Could The Days Of China Exporting Deflation Be Numbered?
6 Min. Read Time
Key News
Asian equities posted strong gains overnight after President Trump’s trade negotiation deadline was extended to August 1st.
Investors interpreted this as a partial retreat, or what some dubbed a “mini-TACO” or perhaps an "empanada" instead of a full "TACO" (Trump Always Chickens Out). Hong Kong and South Korea led the advance higher, while Taiwan, Malaysia, and Thailand underperformed.
Some market participants cited comments from Treasury Secretary Bessent regarding a potential visit to China as a catalyst. Last Thursday, July 3rd, Bloomberg News reported that President Trump may visit China along with U.S. business executives, echoing his earlier trip to Saudi Arabia. According to Bloomberg, the Commerce Department is seeking to recruit CEOs to join the delegation, “according to people familiar with the matter.” There is also speculation about a possible US-China summit in September to mark the 80th anniversary of World War II.
Hong Kong-listed growth stocks outperformed, as the Hang Seng Tech Index rose +1.84%. Guotai Junan, the most heavily traded stock by value in Hong Kong, surged +28.54% after Financial Secretary Michael Hsu Zheng-Yu announced that stablecoin legislation would take effect on August 1st. Both Hong Kong and Mainland China markets saw strong trading volumes and breadth, as growth stocks outperformed value stocks.
Internet stocks had a robust session: Tencent gained +0.5%, Kuaishou gained +5.16%, Trip.com gained +0.59%, Bilibili gained +2.19%, and Baidu gained +3.55%. Despite rising competition among E-Commerce and food delivery companies, Alibaba gained +1.52%, Meituan rose +2.69% as short interest increased, and JD.com advanced +2.32%. The updated Anti-Unfair Competition Law will not take effect until October 15, 2025. It remains unclear whether food delivery and restaurant activities will fall under its scope, as the law primarily aims to protect consumers and merchants.
Mainland-listed solar stocks also performed well, following recent government recognition of the need to curb self-destructive internal competition. This was addressed in a recent Ministry of Industry and Information Technology (MIIT) meeting with solar company CEOs from Tongwei, which gained+10%, Sungrow, which gained +9.45%, and LONGi, which gained +6.46%.
Efforts to address overcapacity are not limited to the solar sector. Last Wednesday, the Central Committee for Financial and Economic Affairs, led by President Xi, announced plans to tackle “low-price and disorderly competition” and to “promote the orderly exit of backward production capacity.” Reuters reported that industries singled out include photovoltaics, lithium batteries, electric vehicles, and E-Commerce platforms. Additional industry associations have commented on the issue: the China Iron and Steel Association (steel and auto industries), China Cement Association (July 1), China Association of Automobile Manufacturers (May 31), and China Plastics and Processing Industry Association and China Battery Association (June).
Potentially big consequences to think about:
- Will addressing this competition improve the balance sheets, net income, and margins of Chinese companies, thus making them more attractive to domestic and foreign investors? A stronger Mainland equity market would help break Chinese citizens' real estate infatuation, as household participation in Chinese stocks is very low. Stronger capital markets would also help fund future companies, which is also a positive.
- Isn’t China’s “overcapacity” a major issue for President Trump? If dealt with effectively, wouldn’t this be a win-win concession in US-China trade talks?
- Are the days of China exporting deflation over? In addition to tariffs, if China produces fewer cheap goods, prices will rise. China’s economy could use some inflation, though global consumers have long benefited from China exporting deflation. I wouldn’t expect to see any changes in June's consumer price index (CPI) and producer price index (PPI), which are due to be released tonight, though we could see a steady increase in both measures farther down the road.
Mainland earnings season is underway, as several companies pre-announced strong results. Foxconn Industrial Internet rose +10.01% after announcing that, for the first half of 2025, net income is expected to rise by over +30% year-over-year (YoY). Huayou Cobalt’s net income is expected to increase between +55% and +67% year-over-year in the first half of 2025.
Australian Prime Minister Anthony Albanese is scheduled to visit China this Saturday.
As a parent, I can’t imagine the depth of the Texas flooding tragedy. Our hearts and prayers go out to our friends and all those affected in Texas!
