This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis, along with Doug Krisner join us each day for the stories making news and moving markets in the Asia Pacific. You can subscribe to the show anywhere you get your podcasts, and always on Bloomberg Radio, the Bloomberg Terminal, and The Bloomberg Business. James Mager joins us Bloomberg Senior reporter in Beijing for the reopening of the China markets and a deeper look at the Chinese economy. James, it seems like
a little bit of a damp squib this morning. The CSI three hundred only up about two tenths of one percent. One can only imagine there's still a lot of skepticism about the durability of the recovery in China and perhaps a little disappointment on the PBOC actions on Sunday.
Your take, I think that's correct. We did see a big rebound in consumers spending over the holidays. Lots of people were traveling, the largest number of people traveling since at least twenty nineteen. So, you know, this is good news in that people were concerned, but it's not great news that you know, people went home for the holidays. You know, that's what you should expect them to do.
And so the fact that, you know, there was a lot of hope that this might mean that there would be a recovery in the stock market, but I think people are looking through this and looking at the broader economic challenges which is not going to be fixed by one strong holiday season. And you know, you see, the halling market is still in a slump. As you said, the PBOC didn't actually do anything over the weekend. We
may see some action and interest rates tomorrow. With the LPR, there is expectation that that will actually be cut, especially if you see a cut in the five year LPR, that would be that would be beneficial for home loan or people wanted to take out new mortgages. But I think, yeah, markets have reacted very you weekly so far today to this data, and I think that's you.
Know, James, I think you know what you mentioned about the five year LPR, and that's almost in essence part of the problem, because even the expectation is going to cut five basis.
Points, right, I mean, yeah, I think nothing, that is nothing, and you know, there's still quite high. Real rates are very high because China is inflation right now. So even if you were to cut rates to zero, people will
still be paying a positive rate on their on their mortgages. So, you know, the expectations for action are very much in the government's court, and all the things that we're seeing, all the things that've been done so far this year and last year have been sort of around the around the margins very small, and you know, it's unclear to
me what exactly would be enough. Can the PBOC, Can the government actually do enough to really turn this around and to totally change the narrative, But at least so far, they haven't done anywhere near enough to as you know, to to fix what the unhappiness that stock investor has been showing.
To say nothing of the deflationary pressures that are happening across the entire economy. So we were talking a moment ago about this uptick and consumer spending during the holiday. What do we know about the prices that can consumers were paying in this period relative to a year ago.
I mean, inflation is inflation is negative right now, consumer installationia is negative. Business producer prices are very falling a lot, and I think the big drivers for that. Food prices are down, food demand is weak. You also obviously demand for a production for construction goods and these kinds of things is also very weak. So people are paying less
than they were a year ago. So that probably means that spending was even greater, like actual people were buying more, but they were just paying less for it than they were. But you know, this is still not a great situation to be in.
Yeah, that was exactly my next point, which that's a little bit of comfort, but really not much in the larger scheme of things that units are Probably volume is up, but prices still down.
Correct, I mean, so box office was up for example, but again I mean, you know, the last four years of being the box officer is shut in twenty twenty, so you know, the people wondn't go to the movies early in twenty twenty two because everyone had COVID, and so to the comparison to say, great, but the box office is really good this year. It's the strongest it's
been in years. Is really really poor comparison, and it's not actually strong, it's just strong compared to the very lean years we've been having over the last few years, especially twenty twenty, twenty twenty, then again and then twenty twenty two, twenty tway three was a little the last, you know, the one we've just had is better, but it's not incredibly strong.
So if we're trying to improve sentiment. You've talked about the interest rate picture. We've also talked about how a weak equity market tends to negatively impact investor psychology. We talked earlier in the show today about the fact that maybe the national team will step in and do more buying,
particularly of the ETF space. Is there anything that you have heard in your travels and reporting on the economy and markets in China, anything that you've heard that is perhaps a novel policy prescription that perhaps can turn this around.
