How to Consider Playing the China Wildcard

Economic

Summary:

Our views on the recent policy direction and why investors could consider China in a diversified approach.

For much of this year investors have had to navigate an uncertain macroeconomic environment. Market sentiment has shifted in response to geopolitical conflicts, election results, the turn of the global interest rate cycle and more.

Through these testing times, China is a wildcard. Until the surprise round of easing measures in September, many believed Beijing had not been doing enough to support the country’s slowing economy. The broad set of supportive measures were more comprehensive in scope and expectations, and in dramatic fashion, it sent the markets into a remarkable rally.

Going into the National People’s Congress (NPC) Standing Committee meeting in November, markets were volatile but hopeful for more. However, while the policy direction is clearer than ever, the lack of new borrowing or spending measures to boost consumption or the property market disappointed investors and sent markets lower. External factors such as possible higher tariffs from the newly elected US administration also had a compounding adverse effect.

Greater policy support is needed

Because policies have an outsized impact on Chinese markets and its economy, we too believe that more should be done – and, crucially, that more will be done. Not only is more needed on both the fiscal and monetary fronts, we believe that fundamental changes to protect consumers, investors and businesses in the areas of property rights, shareholder rights, deregulation and capital market liberalization would go a long way in reviving overall confidence. Despite the near-term stimulus letdown, we think greater policy support is still on its way given the forward guidance in the past few months; Beijing might also be holding off until there is more data on incremental improvement in the economy as well as more details on the US tariff strategy.

Timing of the stimulus aside, it is important to look at the big picture. China has made significant progress in its structural transition away from the old economic model by derisking the property market and strengthening competitiveness in many manufacturing and exports sectors. While the road ahead might still be bumpy, the right stimulus could prevent China from entering a deflationary spiral, smooth the transition process, and accelerate the timeline of the recovery. We are seeing the first signs that the stimulus measures are having a positive impact on certain sectors: retail sales picked up in October. A full recovery, however, will take time.

Taken together, we believe the most challenging period for China’s transition is likely behind us. For the Central Economic Work Conference (CEWC) in December we expect to hear more on Beijing raising the deficit, expanding the special local government and ultralong treasury bonds, increasing central transfers to local governments, as well as more support directed at consumption, the property market and infrastructure.

Markets are inherently forward-looking, and we think a more decisive stimulus response and a turnaround for the markets in the next 12-18 months could be in the cards, bringing along new alpha opportunities for the long term in the various asset classes, and especially for an active multi-asset strategy.

Policy pivot lifts sentiment for China equities

At this policy pivot juncture, there are plenty of opportunities to invest in China equities, given the number of high quality companies with attractive valuations. Despite the threat of more US tariffs and sanctions, Chinese companies have demonstrated resilience under such pressure. We particularly like companies that have a growing presence in foreign markets.

With earnings growth generally healthy, we believe that companies that focus on returning value to investors via dividend payout and share buybacks should also do well. While an uncertain stimulus timeline had again made some offshore investors think twice before getting back into China equities, onshore investors are more optimistic.

China fixed income is so much more than the property market

Before the September rally, Greater China USD high yield credits had already recovered from late last year and earned a spot among the best performing asset classes year-to-date in fixed income. Market sentiment on China had been overly bearish last year, which kept China USD high yield valuations trading at extremely low levels. However, as investors realized that most defaults have already happened a strong rally ensued earlier this year.

The Asian and China USD high yield markets have experienced a significant structural change over the past four years, with the weighting of China real estate sector in JP Morgan Asian high yield index dropping from 38% to 7% as of today.1 The market is therefore more diversified than before. At the same time, the default cycle in China and rest of Asia looks to be peaking. We think that this creates a solid foundation for both asset classes to continue to perform into next year. Credit selection is critical here; generating alpha and adding value require a close look at the credit issue and issuer. For Greater China credits, we currently prefer high yield over investment grade because there are more potential credit alpha opportunities.

