China Monitor: Non-Stop Stream of Government Support Suggests Extending Targets on Long China Trades

Summary

• We examine policy, politics, and markets in this bi-weekly China Monitor.
• An article in the People’s Daily on Sunday suggests that the government is finally ready to fiscally support Chinese households, ie. support the demand side of the economy.
• Until now, most fiscal measures were on the supply side. But demand side measures are a more meaningful boost for economic growth and for the property sector than supply side.
• Strategy: We extend the targets on our long China trades in FX and equities considering the price action of the past week and because of the upcoming support for households.

Finally, Demand Side Support in the Pipeline

An article over the weekend in the People’s Daily (here) suggests fiscal support for Chinese households is on the way.

The key point for me is that this is the first time that fiscal spending is being considered to support the demand side of the economy. In recent months, most of the support had been for the supply side, especially the over-indebted property sector. But it is well understood by economists that in China demand side measures can be more powerful than supply measures.

The sentences in the People’s Daily article that matter most (google-translated):

• ‘increase the income of low- and middle-income groups and those groups that are more affected by the epidemic through multiple channels, meet their basic living needs, and increase consumption capacity.’

• ‘the monetary policy will increase the inclination towards private enterprises, maintain the effective growth of total credit, make good use of inclusive small and micro loan support tools, and promote the reduction of comprehensive financing costs.’

• ‘In the medium and long term, the RMB exchange rate will maintain two-way fluctuations, but will continue to strengthen in general.’

• ‘financial institutions will further establish the concept of equal treatment and treat enterprises of all types of ownership fairly and justly’ (ie. treat private and public companies equally)

• ‘to promote the healthy development of Internet platform companies‘ (ie. the ‘punishment phase’ for companies like Alibaba and Tencent may have ended)

The original article is here: https://mp.weixin.qq.com/s/Xc4vdOwT5WX9KnvSiUTfkw

Extend Targets of Long China Trade Ideas

Last week, in our first strategy report of the year, we added an outright long CNH trade to a basket of China re-opening trades that we had held since November (see here).

We now extend the targets on these long China trades, considering the price action of the past week and because of the non-stop stream of fiscal support:

Extend target on long Hang Seng from 21k to 22k

• A change in focus for fiscal support from the supply to the demand side should boost growth faster. I expect economists to adjust their 1Q and 2Q estimates upward. Being long China stocks is the most straight forward expression of such an improvement.
• Inflows into China equities in the first week of the year were $2bn.

Extend target on CNH from 6.80 to 6.70

• We have written often that Chinese exporter hedging (ie. USD/CNH selling) is needed to truly push renminbi stronger. In the last few days, we have finally started to see signs of increased hedging.

Stay long THB/TWD target 0.92

• THB has been a winner from the China reopening theme since October. We still think it can run further. Outbound tourism will increase, but only gradually, in my view, as there are still various limitations for travelling.

Stay long CLP target 820

• Demand side measures will be more beneficial for the Chinese property market than supply side measures. As such, exporters of metals such as copper and ore should benefit. Among the various Latin-American commodity producers, we like Chile the most, as (1) whereas last year Chile was suffering from political upheaval and fiscal concerns, in recent months the situation has stabilised (eg. the latest proposed round of the pension withdrawal did not happen); (2) the Chile trade deficit peaked in August and turned into a surplus in recent months. Consensus expects another surplus for the December print ($200bn, released today).

Current Trade Table

Bert Gochet is a strategist at Macro Hive, specialising in Emerging Markets strategy. Between 2009 and 2017, he was co-head of global EM strategy with a focus on fixed income and currencies at JP Morgan.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)