Market Overview

MSCI China index corrected by 6.4% during February due to risk-off market sentiment. Various sectors especially real estate, telecom services, financials and energy sectors had material retreat due to weak market momentum. The weak performance of real estate was mainly due to investors’ concern about February sales number and weaker-than-expected mortgage issuance in 2018. Financial and energy had top performance in Jan before the market correction.

In January, export growth (in US dollar terms) was up to 11.1%YoY (vs. 10.9%YoY in December). Meanwhile, import growth also surged to 36.9%YoY (vs. 4.5%YoY in December). As a result, the trade surplus in January was US$20.3bn in January (vs. US$54.7bn in December). Inflation became slightly lower as CPI dipped to 1.5%YoY in January (vs. 1.8%YoY in December) and PPI inflation also further decelerated to 4.3%YoY in January (vs. 4.9%YoY in December). New CNY loan issuance was strong at RMB 2.9trn in January (vs. RMB 584bn in December) mainly due to the new CBRC guidelines for the “non-standardized” asset to return to tradition bank credits. Monthly total social financing was RMB 3trn slightly lower than market expectation and was also lower than RMB 3.6trn a year ago. Headline total social financing growth (excluding equity) slowed to 11.2%YoY in January from 12%YoY in December. M2 growth in January was slightly up to 8.6%YoY (vs. 8.2%YoY in December).

Investment Strategy & Outlook

We expect higher CPI inflation but lower PPI inflation, solid export but slightly weaker import, and stable credit issuance in February. Economic activity data will only be published for January-February combine due to Spring Festival. CPI may be higher than January as high frequency data from the Ministry of Commerce and Ministry of Agriculture showed food prices were higher in February on a year-over-year basis. CPI will likely show a meaningful rebound because of the Chinese New Year distortions but remains below 3%. PPI is likely to fall further in February as high-frequency upstream prices have been broadly stable in recent weeks which imply limited sequential growth. Export growth is likely to rise significantly in February after a stable January as exports normally frontload their activities just before the festival. So February data will be biased on the upside. Import growth will decline given a strong January growth mainly due to CNY Holiday distortion. Credit growth may moderate in February from January. New CNY loan issuance is likely to be similar to the December level but lower than the level in February 2017. However, M2 growth is likely to rebound on a year-over-year basis as shadow banking activities remain subdued but not necessarily weaker than they have been in recent months. Stabilization in these activities will imply less drag on overall M2 growth.

HK market may continue to remain range-bound in the near term due to firstly, the market concern about future growth of China; and secondly, HK’s high correlation with weak overseas market sentiment.

1. Weaker-than-expected February PMI had led to investors’ concern about China growth while we believe the weak data was mainly due to holiday distortion. Such concern is likely to be removed if more macro data after March is disclosed. 2018 GDP guidance of 6.5% is largely in line with market expectation as government guided for a more quality growth.

2. US market sentiment was weak lately because US government introduced tariff hike for steel and aluminum import, which raised market concern about negative impact on economy from trade war. Nevertheless, we expect it to have limited direct impact on China economy as steel import only accounts for low portion of China steel production and export.

We continue to be positive on HK market in the mid-long term. Firstly, HK market valuation has corrected to a relatively reasonable level after recent correction and it is still attractive compared to other markets. Secondly, we expect that new fund will continue to flow into HK market in 2018 as southbound is likely to buy on dip and overseas market will also decrease underweight on China with more quality growth in China guided by central government. We continue to prefer two types of sectors including 1) those laggards with turnaround catalysts including Banks and Energy, 2) sectors with quality and sustainable growth e.g. consumer discretionary, healthcare and information technology.

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