Interest rate cuts are underway!

The end of July has come, but the 'market turnovers' have not yet arrived. A-shares and Hong Kong stocks continue to perform weakly, with a decrease in market volume and a pullback in preferred dividend stocks. After two consecutive months of gains, the Taiwan market also suffered significant selling pressure due to the decline of US technology stocks, and the Taiwan stock index ultimately fell by 2.6%. The MSCI Shanghai, Shenzhen, and Hong Kong Investable Market Index fell 0.4% this month.

The Third Plenum of the 20th Central Committee held this month put forward more than 300 important reform tasks and outlined China's reform roadmap for the next decade; The Politburo meeting held at the end of the month determined the focus of economic work for the second half of this year, which is to boost sluggish consumption and prepare to introduce a series of new measures at an appropriate time to support the economy. In this context, the central bank has implemented interest rate cuts. Firstly, the central bank lowered the 7-day reverse repo rate, LPR (Loan Market Quotation Rate) by 10 basis points, SLF (Standing Lending Facility) rate by 10 basis points, and MLF (Medium Term Lending Facility) rate by 20 basis points. The six major banks also lowered their deposit listing rates, signaling a reduction in financing costs. At the same time, the National Development and Reform Commission and the Ministry of Finance announced an overall arrangement of 300 billion ultra long term special treasury bond to support large-scale equipment renewal and consumer goods trade in. The funding source for this trade in policy is more clear, and the funds involved are shared by the central and local governments according to the overall 9:1 principle, indicating an increase in fiscal policy support. Based on the statement made at this Politburo meeting regarding the further implementation of countercyclical adjustment policies, incremental policies need to be further introduced. After the central bank recently cut interest rates, the yield of China's 10-year treasury bond continued to decline to 2.15%, and the central bank's patience to start trading treasury bond is being tested.

The economic growth rate declined in the second quarter. The year-on-year GDP growth in the second quarter was 4.7%, lower than the 5% growth in the first quarter. In June, CPI increased by 0.2% year-on-year, while PPI decreased by 0.8% year-on-year. Consumption remained weak in June, with total social consumption increasing by 2% year-on-year, a decrease of 1.7 percentage points from May. The Purchasing Managers' Index for the manufacturing industry slightly declined to 49.4 in July, contracting for three consecutive months; The non-manufacturing construction and service industry activity indicators have dropped to 50, and the expansion rate has slowed down compared to June. The export performance is strong, with a year-on-year increase of 8.6% in June (measured in US dollars), of which mechanical and electrical products account for nearly 60% of exports. We expect monetary policy to remain loose in the second half of the year, with room for further reductions in LPR, central bank refinancing rates, and deposit rates. With the Federal Reserve expected to start cutting interest rates from September, the downward pressure on the renminbi over the next four months may ease.

State Grid continues to increase investment in power grid infrastructure, especially in ultra-high voltage transmission and distribution network projects. This year's plan is to start construction of three AC transmission lines and two DC transmission lines, and next year's plan is to build four new lines with a total investment of about 670 billion yuan. The investment in the ultra-high voltage AC system is about 120 billion yuan, including equipment investment of about 30 billion yuan; The investment in ultra-high voltage direct current system is about 250 billion yuan; The initial investment for the flexible DC system is 300 billion yuan, and the equipment value accounts for a relatively high proportion. This will benefit power equipment manufacturers and power automation solution providers.

Thanks to strong global demand for products such as semiconductors and servers that support artificial intelligence technology, Taiwan's economy grew by 5.1% year-on-year in the second quarter, exceeding market expectations. TSMC has raised its revenue growth forecast for 2024 after its quarterly performance exceeded expectations, reflecting confidence in the continued development of artificial intelligence. But we believe that due to the high base of the same period last year, the economic growth in Taiwan may slow down in the second half of the year.

We expect monetary policy to remain loose in the second half of the year, with room for further reductions in LPR, central bank refinancing rates, and deposit rates. With the Federal Reserve expected to start cutting interest rates in September, the downward pressure on the renminbi in the coming months may ease.