It's not a policy prescription per se, but I think the interesting thing that I saw over the holidays was that secondhand home sales really were quite strong. And you saw last year actually the amount of money going to the second hand home market was larger than the primary the new home market for the first time I think on record, And so I think what's happening is that people are you know, people are rightly concerned if they
buy a new home it won't be delivered. They'll pay a bunch of money, they'll take it a mortgage, and then the company that's meant to give them to sell them the home to build the home will go bankrupt and they won't get their house. Yeah, but if you buy a secondhand home, there's much more demand for that, and prices are falling a lot and fall a lot, much more of the secondary market than they have with
the primary markets. That the government is making sure that primary prices at fall, So secondary home sales are actually doing pretty well.
Okay, we'll leave it there. Always a pleasure, James, thanks for making time for James Meger from our bureau in Beijing here on Debreak Casual.
Well. Joining us now in the studios in Hong Kong is Jason Lloyd, who's head of APAC Equity and Derivative Strategy at BNP Parrabad. Jason, thanks for coming on into our studios here. So we had this holiday news really on Friday morning from the state media, and we saw a huge bounce in Hong Kong, so we know that there's some energy there. But Hong Kong is not exactly domestic China. Hangksng index is up two and a half percent. When we look at the futures this morning trading in Singapore,
we don't see a huge bounce at all. Is caution going to end up being the byword even for domestic trading in China?
Well, thanks for having me on the show today, Brian. As you mentioned earlier, I think over the weekend you have seen the PBOC did not change its policy rate, and I think some of the capital injection may have been a little bit modest compared to market expectations. So
that's certainly is one side of the story. I think the other side of the story is that when you look at the travel data, while it's very encouraging on a percentage in terms of number of trips, I think if you look at it from a glass half empty perspective, then some of the poor average number may have been a little bit doesn't follow the same kind of magnitude. So I can understand that the market will want you to look at it from a more negative the lens if
they choose to. I think at this moment, what is more important for us, it's the forward looking policy measures. Yes, looking forward, I think the LPR decision tomorrow will be an important one, but also I think the market will look forward to the so called two Session where the National People Congress will meet and they will issue some of the growth target. That will give the market a little bit more visibility for the rest of the year.
So, Jason, what's the house view at Benprepa about right now on the Chinese equity market?
Sure?
Our view is that we maintain a neutral stance on the overall equity market. The main reason is because if you look at the price action over the past twelve to eighteen months, it has been extremely sensitive to policies, and so far we haven't had enough policy clarity in terms of how much commitment the government wants to really stimulate growth. Because I think over the recent months there's been a lot of discussion regarding is the government really
willing to commit to a five percent growth? It is likely that we'll see a scenario where the government issue an official target of five percent, but then the market will question what are the credible policy package that can get us there? So I think that is why we maintain a neutral stand. That being said, oh sorry, go ahead, no, no you go. Sure, that being said, we do see
a little bit more thematic opportunities. So beyond the index level, we start to see things, for example, like buybacks and dividends, and even some of the ETF purchases are starting to take hold. And this is part of a much longer path of capital market structural reform that we think can be a lot more interesting over the medium to long term.
So it seems like investors, on the one hand, might be saying they're not happy with policy, and you just expressed some concerns about policy making. Is really that some of these if looked through the prism of long term planning, might be quite sound, but that they're just being rushed through too much in the short term and that is disrupting markets.
I think that's a very fair question, because if you look back at what happened over the past six weeks, feeling much longer because of the price action. But if you recall that the narrative starting into twenty twenty four is that twenty twenty three was a very challenging year. Starting in twenty twenty four, there will be more policy action.
Hopefully we grow better from a low base. I think to start the year there was relatively limited discussion regarding the actual policy support and if you recall back in January, the PBUC also did not change its interest rate, despite the fact that there's been a lot of pre communication
heading into that event. So I think that really triggered the beginning of this kind of downward spiral in sentiment and really took the government and some of the stay back funds a lot of effort to stay the market sentiment heading into the Chinese New Year. So I would say, right now we are gradually resetting the expectation, just back to the start of the year.
So if you're moving away, let's forget the indexes for a moment. If your tactical on selected names, I'm wondering about the hedging strategies that you're using, because I note that you're not only the head of the equity side, but the derivative side as well. So is it almost necessary that you put some type of derivative strategy on top of any kind of equity trade if you're playing China.
