David Fuller and Eoin Treacy's Comment of the Day
Category - China

    China Stocks Rally With Tech, Property in Lead Amid Easing Bets

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    The Hang Seng Tech Index jumped 4.5%, with Meituan and Tencent Holdings among those leading gains. The gauge has started 2022 with an advance after losing about a third of its value last year amid Beijing’s clampdown on tech companies. 

    The rally followed clarification from China’s internet regulator late Wednesday that it’s not asking to approve all investments or fundraising by big tech companies, denying an earlier media report.  

    A Bloomberg Intelligence gauge of Chinese real estate developers advanced 3.6%, following reports that the government may ease access to some funds. The sector’s gains came even as Thursday’s cut in the five-year loan prime rate left some market watchers disappointed.    

    Shares of Country Garden Services Holdings Co. and Sunac China Holdings Ltd. surged more than 10% each. The unwinding of some short positions also likely aided the rally in property stocks, traders said.  

    Agile Group, Shimao Group and Guangzhou R&F have about 20% of their free-float shares sold short, among the highest in the MSCI Asia Pacific Index, according to data from IHS Markit. 

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    China Cuts Interest Rate as Growth Risks Worsen With Omicron

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    “Consumption remains the weakest link in China’s growth story at the moment and that will by and large continue for much of this year,” said Louis Kuijs, head of Asia economics at Oxford Economics. “We think Beijing has a bottom line of around 5%. As is the case at the moment, if growth is weaker than that, they’d feel strongly motivated to pursue more policy easing.”

    Economists expect more policy action from the PBOC in coming months. Goldman Sachs Group Inc. said there’s a possibility the central bank will allow banks to lower the five-year loan prime rate, a reference for mortgages, on Thursday. The one-year rate was already cut in December. Economists at Australia & New Zealand Banking Group and BNP Paribas see the likelihood of further reductions in the reserve requirement ratio for banks.   

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    The China Upswing

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    U.S.-Listed Chinese Stocks Post Biggest One-Day Surge Since 2008

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    The Nasdaq Golden Dragon China Index rallied 9.4%, its largest climb since 2008. Electric-vehicle maker Nio Inc. and Tencent Music Entertainment Group were among some of the best performers Thursday, climbing 15% each. Alibaba Group Holding rose 9.7%, while Tal Education Group advanced 15%.

    “It’s finally time to buy Chinese equities,” Vital Knowledge analyst Adam Crisafulli wrote in a research note. The Nasdaq Golden Dragon China Index is back at levels that have acted as solid support going back over the last several years, he said.

    U.S.-listed Chinese stocks have experienced a brutal selloff in 2021 as regulators in Beijing mounted a sweeping crackdown on the nation’s companies. That rout erased more than $1 trillion in value since February as authorities in the U.S. and China continued to put pressure on the firms. Despite Thursday’s rally, the group is still down about 42% this year and about 57% lower from its February peak.

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    Our Market and Economic Observations Heading into 2022

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    Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

    Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

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    Three Sinovac Doses Fail to Protect Against Omicron in Study

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    While much is still unknown about how Sinovac’s shot holds up to omicron -- including how T cells, the immune system’s weapon against virus-infected cells, will respond -- the initial results are a blow to those who have received CoronaVac. There have been more than 2.3 billion doses of the shot produced and shipped out, mostly in China and the developing world. 

    With omicron seen to be about 70 times more transmissible than the delta variant, the prospect of having to roll out different boosters or even re-vaccinate with a more omicron-specific vaccine will set back the world’s efforts to exit the pandemic.

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    Chinese Developer Stocks Jump Most in a Month

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    Developers on mainland and Hong Kong bourses have diverged in recent weeks, with typically stronger firms listed in Shanghai and Shenzhen outperforming. A move by authorities encouraging lenders to fund acquisitions of projects held by distressed developers may benefit larger, often state-owned firms most. A Bloomberg Intelligence gauge of Chinese property companies mostly traded in Hong Kong closed on Monday near a five-year low before rising 3.4% on Tuesday.

