While inflows to China onshore bonds should become more diverse, Chinese equities should also continue to gain ground – although the ground could be bumpy given the variety of headwinds that remain.
The A-share market, as approximated by the CSI 300 index, has surged by more than 25% since January. It has rallied hard on improving trade-war risk but most recently on improving economic data. Notably, China’s manufacturing official and Caixin PMIs, released on 1 April (and it’s not a joke on April Fool’s day) rose to above 50 from below the boom-bust line, beating market expectations (although not mine). Free liquidity has also been recovering.
All this seems to vindicate my view that economic green shoots had emerged and the easing policy impact would be felt by Q2 2019. After pricing in a reduction in trade-war risk, the market is now starting to price in an economic recovery, in my view, as liquidity continues to rise. This should eventually lead to upward earnings revisions later, providing support for more stock market upside.
Bond inflows should be more diverse in 2019
Since policy easing is not quite over, there is still room for bond yields to fall in the near term. But as liquidity and economic activities continue to recover, the onshore bond bull market is probably near its end. Nevertheless, foreign interest in Chinese bonds, especially from official institutions, will likely remain keen. The market estimated that the Central Bank of Russia alone accounted for almost half of 2018’s USD 90 billion of inflows to China’s onshore bond market. The bond inflows should be more diverse in 2019, with more from the private sector, as Chinese bonds are added to the international benchmarks.
We should not expect the continuation of the stock market recovery to be smooth, as headwinds remain. They include weak profit growth in the near term, as the decline in the Producer Price Index will continue to crimp industrial (large cap stock) profits; the tail-risk of Sino-US trade negotiations going bad; and the risk of regulatory tightening to reduce stock punting, which has been on the rise – as indicated by the rise in margin trading.
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