China – Macro headwinds subside offering opportunities in the H-share market in 2020

The long-awaited Sino-US “phase one” trade deal was achieved in December 2019, with the US agreeing to roll back tariffs that were introduced on 15th December 2019 and reduced tariffs on USD 120bn worth of Chinese goods to 7.5% from 15% which came into effect last September.

Fund Commentary
4 Feb 2020

The long-awaited Sino-US “phase one” trade deal was achieved in December 2019, with the US agreeing to roll back tariffs that were introduced on 15th December 2019 and reduced tariffs on USD 120bn worth of Chinese goods to 7.5% from 15% which came into effect last September.

In return China committed to importing US$200bn worth of American agricultural, energy and manufactured products in the next two years. This initial deal helped to partially remove the market anxiety caused by the trade war.

Encouraging and stabilising economic signals have been evident since November 2019. The Chinese government turned more dovish in terms of its property policy with the aim of supporting sales. The PMI rose to 50.2 in November 2019, from 49.3 in October 2019. Retail sales, industrial production and fixed-asset investment growth also recorded improvements.

On the other hand, the CPI reached 4.5%, above the 3% official target, driven by rising pork prices. It is expected that the CPI will be kept at a high level. November macro data generally showed China’s economy was stabilising.

China’s GDP growth in the fourth quarter of 2019 stood at 6%, hammered by the trade tariffs but in line with market expectations. Overall GDP growth for 2019 came in at 6.1%, consistent with official targets of between 6% and 6.5% for the year.

Although 2019 GDP growth was the lowest for 29 years, the Investment Adviser believes that it was satisfactory given that China is the world’s second-largest economy and its growth rate remained above those of developed countries.

The Investment Adviser believes that the worst of the macro slowdown should now be behind us. A partial trade deal between the US and China has been reached, which has been a major overhang that has hampered the Chinese market for the last 18 months. The portfolio management team’s expectation is that China is likely to play catch up with global markets in terms of valuations. The MSCI China is trading at 12.6x 2020 P/E compared to the S&P 500’s 18.6x.

The CSI 300 outperformed the MSCI China last year; however the Investment Adviser expects a reversal in this trend in 2020 due to the following two factors; the weighting of A shares in the MSCI indices was increased in 2019 and social unrest in Hong Kong, that drove fund outflow from Hong Kong to A shares last year has subsided. The Investment Adviser is therefore constructive regarding the Chinese market.

With a stabilizing economy after a year of policy easing, the Investment Adviser is of the view that the Chinese government will shift focus from stimulus to structural reform once again.  The Chinese government is unlikely to implement further stimulus measures unless the macro environment turns sour. The official GDP growth target for 2020 has been set at “around 6%”, against 6.1% in 2019. This suggests to the portfolio management team that the government is happy with a steadily deflating growth rate to address structural issues within the economy. With a stable macro trend, the Renminbi is likely to strengthen in 2020 in the Investment Adviser’s opinion, although the increase should be contained given the invisible hands of the government.

The trade war risk has subsided but is not over. China has made concessions on non-core issues as part of the phase one trade pact, but the Investment Adviser expects China to be resistant in terms of core issues such as intellectual property and technology transfer. Phase 2 trade talks between China and the US are likely to be rough.

In addition the portfolio management team sees the potential for higher market volatility during the second half of the year as the US presidential elections draw closer.


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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Strategic China Panda Fund as of 21/01/2020 and are based on internal research and modelling. This does not constitute independent research and under no circumstances should the information contained therein be used as a recommendation to buy or sell any security or financial instrument or service or to pursue any investment product or strategy or otherwise engage in any investment activity or as an expression of an opinion as to the present or future value of any security or financial instrument. Nothing contained in the views and statements by LBN Advisers Limited is intended to constitute legal, tax, securities or investment advice. The views and statements contain “forward-looking statements”.  All projections, forecasts or related statements or expressions of opinion are forward-looking statements. Although LBN Advises Limited believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct, and such forward-looking statements should not be regarded as a guarantee, prediction or definitive statement of fact or probability.

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