FX and Bond Update

The RMB is showing stability and resilience following Monday's depreciation, supporting our view that China is not actively pursuing a policy of devaluation. China's RMB currently stands at 7.0583 RMB/USD. This rate is an improvement from yesterday's low, but still below the PBOC's reference rate of 7.003 RMB/USD.¹ Beijing's interest in having the currency enter the ranks of the world's go-to reserve currencies means stability will be paramount. Additionally, China has an incentive to maintain a healthy trade relationship with Europe and Japan. China's exports to Europe have risen during tensions with the United States.² Further RMB depreciation might cause China's comparative advantage in exports to rival Europe. RMB depreciation would also make it even more difficult for the BOJ to stem Yen appreciation. We believe that while China and the United States are working towards a trade agreement, Beijing will be particularly cautious not to rattle their other important trading partners.

China's interest rate environment continues to buck global trends. Yields on Chinese sovereign 10-year bonds stand at 3.025% compared to the US 10-year yield, which stands at 1.7115%. In Europe, yields remain mostly in negative territory.¹

Inflation Rate is Healthy

China presents itself as a macro outlier in yet another respect, inflation. While the rest of the world struggles to trigger even minor increases in inflation, China's Consumer Price Index (CPI), a key measure of inflation, continues to rise at a steady rate. China's CPI rose by 2.8% Year-over-Year in July, a minor increase from June's 2.7% rate. Core CPI rose by 1.6% in July. However, this core CPI excludes volatile food and energy prices. The food CPI rose 9.1% in July, most likely due to the effect of trade tensions on agricultural imports from the United States. However, CICC predicts that the upside risks in core and overall CPI should fall in the third quarter.³

Developers Shielded From RMB Risk

Developers in China are shielded from RMB depreciation risk to a greater degree than other core industries due to their foreign-currency debt issuance. Developers are mostly net recipients of USD, EUR, and JPY at present. CICC projects Vanke's 2019 earnings to decrease by no more than 0.5% due to a 1% depreciation in RMB.² While a lack of support from the PBOC might negatively impact the sector compared to those benefitting from stimulus, the industry has the advantage of foreign currency-denominated inflow.

H-Share Update

Hong Kong stocks opened higher coming off yesterday's Wall Street highs. But, gains were reversed due to contractions in 5G names and telecom generally as the US introduced new restrictions on Huawei. However, Southbound Connect investors bought approximately HKD1.4 billion in HK equities last night.³

A-Share Update

A-shares showed some weakness last night as telecoms disappointed, with ZTE leading declines. However, the attractiveness of medium- to long-term valuations has risen, with P/E ratios continuing to decline compared to major stock indexes elsewhere. Furthermore, as plenty of A-share names have yet to report earnings, these declines are not based on changes in fundamentals. Most earnings reports are due by the end of the month.

Having released a solid earnings report, Netease was a bright spot for A-share investors. The company reported a net profit increase of 33.8% year-over-year and a revenue increase of 15.3%.³

What we are watching

We will be closely following the next meeting between US and Chinese trade representatives, which for the time being, remain scheduled for next month in Washington. Also, global macro policies will continue to highlight China's outlier position. We will be keeping an eye on the effects of sudden interest rate cuts in Thailand, New Zealand, and the Philippines on their relative trade advantages over China. And, of course, A-share earnings.

• Shanghai Composite:  -0.71%
• Shanghai Composite P/E:13.47
• S&P 500 P/E:19.05
• Hang Seng: -0.69
• Caixin PMI: 49.9 for July
• China Development Bank 10-Year Yield: 3.45%
• MSCI China All Shares: +1.25
• MSCI China Financials: +0.46%
• MSCI China HealthCare: +1.25
• RMB/USD Spot Rate: 7.0538 RMB/USD
• HKD/USD Spot Rate: 7.8415 HKD/USD
  (Data from Bloomberg as of August 9, 2019)

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Citations:

1. Data from Bloomberg as of August 9, 2019
2. World News Desk. “China Exports Stage Surprising Recovery,” The Wall Street Journal. August 9, 2019.
3. Nguyen, Tom. “Good Morning CHINA from CICC,” CICC Sales & Trading. August 9, 2019.