Sure, that's a great question. In fact, when we look at our client interaction from a derivative standpoint, clients are very active when it comes to China related derivative both for the domestic market as well as the Hong Kong
listed market. On the domestic side, I think some of your colleagues may have reported in recent weeks that the futures were trading at a steep discount compared to its fair value, which attracted quite a bit of attention from global investor in terms of how do you take advantage of some of those mispricing on the Hong Kong side.
If you look at the options market on each CI, for example, you will notice that despite that bearish sentiment to start the year, the relative pricing between calls and puts are still quite skewed to the other side, meaning that investor are willing to spend little bit of premium to capture the upside risk without risking the entire principle.
So I think we feel that investor want to have something on on the upside just in case, because one of the lessons from twenty twenty three is that despite the general downward trend, there has been three or four episodes of very concentrated five to ten percent rally and so we have seen the derivetic position in reflecting those kinds of opportunistic trading.
Yeah, that's pretty interesting. So the skew a little bit to puts on China, but the skew a little bit toward calls on Hong Kong. Is that effectively what you said?
I think that seems to be the case when we look at the relative pricing on a volatility on the China side. It's more has to do with the fact that you have a very big supply demand imbalance on the future, especially when it comes to the small micap indicies, which created a rather unusual miss pricing opportunities for investor to take advantage of.
One of the things we've been talking about recently has been on the part of the national team building larger positions in whether it's ETFs or you know, straight vanilla equities. Do you think there's a real risk if the national team were to take on, you know, additional positions in the market.
Sure. I think that is one of the big questions that a lot of investors are asking at the moment because historically the so called national team they tend to behave in a relatively opaque manner. I think the most recent example that was very high profile is back in twenty fifteen twenty sixteen, where a group of a national team as well as security House group together to try to rescue the market, but the result was a little bit mixed. I think this time around what is different
is in terms of the vehicle of choice. Back in twenty fifteen twenty sixteen, there was a lot more stockpicking involved, whereas this time around it seems that they are focusing on ETF. So perhaps their learning some of their experience from other central banks over the recent years in terms of how to stabilize the market. And I will note that the Central Waging which is the unit that purchased those fund publicly, actually made two announcements over the past
six months. So back in October twenty third they simply mentioned that we have been starting to buy ETF, but they issue another statement on February six which had three key points. They say they will expand the scope of the underlier, they will intensify the buying, and they will also continue to stabilize the market. So this seems to suggest that they have now evolving their mandate compared to
a few months ago. And I think the challenge to gauge that is that, unlike some of the other central banks where they actually have daily or weekly disclosure, the buying from the Central waging or some of the related parties. You can only see from the etfun flow perspective, and you can only infer what they are doing, and so I think that is the difference.
Jason. We've always tried to read policy in China, but that was more from the standpoint of where the government was deploying capital. Now it's almost like it's policy considerations. You know, who do they like and who don't they like. Maybe that's a little kind of crude, but when you see what happened with Ali Baba and ten said, who are some of the new players that may be in favor of policymakers.
I think that is indeed one of the challenges when they look at Chinese equity market. I understand that. I think a lot of the media have pointed out the fact that the Hong Kong China market is down forty fifty percent from this recent peak. A big part of that is due to these crackdown in select industry. So if we look into twenty twenty four, one of the new phrases, I think Bloomberg also reported that is so
called high quality growth. Now there's no official definition of high quality growth, but our interpretation that it involves in the high tech supply chain self sustainability type of investments. So in that sense, I think a lot of the renewable energy supply chain, a lot of the so called
high tech capital equipment, they will continue to benefit. And I think that is one of our investment fsis is that while the overall economy may remain under pressure, you have the subset of what we call upstream and midstream industry that will likely benefit from these kind of government policy.
That's great stuff.
Really thanks a lot, Jason for coming into our studios. We appreciate it. On early Monday morning, Jason Ley, head of APAC Equity and Derivative Strategy at BNP Parabot. Joining us is our colleague Paul Dobson Bloolberg, Executive editor for Asian Markets. So a lot of attention on China today, at least a day or two to shine in the sun. I suppose it's like this. I mean, the China spending up from pre pandemic levels gets your attention, but so does the slow down in FDI and all the other
ills of the economy. And we're not seeing other markets really all that buoyant this morning. How do you read the mood at the moment.
