Review and Outlook (May 16, 2022)

Fortnight in Review

On May 4, The Fed raised fund rate by 50 bp to 75-100 bp. However, the comments of Fed Chairman Powell was interpreted dovish and the S&P 500 Index rebounded by 3% on that day. The market then continued to go down and registered a 2.6% loss in the past two weeks.

RMB kept depreciation rapidly and was down 2.5% against USD, to 6.81 RMB/USD, in the past two weeks. This round of RMB depreciation lasts only 20 trading days but has been down 6.7%, from 6.38 to 6.81 RMB/USD.

Hang Seng Index was down 5.6% in the past two weeks, reaching a 15% loss year-to-day, compared to a 15.6% loss of S&P 500 Index.

Outlook

China Economic Data: Recent data such as social financing, consumption, industrial value-added, job market were all disappointing. We believe this is the unsurprising result of the regulations in the past years and COVID-zero polies of this year. However, we observe the policy fine-tuning recently, yet without big moves. The decision-makers might still be opportunistic in future policies or wait for key dates to announce further stimulations, such as the 25 year anniversary of Handover of Hong Kong to China (July 1) or the 20th National Congress of CCP (likely October).

COVID Update: The central government reiterated the Covid-zero policy. Yet there is no sign of lockdown in Beijing as happened in Shanghai. And Shanghai plans to come back to normal life gradually from May 16. We think Shanghai’s lockdown is an unexpected and one-off event, and would not be duplicated in any major cities in China. According to economist consensus, Shanghai’s lockdown impacted 1 ppt of China’s GDP of 2022, thus the damage would be more psychologically than economically.

Property Market: The mortgage rate is cut today, showing clearly the easing of property market regulation. We believe this move benefits the higher-quality stocks and bonds of China property firms. Note that for the debt-laden property companies, the death spiral has already begun and could not stop unless sufficient fund were to be injected (unlikely). Financially stable property firms, especially SOEs, might take this opportunity to expand.

Hong Kong Stocks: We believe the valuation of Hong Kong stocks is historically low, and the downside is limited even with further bad news. Expecting further easing policies, we recommend to accumulate positions in advance.