The cyclical changes between China and the United States have already given birth to an asset 'crossing point'. The more certain intersection points brought about by the cyclical changes between China and the United States are the short-term debt in the United States, the real estate chain, and the Chinese export chain, with Hong Kong stocks (especially growth stocks) outperforming A-shares.
According to the Securities Times app, China International Capital Corporation has released a research report stating that the cyclical changes between China and the United States have already given birth to an asset 'crossing point'. The more certain intersection points brought about by the cyclical changes between China and the United States are the short-term debt in the United States, the real estate chain, and the Chinese export chain, with Hong Kong stocks (especially growth stocks) outperforming A-shares. From overseas: From the economic data perspective, the expected full inclusion and the early decline in long-term interest rates increase the possibility which means the Fed may not need to cut rates as much. The United States may be approaching an economic cycle turning point. It is more certain to benefit directly from the Fed rate cut with short-term debt (short-term debt offers better value than long-term debt, suggesting a steeper curve), gradually recovering real estate chains (even driving related export chains in China). Domestically, the short-term market sentiment in Hong Kong may have been exhausted, and trading may return to core assets. It is recommended to focus on interest-rate sensitive growth stocks (internet, technology growth, biotechnology, etc.) and export chains benefiting from US real estate demand.But after the bursting of the internet bubble and the Fed's rate cut in 2001, the ROI dropped by more than 10%.Since mid-September, there have been significant changes and reversals in global assets. On one hand, Chinese assets have rebounded rapidly under policy catalysts, with the Hang Seng Index accumulating more than 30% increase since mid-September; on the other hand, after the unconventional 50bp rate cut by the Fed, US bond rates have risen above 4% from 3.6%. The seemingly distinct performances of Chinese and American assets are intricately interconnected, reflecting the intertwined 'interaction' of the macro cycle: the unconventional Fed easing has provided a lenient space for Chinese policies, promoting a rapid market sentiment recovery; however, the substantial rate cut also benefits US economic repair. Together with the expectation of full inclusion, this has led to the bottoming out and rise in US bond rates, which may in turn constrain future easing space. The recent trends in US bond rates, the USD, and the RMB all demonstrate this point.
In this sense, the maximum external leniency space may gradually pass after all. Although the export chain will directly benefit from the US easing-induced real estate repair, the upcoming election is a variable (the probability of Trump winning has recently surpassed again). This further highlights the significant importance of fiscal policy for the future trends of the Chinese market.
From this perspective, the largest period of leniency provided by external factors may gradually fade, although the export chain will directly benefit from the real estate repair under US leniency. However, the impending election is a variable (the probability of Trump's reelection has once again increased recently), further emphasizing the critical significance of fiscal policy for the future trend of the Chinese market.
Chart: Performance of global major asset classes during the National Day holiday, with commodities> stocks> bonds, Chinese equity assets and crude oil leading, while the Japanese and Korean stock markets lag behind.
Data source: Bloomberg, FactSet, China International Capital Corporation Research Division.
At present, there is a gradual recovery in private credit in the US, while the realization of Chinese policy expectations is more crucial than ever. Therefore, the current crossroads of the Chinese and American cycles show a higher level of certainty at the intersection points of US short-term debt, US real estate chains, Chinese export chains, as well as the Hong Kong growth sectors, all directly benefiting from monetary easing and industry trends. The overall market's broader upward trend requires greater policy support for industrial metals like copper, US manufacturing, and China's pro-cyclical sectors.
Chart: The most clear 'crossing point' is the synergy between short-term debt, real estate, China's export chain, and Hong Kong stocks growth.
Source: China International Capital Corporation Research Department
China: Under policy catalysts, assets rebound significantly, emotions are relatively full, waiting for subsequent fiscal policy implementation.
