Ray Dalio, the founder of prolific investment manager Bridgewater Associates, defended China investing today. He said that investors have a historic opportunity to capture value coming out of China as the country opens its markets to foreign investors. The famed investment manager also believes that there is little reason to suspect that China is any riskier than developed markets. He notes that Europe remains out of touch with technological innovations and that the US and Europe are both playing a dangerous game by continuing monetary easing.¹ His comparative statements also suggest that he views China as an asset class of its own, supporting our thesis.

FX and Bond Update

As we reported yesterday, China continues to be an outlier in terms of macroeconomic policy and debt markets. One could argue that China is the only country currently pursuing market-based interest rates, not bad for a "planned" economy.

While over one-third of global government bonds are delivering negative yields, China's CNY Sovereign 10 Year note is yielding over 3% (compared to the US 10-year yield at just over 1.5%).² Critics aside, the PBOC might be more data-driven than the Fed or the ECB, which many suspect are responding to mounting political pressures. As global FI investors scramble for yield, China is becoming ever more attractive.

CICC reports that China's FX reserves declined by $15.5 billion to $3.1 trillion in July, indicating that China is buying its currency. RMB breached the "7" level on Monday but remains within a percentage point of the 7 level, at 7.06 RMB/USD. As the world anticipates more monetary easing elsewhere, RMB depreciation might be limited in scope.

While we have likened the recent RMB depreciation to the depreciation that occurred in 2015, some differences are beginning to pop up. One is that, compared to 2015, there is a more visible selloff in US assets, as the decline in FX reserves suggests. The other is that the depreciation this year appears far more market-based.³ Thus, the repetition of manipulation fears that surfaced in 2015 might not be so apt this time around.

Trade War Muddles On

Markets declined on both sides of the Pacific following Trump's announcement of 10% tariffs on all Chinese goods not previously incurring levies. The Wall Street Journal reports that the US Treasury has received about $63 billion in tariffs over the past year. However, that is being offset by the authorization of farm rescue funds to the tune of $28 billion and counting.⁴ Meanwhile, prices on tariffed goods for US businesses and consumers continue to rise.

A-Share Earnings Eminent

CICC expects A-share earnings for the second half to be lower than those from the first quarter of 2019. The 5% of A-share names that have already reported earnings have demonstrated earnings growth of 19% on average, compared to a first-quarter overall rise of 24%. CICC analysts project that 53% of A-share names reporting later this month will post positive revenue growth.⁵

H-Shares Spotlight

Telecom powerhouse China Tower (788.HK) saw its stock price increase by 1.6% following its reporting of a 7.5% earnings growth rate in the first half.⁵

What we are watching

Of course, we will be watching developments in Sino-US trade relations closely. Volatility in the real estate sector is also expected and should be monitored carefully, especially since China's central bank is leaving the industry out of stimulus. Finally, the effects of deleveraging on small- and medium-sized banks should continue to be an interesting topic considering decreases in reserve requirements for larger banks.

Last Night’s Stats (Data: Bloomberg)

• Shanghai Composite: -0.32%
• Hang Seng: 0.08%
• Caixin PMI: 49.9 for July
• China Development Bank 10-Year Yield: 3.46% (all-time low)
• MSCI China All Shares: -0.56%
• MSCI China Financials: -1.19%
• MSCI China HealthCare: -0.60%
• RMB/USD Spot Rate: 7.06
• HKD/USD Spot Rate: 7.84

1. Smith, Eliot. “Bridgewater’s Ray Dalio backs China despite trade war escalation,” CNBC News. August 7, 2019.
2. Data from Bloomberg as of August 7, 2019.
3. Nguyen, Tom. “Good Morning CHINA from CICC,” CICC Sales & Trading. August 7, 2019.
4. Zumbrun, Josh. “US Collected $63 Billion in Tariffs Through June.,” The Wall Street Journal. August 7, 2019.
5. Nguyen, Tom. “Good Morning CHINA from CICC,” CICC Sales & Trading. August 7, 2019.