It is easy to be positive on China’s economy, its policies, and the near-term outlook of its equities. I think China has been impressive in its control of the Virus and in formulating its economic policies.
- Chinese macro data continue to improve: Manufacturing PMI was 50.9, though this came mainly from the large enterprises, Caixin services PMI was strong at 58.4, industrial profits rebounded by 6% (yoy) in June. There could also be a ‘square-root’ trajectory in China with the pace of recovery flattening out a bit in the next quarters. But so far so good.
- China has consciously refrained from adopting ZIRP or QE. Mr Guo Shuqing – one of the reform czars – has criticised the West for not leaving enough room for further easing in the future, describing liquidity binges as a ‘last supper.’ His comments reflect Beijing’s aversion to ‘flood like’ stimulus. Keeping interest rate high is a way for China to ‘re-load’ in case they need the firepower later.
- Very encouragingly, China has not abandoned its financial reforms. The capital markets continue to be liberalised and I find the political commitment to reforms quite impressive, given the trying circumstances. The PBOC has been developing a digital RMB currency and the government continues to support the development of its tech sector. China is like the student who keeps working hard through the summer vacation, while other kids are having fun playing. Chinese equities have exhibited several mini-boom-bust cycles, and it seems that we will see Chinese equities continue to trade higher in the coming months.
The above article is an extract from our research paper “My Thoughts on Currencies” published on July 13, 2020. Source: Eurizon SLJ Capital Ltd. & Refinitiv Datastream.
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