In the last week of September, the policies of the three financial departments and the Central Political Bureau meeting exceeded expectations, igniting market sentiment, and causing Chinese assets to rebound significantly. Since mid-September, the Hang Seng Index has surged more than 30%, the Hang Seng Tech Index has risen by over 50%, A-shares have not opened during the holiday, but the previous Shanghai and Shenzhen 300 Index has also risen by 27.2%. This kind of rapid rebound is very remarkable compared to any historical stage. Especially during the National Day holiday when A-shares were closed, and the Hong Kong stock connect was suspended, the Hong Kong stock market maintained a strong momentum. From October 2nd to October 4th, the Hang Seng Index rose by 8%, the Hang Seng Tech Index rose by 10%, leading globally.
The market's response to the policies has been so positive, with core changes including: first, encouraging the private sector to increase leverage directly through financial policies (stock market and real estate); second, placing more emphasis on people's livelihoods and consumption, conveying signals and ideas that are somewhat different from before. Specific policy measures include: 1) Interest rate cuts and reserve requirement cuts: a 20 basis point rate cut, with a high probability of a 20 basis point simultaneous drop in the October LPR, allowing adjustments to the extent of rate increases on housing loans; a 50 basis point reserve requirement cut, providing 1 trillion yuan of long-term liquidity, with a possibility of further reductions by 25-50 basis points in the future. 2) Relaxation of real estate policies: reducing the down payment ratio to 15%, lowering the threshold for residents' mortgage loans; lowering the outstanding mortgage rates to new issuance levels, with an average reduction of 50 basis points; the Political Bureau meeting[1] for the first time explicitly stated the targeted goal of "stabilizing the real estate market and preventing further decline," significantly exceeding market expectations. 3) Stabilizing the stock market: the central bank has introduced two new structural monetary policy tools to stabilize stock prices. 4) Consumer livelihoods: the Political Bureau meeting's statements on fiscal policy, as well as the tilt towards livelihoods and consumption sectors, have conveyed ideas and signals that are somewhat different from before.
However, after this round of rapid rise, the market has already factored in a high level of optimism. 1) The Hang Seng Index's relative strength index measuring overbought conditions reached a high of 90.9 on October 2. 2) The short-selling ratio, which fell from 19.9% when the rebound started in the last week of September to below 14%, shows characteristics of a squeeze play in the market. 3) From a valuation perspective, the dynamic valuation of the MSCI China Index has quickly risen from the low of 8.6 times on September 11 to 11.7 times, exceeding the historical average of 11 times since 2010. The Hang Seng Index's dynamic PE ratio also increased from 7.9 times to a high of 10.6 times on October 7, the highest since January 2023. Currently, the risk premium of the Hang Seng Index has rapidly fallen from its high of 9.5% on September 11 to around 6%, lower than the historical average since 2010, and the lowest since January 2023. Therefore, roughly speaking, the current level of optimism is approaching the peak sentiment seen at the beginning of 2023, indicating a short-term overextension.RSIHanging_Heng_Index, Relative Strength Index (14-day) reached a record high of 90.9 on October 2. 2) The short-selling ratio, from a rebound initiation of 19.9% in the final week of September, dropped below 14%, showing a characteristic of 'forcing short positions'. 3) From the evaluation perspective, the dynamic valuation of the MSCI China Index quickly increased from a low of 8.6 times on September 11 to 11.7 times, surpassing the historical average of 11 times since 2010. The dynamic PE ratio of the Hang Seng Index also increased from 7.9 times to 10.6 times on October 7, reaching a new high since January 2023. The current risk premium of the Hang Seng Index declined rapidly from a high of 9.5% on September 11 to about 6%, below the historical average since 2010 and the lowest since January 2023. Therefore, roughly speaking, the current level of optimism is close to the early 2023 peak sentiment, indicating a short-term overextension.technical aspectsThe overdraft is evident.
Chart: Hang Seng Index relative strength indicator 14-day RSI reached 90.9 on October 2, hitting a new high.
Data Source: Bloomberg, China International Capital Corporation Research Department.
Chart: Hang Seng Index risk premium quickly fell from the high point of 9.5% on September 11 to 6.0%.
Data Source: Bloomberg, China International Capital Corporation Research Department.
USA: Unconventional rate cuts increase the possibility of a 'soft landing', cooling expectations of recession and rate cuts, waiting for validation from 'hard data'.
