China’s property market finally showed signs of recovery in February, with the top 100 national developers recording the first year-on-year sales growth since June 2021 and growth of construction activity also accelerated. Excluding the seasonal factor caused by the Lunar New Year, the total new home sales in the first two months of this year reached RMB 816 billion, down by 12% as compared with a decline of 30.8% seen in December last year. The pace of recovery is meaningfully stronger than market expectation and should drive positive reaction to the capital market. Analysts would monitor closely whether the strong data signals the start of a full-blown recovery or merely a temporary release of pent-up demand. With the ongoing supportive measures introduced by both central and local govenrments, it is highly probable that the strong sales data may continue and help investors look beyond developers’ dismal FY22 earnings season.

China’s CPI edged up to 2.1% YoY in January from 1.8% in the prior month, indicating a consumption recovery led by the reopening. Some investors wonder if increasing economic activities will eventually jack up the pricing pressure in China, similar to what we have seen in most economies in the past twelve months. We do not think so. First, the current inflation is still very mild with the core CPI reaching a six-month high at 1% YoY only, while PPI is even dipping into a negative territory at -0.8% YoY. Food price seems to pick up, rising 6.2% YoY last month, but pork price expansion has decelerated from the level of over 20%-30% to the latest 11.8%. Second, global commodity price has seen softening in recent months, falling close to 20% from the peak last year. With less logistics/production disruption from COVID measures and potential recession threats in the developed economies, the global demand and supply balance should be improved substantially for the rest of this year. Third, China does not face the structural inflationary pressure coming from wages as the domestic labour market is not as tight as its peers. In short, China’s CPI may step up a bit in 2023, but it is far away for the authority to make any detours in the loosening monetary policies.

Foreign investors increased their holdings of onshore yuan-denominated bonds in December, ending a ten-month losing streak and posting a net inflow of RMB 60 billion before entering 2023. Analysts explain the change is a result of the relaxation of Covid measures in the mainland, the announcement of border reopening, coupled with the narrowing of yield differentials between China and the US treasuries. The strengthening of Chinese yuan is another catalyst driving the return of international funds. The currency has appreciated against the dollar by 8% since the trough at the end of October, and the upward momentum may continue in medium-term given dollar weakening is almost inevitable. According to SAFE, foreign participation in the domestic capital market has remained active, with net purchases of onshore A-share and Chinese bonds totaling about USD 12.6 billion in the first half of January this year. Premia China Treasury and Policy Bank Bond Long Duration ETF (2817.HK) has posted a positive return of 3% year-to-date.

China is set to reopen its borders on January 8th, while the State Council has reiterated the government’s priority in promoting economic growth for 2023. Given the rising external uncertainty will pose a threat to China’s recovery, it is crucial for a timely implementation of the recently launched stimulus measures, including accelerating the construction of infrastructure projects and equipment upgrading. The officials also voiced out the importance in ensuring stable supply and stabilizing prices of daily necessities, solving the problem of the last-mile logistics during the holiday seasons, and providing the medical services and essential drugs for the needed. Investors may feel overwhelmed by the surging COVID cases in China and the corresponding disruptions in economic activities. We should understand the situation usually gets worse before it gets better, but the chaos is temporary in nature. The current deep discount of China stocks is simply not justified for the improving fundamentals in medium-term.

Chinese yuan jumped past the closely watch 7-per-dollar level for the first time since September, as China’s reopening is gaining momentum. The country moved definitively away from its long-held COVID Zero approach as the National Health Commission set out 10 new measures last week, less than a month after it relaxed the strict pandemic control with 20 guidelines for officials to minimize disruption. The latest changes include allowing home isolation and scrapping negative nucleic acid result for entering public venues. With the weakness of the greenback, improving domestic economic expectations, as well as the accumulated demand for FX settlement at the end of the year, analysts believe that the Chinese yuan would remain strong in near term. The renewed interests on China assets will also help support the currency appreciation. 

