Hao Hong | Outlook 2024: A Year of Normalization

  • Year two of normalization with similar trading range. The biggest normalization of 2023 is that China emerged from COVID. An extended period of seclusion naturally breeds confusion. But with improved communication, as evidenced by high-level exchanges between both sides and increased international traffic, foreign relationship should improve.

    At the darkest hours of last October, we were the lone voice for optimism and forecasted that the Shanghai Composite should trade between ~3,000 and 3,500, while the Hang Seng should trade between ~16,000 and 23,000 in the following 12 months. The actual trading range was 2,924 to 3,419 for Shanghai, and 15,945 to 22,700 for Hang Seng. We look for an extension of this trading range in the coming 12 months.
  • CNY weakness/China-US yield gap at extremes and set to normalize. As the Fed tightens relentless while the PBOC eases to support the Chinese economy, the China-US yield gap has widened to its largest in history and comparable to the level in early 2006. Such wide and stable yield gap presents a carry trade opportunity for speculators, and weakens foreign confidence and investment return from Chinese assets.

    Fortunately, the CNY REER has reached its cyclical lows, and the market is starting to price in four Fed cuts in 2024. As such, the historic weakness of the CNY should trough, while the yield gap should narrow. Such normalization should alleviate the pressure on fund flows and Chinese assets, and spur intermittent market rebounds and rallies.  
  • PBOC sterilization to wane after strong liquidity growth; fiscal policies coming. The PBOC does not appear to be shortening its balance sheet, with higher foreign assets holdings and steady free reserves. This is not a balance sheet of heavy FX intervention, despite capital outflows. Strong deposit growth, or “excess saving”, is in tandem with China’s surplus in goods trade vs current account.

    That said, property malaise will likely take a few years to heal, given the current inventory buildup. As such, deposits balance will unlikely be allocated systemically towards property or stocks, leaving an impression of an economy beset by weakness. In 2023 property statistics worsen further from 2022, with halved land sales, falling property investment and tepid sales growth. but China still manages 5% growth. It is likely to muddle through again in 2024.

    As liquidity growth normalizes, fiscal policies will likely take over as a more important stabilizer of growth. Local government debt can be swapped for central government bonds, its maturity can be extended, and interest rate can be cut. For the embattled developers, they need to plan for an extended period with annual sales well under 10 trillion RMB, as the breakneck urbanization pace normalizes and demographic ages. These changes will create headline risks for the market, making any rebound more capricious to trade. 

Hao Hong: Fundamental Differences

  • Chinese stocks are plunging with US treasuries. Yet no one seems to blame surging US yields for the bane in Chinese stocks.
  • Gold’s historical correlation with US yields is breaking down. Safety in gold, and no longer in US treasuries.
  • For now, iron ore and oil are more direct bets than stocks on improving Chinese growth. More potent policy shots are needed to resurrect stocks.

Hao Hong: Policy Combo, Mumbo Jumbo?

  • Jackson Hole shows divergence in global central banks and dyssynchronization in global economic cycle. Yield surging to new highs and splitting from gold. A paradigm shift is afoot, but near term the US sell-off is abating.
  • The market is well versed with the stamp duty cut and its effects. The sentiment boost from such a cut will be fleeting, but its policy intent should not be unheeded.
  • Economic fundamentals, as reflected in the cyclical asset prices, have so far failed to respond to policies as they used to. More needs to be done, and will be.

Hao Hong: Lessons from Japan

  • SOE developers’ sales still rising strongly, and their stock prices are diverging from those of POEs. Thus, housing demand is probably delayed, not disappearing.
  • The momentum in iron ore price is rising, and tends to lead long bond yield and market recovery by one and three months, respectively.
  • So far, the market recovery is driven more by valuation than by fundamentals. Policies must deliver. And China’s private sector leverage is similar to that of Japan in 1993. It is a significant turning point that warrants all attentions and resources.