Global asset trends have also shown a "turning point", with both recession and rate cut expectations cooling down. The underperformance of the top technology sector in the US stock market since July, weakening macroeconomic data, and the unconventional 50bp rate cut by the Federal Reserve have all led to an increase in recession expectations. However, after the Federal Reserve actually cut rates, the main theme of US asset trading did not continue towards recession and rate cuts, but rather reversed significantly. The 10-year US Treasury bond yield rebounded from a low point of 3.6% on September 17 to 4%; at the same time, the US dollar index also rebounded from 100 to around 103; gold fell from $2672/ounce to $2620/ounce. The surface reasons behind these changes are the improvement in September economic data, while the fundamental logic is the downward trend in financing costs driven by rate cut expectations. This rate cut cycle requires a "think and act backwards" approach, as rate cuts may coincide with the end of the rate-cutting trade. The unconventional rate cut by the Federal Reserve may instead increase the likelihood of a soft landing. Post-rate cut, the US Treasury bond yield turning upward echoes the experience of 2019.
Chart: Overseas asset trends show a turning point, with reversals in recession and rate cut trades.
Data Source: Bloomberg, China International Capital Corporation Research Department.
On the one hand, the current growth in the USA is not as bad as expected. Looking at the leading economic indicator PMI, the September ISM Manufacturing PMI disclosed in early October, although still below the boom-bust line, saw the new orders sub-index rise month-on-month to 46.1. The Service PMI far exceeded market expectations, rebounding to 54.9, consistently above the boom-bust line for three consecutive months since July, also the highest value since February 2023. Compared to PMI, employment data is a lagging indicator of the economy, but it also exceeded expectations across the board. New non-farm employment was 0.254 million, significantly higher than the expected 0.15 million, with upward revisions to July and August data; the unemployment rate dropped from 4.2% to 4.1%; wages exceeded expectations both month-on-month and year-on-year, with upward revisions to previous values; the temporary unemployment that had significantly hindered employment in the first two months has essentially disappeared.
Chart: Although the September ISM manufacturing PMI is still below the boom-bust line, there is an improvement in the new orders component, while the service industry PMI far exceeded market expectations, rising to 54.9.
Data Source: Bloomberg, China International Capital Corporation Research Department.
Chart: Employment data exceeded expectations across the board.
Source: Haver, China International Capital Corporation Research Department
On the other hand, loose financial conditions have also nurtured the space for economic rebound. By comparing the financing costs of residents and corporate sectors andreturn on investment, and comparing actual interest rates and natural interest rates, the bank's calculation of a 3.7% long-term bond rate has already reduced financing costs below the investment return rate, which means it can boost demand. The decline in long-term bond rates and broad financial conditions had already occurred in the second half of 2023. Compared to the federal funds rate, financial conditions are more relevant to the real financing costs of the real economy.
These changes have dampened recession narratives and rate cut expectations. The probability implied by CME interest rate futures of another 50bp rate cut in November has dropped to zero, with a total reduction of 100bp by September 2025, 50bp less than the market expectations before the September FOMC meeting. On September 30, Powell reiterated at the National Association for Business Economics annual meeting that the U.S. economy is in good condition, with risks on both sides, the Fed has not predetermined any path and will continue to make decisions at each meeting. On the same day, Fed Governor Bowman, who voted against a 50bp rate cut, once again stated that the risks of inflation persistently rising are still prominent and the future policy stance will continue to be adjusted cautiously.
Chart: The CME interest rate futures imply that the probability of another 50bp rate cut in November has dropped to zero.
Source: CME, China International Capital Corporation Research Department
Furthermore, supply-side disturbances still exist, but have not yet altered the rate-cutting path. Consistent expectations for a slight decline in overall and core CPI month-on-month since September, but since entering October, changes in the Middle East geopolitical situation and the strike by East Coast port workers have increased the uncertainty of October inflation. 1) Escalation of the Middle East geopolitical situation led to an increase in oil prices, with escalating conflicts between Iran and Israel triggering concerns in the market about interruptions in crude oil supply, causing Brent crude oil prices to rise continuously from $72/barrel to $78/barrel. If the situation escalates further, the bank believes that the supply-side impact will lead to upward inflation; 2) U.S. port workers strike for three days, exacerbating short-term supply chain pressures. From October 1st to October 3rd, nearly 0.045 million workers struck at 36 ports near the U.S. East Coast and the Gulf of Mexico, with at least 54 container ships blocked at ports due to the inability to unload. After swiftly reaching a temporary agreement to increase wages by 62% over the next six years, the strike was quickly resolved, but it will still take some time to restore normal goods circulation, and the pressure on the supply chain end may transmit to inflation prices.
