Rough Economic Recovery and Upward Fluctuated Stock Market
Key Findings
The findings of Taihe Economic & Financial Outlook (July 2020) for the global financial and economic hotspots, global macroeconomic trends and financial market trends in June 2020 are as follows:
1. Aggregate financing data exceeded expectations but its sustainability remains doubtful. Aggregate financing data exceeded expectations again, and credit and government bonds constituted the main power for this increase in June. As for yuan loans, due to the improvement in consumption and margin of real estate on sales, loans to the residential sector have increased significantly. The growth of loans to the corporate sector should be viewed in terms of cause and effect. On the one hand, as a result of the recovery of production after the COVID-19 outbreak, the corporate financing demands have relatively revived; meanwhile, with the gradual implementation of infrastructure funds and projects of this year, the demands for the corresponding loan are also increasing. On the other hand, as the tone of the government’s monetary policy turned towards prudence, the possibility of continued growth on financing in corporate sector is low. Looking ahead, the monetary policy and the credit policy in the second half of the year are expected to return to normal, with the quite low possibility to be extreme easing. The financing for the corporate and the residential sectors will be driven primarily by their own needs. Considering the difficulties in boosting domestic and international demand during the pandemic, it is projected that the possibility of a short-term rebound in the growth of financing demand for the corporate and residential sectors is very low.
2. A difficult economic recovery. Although overall economic recovery of China is second to none in the world, the negative impact of the pandemic on economic recovery will not end in the short term. There is a clear imbalance between the recoveries of the supply side and the demand side in China and the huge gap in the domestic macro-economy shows that if the domestic demand remains slack, the products of the companies on the upper supply chain will be unsaleable, and therefore, the future development of the economy will be more difficult. At the same time, the external demand is doomed to remain weak. As the trade uncertainty increases, the domestic exporters, especially those in the private corporate sector, will be seriously affected. In the context of decreasing trade and uncertain investment, consumption in the second quarter of 2020 did not rebound as it did after SARS. The GDP growth in the second half of the year is expected to be mainly driven by the recovery of investment and real estate. However, if the problems caused by inherent weaknesses in the economic structure cannot be alleviated, the strength of economic growth will inevitably decline.
3. Review of China’s price trend: CPI and PPI both bottomed out and rebounded, which showed an upward trend in June 2020. The main reason why the CPI rose in June was the impact of weather and other short-term factors that led to an increase in food prices. The growth in the PPI was mainly caused by the rise in international oil prices and the recovery of the demand for bulk commodities. The CPI is expected to rise slightly in the short term, and the structural threat of moving from deflation to inflation still exists. The PPI is expected to rise steadily.
4. Review of the trends in China’s foreign trade: Judging from the trade data of June 2020, the growth rate of imports and exports during the month exceeded market expectations and turned positive for the first time of this year. The growth rate of exports slightly exceeded market expectations in June 2020, and exports have shown resilience over the past six months, mainly for the three reasons: first, benefit from the “time gap” dividend in fighting against the pandemic; second, benefit from the substantial exports of pandemic prevention equipment; third, benefit from the growth in exports of labor-intensive products. In addition, the growth of imports rebounded strongly in June 2020, exceeding market expectations and rising for the first time since the outbreak of the pandemic. It shows that the domestic demand is gradually improving, and the main reasons are as follows: first, the import volume of agricultural products, mainly grain and soybeans, has increased significantly; second, the volume of imports of bulk commodities, mainly iron ore, crude oil, refined oil and copper, has increased significantly; third, the number of imports of industrial products, mainly integrated circuits and semiconductor devices, has also increased significantly.
5. Review of China’s investment trends: In terms of the long-term trend, excluding the impact of the pandemic, the growth rate of investment in China has been gradually declining in recent years. 4-trillion-yuan stimulus in 2009 and 2012 each, resulted in overall overinvestment, rapid reduction in investment efficiency and diminishing marginal returns in traditional investments. However, the investment in China’s high-tech industries is still growing despite its recent adversity. Taihe Economic & Financial Outlook believes that if China can take this opportunity to find new engines of economic growth in addition to real estate and infrastructure investment, the investment in high-tech industries would be a healthier option and more likely to bring reasonable returns.
6. Review of the U.S. labor market: Since the beginning of 2020, the U.S. economy has been affected by the pandemic and the uncertainties at home and abroad. The simultaneous decline of domestic and external demand has largely dashed the hopes of recovery for the U.S. economy. Disruption in both domestic industrial chain and global trade chain has worsened the employment situation in the U.S. At the same time, unemployment figures released by the United States Department of Labor were too subtly selective to reflect reality. On the one hand, during the pandemic, consumption in the residential sector has declined, and a large amount of funds have been reabsorbed by the financial market. On the other hand, the contradiction between increased income and decreased consumption indicates that the relief policy of the U.S. government is proving ineffective in saving the economy, and the short-term rise of the U.S. stocks cannot compensate for the weak consumption.
7. Review of the domestic stock market: Stock markets have begun to cool down. After a fairly modest rally in June, the domestic stock market saw a strong upswing in early July 2020, due to a series of policies implemented by the central government at the beginning of July 2020. However, it is worth noting that the probability of an “explosive” bull market is relatively low, and it is most likely that funds will move between different sectors and the prices of stocks will fluctuate upwards as funds rotate between sectors. Therefore, there is a high risk in the short term. “Contrarian investment” in the stock market is a relatively safe strategy in the short term, but it would not be wise to pursue this blindly until the trends become clear.
8. Review of commodity markets: Affected by the pandemic, gold has attracted a large amount of investment due to its value as a safe haven which has been reinforced by increased uncertainties in international relations and resulted in exchange-rate turbulence, further strengthening the safe-haven value of gold. At the same time, in order to offset the impact of the pandemic on the economy, all countries in the world have implemented relatively loose monetary policies, especially the printing of large numbers of dollars by the Fed, which resulted in the dollar depreciation and a further rise in the gold price. Therefore, there is still an opportunity for gold prices to rise, and gold-related derivatives such as equities, funds, futures and options, all have value to allocate.
9. Review of bond market: Unlike the promising stock market at the beginning of July, the domestic bond market showed a bearish trend due to the rising interbank rate. As for the U.S., the 10-year U.S. treasury yield fell steadily from late June to the first half of July, indicating that the risk aversion during the pandemic has not subsided, and that U.S. Treasuries remain an important target of investment. Considering the risk-aversion tendency of the market, the 10-year treasury yield should peak at around 3% in the short term. Although its sustainability is limited and the adjustment has entered the final stage, the bond market is still promising.
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