China Monitor: Strong Data Reaffirms Long China Stance Despite Global Turmoil

Summary

• Data released this week confirms a bullish view on the China recovery.
• Activity data for January and February shows that the economy is recovering faster than expected, and economists are upgrading their growth forecasts for 1Q towards 4%.
• Recently released reserves data from PBOC shows that the central bank bought up to USD40bn for its reserves book during December and January.
• Strategy:
  • We still hold long A-shares (SHCOMP), latest at 3,280 and targeting 3,600.
  • We still hold short USD/CNH targeting 6.65, despite the volatility in global markets.

Activity Data Was ‘Good Enough’

My read on the China activity data released yesterday was that it was not a blowout, but good enough to support an optimistic China investment stance. This is especially so when comparing it with the market scepticism about a China recovery.

Here are four points on yesterday’s data:

• Property investment was higher than expected (-5.7% vs -8.5%). This was somewhat expected, as high-frequency (weekly) property sales data had been coming in stronger than last year. Also, today saw the release of New Hom Price data, up 0.3% MoM. In summary, I assume that economists will now upgrade their forecasts for property sales for this year from a small negative single digit percentage growth to a small positive.
• Fixed asset investment was also good, at 1% higher than expected (+5.5% vs +4.5%). This shows the continued use of government-led infrastructure building to compensate for the still weak if improving growth rate in property.
• Retail sales came on target (at +3.5%) and bounced back from -0.2% in December. The strongest element of consumption was catering. The weakest element was durable goods (especially auto sales). This was slightly disappointing, but we already know from the high-frequency data that auto sales have recovered in recent weeks, so March retail sales have a good chance to print higher.
• Employment data was weak still, with the jobless rate rising to 5.6% (from 5.3%). But I assume that the government will redouble its efforts to create jobs going forward. This was highlighted in last week’s NPC address, where a total job creation target of 12 million was adopted.

To some extent, we already knew that China was recovering well, based on previously released ‘soft’ data such as the strong PMIs. But this ‘hard’ activity data confirms that economic stakeholders have acted on the intentions indicated in the surveys.

In sum, this latest data is strong enough for an early stage of the recovery, and we think that March and April will continue this trend. It is no surprise that economists are raising their forecasts for 1Q growth from 2-3% towards 4%.

PBOC Has Been Buying Dollars

Another data point that came over the weekend supports the view of a stronger RMB.

Judging from the recently released PBOC FX reserves data, it is estimated that PBOC bought up to USD40bn for its reserves book during December and January. This is the period when CNY was rallying quite hard, from 7.30 to 6.75.

I think few in the market were aware of this USD buying , until this data was released. I certainly was not. But it shows that the inflows into renminbi were larger than we thought originally, and it therefore contributes to my positive stance on the currency.

Hold Long CNH and Equities Stance

What is the trading conclusion?

I still have a short USD/CNH entered in the early days of 2023. The renminbi has oscillated in a wide range YTD, and spot today is still near my entry level of 6.89. But it makes sense to hold onto long CNH now, especially when we contrast the strong recovery in China with the turmoil in US and European markets. US rate expectations have collapsed, whereas China is done cutting rates. China’s trade balance for January/February was stronger than expected. Trade will benefit further from an oil price that has now fallen to the sixties (WTI price), even if simultaneously it may be negatively affected by a less rosy outlook for exports to the US and Europe (if this bank crisis translates into lesser DM growth). I hold my CNH target at 6.65.

I also still expect A-shares to rise further. Equity flows into China should benefit from an improved growth differential vs the rest of the world. Note that onshore China equities are still near the highs of the year, even when offshore China equities are not. But global equity investors are underweight China, and even if geopolitical concerns justify some of that, there is scope to add to positions as performance will dictate flows over time. Chart 2 shows how SHCOMP has outperformed SPX this year. I hold my SHCOMP target at 3,600.

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.

Photo Credit: depositphotos.com

(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.)