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The Powerful Credit Expansion in 2019 Marked a Major Turning Point

15 April 2019Emerging Markets
The Powerful Credit Expansion in 2019 Marked a Major Turning Point - Market Insights by Citibank UK

-->The powerful credit expansion in 2019 marked a major turning point

The China/greater China sector has had a stellar 1Q, with China H-shares and A-shares rallying 12.4% and 28.7%, respectively. This outperformance follows a poor 2018 with full year losses of 10% and 23.6% respectively. The strong performance, against the backdrop of Fed dovishness and US/China trade deal progress, has led to investors wondering just how long the rally will last. Citi analysts expect Chinese equities to be able to reclaim the levels reached in early 2018, which is still 15-20% above end of March 2019 levels for the MSCI China and CSI 300 indices. This is based on a trio of factors:

  • Domestic stimulus policies are in place: The real game changer for financial markets may be the large credit expansion in China seen in January 2019, aimed at boosting the economy. The CNY4.6 trillion of new aggregate financing in January was spread out among mortgages, corporate bond, both short- and long-term corporate loans, as well as off-balance sheet financing. The fact that bill financing and off-balance sheet credit are seeing a comeback after a deep freeze in the prior two years should serve as further evidence that authorities desire to ease credit conditions and signals a material change in the conservative targeted easing of 2018 to a more broad based and direct stimulus. Also note that this was followed by China announcing at the National People's Congress in March that it will reduce taxes and fees totaling 2 trillion yuan, or around $298 billion this year. That's almost twice as much fiscal stimulus than originally planned. Last year, China made 1.3 trillion yuan in tax cuts as the economy showed signs of slowing amidst trade tensions with the US
  • Chinese earnings are still growing: Consensus EPS growth estimate for 2019 is 12%, which may be slightly optimistic. But Citi analysts believe Chinese earnings growth is likely to reach 8-10% in 2019 with the two largest contributors coming from Technology and Financials. Technology earnings growth is likely to be stronger than 2018, as trade war and regulatory risks are much lower. Financials can benefit from the domestic stimulus aimed at the consumer, which will help with higher loan growth, greater trading volume and better investment returns.
  • More capital inflows to support further gains: Citi analysts estimate that the MSCI A Share reweighting and FTSE Russell index inclusion could bring US$100bn in equity inflows from passive and active investors and a further US$110-130bn bond inflows from the Bloomberg-Barclays Global Aggregate Index inclusion. This secular trend is likely to continue as long as the Chinese government's commitment to open its financial services and capital markets for greater foreign participation remains credible. This then requires authorities to ease capital control measures that could lead to sizeable inflows, leading to RMB appreciation.


  • Combining valuation re-rating and earnings growth, Citi analysts expect Chinese equities to be able to reclaim the levels reached in early 2018, which is still around 15-20% above end of March 2019 levels for the MSCI China and CSI 300 indices.

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