by Desmond Kuang, Chief Investment Officer, China, HSBC Global Private Banking and Wealth
- China's Q2 GDP YoY growth, with the low base considered, fell slightly short of expectations mainly due to the lagging recovery in the property chain and capacity utilisation. Since July, we have seen accretive positive policy signals, including various pro-growth measures in fiscal, monetary, real estate and consumption areas that support economic recovery. The Politburo meeting, which took place as scheduled at the end of the month, responded to market concerns in multiple areas, particularly with respect to the property sector and capital markets investor sentiment. Overall, these signals have turned out to be more positive and broad-reaching than the market generally expected
- Recently, the Chinese stock market has priced in a relatively pessimistic outlook following a slower recovery. Trading volume hit a rock bottom in mid-July, indicating a weakening sentiment in the stock market. This provides more upside potential to the market technically. With positive policy signals from the Politburo meeting, we believe that more policy measures in the future will help rebuild sentiment in the Chinese stock market and support an uptrend in valuations as risk premium gets discounted
- Undoubtedly, China faces significant economic challenges in pursuing "high-quality growth" and structural adjustment. As a result, policy considerations need to be more balanced and long-term, allowing for structural adjustment and risk mitigation, rather than pursuing excessive economic stimulus. We believe the likelihood of traditional debt-driven investments or oversized real estate stimulus is relatively low. Therefore, restoration of sentiment is likely to occur before a recovery of corporate fundamentals. In the short term, we make reference to the two sentiment-driven rallies last year as guidance for our initial goal posts for this rebound although the policy factors now look more certain. In the medium term, the market's focus will shift to policy implementation and improvements in corporate earnings expectations in the real economy. These factors are expected to drive the market's momentum going forward
- The Q2 earnings season for A-share market has kicked off. Compared with the same period last year, the proportion of companies with positive earnings alerts has increased only marginally, reflecting the reality of a weak economic recovery. Meanwhile as the market has lowered its expectations of macroeconomic growth throughout H1, the expected A-share earnings growth has been revised downwards. The market still expects that A-share earnings growth may reach over 20 per cent in 2023. Given the current reasonable expectations of economic growth, we believe that the likelihood of further downward adjustments to A-share earnings expectations is lower
- In the bond market, we believe that government bond yields are likely to range trade, following the release of positive policy signals in the Politburo meeting and the continued introduction of a basket of pro-growth policies. The lower-than-expected GDP growth in Q2 has put downward pressure on interest rates but this is partly offset by the expectation of fiscal stimulus. We maintain a neutral view on China's onshore bond market in H2 and uphold a high-quality credit strategy. However, we still believe that in the long run, the level of risk-free interest rate in China may experience a downward trend to accommodate the new normal growth rate and the need for structural adjustment
- With the rising expectation that Fed's rate hike peaked, the RMB exchange rate has stabilised amid a weakening US dollar index. We hold a neutral view on the RMB/USD exchange rate and believe that the RMB may slowly appreciate from its current level in the next few months, helped by a moderate economic recovery in China under comprehensive policy support
