In recent developments, China's trade performance during April 2023 has demonstrated a remarkable rebound, defying expectations and highlighting a shift towards positive economic indicatorsThe data released on May 9 illustrated that imports surged by 8.4% year-on-year, amounting to a total of $220.1 billion, while exports saw a smaller but significant rise of 1.5%, tallying up to $292.45 billionThis improvement could serve as a catalyst for renewed optimism within economic circles.

On the same day that the trade statistics were unveiled, various financial markets reflected this uptrendThe Shanghai Composite Index climbed above the 3150 mark, while Hong Kong's Hang Seng Index exceeded 18500, gaining 1.22% in just one day and recovering nearly 25% from its lowsSuch positive movements suggest a stabilization of the markets, reinforced by signs of early macroeconomic recovery noted since the start of the year—a recovery that has particularly benefitted from the stability in manufacturing and exports.

Furthermore, the offshore yuan fluctuated near the 7.2 levels, indicating a degree of investor confidence in the Chinese markets

The recent performance of the A-shares has positioned China as one of the top-performing markets globally over the past month, primarily attributed to early signs of macroeconomic stabilityBetween January and February, exports saw an impressive rise of 7.1%, with additional support from the Purchasing Managers’ Index (PMI), which further confirmed the recovery in economic growth rates.

The rebound in Chinese exports has been further supported by global trends, including a return of quantitative investments and hedge funds to the Chinese market starting in MarchIn contrast, over the past several months, long-term global investors had been hesitant to engage with China’s markets, peaking at a low point by the end of JanuaryThe reversal in capital flight has sparked renewed interest in A-shares and Hong Kong stocks.

According to Wang Ying, a strategist at Morgan Stanley focusing on China, the current upward trajectory of the stock market needs to be sustained with bolstered fundamentals, particularly deriving from improved corporate profitability

• Debt Costs Soar as Banks Reevaluate Deposit Strategies
• Crypto Surge Pushes Major Indices to New Highs
• Bitcoin Breaks $100,000 Barrier
• MCU: Struggles and Breakthroughs
• Oil Prices Expected to Fall to $65/Barrel Next Year

As the valuation of the MSCI China Index continues to recover—currently sitting at approximately 10 times earnings—the relative discount compared to emerging markets has shrunk from over 30% to under 20%, showcasing a redistribution of investment sentiment.

Earlier in 2023, the global manufacturing PMI began to show signs of recoveryFor instance, in March, many countries reported PMI scores exceeding the pivotal 50 mark, indicating a return to expansionary territory for manufacturing, including in the US—where manufacturing PMI also rose to 50.3 from 47.8 in FebruaryThis global trend positively influences foreign demand for Chinese exportsThe expansion of China’s official manufacturing PMI's new export orders index over the last two months supports this notion, suggesting an uptick in external demand.

Lou Huai-Jie, a senior researcher at the Guangxun Chief Industry Research Institute, commented on April's trade figures, stating that the surges in both exports and imports represent significant gains compared to prior values, with April’s trade surplus reaching $72.35 billion—although slightly below expectations, it also improved considerably by $13.8 billion from previous estimates

The confluence of recovering foreign demand, a revival of the US real estate cycle, inventory replenishments, and a beneficial low base effect have collectively facilitated a quicker rate of export growth.

This year, China's export sector has consistently illuminated points of strength within its economyA backdrop of subdued domestic demand has intensified deflationary pressures, consequently enhancing China’s export competitiveness—a development that could be construed as a silver lining against the backdrop of general inflationary woes that many central banks are grappling with globallyHowever, it’s essential to note potential tariff increases on specific goods, such as electric vehicles, which may lead to stiffer competition between Chinese manufacturers and their foreign counterparts.

Dissecting the specifics of exports by category, the period from January to April has revealed that the export values for ships, automobiles, and integrated circuits surged by 101.4%, 21.2%, and 19.1%, respectively

This data highlights a clear upgrade in the quality and composition of China's export offerings and indicates a steady rise in the proportion of electromechanical productsIn parallel, domestic demand has shown improvement, with indices for new orders and procurement both expanding for two consecutive months, suggesting a recovering economic backdrop.