A long/short approach to potentially capitalize on divergent returns

Our longer-term view of China is constructive, but the country’s transition could bring more market volatility. Stock performance could become more divergent, even within the same sector, which a long/short investment approach could potentially capitalize on.

While we don’t have a sector preference, we like market leaders that have reinforced their leadership position in the past cycle through improved financials, better sales, and larger market shares. These companies tend to deliver solid returns to shareholders, and they have the potential to consolidate the industry they are in.

Going forward, artificial intelligence, state-owned enterprises, and energy transition will likely continue to be our main investment themes, giving us many interesting alpha ideas in our long and short books.

The China wildcard

As global markets become more concentrated and unpredictable, diversification has again been brought to the fore as the central tenet of investment practice. China could be the wildcard in a diversified approach.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Owen Li

Economic

The OPEC+ "precautionary" decision to postpone crude production hikes until after the first quarter bides the group time to assess developments in global demand, European growth and the U.S. economy, according to the coalition's chair, Saudi Energy Minister Abdulaziz bin Salman.

On Thursday, the oil producers' alliance agreed to extend several output cuts, with the timeline to start gradually unwinding a 2.2-million-barrels-per-day voluntary decline undertaken by a subset of OPEC+ members pushed back by three months to April.

Several group members are delivering a second voluntary production decline, while the coalition as a whole is also restricting production under its formal policy — both now set to stretch until Dec. 31, 2026, rather than the previously penciled end of 2025.

Speaking to CNBC's Dan Murphy on Friday, the Saudi energy minister said OPEC+ had to undertake a "reality check" and reconcile supply-demand signals with market sentiment and attend to "the fundamentals, yet put together something that mitigate these negative sentiments within, of course, the contours of what OPEC+ can do."

Barclays analysts partly echoed the minister's feelings, saying the alliance "maintained a cautious stance" and suggesting "market share concerns among members are likely exaggerated."

OPEC+ faces a spate of variables affecting the supply-demand picture and geopolitical uncertainties, ranging from economic growth amid lowering inflation to conflict in the oil-rich Middle Eastern region and the January White House return of President-elect Donald Trump — a long-time champion of the U.S. oil industry, who applied protectionist tariffs on China and sanctioned Iran for its nuclear program during his first presidential mandate.

"There are so many other things, you know, growth in China, what is happening in Europe, growth in Europe … what is happening in the U.S. economy, such as interest rate, inflation," the Saudi energy minister said Friday.

"But honestly, the primary cause for moving, or shifting, the bringing of these ballots is [supply-demand] fundamentals. It's not a good idea to bring volumes in the first quarter."

The first quarter typically sees inventory build-ups due to lower demand for transport fuels.

OPEC+ member compliance

In a Friday note, analysts at HSBC assessed that the Thursday OPEC+ agreement is "marginally supportive" for supply-demand balances, reducing the projected market surplus in 2025 to just 0.2 million barrels per day, if the oil producers' alliance proceeds with hiking production in April.

"Another delay, which we would not rule out, would leave the market broadly in balance next year," they said. "While OPEC+'s decision to hold off strengthens fundamentals in the near term, it could be seen as an implicit admission that demand is sluggish."

Demand has been at the forefront of OPEC+ considerations, with the OPEC's November Monthly Oil Market Report seeing 1.54 million barrels-per-day of year-on-year growth in 2025.

The Paris-based International Energy Agency, meanwhile, last month forecast that world oil demand will expand by 920,000 barrels per day this year and just under 1 million barrels per day in 2025.

Market concerns have especially lingered over the outlook of the world's largest crude importer, China, whose convalescent economy has received a governmental boost in recent months by way of stimulus measures.

Abdulaziz bin Salman said OPEC+ had "not necessarily" lost confidence in global crude appetite or in recoveries in China, but admitted that "what is not helpful was the fact that some [OPEC+] countries were not attending to their commitments properly."

OPEC+ has increasingly cracked down on member compliance with individual quotas — which has in the past included the likes of Iraq, Kazakhstan and Russia — and requires overproducers to make up excess barrels with additional cuts. The deadline for these compensations is now the end of June 2026.

Oil prices have retreated despite the three-pronged extension to production hikes, with the Ice Brent contract with February expiry trading at $71.40 per barrel at 2:46 p.m. London time, down by 0.96% from the Thursday close. Front-month January Nymex WTI futures dipped to $67.63 per barrel, lower by 0.98% from the previous day's settlement price.

"While prices are likely to stay volatile in the near term, we expect falling inventories this year and a closely balanced market next year, in contrast to market expectations for a strongly oversupplied market, to support prices over the coming months," UBS Strategist Giovanni Staunovo said in a Friday note.

Source:CNBC

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Saif

Economic

Sawada’s employment at Nomura was “terminated” Sept. 30 after a Japanese markets watchdog found that he had “engaged in manipulative trading” of derivatives tied to the country’s sovereign debt, according to a filing with the US Financial Industry Regulatory Authority. The transactions amounted to “layering,” a version of an illicit practice known as spoofing, the filing shows.

Nomura Chief Executive Officer Kentaro Okuda has been under pressure to restore the bank’s reputation since Japanese authorities disclosed the trades in September. The firm’s role in state bond auctions was crimped while corporate clients such as Toyota Finance Corp. and Sumitomo Mitsui Trust Holdings Inc. took some of their business elsewhere.

“All trading staff are trained repeatedly by Nomura and Finra that spoofing is unacceptable and sign many acknowledgements and attestations of compliance,” a Nomura spokesperson said. “All staff bear obligations to escalate any concerns of impropriety.”

Sawada first joined Nomura in Tokyo in 2002, according to the Finra filing. He rose to become one of the most senior traders in Japanese government bonds, a market almost $8 trillion in size where the bank has considerable clout.

The Securities and Exchange Surveillance Commission, the investigative arm of Japan’s Financial Services Agency, disclosed Sept. 25 that an unidentified Nomura trader had manipulated the market for derivatives tied to 10-year government bonds. The employee arranged a series of buy-and-sell orders and then canceled them, the watchdog said.

An SESC official declined to comment on the Finra filing. Sawada couldn’t immediately be contacted for comment.

This kind of trading can manipulate a market by creating a false impression of supply or demand. Regulators in the US have clamped down on the practice since the 2010 Dodd-Frank Act and pursued multiple banks. In September, Toronto-Dominion Bank agreed to pay more than $20 million to resolve allegations that a former trader had placed “hundreds of fraudulent spoof orders” in the market for US Treasury securities.

Some clients have returned to Nomura after the brokerage explained to them measures it is taking to prevent a recurrence of the breach, Bloomberg previously reported. The country’s megabanks have resumed trading activities with the lender and at least four insurers that had halted their equity or bond dealings with Nomura are also restarting these activities.

Source:Bloomberg

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Justin

Central Bank

India’s central bank expectedly kept the benchmark interest rate unchanged at 6.50% on Friday as it struggles to contain rising inflation without hurting growth in Asia’s third-largest economy.

The decision came in line with economists’ expectation in a Reuters poll, as India’s consumer prices inflation surged to a 14-month high of 6.21% in October, significantly higher than the central bank’s target of 4% and also above its tolerance ceiling of 6%.

Reserve Bank of India Governor Shaktikanta Das said the central bank had revised India’s GDP growth outlook for fiscal year 2025 down to 6.6% — RBI had forecast 7.2% growth in October — adding that the slowdown in the domestic economy had “bottomed out” in the September quarter.

The central bank also announced a cut to banks’ cash reserve ratio by 50 basis points to 4.0% to bolster liquidity in the economy.

The RBI has held the interest rate steady since February last year, however, a sharper-than-anticipated slowdown in India’s economic growth has made the central bank’s task tougher.

In the July to September period, India’s economy grew 5.4% from a year ago, drastically missing Reuters-polled economists’ expectation of 6.5%, and marked the slowest pace in nearly two years.

The slowdown has prompted worries that the RBI’s restrictive policies may be putting the economy at risk of missing its forecast of 7.2% growth for the year through March 2025.

Both Finance Minister Nirmala Sitharaman and Trade Minister Piyush Goyal have reportedly called for lower borrowing costs to bolster lending demand and support a slowing economy.

“At a time when we want industries to ramp up and build capacities, bank interest rates will have to be far more affordable,” the finance minister said at an event in Mumbai last month.

The RBI chief Shaktikanta Das, however, has ruled out an immediate rate cut, though the central bank shifted its policy stance to “neutral” from a more restrictive “withdrawal of accommodation” in the October meeting.

Das, whose second term leading the central bank will end later this month, had said in October that an immediate interest rate cut can be “very premature” and “very, very risky”, and that he was in no hurry to join the global central banks in easing.

Indian rupee fell to record lows against the U.S. dollar earlier this week, LSEG data showed, and any monetary easing measures would likely put further pressure on the currency and likely trigger capital outflows.

Following the announcement on Friday, the rupee was little changed at 84.666 against the greenback. Nifty 50 index erased earlier losses to trade nearly flat.

The benchmark index has risen modestly since the GDP release last Friday and is up 13.7% since the start of the year. For comparison, the MSCI Asia ex Japan index — which allocates nearly 23% of its funds to India — is down around 12% so far this year.

Indian bonds have rallied over the past few days with the 10-year benchmark yield dropping to 6.677% on Thursday, its lowest level since February 2022, according to LSEG data.

Source:CNBC

Risk Warnings and Disclaimers

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Owen Li

Economic

Bank of England policymaker Swati Dhingra warned that high interest rates are bearing down too heavily on the economy by curbing consumer spending and business investment.

“We have a very restrictive stance at the moment,” the external member of the Monetary Policy Committee said in an interview with Bloomberg TV Friday. “The weak consumption, the weak investment, and possible damage to supply capacity is what I would worry about, and that’s why I think we should be easing policy more.”

Dhingra is the MPC’s most dovish member, voting for rate cuts since February. The BOE lowered borrowing costs by a quarter-point first in August to 5% and again last month to 4.75% as it reverses policy now that inflation has dropped back close to the 2% target.

Dhingra said she prefers “gradual” rate cuts and expects policy to settle at between 2.5% and 3.5%, which is her estimate of the “neutral rate” that is neither restrictive nor stimulatory. “I’m willing to buy the argument that the neutral rate has risen to some degree” since the BOE’s last estimate of 2%-3% in 2018, she said.

The BOE’s next policy decision is on Dec. 19, when markets expect the committee to leave rates unchanged. They put an 80% chance of another quarter-point cut in February. “We’ve actually seen wage pressures come down, we’re seen services continuing to ease,” Dhingra said. “Bank Rate has to ease as a result.”

She added that high interest rates are “weighing on living standards, on supply capacity and investments, and that’s why we need to start to take that away to some degree, so that we start to get normalization back into the economy.”

Dhingra, a trade expert and associate professor at the London School of Economics, also warned that a re-escalation in the global trade war with Donald Trump as US president would hit productivity. Trump plans tariffs on Mexico, China and Canada and has threatened them on the European Union.

Productivity Loss

A global trade war would hit UK productivity and undo any benefits from cheaper goods being diverted from China and elsewhere to Britain, she said. Because weaker productivity reduces the capacity of the economy, lower prices would prove just as inflationary as at present, she explained.

A trade war “might come at a pretty substantial productivity loss,” Dhingra said. “In that case, expecting businesses to rewire so quickly is asking a lot. So I don’t think it necessarily is going to make my job easier. It might make my job easier for a month or two months, but not necessarily over a two or three year horizon.”

A trade war would have only a “limited” direct impact on the UK in growth and inflation but the indirect effects would be far more damaging.

“In principle, we could be beneficiaries in terms of lower prices,” she said. “But equally, if all of us start rushing to the same alternative exporters - if we want to move away from, say, Chinese exporters supplying us those products - then we all end up basically crowding to one source of supply and could end up in very much the same kind of world we’ve seen in the past few years of supply chain disruptions.”

Source:Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

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FxPro

Cryptocurrency

Thursday’s US session saw a strong wave of profit-taking, which quickly turned into a liquidation of marginal long positions. Both bullish and bearish liquidation created a swing range of almost 13% in less than 24 hours. At its lowest point, the price of Bitcoin was down to $91,000. By early European trading, it had stabilised just below $98,000, back to where it started the day on Thursday.

Other stars of recent flights are also cooling off. Tron has stabilised around $0.32, roughly in the middle of this week’s range. XRP is cooling off, pulling back to $2.30, which is near the 76.4% level from the early November lows.

News Background

There is a strong correlation between Bitcoin’s rise above $100,000 and Tether’s increased supply of USDT stablecoin, said CEO Paolo Ardoino. Over the past 20 days, the stablecoin’s capitalisation has increased by approximately $16 billion.

CryptoQuant identified significant institutional demand from US investors based on Coinbase’s premium dynamics.

Mining company Hut 8 will sell $500 million worth of shares. The funds will be used to expand the company’s data centre infrastructure and to purchase Bitcoin as a strategic reserve.

Venture capital firm Andreessen Horowitz (a16z) sees the integration of AI with blockchain, tokenisation and stablecoins as key areas of development for the crypto industry in 2025.

Justin Drake, one of Ethereum’s core developers, said the Solana network, touted as a “killer” of Ethereum, is not really a threat or even a direct competitor.

Arkham Intelligence noted that the bankrupt Mt. Gox exchange moved 24,052 BTC ($2.47 billion) to an unknown address. This is the first major move of the exchange’s assets since 12 November, when the platform sent 2,500 BTC to two unknown addresses.

Source:FxPro

Risk Warnings and Disclaimers

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Justin

Economic

The Canadian labour market gained 50.5k positions in November. Most of them were full-time jobs, which rose 54.2k, while part-time employment fell 3.6k.

The unemployment rate rose 0.3 percentage points to 6.8% as more people joined the labour force (+138k). The labour force participation rate rebounded 0.3 percentage points to 65.1% after two months of decline.

Employment by sector showed gains in trade (+39k), construction (+18k), and professional, scientific and technical services (+17k). Declines were seen in manufacturing (-29k) and transportation and warehousing (-19k).

Lastly, despite so many new jobs, total hours worked fell 0.2% month-on-month due to labour disputes. Wages were up 4.1% year-on-year (from 4.9% in October).

Key Implications

Today’s jobs report had a lot of moving parts. Yes, the unemployment rate rose significantly, but this was due to a massive increase in the labour force rather than outright job losses. Remember that Statcan has cautioned people on using its jobs report population figures, which don’t match recent demographic data (also means caution of labour force figures). So, we should be taking this with a heavy hand of salt. Rather, we focus on the trend, where employment growth has held up well, with cyclically sensitive sectors driving gains over the last few months.

The Bank of Canada will make an interest rate announcement next Wednesday and markets are still on the fence as to whether the bank will cut by 50 or 25 bps. Recall that the BoC accelerated its rate cutting cycle with a 50 beeper in October as weak growth and an inflation undershoot raised fears that it was behind the curve. But since then, economic data have shown more resilience, with consumer spending, the real estate market, and price pressures rebounding. Even with the messiness of today’s employment report, the economy continues to add jobs, reinforcing our view that the labour market is on solid foundations. We think this should be enough to convince the central bank to revert to a 25 bp cut next week, but it will remain a close call for the central bank.