Last Night's Performance
| Country / Index | Ticker | 1-Day Change |
|---|---|---|
| China (Hong Kong) | HSI Index | 1.1% |
| Hang Seng Tech | HSTECH Index | 1.8% |
| Hong Kong Turnover | HKTurn Index | 10.1% |
| Hong Kong Short Sale Turnover | HKSST Index | -11.4% |
| Short Turnover as a % of Hong Kong Turnover | N/A | 12.5% |
| Southbound Stock Connect Net Buy/Sell (US $ Millions) | N/A | 80 |
| China (Shanghai) | SHCOMP Index | 0.7% |
| China (Shenzhen) | SZCOMP Index | 1.3% |
| China (STAR Board) | Star50 Index | 1.4% |
| Mainland Turnover | .chturn Index | 20% |
| Nouthbound Stock Connect Net Buy/Sell (US $ Millions) | N/A | Not Available |
| Jing Daily China Global Luxury Index | CHINALUX Index | 0.3% |
| Japan | NKY Index | 0.3% |
| India | SENSEX Index | 0.3% |
| Indonesia | JCI Index | 0.1% |
| Malaysia | FBMKLCI Index | -0.5% |
| Pakistan | KSE100 Index | 0% |
| Philippines | PCOMP Index | 0.1% |
| South Korea | KOSPI Index | 1.8% |
| Taiwan | TWSE Index | -0.3% |
| Thailand | SET Index | -0.7% |
| Singapore | STI Index | 0.4% |
| Australia | AS51 Index | 0% |
| Vietnam | VNINDEX Index | 1% |
| Indicator | A | Mainland China |
|---|---|---|
| Today's Volume % of 1-Year Average | 107% | 110% |
| Advancing Stocks | 302 | 3851 |
| Declining Stocks | 166 | 1087 |
| Outperforming Factors | Liquidity, Growth, Buybacks | Liquidity, Growth, Buybacks |
| Underperforming Factors | Low Volatility, Dividend Yield, Value | Low Volatility, Value, Dividend Yield |
| Top Sectors | Tech, Discretionary, Materials | Tech, Industrials, Communication |
| Bottom Sectors | Utilities, Healthcare | Utilities |
| Top Subsectors | Consumer Durables/Apparel, Media/Entertainment, Semis | Communication Equipment, Diversified Financials, Electronic Components |
| Bottom Subsectors | Transportation, Healthcare Equipment, National Defense | Soft Drink, Power, Highway |
| Southbound Connect Buys | Alibaba, Meituan (Large), GCL Tech, Guotai Junan, SMIC (Small) | |
| Southbound Connect Sells | Tencent, Xiaomi (Moderate), Pop Mart (Smal) |
| MSCI China All Shares Index | # of Stocks | Average 1-Day Change (%) |
|---|---|---|
| Hong Kong Listed | 152 | 1.06 |
| Communication Services | 9 | 0.95 |
| Consumer Discretionary | 28 | 1.49 |
| Consumer Staples | 13 | 0.48 |
| Energy | 6 | 0.37 |
| Financials | 24 | 0.65 |
| Health Care | 12 | -0.17 |
| Industrials | 21 | 0.49 |
| Information Technology | 10 | 2.56 |
| Materials | 10 | 1.31 |
| Real Estate | 7 | 0.01 |
| Utilities | 12 | -0.49 |
| Mainland China Listed | 395 | 0.87 |
| Communication Services | 7 | 0.86 |
| Consumer Discretionary | 29 | 0.23 |
| Consumer Staples | 24 | 0.45 |
| Energy | 13 | 0.34 |
| Financials | 64 | 0.24 |
| Health Care | 32 | 0.29 |
| Industrials | 61 | 0.98 |
| Information Technology | 90 | 3.13 |
| Materials | 54 | 0.85 |
| Real Estate | 6 | 0.68 |
| Utilities | 15 | -0.78 |
| US & Hong Kong Dually Listed | Ticker | 1-Day Change (%) |
|---|---|---|
| Tencent HK | 700 HK Equity | 0.5 |
| Alibaba HK | 9988 HK Equity | 1.5 |
| JD.com HK | 9618 HK Equity | 2.3 |
| NetEase HK | 9999 HK Equity | 1.5 |
| Yum China HK | 9987 HK Equity | 1.6 |
| Baozun HK | 9991 HK Equity | -5.5 |
| Baidu HK | 9888 HK Equity | 3.6 |
| Autohome HK | 2518 HK Equity | 0 |
| Bilibili HK | 9626 HK Equity | 2.2 |
| Trip.com HK | 9961 HK Equity | 0.6 |
| EDU HK | 9901 HK Equity | 3 |
| Xpeng HK | 9868 HK Equity | 0.1 |
| Weibo HK | 9898 HK Equity | 2.8 |
| Li Auto HK | 2015 HK Equity | -0.1 |
| Nio Auto HK | 9866 HK Equity | 0 |
| Zhihu HK | 2390 HK Equity | 5.2 |
| KE HK | 2423 HK Equity | 0.6 |
| Tencent Music Entertainment HK | 1698 HK Equity | 1.5 |
| Meituan HK | 3690 HK Equity | 2.7 |
| Hong Kong's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| GUOTAI JUNAN INTERNATIONAL | 28.5 |
| ALIBABA GROUP HOLDING LTD | 1.5 |
| MEITUAN-CLASS B | 2.7 |
| TENCENT HOLDINGS LTD | 0.5 |
| XIAOMI CORP-CLASS B | 2.4 |
| KUAISHOU TECHNOLOGY | 5.2 |
| SEMICONDUCTOR MANUFACTURING | 3 |
| POP MART INTERNATIONAL GROUP | 4.1 |
| CHINA CONSTRUCTION BANK-H | 0.5 |
| GCL TECHNOLOGY HOLDINGS LTD | 10.8 |
| Shanghai and Shenzhen's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| EAST MONEY INFORMATION CO-A | 1.8 |
| ZHONGJI INNOLIGHT CO LTD-A | 7.2 |
| FOXCONN INDUSTRIAL INTERNE-A | 10 |
| SUNGROW POWER SUPPLY CO LT-A | 9.5 |
| VICTORY GIANT TECHNOLOGY -A | 9 |
| EOPTOLINK TECHNOLOGY INC L-A | 6.7 |
| TIANFENG SECURITIES CO LTD-A | 2.7 |
| SHENZHEN WOER HEAT-SHRINK -A | 8.1 |
| SUZHOU TFC OPTICAL COMMUNI-A | 12.7 |
| BEIJING COMPASS TECHNOLOGY-A | 3 |
Last Night’s Exchange Rates, Prices, & Yields
- CNY per USD 7.17 versus 7.17 yesterday
- CNY per EUR 8.42 versus 8.42 yesterday
- Yield on 10-Year Government Bond 1.64% versus 1.64% yesterday
- Yield on 10-Year China Development Bank Bond 1.70% versus 1.69% yesterday
- Copper Price -0.04%
- Steel Price -0.20%
