While While While

While mainland China heading for monetary easing, Hong Kong follows the Fed to raise rate

Macro
Redmond Wong

Market Strategist, Greater China

Summary:  China’s 5.5% growth target for 2022 is a challenge. With a struggling property sector, rising energy and material costs and resurgence of COVID cases, China’s central bank needs to move fast to ease monetary policies and the Government shall roll out more infrastructure projects in the first half of the year. On the other hand, under the Linked-exchange-rate regime, Hong Kong followed the Fed to raise rate and has been mopping up liquidity in the banking system. President Xi’s call to minimize the socioeconomic costs of the Dynamic Zero-COVID policy is a positive development.


Vice Premier Liu’s remarks turned the tide of selling. On Wednesday, Hang Seng Index and Hang Seng TECH Index surged by jaw-dropping 9% and 22% respectively following China’s Vice Premier Liu He’s remarks pledging support for market stability, accommodative policies, overseas listing, potential resolution of the disagreement with the U.S. over Chinese ADRs as well as hints of scaling down of the regulatory pressures against ecommerce platforms and a more supportive tone towards the property sector.  It is important to note that approaching the 20th Party Congress of the Chinese Communist Party this fall, Chinese authorities will have social, economic and financial stability at the top of their priorities.   

COVID related lockdowns and Fed’s rate hike taking the backseat. The comments triggered massive unwinding of shorts and market sentiments have significantly improved in the Hong Kong and mainland Chinese stock markets.  COVID related lockdowns in mainland China and the Fed’s beginning of monetary normalization are taking a backseat for the time being.  The U.S. Fed’s move to raise interest rate by 25bps overnight was as expected but the dot plot and the press conference were on balance hawkish.  The Fed indicates in its dot plot 7 times of 25bp rate hikes in 2022 and 3.5 hikes in 2023, leading to a terminal Fed Fund rate of 2.75% in 2023 and 2024, above its long-run central tendency neutral rate of 2.3 to 2.5%.  Fed Chair Powell played down the risk of recession. He remarked that labor markets were “tight to an unhealthy level” and pledged to adhere to the Fed’s price stability mandate.  It is widely expected that the Fed will start quantitative tightening in the May FOMC. 

Meeting the 5.5% growth target in 2022 is a challenge.  During the China’s National People's Congress (NPC) which convened on March 5, 2022,  Premier Li Keqiang delivered his Government Work Report. The around 5.5% GDP growth target was at the high end of economist expectations. CPI target is set at around 3%.  M2 money supply growth and aggregate financing growth is targeted to be in line with nominal GDP growth. On the subject of the property sector, Li reiterated that “housing is for living in, not for speculation”.  No property tax was mentioned so it should have been shelved.  He remarked that the Government would satisfy reasonable housing demand and implement city-specific policies.  

The budget deficit target is higher than the official target pf 2.8% of GDP once we include the RMB2.3 trillion transfers from SOE profits and the fiscal stabilization (which will bring the number to 4.6%). Tax cuts and rebates of RMB2.5 trillion in total are targeted (vs. RMB1.1 trillion in 2021). The tone of Li’s Report is in line with the Chinese Communist Party’s (CCP) Central Economic Work Conference last December: stabilizing the economy and engineering a sustainable recovery in growth on the basis of stability but no massive stimulus mentioned.    

Meeting the GDP target seems challenging.  The property sector, which accounts for 30% of the economy and a major drag to the growth last year, remains weak despite the fact that the Chinese Government has shifted from crackdown to a risk management modus operandi.  Credit growth has been weak.  In February, mortgage loan growth was negative.  Land sales have come down a long way and will continue to be a constraint on local governments to roll out infrastructure projects given their reliance on the proceeds from land sales for revenues in their budgets.   

Rising energy, industrial metals and grain prices in the global markets have worsened China’s terms of trade significantly.   China is importing 70% of its crude oil, 40% of its natural gas, 90% of its soybeans and a high percentage of other materials, such as iron ores and so on.  The sharp rises in the price of energy and materials are going to drag on China’s economic activities, corporate profitability and the Government’s budget.  Under the current mechanism, when crude oil goes above US$130 a barrel, the Chinese Government will need to start subsidizing refineries to keep producing refined products.

While investors have temporarily thrown the fear about more lockdowns and supply chain disruption under China’s “Dynamic Zero-COVID” policy to the backseat,  the fear may reemerge and  linger for the months to come.  The Chinese authorities have prided themselves for the Chinese economy’s impressive rebound from the pandemic before everyone else in 2021.   The “Dynamic Zero-COVID” policy has been advocated to the country’s population as well as the rest of the world as demonstration of President’s Xi’s socialism with Chinese characteristics for a new era.    It is politically difficult for the Chinese authorities to change course completely with the 20th Party Congress approaching.   

Xi Jinping hosted a meeting of the Central Committee of the Chinese Communist Party’s Politburo on containment of the spread of COVID-19 yesterday.  While he reiterated the rhetoric of stringent implementation of the policy of early detection, reporting, quarantine and treatment, the key takeaway from the press release was Xi’s remarks that “more effective measures should be taken to achieve maximum effect in prevention and control with minimum cost, and to reduce the impact on socioeconomic development as much as possible”.   Immediately last night, Shenzhen announced that economic activities and public transportation will resume in 5 out of 10 regions of the city from today Friday March 18.  Another manufacturing hub, Dongguan, also announced last night that the city will resume all public transportation starting today.  This is a positive development but further spread of COVID cases remains a significant potential drag to the Chinese economy in 2022.  

All eyes are on more infrastructure spending and monetary easing.  With major economies in the worlds are facing high inflation, rising energy and commodity prices, monetary tightening and early signs of slowdown in economic activities, exports, China’s key growth driver last year, is having difficulty to do the heavy lifting this year on its own. To preempt much of the economic headwinds and risks, the Chinese authorities may accelerate the front-loading of infrastructure spendings in the first half of 2022.  The People’s Bank of China (PBOC) is also likely to go into high gear to conduct a series of rate cuts and reduction in reserve requirement ratios when the window is still open.  If the Fed’s monetary tightening and capital outflows from China starts putting depreciation pressures on renminbi in the coming months, it will become more difficult for the PBOC to ease.  Apart from outflows from the Chinese equity markets, foreign investors sold US$35 billion worth of Chinese Government Bonds in February, the first time they turning net sellers in recent years.  

Hong Kong follows the Fed to raise rates.  While the PBOC is expected to accelerate its widely communicated tendency to ease monetary policies in mainland China, the Hong Kong Monetary Authority (HKMA) will follow the Fed to raise interest rates.  Under the Linked-Exchange-Rate regime, Hong Kong adopts a currency board system for its currency and must keep the Hong Kong dollar’s interest rates close to those of the U.S.  After the overnight move from the Fed to raise rate by 25 basis points, the HKMA followed suit this morning by raising the base rate 25 basis points higher to 0.75%.  It is worth to note that the balances that banks have at the HKMA have been declining since September last year. In other words, the HKMA has already let the interbank liquidity to drain for quite some time.   Despite the turmoil in the Hong Kong equity markets over the recent weeks and the embarrassing surge of COVID cases and mortality rate, the USDHKD 12-month forward point remains at a discount of 250 to 300 bps, showing no stress on Hong Kong’s Linked Exchange Rate regime so far.  
 
Source: Saxo, Bloomberg
Source: Saxo, Bloomberg
Source: Saxo, Bloomberg
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.