During the holiday, Hong Kong stocks rose nearly 5% in a week, and the offshore

During the Labor Day holiday, the Hong Kong stock market was open for trading on May 2nd and 3rd, and the offshore foreign exchange market also operated as usual. The sentiment towards Chinese assets in the international market has significantly warmed up, with the Hang Seng Index in Hong Kong rebounding nearly 5% in a week; the offshore renminbi against the US dollar surged by nearly 700 pips, with the USD/CNH moving back below 7.2 from the previous level around 7.28.

Factors such as the US non-farm employment data falling short of expectations, Federal Reserve Chairman Powell downplaying the prospect of interest rate hikes, hot money flowing back to undervalued markets, and positive signals from the Chinese Politburo meeting have collectively driven the market's recovery. A QFII investment manager from a foreign capital told reporters that some overseas funds are flowing out of markets in South Korea, Japan, India, and the United States, especially some hedge funds that may seek opportunities in the Hong Kong stock market. Southbound capital has been in a state of net inflow throughout April, but longer-term funds may still be on the sidelines.

The Hang Seng Index Enters a Technical Bull Market

The Hang Seng Index in Hong Kong bottomed out on January 22, 2024, closing at 14,961 points, falling back to the level of 1997. However, even the most lackluster market will experience a technical rebound. In the week of April 15th, the Hang Seng Index surged by 7.5%, leading the global major stock indices, and then continued to climb.

"In the week of April 15th, the Hang Seng Index formed a bullish engulfing pattern on the weekly chart, and in the past 8 trading days ending on the 29th, it continued to rise and broke through the downtrend line and 200-day moving average that lasted for 3 years. This means that the next significant target for the bulls is the 18,000 to 18,200 area (which has already broken through to near 18,500 during the May Day period), which is close to the upper rail of the channel and also the high point of the fourth quarter of last year," said Jerry Chen, a senior analyst at Gain Capital Group, to the reporter.

Due to the two hottest markets last year (Japanese and US stock markets) having reached a phase high, coupled with the Hong Kong stock valuation reaching an extremely oversold level, China's real estate and fiscal easing policies are frequently introduced, and funds have begun to enter Hong Kong, China. Some overseas funds are also flowing out of markets in South Korea, Japan, India, and the United States.

The increase in holdings of the Chinese market, especially the Hong Kong stock market, is also evident in the fund positions. According to Goldman Sachs' Prime Services data (mainly for global hedge fund clients), Chinese stocks (onshore + offshore) saw net purchases in April (with 4 out of the past 5 months seeing net purchases), mainly buying H-shares, with the net allocation increasing to 7.5% (the 10th percentile in the past five years); the hedge funds that had previously flooded into the Japanese stock market continued to flow out of Japan (this trend began to emerge in late March), and Japanese stocks were slightly sold in April. The overall net allocation to Japan remained unchanged at 4.5% (the 66th percentile in the past five years).

"For those active funds that are still allocating to China, many funds are willing to reduce their underweight position in the Chinese market or increase their allocation. However, for funds that have already exited China or do not invest in China, there is no significant sign of a large influx. Due to the poor liquidity of Hong Kong stocks, it is quite rare for trading volume to break 100 billion, while A-shares can break 1 trillion in recent days. Poor liquidity can also easily lead to sharp fluctuations in Hong Kong stocks, and the sustainability of continued inflows of funds into Hong Kong stocks still needs to be observed," said a strategist from an international investment bank to the reporter.

Some overseas funds believe that the further upward space in the US and Japanese markets has decreased, and some of these funds are willing to reconsider the allocation opportunities in the Chinese market this year, especially some long-term funds from Southeast Asia and the Middle East have begun to show interest in the Chinese market. Recently, the Nikkei index has retraced by more than 6%.

The reform of capital market governance has particularly attracted the attention of foreign capital, as they have already tasted the benefits from the Japanese and South Korean markets. On April 12th, the new "Nine National Policies" is the third guiding document for the capital market issued by the State Council after the two "Nine National Policies" in 2004 and 2014, emphasizing the strengthening of cash dividend supervision for listed companies and increasing the dividend rate to enhance the stability and predictability of shareholder returns. The following week, the China Securities Regulatory Commission announced five measures to support the development of Hong Kong's capital market, covering the further expansion and improvement of the existing Shanghai-Hong Kong Stock Connect program (including ETFs, REITs, and mutual funds), encouraging more funds to flow into Chinese enterprises listed in Hong Kong IPOs.Additionally, the recent market rumors about policies aimed at stimulating the real estate sector have also boosted market sentiment. Wang Qiangsong, the head of research at Nanjing Bank Wealth Management, told reporters that the meeting memorandum released on April 30 emphasized the task of ensuring the delivery of pre-sale housing, but omitted the so-called "three major projects," including affordable housing. This has been interpreted by the market as a positive sign, as the central government's focus has shifted from promoting affordable housing to ensuring the delivery of pre-sale housing, marking an important step towards addressing real estate risks.

