Asian Markets and China’s Economic Direction
Asian equities presented a mixed picture overnight, marked by low trading volumes and a lack of significant news. South Korea saw consecutive gains of 1% for the first time since early July, while the Philippines lagged behind. Market attention remained focused on China, where the Central Economic Work Conference (CEWC) convened, setting the stage for the nation’s economic agenda. An unsubstantiated report circulated, suggesting intentional weakening of the Renminbi (RMB) to counter US tariffs, a claim that contradicts China’s current easing monetary policy, indicated by record-low 10-year government bond yields. This easing, coupled with persistent tariff concerns, has deterred foreign investment in Chinese bonds, despite attractive yields.
CEWC and Potential Economic Stimulus
The CEWC, while typically lacking in specifics, holds significant weight as it lays the groundwork for the detailed economic plan to be formalized during the Dual Sessions in March. Market anticipation is high for a strong statement from the CEWC, particularly given the inclusion of President Xi in the recent Politburo release title. Expected areas of focus include bolstering the housing market and local governments, potentially extending existing consumption subsidies currently covering automobiles, home appliances, and electronics, to encompass broader consumer sectors such as textiles and restaurants. Such measures aim to stimulate domestic demand and offset external trade pressures.
Subsidies, Employment, and Structural Reforms
Extending consumption subsidies to sectors like textiles and restaurants could significantly impact employment, especially considering the substantial workforce involved in automobile manufacturing, electronic industries, and the food service sector. For instance, BYD alone employs over 700,000 individuals. This emphasis on consumer-focused industries suggests a concerted effort to boost domestic demand and maintain employment levels amid global economic uncertainty. Beyond immediate stimulus measures, the CEWC might also address underlying structural issues, such as China’s limited social safety net – encompassing healthcare, pensions, and social security – and the rights of migrant workers. Reinforcing this expectation, a Mainland media outlet highlighted the Ministry of Human Resources and Social Security’s plan to expand the individual pension system nationwide.
Market Reaction and Hong Kong Dynamics
Mainland Chinese investors responded positively to the potential expansion of consumption subsidies, with sectors like retail, leisure products, household goods, textiles, and liquor outperforming. This optimism suggests a belief in the efficacy of such measures to boost consumer spending. Conversely, Hong Kong markets slipped, reflecting lingering foreign investor skepticism awaiting concrete policy implementation. Growth stocks generally declined, with the exception of electric vehicle (EV) stocks, buoyed by strong November sales figures and rumors of the Cybertruck’s launch in China. Regulatory scrutiny of stock recommendations on social media platforms, primarily targeting individuals rather than the platforms themselves, posed minimal concern. Mainland investors capitalized on the Hong Kong dip, injecting $937 million into Hong Kong stocks and ETFs, although volumes in favored ETFs remained light. Corporate buybacks, totaling RMB 160 billion ($336 billion) by 2,446 mainland companies in 2024, represent another supportive factor.
Detailed Hong Kong and Mainland Market Performance
The Hang Seng and Hang Seng Tech indices retreated, while overall volumes were significantly below the one-year average, mirroring the cautious sentiment pervasive in the market. Short selling activity also declined, suggesting reduced bearish pressure. Utilities, materials, and consumer staples were the leading sectors, while technology, real estate, and consumer discretionary lagged. Southbound Stock Connect volumes, indicative of Mainland investor participation, exceeded pre-stimulus levels, with notable net buying in the HK Tracker ETF, China Mobile, and Alibaba, offset by net selling in Tencent, Meituan, Xiaomi, and Sunac.
Meanwhile, Mainland markets presented a mixed performance, with Shanghai and Shenzhen edging higher while the STAR Board declined. Trading volumes were elevated compared to the one-year average, and growth stocks outperformed value stocks. Energy, real estate, and materials sectors led the gains, while financials, communication services, and industrials lagged. Northbound Stock Connect volumes were also above average, highlighting continued cross-border investment flows. Currency movements saw the RMB and the Asian dollar index depreciating against the US dollar. Treasury bonds rallied, reflecting a flight to safety, while commodity markets showed mixed results with copper rising and steel declining. Overall, the market dynamics pointed to cautious optimism tinged with anticipation for concrete policy announcements from the CEWC.
