Chinese equities

FX Daily: European pessimism, Chinese optimism In quiet markets ahead of G3 central bank meetings later this week, currency pairs are being driven by the soft set of eurozone July PMIs and also the prospect of some renewed Chinese stimulus after China's Politburo promised 'counter-cyclical' measures. These look like short-term trends. We would wait for the policy meetings to set the true FX tone.   USD: China stimulus – here we go again In quiet markets ahead of G3 central bank meetings, the FX market's focus has once again fallen on China. Having broadly disappointed investor expectations this year, China's economy is seen as enjoying a lift after China's Politburo yesterday promised 'counter-cyclical' measures. These follow a drip feed of support measures over recent weeks, such as the easing of restrictions in the mortgage sector, the encouragement to buy cars and electronics, and perhaps some support to local governments saddled with debt. None of these seem to be a game-changer so far, but the market optimists are hoping that this new directive from the Politburo will be turned into powerful stimulus at the State Council level.  Tellingly, USD/CNH did not move much when these measures were announced during the European session yesterday, but Asian investors are running with the story and driving the renminbi some 0.6% higher this European morning. Chinese equities are having a decent run too. These short-term trends may well fizzle out – we've been here before with prospects of China stimulus – but they could provide some mild support to emerging market and commodity currencies through the session. The reason why we warn against pursuing a full 'risk-on' rally in Rest of World (RoW) currencies is that the European economy looks weak and tomorrow's FOMC meeting will probably see the Fed's foot remaining firmly on the monetary brakes. Additionally, there was an overnight Wall Street Journal article by Fed watcher Nick Timiraos entitled: 'Why the Fed isn't Ready to Declare Victory on Inflation' – perhaps a nod to a still hawkish FOMC statement tomorrow.  Today's US data releases are second tier, but the consensus is expecting a decent tick-up in the July consumer confidence reading. As in the UK, there is a growing sense that consumers have so far been able to handle the pain of higher rates, diluting the case for any early easing cycles.   DXY can trade a tight 101.00-101.50 range ahead of tomorrow's Fed meeting.

Looking ahead, investors are closely watching the upcoming PMI data releases. The National Bureau of Statistics (NBS) is set to release Manufacturing and Non-manufacturing PMI data on September 30. The Emerging Industries PMI's rise to 54.0 in September, up from 48.1 in August, has boosted expectations for a Manufacturing PMI above 50 for the first time since March. Non-manufacturing PMI is also anticipated to show growth, driven by infrastructure construction and local government bond issuance. The Caixin Manufacturing PMI and Services PMI are scheduled to release on Sunday, October 1. Bloomberg's survey is projecting the Caixin Manufacturing PMI to increase to 51.2, up from 51.0 in August. Having a higher weight in exporters in the eastern coastal regions of China, the Caixin survey tends to be influenced by the export trend in China. The first 20-day trade data in Korea showed a rebound in trading activities with China and pointed to the potential of a positive surprise in this data. But the fact that the Korean data this September had 2.5 more working days might caution such a conjecture. The Caixin Services PMI is expected to tick up to 52 from 51.8. These PMI indicators serve as timely barometers of economic activity and provide insights into the pace of recovery of the Chinese economy. If they come in higher, it will tend to confirm our base case for a gradual recovery in progress and a tactical rally in the making for Chinese equities. Nonetheless, if the majority of them come in lower than expected or even fall, the equity market will be at risk of making new lows. The upcoming PMI data will be pivotal for the near-term direction of the Hong Kong and mainland Chinese markets. It's worth noting that during this period, the Stock Exchange of Hong Kong will be closed for the National Day holiday on Monday, October 2, while mainland bourses will be closed for six sessions to observe the Mid-autumn festival and the National Day holidays from Friday, September 29 to Friday, October 6, 2023.   Crucial Meetings on the Horizon Looking beyond the immediate economic data, several crucial meetings are on the horizon that will significantly impact China's economic and financial policies. The Third Plenary Session of the 20th Central Committee of the Communist Party of China is expected to convene in late October. This session will address critical economic policies and set the strategic framework for economic development over the next 5 to 10 years. Another important meeting is the 6th National Financial Work Conference, which guides major financial system reforms and addresses critical issues in the financial system. It is held every five years, and the last one was held in 2017. While it was initially slated for 2022, it was postponed and is widely expected to be held in Q4 this year. This conference is likely to cover topics such as deleveraging in the property sector, shadow banking, and local government debts. Additionally, it will likely shape the financial system in ways that focus on serving the real economy, the government’s industrial policies, and comprehensive national security. Additionally, the Central Economic Work Conference in December will review the economic performance of 2023 and begin formulating policies for 2024. These meetings come at a crucial juncture for China's economic trajectory and provide an opportunity for policymakers to address pressing issues and shape the country's economic future.   Closing Thoughts In conclusion, the situation surrounding China Evergrande and the broader property developer debt overhang remains a significant concern. There is no expectation of a policy bailout for property developers, and the focus is on clearing housing inventory and completing pre-sold units. Deleveraging efforts will continue in the property sector, shadow banking, and local government financing vehicles. Recent economic data show tentative signs of a recovery in the Chinese economy. The upcoming PMI data releases will provide further insights into the sustainability of this recovery. Beyond that, the forthcoming critical meetings, such as the Third Plenary Session and the 6th National Financial Work Conference, will play a vital role in shaping China's economic and financial policies. In light of these developments, the base case remains a gradual economic recovery. However, it's important to monitor the evolving situation and be prepared for potential market volatility based on the outcomes of these meetings and economic data. For now, a tactical trade to go long on China and Hong Kong equities for Q4 is intact, but investors should remain vigilant and adaptable in the face of uncertainty.