In terms of the overall economic situation, China's macroeconomic start in the first quarter was good, with GDP growth of 5.3%, better than market expectations. Imports and exports and industrial production were highlights, while consumption was average, but real estate data still faces significant pressure, and the Politburo meeting's signals on real estate are particularly closely watched. Specifically, in the first three months, the total value of imports and exports exceeded one trillion for the first time, with a year-on-year increase of 5.0%, reaching a high not seen in six quarters. Industrial production accelerated, with a year-on-year increase in added value of 6.1%. After the Spring Festival holiday, consumer sentiment fell, and the total retail sales of social consumer goods in March only grew by 3.1%. However, the new construction area and sales area of real estate decreased by 27.8% and 19.4%, respectively.

Offshore RMB Reversal

With the recovery of the Hong Kong stock market, the performance of the offshore RMB has also been quite eye-catching, rising by nearly 700 points during the holiday week. As of the close on April 30, the USD/RMB was reported at 7.2411, and as of the close on May 3, the USD/CNH was reported at 7.1925.

"I was originally thinking that offshore short positions would take advantage of the Chinese holiday to make a move, causing a depreciation of the RMB, and then wait for the long positions in the onshore market and the central bank's stability signals to 'suppress' it after the holiday ends, but now it seems that this judgment was way off," said a foreign exchange trader at a Chinese bank to the reporter, noting the need to closely monitor the opening of the onshore RMB on Monday.

The latest Federal Reserve interest rate meeting maintained the interest rate unchanged, on the one hand, considering that progress in fighting inflation is limited, and a rate cut may be postponed, on the other hand, Federal Reserve Chairman Powell stated that "the next move is unlikely to be a rate hike," leading to a significant drop in the US dollar and US Treasury yields for two consecutive days.

The non-farm employment data on May 3 was below expectations, further driving the US dollar lower. Data released by the US Department of Labor showed that the increase in the US non-farm employment population in April was the smallest increase in six months, with the US non-farm employment population increasing by 175,000 people, expected to be 240,000; the unemployment rate unexpectedly rose from 3.8% in March to 3.9%, expected to be 3.8%, and the year-on-year wage increase was lower than expected and the previous value.

After the data was announced, traders' expectations for the first Fed rate cut were moved up from November to September, with US stocks and bonds rising and the US dollar falling. The US dollar fell sharply against non-US currencies, for example, the US dollar fell more than 1% against the Japanese yen, reported at 152.09, with a cumulative decline of 4% since last week, the largest drop since November 2022. It is expected that in the coming week, the RMB is likely to continue to rebound against the US dollar.

"The 'Sahm rule' recession indicator, compiled based on the unadjusted average of the US three-month unemployment rate, is 0.36 percentage points higher than the lowest value in the past 12 months, which is the highest value in this cycle," said Nick Timiraos, the "new Fed's communication agency."

"The conflict between Iran and Israel has eased, and the improvement in the eurozone data has driven the euro to rebound. In addition, most of the repricing of US interest rates has already been reflected in the prices, and if any subsequent US economic data falls short of expectations, the US dollar is expected to weaken," Chen Jia Rui mentioned to the reporter.Barclays has recently stated that as of May 1st, the sentiment towards the US dollar has clearly favored a stronger dollar, with market positions indicating a tendency to believe that the euro, yen, and renminbi may further weaken. However, Japan's foreign exchange intervention and Powell's press conference were not as hawkish as the market had feared, leading to a rebound of most currencies against the US dollar. "In the foreign exchange market, we currently believe that the asymmetry is skewed towards a weaker dollar. Since many currencies are trading at multi-year lows against the dollar, a weaker dollar would be a more influential event if the Federal Reserve could implement a rate cut before July. Given the potential for significant swings in central bank policies (towards two extreme directions), we believe that policy divergences could drive an increase in foreign exchange volatility in both developed and emerging markets."