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    China's Economic Slump Fuels Calls for More Stimulus

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    The weakening of retail sales surprised analysts who were expecting a boost from the annual online “Singles Day” shopping festival. Spending in the restaurant and catering sector fell year-on-year in November, while car sales dropped for a fifth straight month. 

    China has been facing persistent outbreaks of the delta-variant and recorded its first cases of the more-contagious omicron variant this week, adding to pressure on authorities to implement local lockdowns.

    What Bloomberg Economics Says...
    China’s November activity data suggest the economy is still under strain, though the production side appears to be stabilizing. The pressure on the demand side was clear, with growth in both fixed-asset investment and retail sales extending slowdowns. We expect fiscal and monetary policies to become more supportive in the months ahead.

    The central bank refrained from easing monetary policy on Wednesday. It kept the interest rate for one-year loans to banks unchanged and only rolled over about half of the maturing debts, withdrawing liquidity from the banking system. A recently announced cut to the reserve requirement ratio for banks takes effect from Wednesday, which should make it cheaper for them to extend new loans.

    There was limited reaction in financial markets to the data. The CSI 300 Index was down 0.6% as of 1:45 p.m. in Shanghai. The yield on 10-year government bonds was flat at 2.88% and the yuan strengthened less than 0.1% to 6.3644 per dollar.

    A weak labor market further worsened the outlook for consumer spending. The surveyed jobless rate inched up to 5% while the average number of hours worked per week fell slightly from the previous month.

    “Domestic consumption remains weak with retail sales disappointing,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “The incremental increase in the jobless rate is concerning. The authorities should pledge more support and offer a stronger signal to the market.”

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    Evergrande Declared in Default as Huge Restructuring Looms

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    While Evergrande bondholders face deep haircuts in a restructuring that could take months or even years to resolve, there were few signs of financial contagion on Thursday. That’s partly because investors had been anticipating a default for months, but also thanks to a flurry of activity by China’s government to cushion the blow.

    Policy makers have in recent weeks cut lenders’ reserve requirements, signaled an easing of real estate curbs and rolled out measures to ensure higher-rated developers retain access to funding. They’ve also taken a leading role in Evergrande’s restructuring, appointing officials from the developer’s home province to help oversee the process. 

    While that’s likely to help prevent nightmare scenarios of an uncontrolled Evergrande collapse, authorities have made it clear they have no intention of bailing out the property empire started by billionaire Hui Ka Yan 25 years ago. In a pre-recorded video message at a seminar in Hong Kong on Thursday, People’s Bank of China Governor Yi Gang described Evergrande’s situation as a market event that should be dealt with in a market-oriented way. 

    The Shenzhen-based developer, which disclosed more than $300 billion of total liabilities as of June, said in a brief exchange filing on Dec. 3 that it will “actively engage” with offshore creditors on a restructuring plan. But with Chinese authorities now calling the shots, the developer has stayed largely silent on details of what its restructuring might look like. 

    Even Fitch has struggled to get information from Evergrande, noting on Thursday that the developer didn’t respond to its request for confirmation on this week’s coupon payments. “We are therefore assuming they were not paid,” Fitch analysts wrote in a statement. Bloomberg reported earlier this week that bondholders hadn’t received the money.

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    Gundlach Sees 'Rough Waters' for Market as Fed Pursues Taper

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    Gundlach, 62, said the reason why Fed Chair Jerome Powell characterizes the economy as strong, but not strong enough to allow for a rate hike at this point, is that the underlying condition is in fact weak -- artificially propped up by an unprecedented degree of stimulus.

    Here are some other takeaways from Gundlach’s remarks:
    He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.

    Markets could face more volatility now that the Fed has said it might quicken its tapering program.

    Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.

    The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.

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