Chart: Since October, Brent crude prices have continuously risen from $72/barrel to $78/barrel.
Data Source: Bloomberg, China International Capital Corporation Research Department.
The 'new' change in the Sino-US cycle: rebound or reversal? The directions have both changed, with the US private sector repair or clearer, requiring China to cooperate with fiscal efforts.
The bank pointed out that compared to the private sector leveraged, China's changes are more from the government's fiscal expenditure, while the US is more from the monetary policy's impact on private credit, such as residential real estate and business investment. In the first quarter of this year, the actual 'small wave band' resonance of the credit cycle was achieved by the United States real estate chain, China's export chain, and the rise of global industrial metals. From the current perspective, China's policy efforts and the cooling of US recession expectations indicate a change in direction, which in turn will constrain internal loose space and further highlight the importance of fiscal efforts.
Chart: China and the USA actually achieved a 'mini-cycle' resonance of the credit cycle in the first quarter of this year
Data source: Wind, Haver, China International Capital Corporation Research Department
Due to the earlier and sustained maintenance of loose financial conditions in the USA, high-elasticity sectors have rebounded, and the trend of re-leveraging in the private sector is more evident. 1) Credit pulse: The banking credit pulse has already turned the corner by the end of 2023, and commercial loans have already turned positive. 2) Corporate sector: The credit spread reflecting direct financing continues to narrow, with high-yield and investment-grade credit spreads narrowing by 30bp and 6bp respectively in the third quarter, falling back to the pre-hike levels of 2022, further driving a 16% increase in bond issuance volume in the third quarter to $502.3 billion. 3) Residential sector: The 30-year mortgage rate has fallen to around 6.1% under the impetus of US bond rates, close to the level in September 2022, and the refinancing application index has also risen to a new high since the rate hike in March 2022. Despite the significantly restored sales being somewhat restrained by high house prices, the increase in refinancing volume can marginally improve residents' interest payment pressure, providing support for consumer. Therefore, compared to a recession, what needs to be verified more is the transmission of the credit cycle restarting to hard data and the degree and speed of economic rebound.
Chart: Financial conditions eased earlier and have been maintained at a low level.
Data Source: Bloomberg, China International Capital Corporation Research Department.
Chart: The bank's crediting pulse has already shown a turning point by the end of 2023, and the industrial and commercial loans pulse has turned positive.
Source: Haver, China International Capital Corporation Research Department
Chart: The scale of bond issuance in the third quarter increased by 16% to $502.3 billion compared to the previous quarter.
Source: SIFMA, China International Capital Corporation Research Department
The certainty of China lies in the decrease in financing costs, but the external maximum space may gradually pass; it is necessary to observe whether the fiscal intensity is sufficient. Compared to the current policy measures, completely reversing the credit cycle trend still relies on fiscal efforts. Otherwise, there may be a lack of clear fundamental support after being driven by sentiment and liquidity. From the perspective of policy intensity, attempts are made to statically calculate the gap between investment returns and financing costs. 1) Currency: According to calculations, a further 45-70bp decrease in the 5-year LPR to 2.95%-3.2% will help solve the current issue of investment returns being lower than financing costs. 2) Fiscal: If the fiscal impulse is to return to historical highs or if the overall social financing growth rate is to return from the current 8.1% to the level at the beginning of 2023 of 10%, the bank's calculation requires an additional issuance of 7-8 trillion yuan. From this perspective, there is still a gap in the current policy intensity, and it is necessary to pay attention to the implementation of follow-up policies.
Chart: A further 45-70 basis point drop in the 5-year LPR to 2.95%-3.2% would help solve the current issue of investment return rates falling below financing costs.
