Newsletter commentary July 2023

In July, the market experienced a major turning point. As per our mid-term investors’ calls lately titled "Calmness, But Not Lying Flat", we believed that the market was too pessimistic, and that much of the pessimism was self-reinforcing and self-fulfilling, as different interpretations and assumptions about objective difficulties determine various emotions. We believe that in the next stage, with the improvement of the market, many things will also be reversed.

In fact, the market had begun to gradually see the market bottom at the end of May. On the one hand, the Chinese yuan has been breaking away from the trend of depreciation against the US dollar since July, which had been ongoing since March. On the other hand, the industrial enterprise profit rate declined significantly from January to April this year, but has rebounded significantly from May to June, surpassing last year's annual level and exceeding the pre-pandemic level.

According to the 24 July’s Politburo communiqué, which pointed out the current difficulties, mainly the insufficient domestic demand, some enterprises faced tough time, and numerous risks in key areas and plus the external environment is also complex and severe. After a stable transition in pandemic prevention and control, economic recovery is a process of “wave-like” manner and twists and turns. In terms of promoting continuous improvement in economic performance, continuous enhancement of endogenous power, continuous improvement of social expectations, and continuous resolution of risks, macroeconomic policy adjustments need to be strengthened, with a focus on expanding domestic demand, boosting confidence, and preventing risks. This will promote the achievement of qualitative and effective improvement and reasonable growth in quantity of the economy.

Besides, the government will continue to optimize and improve tax reduction and fee reduction policies and utilize both overall and structural monetary policy tools to vigorously support technological innovation, the real economy, and the development of small and medium-sized enterprises. It will also boost investor confidence and stimulate bulk consumption in areas, for instance automobiles, electronic products, and home furnishings. 

Also, the government will play a better role in driving investment, accelerate the issuance and use of local government special bonds, and adjust and optimize real estate policies in response to significant changes in the supply and demand of China's real estate market. It will also increase the construction and supply of affordable housing, actively promote the transformation of urban villages and the construction of "dual-use" public infrastructure, and revitalize and transform various idle properties. Ultimately, the government will effectively prevent and resolve local debt risks and develop and implement a comprehensive debt-reduction plan.

Investors are concerned about issues for example, real estate, local government debt, and the capital market, and both fiscal and monetary policies have been mentioned in relation to these issues. The implementation of relevant measures in the second half of the year will have a significant impact on the economy and the market.

We believe that both the market bottom and policy bottom have been reached. Compared to other markets, our valuation is low, and the marginal effect has been improving. During the past period, investors have been cautious about the market due to the lack of profitability, but there may be a turning point in the future. 

As China's excess savings will not always exist in banks as savings. It will eventually be invested or consumed. In the past, there was a negative cycle of not investing or consuming, but it is worth paying attention to whether there will be a positive cycle of consumption promoting investment or vice versa. The positive effects of the wealth of real estate in the past may only be absorbed by the capital market due to its size. Certainly, the real estate cycle is now seen as playing excessively. If the capital market can make significant improvements in the balance between investment and financing functions, it may be able to shoulder this responsibility.

Furthermore, foreign investors are similar. Compared to other markets, many of our assets are attractive, and at least the pressure of continuing outflow has eased marginally, and there is no exclusion of some returning.

Overall, the opportunities in the future may not be comprehensive opportunities because the way the economy develops has changed, and the old approach of relying on market share and internal efficiency improvement is no longer easy. Instead, it is important to focus on transitioning from the old to the new without incurring significant risks and gradually creating new opportunities. In addition, different stages of enterprise development will bring various stages of feedback to shareholders. In the past, when ROE was high, there was less feedback from shareholders regarding reinvestment, but at present, with fewer opportunities in many areas, there may be significant returns to shareholders and it may be more valuable.