Overall, the latest economic data from China present an encouraging glimpse into the future of its economic landscapeThis optimism has fostered a willingness among foreign investors to keep a vigilant eye on the continued performance of these statistics, with some long-term institutional money reducing their underexposure to the Chinese marketReports show that during the first quarter, China's GDP expanded by 5.3%, exceeding market forecastsTrade, alongside industrial production, emerged as pivotal strongholds, while consumption slowed and the real estate sector continued to face considerable pressures, with new construction and sales areas plummeting by 27.8% and 19.4%, respectively

Simultaneously, financial indicators, such as new social financing and RMB loans, lagged behind last year’s figures.

Post the “Two Sessions,” the macroeconomic policies remained stable, with capital markets receiving significant policy directivesThe central bank did not pursue further monetary easing, and fiscal expenditures have not significantly accelerated, as noted by Wu Zhaoyin, macro strategy director at China Aviation Trust.

In the context of housing market dynamics, Tian Yujin, research director at the E-House Research Institute, analyzed the recent trajectory of relaxed purchasing restrictions in HangzhouInitially focused on suburban markets, the scope of policy relaxations soon encompassed second-hand homes within more central city areasRemoving purchasing restrictions outright signifies a shift in policy towards districts such as Wuchang, Xihu, Gongshu, and Binjiang, now allowing buyers to forgo compulsory social insurance contributions when purchasing new homes.

With a promising outlook for even stronger growth momentum expected in Q1 of 2024, Morgan Stanley's China economics team has revised its predictions for real GDP growth upward from 4.2% to 4.8% for the upcoming year, with nominal growth forecasts also being raised correspondingly

The team anticipates that exports combined with moderate stimulating measures will play a vital role in this growth trajectory.

Looking ahead, after a period of aggressive inflows from overseas capital, it is anticipated that the market will stabilizeThe Chinese stock market has outperformed globally on both weekly and monthly termsThe MSCI China Index, which encapsulates a majority of offshore market stocks while including a small proportion of A-shares, found itself at its lowest point on February 2, 2024, only to recover significantly since then, particularly ramping up since April 19.

As of May 7, the returns for the MSCI China and Hang Seng Index stood at 9.5% and 8.9%, respectively, while during the same period, the MSCI Global and Emerging Market indices showed more modest returns of 6.7% and 4.2%. While the A-shares have lagged behind their offshore counterparts, they, too, posted a noteworthy 4.8% increase since early February.

The recovery of local investments in the Chinese markets is mirrored by notable net purchases of Hong Kong stocks by Southbound funds daily since April

Despite these local equity purchases, the returning foreign capital—especially speculative funds such as hedge funds—plays a crucial role in invigorating the market, albeit long-term capital flows have not yet demonstrated a substantial increase.

According to data from EPFR, Morningstar, and IHS Markit, there was a net seller position of $2.34 billion by active long-term funds, while passive long bull funds recorded a sell-off of $1.22 billion during AprilConversely, Southbound funds saw net purchases amounting to $10.7 billion—a clear signal of growing demandFurthermore, speculative investments also witnessed heightened activity, with rising premiums for Hang Seng Index futures indicating a robust interest from quantitative funds looking to capitalize on the offshore market trends.

An overseas investment banking source reported that foreign long-term holding funds significantly engaged in the recent market rally

Interestingly, there’s a noticeable trend where these firms are maintaining their positions in China while liquidating stakes in other Asian markets to fulfill redemption demands from investors, indicating a reduction in their prior low exposure to the Chinese market.

However, following the pronounced rally, analysts from Morgan Stanley anticipate that momentum may lessen and caution against chasing gains at current index levelsTechnical indicators suggest signs of short-term overbought conditions, which could deter further large-scale purchases from global quantitative investorsGiven the positive shift in investor sentiment, it is recommended instead to focus on specific stock and thematic investment opportunities.

Additionally, easing geopolitical concerns and decreased volatility in US and Japanese markets have shifted the urgency of reducing exposure in these markets