Investors are more optimistic about China’s economy as more policies have been rolled out after the 20^th National Congress, such as some supportive measures to the property sector and some relaxations on the COVID restrictions to reopen the economy. More recently, NDRC director He Lifeng, a potential candidate for succeeding Liu He, commented that the next stage of development will be centred around core technology and the digital economy and that China should lay out the infrastructure in advance to promote innovation and autonomy in those areas. Some onshore brokers think that may be a signal to ease the regulator crackdown on the internet and software industries. The gaining of investors’ interests in China’s stock market could be observed in the outstanding amount of call options in one of the largest A-shares ETFs listed in the US, FXI, which has shot up to an unprecedented level in 5 years. Premia Partners offers ETFs which have more precise exposure. Investors who would like to get exposure to the traditional sectors, such as Financials and Real Estate, may have a look at our Premia CSI Caixin China Bedrock Economy ETF. Those who would like to get exposure to the new economy sectors, such as Information Technology and Healthcare, may have a look at our Premia CSI Caixin China New Economy ETF.

Increasing geopolitical risks, soaring inflation, interest rate hikes and recession threats have hurt investors’ confidence, resulting in the year-on-year drop of 57% and 22% in global and Asian IPOs in the first three quarters this year. On the contrary, China’s A-share IPO market activities bucked the trend, with 267 newly listed companies gathered a total of USD 74 billion that increased 24% year-on-year. More than two-third of the IPO fundings came from the STAR market and ChiNext board. The IPO proceeds raised in both Shanghai and Shenzhen accounted for over 50% of the global IPO market during the same period, highlighting the strong fund-raising capability of the A-share market. The dispute between the US and Chinese regulators over the accounting disclosure helped act as a catalyst. 

The National Development and Reform Commission reiterated that it is studying various policy measures to promote consumption to help support the economy. It pinpointed the new energy vehicles (NEVs) as one of the major focuses. The sales volume of NEVs were up 1.1 times YoY to 3.86 million units in the first eight months, accounting for 22.9% of all vehicle sales. In August, sales of battery EVs were 522,000, a 92% YoY increase, and plug-in hybrid sales grew by 160% to 144,000 YoY, while fuel cell vehicles reached 255,000 units, a 5.7 times YoY increase. Public charging stations increased 65% YoY to 1.6 million, of which 70% are located in the top 10 regions including Guangdong, Shanghai, Jiangsu, Beijing and Zhejiang, showing the current infrastructure is fairly concentrated. In August, the total charging consumption was 2.3 billion kwh, up 136% YoY. Analysts believe an expanding public charging outlets set the foundation for wider EV adoption. 

President Xi emphasized the country should strengthen its scientific and technological innovation during the latest meeting of the Central Comprehensively Deepening Reforms Commission. Analysts suggest that the state will play a more active role in driving the advancement in various aspects, such as semiconductor, artificial intelligence, biotech, renewables, and aerospace, etc. The key message is no different from what we have observed in the past few years that China is eager to fast-track the development in hardcore technologies. On a positive note, national champions are reporting a satisfactory progress. Baidu has revealed the achievement of its 2nd generation Kunlun chip, that runs 3 times faster than its predecessor and has a cost advantage over its peers aboard. Huawei has also launched the newest Mate 50 series mobile phone, equipped with a domestic operating system Harmony OS 3.0 and a satellite communication function leverage on BeiDou navigation system, an alternative to the GPS. 

Bank Indonesia has been pushing its own version of Operation Twist via selling short-term notes and buying longer ones, expecting to help shore up the rupiah by bringing in foreign inflows. The yield spread between 5-year and 10-year government bonds has narrowed from 110 basis points at the end of June to the latest 46 basis points. The local currency shows initial success by strengthening 1.1% against the US dollar versus the bottom seen in late July. The central bank said the operation seems to be effective as an inflow of USD 1.4 billion poured into government bonds so far this month. Indonesia stock market is one of the best performers globally with a year-to-date return of 11.8% in rupiah, or 7.5% in dollar. Investors believe the rally may carry on due to the market’s cyclical nature and the country’s economic recovery. A stronger rupiah would be another catalyst for the foreigners investing in the Indonesian stocks.