Paul, Yeah, I would say that the mood is the main markets reopen, should be cautiously optimistic. Perhaps we had a better week last week in the offshore markets, the ADRs in the US and the Hong Kong gages as well, which boats well. And I think that the economic data, the real time economic data that we have on spending and travel seems relatively benign and positive. Ah And that really is the thing that it's needed more than anything else to turn around the economy right now, a recovery
or a rebuilding of consumer confidence. Now, this is a very small step, and you know, it may have been a particularly good reason a particularly good year for many other reasons as well, but nonetheless it does give some hope, and so you would expect that there would be some pretty good gains at the start. But let's see how much follow through we get through the rest of the week once that sort of initial philip is done and dusted.
And if there is follow through, whether it's lasting. You know, going into the weekend, there was a little bit of speculation that perhaps I realized that this was not the mainstream bet, that maybe the PBOC would tweak its key policy rate as a way of incentivizing people maybe to take on a little bit more risk. That didn't happen. The one year policy loan rate was held at two and a half percent. But what we're learning now is that maybe the big banks in China will cut rates
in the coming week. Do you think that's likely.
It seems like it's a possibility. It was certainly mentioned in the local media the official media today is being a potential thing that we will see happen. They created some space recently with chripple R cuts to open a little bit of room for banks to lower those rates further. So that's in the cars. I think on both of these measures or metrics, what's quite important is that limited room that there is in which the authorities have to operate with the loan prime rate in the bank rates.
You know, bank margins are already under quite a lot of pressure, so there's only so far and so much that they can do with the MLF that we had at the weekend. The concern is that they would trigger more currency weakness or more capital outflows, and that's something that they also want to avoid. So in both cases, the space is reasonably tight and there needs to be a strong case or a compelling reason to do more.
We just did have that chip all our cut and that's supposed to be helping, and so I guess they'll want to watch and see how that feeds through into the economy before.
Well, and the apparent pickup, the apparent pickup in spending indicates things are working even without a cut in interest rate. So I suppose one could read some caution is okay there, and what we're talking about with the stock market gains today would be mostly domestic. I would think foreign investors remain pretty jaded about China, although you do see pockets
of interest. I'm kind of curious about whether or not there's a way to read this that perps because Japan, you know, has seen such gains and the US has seen such gains that maybe just maybe a little bit of foreign money might take a.
Punt as possible. But the overwhelming sort of mood from the international community is that there are those better opportunities elsewhere. Right, like you said, Japan looks great, India looks great, the US.
Why would you put your money anywhere else right now when the technocs are going so crazy unless you're looking at the relative valuations, So it might be the sort of longer term investors that are keener in some ways, and yet with so much policy uncertainty still there and the growth outlook looking you know, still longer term, pretty modest by recent standards, and that disinflationary impulse still hanging over the market as well, there are reasons why international
investors are concerned. And that's what we've seen in the FDI numbers are the the you know, kind of spending by businesses basically into the economy shrunk continually for several years now, the lowest in thirty years, and I think that's more of a sign of kind of you know, the US general retrenchment from China's markets in general, sort
of stay away mentality. So yes, of course there'll be some suspecative deflows that would like to try and jump on any big moves that we see, but like you said, I think the domestic investor is the key player here at the moment.
I thought it was very interesting the latest survey of global money managers from Bank of America shows that going short Chinese stocks is still very popular, maybe becoming more so. And this has been the second most crowded trade. We know for months now, and I'm wondering, at what point do you get hurt if you step in and aggressively short China.
Well, the last two weeks would have been pretty painful given the Golden Dragon. I think in the US had gains of five percent two weeks in a row. So so, but maybe people are seeing lads as an opportunity to reload those short bets again and still see more scope for weakness in the Chinese markets. And I think because of those international outflows, which has been such a persistent theme,
that would put you in that mentality. But maybe, you know, kind of it doesn't take much to get China's markets excited, and when we see big ruddies they come exceptionally hard and fast, so the short sellers will want to be wary of that as well.
All Right, Paul, thanks very much for joining us. Paul Dobson, Bloomberg Executive Editor for Asia Markets.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.