22 January 2024Thematics - Is bad news good news in a way? There hasn't been much to cheer for China at the start of 2024 - either on data front or in terms of market price action. Is bad news good news in a way though? Over the past few days, the government has been ramping up its announcement of measures both on the fiscal and property fronts to support growth. To be sure, we still need to see (a) speedier and more coordinated implementation; and (b) sizing up in the support measures (particularly in the property sector). But the willingness of the authorities to do more in stabilizing growth, versus the prevailing level of bearishness on the China narrative, makes the risk-reward relatively more attractive to go long Chinese assets.Economics - Waiting for policy tail wind. China's trend growth has shifted downward in recent years. We believe that potential growth is now in the 4.5-5% range. This means that the economy, growing by 4.1% on average in 2022-23, is operating below potential. However, the economy lacks the endogenous momentum to rebound. As such, only the government can jump-start the economy through forceful and coordinated policy responses. A 1.5% - 2% of GDP expansion in fiscal spending, combined with further PBoC rate cuts, should be sufficient to lift GDP growth to 4.7% and inflation to 0.9% in 2024. In addition, government-led urban redevelopment and social housing projects should finally see the property sector not being a drag on growth in 2024.Macro Strategy - A harder pivot to come? The markets have turned increasingly bearish on China assets, setting a relatively low hurdle for China growth to surprise to the upside. The key to the balance of risks on China growth, we believe, lies with whether the authorities there are willing to pivot harder on their policy choices. Indeed, that does seem to be the direction of travel. If so, the risk to USD/RMB is on the downside.Equity Strategy - Will HK equity market recover? After four down years in a row, the HK Indices sit in a very small pocket of market history. In the rare cases where we can find such ongoing drops, they have tended to follow major bull market - of a type HK hasn't seen in close to 20 years. Valuations are extremely low, and prospective catalysts include a plateauing in the bad- news cycle, liquidity shifts from bank accounts as rates ease (and even a potential skew from bonds to equities at HK's Exchange Fund) , rising earnings, and buybacks. While the CSI300 also appears oversold, it lacks the investor exhaustion and possible depth of value of HK.Perry KojodjojoStrategist+852-2203 6153Peter Milliken, CFAResearch Analyst+852-2203 6190Yi Xiong, Ph.D.Chief Economist+852-2203 6139Deyun OuResearch AssociateDeutsche Bank AG/Hong KongIMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. MCI (P) 041/10/2...
