Hao Hong | Outlook 2H2023: This Time is Different

  • China’s record trade surplus mirrors the surge in deposits and M2. It is a testament of China’s manufacturing prowess. But such comparative advantage also means that Chinese exports have been the key to cope with the slowdown during the pandemic. The US demand is now being tampered with by the Fed, hampering China’s manufacturing and exports strength. As such, commodities, energy, and Chinese stocks are frail despite China’s reopen.
  • Chinese households are overextended during the pandemic, and are not in a strong position to borrow more. This is why lending lags money growth, and “revenge consumption” is fleeting. Further, consumption is a much smaller part of the Chinese economy, and thus the foreign recovery experience won’t easily apply – contrary to consensus belief.
  • If the US avoids a recession, Chinese manufacturing and exports will pull through. Bottoming industry profits and recovering confidence both in the US and China are hinting at rising probability. If so, the recovery will take some time to eventuate, and risk assets will perform later. If not, the market will take a dive, but then the PBoC will likely ease further to support the recovery – much like it did in 2014 to 2015. In either scenario, we must take a deep breath, and hold onto our faith a little longer.

Hao Hong: The Puzzle of “Vanishing Surplus”

  • FX settlement growth at record low, trade surplus has not yet been converted to yuan liquidity fully but will likely so. It explains the disconnect between record surplus and plunging stocks in 2022.
  • The yuan vol and traders’ USD positions are not sending out strong trading signals, while northbound buying has hit a near-term wall. Bide your time, while waiting for the recovery to unfold.

Hao Hong: A Deadcat, or A New Bull?

  • The Hang Seng rally stalled at 22,700, vs. our price target of 23,000 set in late October 2022 and our 850-Cycle line of 22,500.
  • After a 50% rally in three months, the itch to take profit cannot be denied. Onshore market has yet to respond in full to China’s PMI re-expansion.
  • But – the market bottom we called in late October 2022 is indeed a secular turning point, as shown by our leading indicator, valuation and China’s market cap.

Hao Hong: Savings Glut Fuel for Spring Rally

  • Consensus is mistakenly over analyzing the activity data during the Spring Festival. Good data mean recovery, bad data suggest more stimulus. Indeed, PBoC’s balance sheet expansion has heralded a positive turn in economic cycle.
  • With data vacuum, we are at the inception of intense speculation. China’s savings glut many taken as a sign of extreme risk aversion can be the fuel for a spring rally.
  • Stay bullish.