洪灝|新世界格局里的“双循环”(Dual Circulation in a Changin...

这是我们20200802的报告《洪灝|新世界格局里的“双循环”》的英文原版。感谢阅读。

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At the latest politburo meeting, a new mantra has been proposed to boost domestic demand while attracting foreign investment and stabilizing trade. Meanwhile, fiscal policy is guided to be supportive, while maintaining flexibility on monetary policy. The policies are stipulated to be counter cyclical and preemptive. The overall tone of the politburo meeting is reassuring, but the tenet to curb property speculation is reemphasized. The market will likely continue to be bounded by the strong resistance level we discussed in our last report in the near term, as the tension between China and the US escalates (please refer to “Policy Signs” 20200727). 

It pays to understand the new mantra of dual circulation in the context of a changing world. The structural shift in global economic alignment indeed began around 2008, when the subprime financial crisis initiated macro changes in the global economy. Historically, the US has been the insatiable consumer of global output, and China enjoyed the largest trade surplus with the US. As the US consumed and the rest of the world saved, the US personal saving rate as a reflection of expanding US current account deficit had been falling consistently till 2008. Since then, however, the secular trend that had persisted for almost four decades started to reverse. As the US started to save, its current account deficit improved. The latest recession induced by COVID-19 has spurred the US personal saving rate to 13%, a level not seen since the early 1980’s (Figure 1). Incidentally, the US market valuation, as measured by the ratio of US market cap to GDP, is closely and inversely correlated with the US saving rate. If this relationship persists, and the US saving rate has bottomed out, the US market-cap-to-GDP ratio has probably peaked.

Figure 1: The US saving pattern has fundamentally changed since 2008

Source: Bloomberg, BOCOM Int’l 

It is in this milieu that the new mantra of dual circulation is proposed. It has as much urgency as necessity. Consensus seems to think that this is a brand new strategy for the new era. But the world has long changed, especially the rivalry between China and the US. At a time when global demand has been weakened by COVID-19 and value added by exports to China’s GDP has declined, stimulating domestic demand should be top of the agenda. In the past few years, China has been busy upgrading its manufacturing industries and structuring its economy towards consumption. Figure 1 shows the secular necessity of these strategic moves. Now it may be the first time to articulate a strategy that has long been executed. In light of recent developments such as TikTok’s pickle, there is no more need to be reticent.

Such secular changes are affecting the US dollar as well. The talks about the Dollar is at risk of losing its reserve currency status have resurfaced. But, recently, the non-commercial net long positions on the Dollar have been reduced fast to a level that used to portend some technical support for the Dollar in the near term (Figure 2). That said, we should not mistake technical support, if any, for a reversal of the Dollar’s long-term descent. As the US continues its monetary debauchery, the Dollar’s secular weakness is likely to continue.

Figure 2: USD non-commercial net long position falling together with the Dollar 

Source: Bloomberg, BOCOM Int’l 

We also note that traders are reducing their non-commercial net long positions in gold. Historically, these changes in net long position are highly correlated with gold’s performance in the near term (Figure 3). The technical breather in the weakness of the dollar aforementioned can also contribute to a waning upward momentum of gold in the near term. That said, when the Dollar resumes it secular decline, gold will see new highs beyond the near term.

Figure 3: Gold non-comm net long falling, together with the upward momentum of gold.

Source: Bloomberg, BOCOM Int’l 

The market is also rightly concerned about the reemphasis on containing property speculation. In our last report titled “Policy Signs” on 27 July, we discussed the positive relationship between property and stocks before 2015 has changed into an inverse one. As such, a lukewarm property market is not necessarily bad news for stocks. From tepid narrow money M1 expansion, home loans as a percentage of total new loans and tier-1 cities property price inflation, we have not detected signs of a spreading property speculation on a national scale (Figure 4). We believe this is the reason why the Politburo meeting is sticking to the tenet of “one city one policy”. And of the five cities that are implementing some forms of property curbs, only Shenzhen is in tier 1.

Figure 4: Narrow money growth still slow, no sign of spreading property speculation

Source: Bloomberg, BOCOM Int’l 

Interestingly, our bottom-up short-term stock picking model has significantly increased the allocation towards discretionary consumption and technology, while reducing substantially the allocation towards healthcare by closing winning positions. While this stock picking model is short term in nature, it is already starting to reflect the mantra of dual circulation by increasing allocation to discretionary consumption and technology that are set to benefit from increasing policy support. While the model is completely driven by quant program and no human intervention is necessary, the changes in model allocation suggest that the market has sniffed out China’s new direction in a changing world.  

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洪灝,CFA

交銀國際

2020.08.03

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onceyanzi08-05 11:15

洪总您好,麻烦看一下私信,谢谢您