21 October 2016
Investors are keenly awaiting the meeting between US President Barack Obama (left) and Chinese leader Xi Jinping. Photo: Reuters
Investors are keenly awaiting the meeting between US President Barack Obama (left) and Chinese leader Xi Jinping. Photo: Reuters

Sino-US summit may provide investment hints

The market is awaiting the results of the US Federal Reserve meeting this week as well as the visit of Chinese President Xi Jinping to the United States later this month.

The summit between the Chinese leader and US President Barack Obama might help get rid of various uncertainties haunting global financial markets in recent months, in particular, whether China is capable of stabilizing its currency and stemming further economic slowdown.

It should be the most important meeting for investors for the rest of this year, as it could also become a turning point for Beijing to fine-tune its fiscal and monetary policy in the last quarter of this year.

The Hang Seng Index has traded in the range of 21,300 to 22,000 points amid the wait-and-see attitude of big investors.

The market is likely to remain volatile in the short term, and we are cautiously optimistic about the medium-term outlook for the China and Hong Kong markets.

Major central banks still have the determination and capability to stabilize market. Meanwhile, Beijing is keeping a tight grip on the stock market so any market bull or bear period won’t last very long.

The Obama-Xi summit is critical to the global economy and financial market. Two nations will work on how to restore market confidence amid the looming US rate hike, Chinese yuan devaluation and continued China slowdown.

Both should work together to beat short-sellers and avert the “domino effect” in emerging markets, followed by a credit crisis and rating cuts for sovereign and corporate debt.

That might plunge the global economy into another contraction cycle. We hope something positive will come out of the Obama-Xi summit to restore market confidence and order.

I noted last week that China won’t maintain its current stance on interest and exchange rates as well as capital flow amid the slowing economic growth.

Nevertheless, China has more than US$3.6 trillion in foreign exchange reserves, and Beijing could manage its market reforms through appropriate fiscal and monetary stimulus coupled with a currency depreciation of 2 to 3 percent per year.

Moderate adjustment in yuan strength and interest rate could help offset the impact from massive capital outflow, and in turn stabilize economic growth.

On the other hand, the US will focus on China’s potential move to dump US treasuries in response to the huge capital outflow.

The rout in China and other emerging markets will cause some shock to its fragile global economic recovery. The forthcoming US presidential election will also motivate both parties to help restore market confidence.

For investors, the most important thing is to mitigate the panic stemming from unreasonable expectations. It remains unclear whether the Obama-Xi summit would achieve that.

Investors should wait after the meeting concludes, and hopefully the stock market will kick off a real rebound cycle in the fourth quarter.

The market is closely following the US Fed meeting on Wednesday, and as I’ve pointed out earlier, the announcement of a Fed lift-off could remove long-time uncertainties.

However, emerging markets like Brazil are grappling with credit rating downgrades, and various central banks are fretting over the market turmoil. Europe, meanwhile, is facing a refugee crisis.

In the face of all these troubles, the Fed may decide to postpone the rate hike until the fourth quarter after restoring market confidence.

FTSE Group said it would keep China’s A shares on its watch list for potential inclusion in its secondary emerging-market benchmark gauges. That came after the MSCI index postponed the inclusion of A shares in its key index.

Sources also said the Shenzhen-Hong Kong Stock Connect might be delayed. The central government has placed top priority on stemming further yuan slide and preventing a hard landing for the economy.

Stimulating the stock market and luring investors are not the top priorities. A shares won’t reclaim their function of raising capital and stimulating consumption anytime soon.

As such, investors may need to wait for capital flight from China and other emerging markets to wind up, and for foreign investors to return.

Still, the Hong Kong market may continue to post short-lived rallies in the coming months.

SOE reform

China’s plan to reform its state-owned enterprises has been a hot topic this year. However, the market was disappointed at the recent reform plan released by the government.

Parts of the plan are still at the conceptual stage. The government has filed a detailed action plan that can be implemented in the short term. That’s partially due to opposition from vested interest groups and concern for the loss of state assets.

China has adopted the “crossing the river by feeling the stones” approach. There are still a lot of gray areas in the SOE sector as state firms need to make profit while taking on public welfare responsibilities.

Meanwhile, the government has yet to say which industries will be first affected by the reform plan.

This article appeared in the Hong Kong Economic Journal on Sept. 15.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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