Chinese markets miss the global rally, worrying about deflation

KEY DEVELOPMENTS

Recent consumer price inflation data hints at deflation in China and suggests that consumers remain pessimistic. The weak property sector is causing this deflationary pressure, with 60% of Chinese families' assets related to their properties. Financial markets continue to worry about the possibility of "stagflation" if Beijing does not respond. Weak domestic loan growth provided further evidence of sluggish financing demands amid looming uncertainty over the domestic economy. China's central government's one trillion-yuan special bond targeting infrastructure construction is starting to have an impact, but it needs to benefit the consumer more. S&P Ratings added their criticism to Moody's, warning of the knock-on effects of a weak property market on the banks and consumer sentiment.

GLOBAL IMPACT

Funds have been flowing back into emerging markets following the mid-week rally in the US stock market, but mainland China and Hong Kong missed out. Foreign investors reportedly pulled $3.7 billion from China's capital market in November, prompted by China's deteriorating relations with the West and its slow action to tackle economic issues, notably the continuing property market decline. However, there was some good news, with the yuan continuing its recovery versus the dollar.

MARKETS

• Chinese stock markets attempted a rally early last week. Still, it didn't persist, with the Shanghai Composite Index and Shenzhen Composite Index unchanged on the week despite a robust rally in developed markets led by the US.China’s stock market continued to grapple with deepening pessimism. The Shanghai Composite Index dipped to test the last low seen in late October before closing at the lowest of this year at 2930.8, while the Shenzhen Composite Index fell below the pandemic lowest and dived to a four-year low, down by 1.13% from the previous close
• The offshore yuan's rally resumed, with a 0.7% rise versus the dollar, from $/CNH 7.1858 to $/CNH 7.1346. The yuan started this year at $/CNH 6.75..

MAJOR NEWS

Economy

Deflation in China's Consumer Price Index (CPI)

• China's CPI for November fell more than the market expected, down 0.5% year-on-year, versus a 0.1% decline forecast and a 0.2% fall in October
• Authorities attributed the unexpectedly significant contraction to pork prices, which fell 31.8% year-on-year
• Core CPI, excluding volatile food and energy prices, also fell 0.3% month-on-month but was 0.6% up year-on-year
• Elsewhere, a private survey reported that personal care products saw a 4.5% reduction in average selling price over the first three quarters of this year, while discounts offered by brands drove up sales volume by 2.5%

Retail sales recovering

• Retail sales in November rose 10.1 % year-on-year, missing a forecast 12.5% growth rate, but they were up from 7.6% in October and the highest growth since June
• Catering spending rose by 19.4% year-on-year, followed by an 11.5% increase in 
• Clothing and apparel sales rose by 11, and entertainment rose by 10.7%
• Retail sales on big-ticket items also rose moderately, with auto sales up 6.5% year-on-year, while sales of electronic and telecommunication devices were up 6.6% year-on-year

Loan growth slows, highlighting a lack of optimism.

• China's newly increased yuan loans in November reached 1.09 trillion yuan ($779 billion), versus an expected 1.3 trillion ($182 billion), down 10% year-on-year and the lowest for this period since 2017
• Enterprises medium-long term loans, a measure of business sentiment, rose by 16% to 446 billion yuan ($62 billion) from 383 billion yuan ($54 billion) in October. However, it was still nearly 40% lower compared with the same period of last year
• Households' medium-long-term loans, a measure of newly increased house loans, was 233 billion yuan ($33 billion) in November, up 10.8% from last year but less than half the level seen before the property downturn
• Total social financing climbed to 2.45 trillion yuan ($343 billion) in November, but it missed market expectations of 2.6 trillion yuan ($364 billion)
• Government bond issues were down 23% at 1.15 trillion yuan ($161 billion) in November, after 1.5 trillion yuan ($210 billion). Nonetheless, this level was higher than the average level this time of year, indicating that China's economy has relied mainly on government expenditures. At the same time, business sectors and households still lack confidence

China's property market sees a steeper fall.

• Property sold areas in the first eleventh months of the year fell 8% year-on-year
• The value of sold properties fell 5.2% in the year-to-date
• Property investment fell 9.4% year-on-year
• New building investment was down 21.2% year-on-year
• Investment in infrastructures and major projects saw moderate growth, down from 5.9% in the last reporting month but up 5.8% year-on-year

Key cities make house buying more affordable

• Beijing and Shanghai lowered loan rates and cut the down payment ratios for house buyers on Friday
• However, restrictions remained in place, with families owning two properties cannot buy more
• Analysts doubted that such moderate policy adjustments would have much impact absent lowering interest rates

S&P warns that property sector debt overhang continues

• S&P Global Ratings issued a wakeup warning for the Chinese property sector on Wednesday, after the conclusion of China's economic meeting, noting that without it, the country's economic slowdown would continue to pressure heavily indebted local governments and further stress credit risk among China's banks, local government financing platforms, and real estate enterprises
• S&P argued that current central government measures may not be enough to alleviate these pressures, adding that a debt swap plan, reported to be worth 2.3 trillion yuan ($320 billion), might lessen the local government's debt repayment pressure to some extent, but would not fully discharge the burden on banks, especially those in economically weak areas
• Moody's downgraded its outlook for China's long-term sovereign bond from stable to negative earlier this month using the same argument

Business

E-commerce discounting

• China's e-commerce platforms are offering steep discounts to perk up year-end sales.
• Online retailers like Alibaba and JD are doubling their low-price strategy to attract price-sensitive consumers
• Taobao has launched a discount campaign worth 10 billion yuan ($1.4 billion) and promised to provide an array of perks and deep discounts on a wide range of products
• JD appeared to be even more stressed, as its net revenue only increased 1.7% from a year ago in the third quarter

Historic cold wave hits Chinese infrastructure

• A historic cold wave hit most parts of China last week, putting pressure on infrastructure, the electricity grid, and transportation, threatening commodities' supply and the growing season, putting pressure on food supplies and increasing import demand, most notably wheat
• Many areas in north China, including Beijing, suspended schools and encouraged people to work from home
• Parts of southern Shanxi, northern Henan, Hebei, and northern Shandong are expected to have snowstorms to blizzards, with some areas experiencing blizzards (20-28 mm), adding snow in depth by 5-20 cm, along with steep temperatures drop to below (-10 C)