Important Links

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.

Conclusion

  • 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.

Our recent research

Fed and ECB speak not showing much enthusiasm for policy easing anytime soon

Fed speak shows little enthusiasm for "insurance" rate cuts......

Find out more

Economics

Competing narratives leaves sentiment mixed overnight

Risk sentiment is supported overnight from Trump's comments earlier in the week when he says, "he feels China talks will be successful".

Find out more

Economics

Bracing for US-China 'Trade War Today, Trade Deal Tomorrow'

Market response to the latest escalation of US-China Trade war has been muted so far. The negative sentiment has limited itself to Chinese stocks with the Shanghai Composite falling almost 5.0% since the start of last week while declines in US and European stocks have been half that. In FX, USD (a safe haven in times of crisis) has dropped a mere 0.2% since the escalation of the crisis.

Find out more

Economics

Take the first steps to your wealth management planning with Citi

Speak to a Relationship Manager
0207 500 1992

Already with Citi? Contact your relationship manager or view product availability on Citi Online

Why choose Citi

A relationship - not just a bank account

A dedicated Relationship Manager giving you access to our internal team of product experts and all our benefits

Access to exclusive Citi products

A range of current and investment products available both on shore and offshore, in the currency of your choice
Multi-currency accounts
Investment products

Global services for a global lifestyle

Our team is here to support you getting started in UK or with International travel and relocation
Moving to and from the UK
Travelling overseas

Offshore investments

We offer a diverse range of banking and investment services, including for those who want access to offshore investments

Find out more

Just moved to the UK?

We can save you time money and hassle. If you are a foreign national in the UK, Citi's International Banking Service can help you manage your money, home and away.

Find out more

Investment products are not insured by any governmental agencies, are not bank deposits, and are neither obligations of, nor guaranteed by, Citigroup, or any of its affiliates, unless otherwise stated. Investment products are subject to investment risks, including possible loss of some or all of the principal amount invested. Past performance is not indicative of future results, investments can go down as well as up.

“Citi analysts” refers to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”) and voting members of the Citi Global Investment Committee. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information on this page has been obtained from reports issued by CGMI. Such information is based on sources CGMI believes to be reliable. CGMI, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI’s judgment as of the date of this page and are subject to change without notice. This page is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this page may be reproduced in any manner without the written consent of Citibank N.A. Information on this page has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this information. Investors should consider this information as only a single factor in making their investment decision.

Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions.