To The Moon

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On Friday, the A-shares saw a strong rally, indicating that President Xi hasn’t given up on the Chinese market just yet. Although there were three previous press conferences aiming for expectation management, much like the U.S. approach, the real takeaway is that the People's Bank of China (PBOC) has consistently been the most reliable when it comes to action. It seems President Xi has realized that other departments should stay out of this, leaving the job to the central bank.

Yesterday, the PBOC made a decisive move to boost market confidence once again. PBOC Governor Pan Gongsheng announced at a financial forum that before year-end, they plan to cut the reserve requirement ratio by 0.25–0.5 percentage points, and there will be an additional interest rate cut of 0.25–0.5 percentage points. While Pan mentioned these changes would happen "when appropriate," I expect action soon. Simultaneously, twenty top brokerage firms and funds, including Zhongjing, have already applied for over 200 billion yuan of the 500 billion yuan quota the PBOC allocated to support the market. This is the kind of real action that can truly stabilize the Chinese market, as opposed to holding endless press conferences that end up doing more harm than good.

But let’s step back. Is the PBOC rushing these moves just to prop up the market? I don't think that's the whole story. Yesterday’s third-quarter GDP figures were released, coming in at just 4.6%,which is below expectation. To meet the target of 5% growth for the year, the fourth quarter would need to hit at least 5.4%. This explains the central bank’s urgency. The external environment is challenging too, with Trump looking strong in the U.S. elections, and his economic advisor signaling a strong dollar policy. Recent U.S. economic data also points to a soft landing, driving up the dollar index and pressuring the yuan, which is now at 7.12 to the dollar. The PBOC’s bottom line for the yuan is around 7.3, so there isn’t much room for further rate cuts.

Despite this, the PBOC has no choice but to continue easing. The only way to boost GDP in the short term is through investment, which requires more liquidity. I will analyse on how the fourth-quarter investments are likely to play out, and what the macroeconomic environment means for the future of the China market.

China's GDP growth relies on three main drivers: investment, consumption, and net exports. Their respective contributions to GDP have shifted over the years. According to Governor Pan, consumption, investment, and exports made up 56%, 42%, and 2% of GDP in 2023, compared to 49%, 47%, and 4% in 2010. This tells us two things: first, exports, despite performing well, only account for a small share of GDP. So, it’s unrealistic to rely on exports alone to hit the GDP target. Second, consumption’s share of GDP is growing, but this includes both household consumption and government procurement.

In terms of sectors, the weakest area dragging down GDP this year has been the service sector, not manufacturing or infrastructure, which have seen investment growth. With just over two months left in the year, it’s unlikely the service sector can recover quickly enough to fill the gap. So, to hit the GDP target, the Chinese government must focus on investments, particularly in infrastructure and manufacturing, where growth has been strong.

Looking at third-quarter fixed asset investment, the standout performers were manufacturing and infrastructure. Manufacturing investment grew by 9.2%, with many sectors seeing double-digit growth. Infrastructure investment also surged, with railway investment up 17.1% and water conservancy investment up 37.1%. However, private sector investment declined by 0.2%, and foreign direct investment plummeted by 19.1%, further highlighting the reliance on government-driven projects.

One major drag on fixed asset investment has been the real estate sector, which saw a 10.1% decline. Real estate is simply too large to ignore—it accounted for 7.8 trillion yuan of the 37.9 trillion yuan in fixed asset investment over the first nine months of the year. If the decline in real estate investment can be reduced, it would have a similar effect as pouring money into new projects.

In conclusion, for the fourth quarter, it seems the most practical strategy would be to stabilize the real estate sector. Trying to spur new investment projects at this point would likely be a waste of money, given their limited contribution to long-term profitability. On the other hand, shoring up real estate could help both the economy and ordinary people by giving them some relief from the housing market downturn.

Lastly, let’s circle back to the China market. By analyzing macroeconomic policies and following the flow of funds, we can make some educated guesses about which sectors are likely to benefit. Manufacturing, particularly high-tech industries like aerospace and chip-making, along with infrastructure, will likely see more investment. However, be cautious and avoid sectors like the automotive industry, which is showing signs of slowing down. Based on this analysis, if the market rallies again, it will likely be led by blue-chip companies and sectors benefiting from government-driven investments.

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