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The RMB has gained 4% against the US dollar since Sept. 2 when we wrote, “All signs point to a fast-rising yuan.” We argued that US monetary policy was more expansive than at any time in history with broadly-defined money supply growth close to 25% year-on-year; that the differential between US and Chinese interest rates hadn’t been so wide since the yuan traded around 6 to the US dollar in 2018; that the yuan had sailed past key technical boundaries; and, above all, that China’s economy would show strong growth while the US economy sputtered.
The dollar fell against most major currencies after initial US election results pointed to a Democratic victory, but the yuan led the dollar down, as can be seen clearly in the chart below showing five days of intraday prices.
China’s leadership wants the RMB to appreciate further. China’s economic model until recently entailed an extremely high savings rate, some of which was invested in export industries to earn foreign exchange. China’s current account surplus reached a remarkable 10% of GDP in 2007 but since then has fallen to about 1.5%.
China wants to import more as part of its shift towards domestic consumption. It doesn’t want a trade deficit. The solution is to buy imports more cheaply, using a currency with higher parity. The RMB will continue to rise to around 6 to the dollar, because the interest-rate differential and economic growth differential with the West supports it, and because China’s authorities want it to rise.
And on Aug. 17 we wrote, “Time to buy China’s smoking-hot equities,” adding “The domestic focus of China’s policy bodes well for consumer industries, for example China’s automobile companies.” Since then the ETF that tracks the CSI 300 onshore (or A-shares) market, ASHR, has gained 8%, compared to 4% for the S&P 500. The consumer discretionary sub-index of the CSI 300, though, gained 23% in the same period, led by automotive shares.
Among the Chinese automotive stocks, BYD gained 130%, Great Wall Motor 93%, Chonqing Changan Automotive 51%, and SAIC Motor gained 47% since August 2017.
Will China’s rally continue? The CSI 300 now trades at 17 times forward (expected) earnings, pricer than the 15 times earnings multiple at the end of 2019, but nowhere near the 22 times multiple of the 2015 bubble. The market isn’t screamingly cheap unless, of course, you compare it to the S&P 500 at 27 times trailing earnings at 25.5 times forward earnings. Only once in the past has the S&P 500 been so expensive, and that was just before the 2000 tech stock crash.
China’s consumer stocks anticipated the shift towards domestic consumption in the government’s policy planning mix, announced in a number of official pronouncements during the past two months and embedded in the new Five-Year plan set forth at last week’s Communist Party plenum.
Growth opportunities in China are likely to focus on new technologies enabled by the installation of six million 5G base stations during the next two years. Big Chinese tech companies like Alibaba, Tencent, and Huawei will expand their Cloud businesses to exploit the new broadband, in a number of ways, starting with so-called smart cities. Think of Uber’s effect on urban transportation in the US, and add a zero on the right to estimate what Smart Cities can do. Ride-sharing apps match travelers to vehicles. A city wired together by 5G can match every passenger and every package to vehicles and route all the city’s traffic according to a time-saving algorithm.
Telemedicine, robots and fintech also will benefit, although the Chinese authorities took away the punchbowl at the fintech party last week by postponing Ant Financial’s largest-in-history IPO. The fact that Chinese stocks rallied through the incident is a robust gauge of the market’s underlying strength, and Ant will be back in a few months. One way to express optimism about China’s tech sector is through ETF’s like CQQQ or KWEB, which concentrate on tech stocks.