To The Moon

Against the backdrop of the continuous depreciation of the Chinese Yuan rate and market concerns about China's economic recovery, overseas Chinese-funded stock markets failed to continue the previous two weeks of gains driven by favorable policies.

Of course, the effects of policies and market bottoms usually take some time to manifest, and the usual sequence is policy bottom, sentiment bottom, market bottom, capital flow bottom, and then profit bottom. We believe that we are currently at the "policy bottom," so the market has downside protection, but the speed and strength of subsequent rebounds still largely depend on future policy developments, especially those more powerful policies mentioned above.

However, recent inflows of southbound funds have remained very strong, with inflows last week reaching the highest single-week inflow record since November last year, and inflows in August reaching the highest monthly level since January 2021. After further analysis of the specific flow of southbound funds (defensive stocks with high dividends such as CNOOC and China Mobile have been among the top two in terms of inflows since August), we found that the recent large-scale inflows of southbound funds are within reason, mainly due to:

1. relatively sluggish domestic economic growth and policy expectations, coupled with weak performance in the A-share market, otherwise the Hong Kong stock market may not attract mainland funds so strongly;

2. RMB depreciation, which can provide a certain hedge effect for some Hong Kong stocks;

3. high dividends and defensive targets are expected to provide stable cash flow returns in a macroeconomic environment of uncertainty.

Macro

China's trade data in August showed marginal improvement, but challenges remain. China's exports continued to decline for the fourth consecutive month in August, down 8.8% YoY to $28.49 billion. However, compared with a sharp YoY decline of 14.5% in July, the decline in August was significantly narrowed and better than the market's expected decline of 9.5% YoY. Specifically, China's exports to Europe and ASEAN still fell by double digits. However, we also note that China's exports to the United States improved significantly in August, down 9.5% YoY, significantly narrowing compared with a decline of 23.1% in July. The main reason for the narrowing of the export decline is the base effect, according to CICC's macro team. At the same time, China's YoY decline in imports in August also narrowed from 12.4% in July to 7.3%, better than the market's expected decline of 8.2% YoY.

Chinese Price

China's CPI YoY turned positive in August, and the decline in PPI also slightly narrowed. After the first YoY decline in two years in July, China's CPI returned to positive territory in August, up 0.1% YoY (vs. a decline of -0.3% YoY in July). According to the National Bureau of Statistics data, the improvement in August's CPI was mainly driven by non-food prices such as air tickets and tourism accommodation, but food prices fell again by 1.7% YoY. Meanwhile, China's PPI continued to decline for the 11th consecutive month in August, but the YoY decline narrowed from 4.4% in July to 3.0%.

US PMI

The US ISM services PMI exceeded market expectations, highlighting economic resilience. Specifically, US service sector economic activity expanded for the eighth consecutive month in August, with the ISM services PMI rising to 54.5, the highest level since February and significantly higher than July's 52.7. Among the sub-indices, business activity, new orders, employment, and supplier deliveries all increased slightly.

Liquidity

Southbound fund inflows remain strong, while northbound fund outflows continue. Specifically, data from EPFR showed that overseas active funds flowed out of overseas Chinese-funded stock markets last week, with outflows totaling $350 million. This is consistent with the current situation in the A-share market, where northbound fund outflows remain unchanged. In contrast, southbound fund inflows have provided support for the Hong Kong stock market for the past 13 trading days.

Overall, southbound funds maintained a net inflow last week, with an overall inflow size of HKD 27.5 billion.