After two weeks, China’s overall stock assets have gradually fallen, while the bond market still shows a bullish trend. The yield on ten-year government bonds has dropped to around 2.5%. Meanwhile, the external market, particularly the Nasdaq, has quickly risen after a brief correction. The overall external bond market has also experienced some fluctuations, but the overall bond yields are declining, with the yield on US ten-year government bonds falling below 4%, and the US dollar index maintaining around 102. The enthusiasm for betting on the Federal Reserve’s interest rate cuts remains high in the external bond market. We speculate that the Federal Reserve intends to control the pace of balance sheet reduction to suppress the rapid rise of the stock market, not wishing to see a rapid expansion of the financial environment.
However, on Thursday this week, the overall situation seemed to change as the disclosure of data altered market expectations. In China, although the December PMI overall declined, there were two pieces of good news on Thursday. The first is that export and import data have risen for two consecutive months. Judging from Japan and South Korea’s export and import data, China’s figures are expected to continue expanding, with a significant increase in the trade surplus, which is beneficial to some extent for the monetary policy space of the Renminbi. The second piece of news is about policy. The central bank approved a 100 billion yuan rental housing loan plan. The “100 billion yuan rental housing loan support plan” approved by the central bank on Thursday is a structural monetary policy tool specifically established by the People’s Bank of China in 2023. It will be piloted in eight cities including Jinan and Zhengzhou. It aims to guide seven banks including ICBC, ABC, BOC, and CCB to provide financial support for the purchase of existing houses for housing rental entities in pilot cities, thereby revitalizing existing houses and expanding the rental housing supply in a market-oriented manner.
As we have said in previous reports, the most important indicator of China’s economy is real estate prices. For macro-control authorities, this price decline is determined by market supply and demand. Real estate prices must fall, but authorities must control the pace and bottom of the decline. If the bottom of this decline reaches a 20% discount, it will affect people’s willingness to leverage on new homes. If the decline reaches 20-40%, it will threaten the holders of second-hand homes, leading to frantic selling. From the overall market decline, we have already entered the 20-40% discount range, and the number of second-hand homes listed has seen a surge. From the perspective of macro-control authorities, setting up special structural monetary tools to purchase existing houses on the market and maintaining price stability while injecting liquidity into the market is what we consider the most ideal monetary tool. The 100 billion yuan structural funds approved this Thursday are the ideal monetary tools we have been talking about. This 100 billion yuan covers eight cities, which are the backbone of China’s first and second-tier cities with a large population. Our simple calculation shows that this 100 billion yuan can buy about 60,000-70,000 houses, with each city getting about 8,000-9,000 houses. The 100 billion yuan might be fully utilized in the first quarter. This monetary policy tool reflects not only the 60,000-70,000 houses but also the direction of the central bank’s monetary policy adjustment. The regulatory authorities may believe that the bottom of the real estate market will appear in the first half of 2024, and there might still be some excess supply, which will be stored through rental and exit the commodity housing market. From this perspective, if this 100 billion yuan is effective, more will continue to be added in the future. We will continue to track the transaction prices, volumes, and inventory levels of new and second-hand houses in these eight cities.
From the attitude of this 100 billion yuan monetary policy, Thursday should be the bottom of the stock market for some time to come. Further developments in the situation will depend on the trend of real estate in these eight cities and the progress of the real economy.
Besides these two positive factors, China’s price and financial data were also disclosed on Friday. The narrowing of the CPI and PPI decline, and the slight fall in M2 and social financing growth rate, did not lead to a significant improvement in the price and financial data situation. However, December’s data shows a stabilizing trend compared to November. In the US, the December CPI reached 3.4%, up 0.3 percentage points from November and 0.2 percentage points higher than market expectations, which is not good news for the stock market. However, the trading results on Thursday and Friday, with the Nasdaq closing flat and the US bond market continuing to fall, suggest that this data has not fundamentally changed the restrictive nature of US monetary policy. It only changed expectations of whether the Federal Reserve will cut interest rates in March, not the expectation that the Federal Reserve
will not raise rates again. US asset prices have shown considerable resilience. Some other data are also worth paying attention to, such as the US fourth-quarter GDP data, which we need to determine the possibility of a recession in the US in the future. If the data can maintain around 2.0%, then the risk of a recession trade in US stocks is still very small. The mainstream trade is still rate cuts and bullish outlooks.
In summary, on Thursday, China saw positive information internally, with good signals in monetary policy and macro-control. Externally, the US CPI data suppressed the rapid rise of US stocks, and the overall situation has changed compared to the past two weeks. We will gradually present the real estate market monitoring situation of the eight pilot cities in the coming period.