Source: Wind, China International Capital Corporation Research Department.
Chart: To restore the social financing growth rate to 10% within the year (at the beginning of 2023), an additional issuance of 7-8 trillion yuan is needed.
Source: Wind, China International Capital Corporation Research Department.
For China, the restart of the US credit cycle means that the financial importance is further increasing, so the most sensitive stage of loose expectations is gradually passing. On the one hand, this round in the USA is more likely a preventive rate cut under a soft landing scenario, and the rate cut space may not be very large. More aggressive unconventional rate cuts may in turn make the subsequent rate cuts not need to be very large, which also means that the maximum period of external loose environment faced domestically may gradually pass. On the other hand, although the positive effect of the restart of the US credit cycle on exports is considered, the impact of the election needs to be taken into account. Currently, exports are an important support and highlight of China's growth. The interest rate-sensitive US real estate cycle re-initiation helps stabilize China's export growth. Just as the resonance of the first quarter between the Sino-US cycles affected our export chain. However, next year, the export chain will also be affected by the election. According to RCP statistics, Trump's recent approval ratings have risen again, especially the approval ratings for gambling leading by nearly 4 percentage points. Some key swing states, such as Pennsylvania, have also reversed again.
Chart: Trump's recent approval rating has risen again, especially the gambling approval rating is once again leading by close to 4 percentage points.
Data source: RCP, Research Department of China International Capital Corporation.
Allocation suggestion: The most obvious "crossing point" is the US short-term debt, real estate, China's export chain, and Hong Kong stocks growth; greater rebound and pro-cyclical policies require coordinated efforts.
Looking ahead, the bank believes that the changes in the Sino-US cycle have already given birth to an asset "crossing point". The more certain crossing point brought by the changes in the Sino-US cycle is the US short-term debt, real estate chain, and China's export chain, with Hong Kong stocks (especially growth stocks) outperforming A shares. 1) Overseas: From economic data, the expected full incorporation and the early downward trend of long-term interest rates have increased the likelihood of a soft landing, thus making the Fed actually not need to cut as much. The USA may be approaching an economic cycle inflection point. Compared to US bonds and gold, the more certain beneficiaries are the short-term debt benefiting directly from the Fed rate cut (short-term debt has better cost-effectiveness than long-term debt, and should make the curve "steeper"), and the gradually recovering real estate chain (even driving China's relevant export chain). 2) Domestic: Short-term market sentiment in Hong Kong stocks has been overdrawn, and trading may return to core assets. It is recommended to focus on interest rate-sensitive growth stocks (internet, technology growth, biotechnology, etc.) as well as the export chain driven by the demand in the US real estate sector.
Chart: The most clear 'crossing point' is the synergy between short-term debt, real estate, China's export chain, and Hong Kong stocks growth.
Source: China International Capital Corporation Research Department
Greater index rebound and pro-cyclical performance require the catalysis and coordination of data and events. If the future economic and fiscal data of the USA and China are confirmed in the next one or two months, industrial metals such as copper, manufacturing in the USA and pro-cyclical sectors in China are also worth paying attention to. 1) Overseas: With the recovery of the economic, especially the investment cycle, industrial metals like copper can also be gradually focused on, but currently slightly to the left, waiting for several important data confirmations, such as the USA election day (November 5th), FOMC in November (November 8th), and inflation in October after the rise in oil prices and strikes in September (November 13th). 2) Hong Kong stocks: According to the calculation, if the risk premium falls to 6.7% at the market high point in May 2024, or supports the Hang Seng Index to around 21,000 points; if sentiment continues to improve to the 6.1% corresponding to the high point after the adjustment of epidemic policies in early 2023, the Hang Seng Index may reach around 22,500 points. However, the Chinese supply chain is recovering the fastest in the world at that time, while the real estate sector is also at historical highs, making it difficult to compare the balance sheets of various departments currently. The bank believes that if policies are continuously fulfilled and fiscal intensity exceeds expectations, pro-cyclical sectors directly benefiting are expected to outperform, including consumer, real estate chain, and non-bank financial sectors.
