded to 80% of the 2019 level, domestic tourism per capita spending has recovered to 89% of the pre-pandemic level, and lower-tier cities are becoming more popular with tourists, but the average daily international flight volume has only recovered 74% of the pre-pandemic level and is expected to recover to 80% by the end of the year. There are two obstacles to outbound travel: first, it takes too long to apply for visas in the United States and major European countries; Second, the capacity of international flights is limited. We believe that as China further expands the scope of visa-free countries, outbound tourism will improve.
For the stock market, we have seen the following five positive signs that the stock market has bottomed:
Recent short interest in Hong Kong stocks still accounts for 15% of total trading volume, and the index has begun to rebound from its lows since 2012;
• The A-share market remains close to its trough during the 2018 trade war;
• China's 10-year government bond yield appears to have stabilized at 2.3%, below the 2.7% dividend yield on the CSI 300;
• The discount on Chinese 10-year government bonds has fallen to 200 basis points relative to U.S. 10-year bonds from a peak of 240 basis points, reflecting changing views on future growth in both countries
• Valuations in the domestic A-share market are very attractive - 300 P/E 14.2x in Shanghai and Shenzhen, and 25.4x in S&P 500 P/E
China held targeted military exercises after the inauguration of Taiwan's new leader, Lai Ching-te. We expect the risks across the strait to be controllable in the short term, and the impact on the securities market will be limited.
Looking ahead, the country will more aggressively ease credit supply to boost the property market and economic growth. The Third Plenum to be held in July deserves our attention for deep reforms in real estate, employment, population, electricity and other areas.
