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China’s major A share indices traded higher in the first month of 2017 thanks to the positive message delivered by the Chinese top leader and the favorable monetary support by the central bank ahead of the Chinese New Year holiday. China delivered a strong signal of liberalization in January, a one-two punch that saw President Xi promoting globalization at Davos while China’s State Council announced 20 measures to encourage overseas investment in China. 

In his keynote speech to global political and business leaders, President Xi affirmed China’s commitment to global trade and governance while railing against encroaching protectionist sentiments. While acknowledging the downsides of globalization, Xi articulated the importance of pushing forward and the impossibility of reversion to a mercantilist past. His attendance and comments evince China’s concern about the impact of growing populist headwinds on China’s export machine, and signal China’s attempt to address the situation by consolidating leadership in the current global vacuum. 

After Xi’s speech, China’s State Council published new rules reducing restrictions on foreign investment in the country. The reforms cover a range of industries, allowing foreign investors to enter fields such as transportation, industrial and automotive manufacturing, telecommunications, internet, and education— in some instances even receiving preferential policy support from local governments. In addition, a top Ministry of Commerce official promoted reforms that would cultivate a financial climate more hospitable to foreign companies. Under such reforms, foreign companies will be able to issue debt instruments to raise funds in China’s capital markets or list on Mainland China’s stock exchanges. 

Meanwhile, China’s central bank injected more than RMB 410 billion (USD 60 billion) during the month, a ‘temporary facility’ to help ease a liquidity crunch ahead of the Chinese New Year  holiday. Short-term funding costs reached a ten-year high ahead of the week-long holiday, which sees hundreds of millions of celebrants withdrawing cash to visit family and exchange the traditional money-laden red envelopes.

The injection is significant because it represents a new policy tool in the PBOC’s arsenal, a subtle departure from favored mechanisms like reverse repurchases and 3-month Medium-term Lending Facilities. Citing the desire to balance seasonal liquidity demands while avoiding Yuan depreciation, the bank is relying on the temporary facilities instead of more traditional Required Reserve Ratio (RRR) cuts to avoid sending easing signals. The bank maintains the 28 day facility is temporary, not a reversal of the stated “prudent and neutral” monetary policy goals for 2017.

Economic activities will gradually recover in February as Chinese start to come back work for the Year of Rooster. In the Chinese culture, the rooster is a well respected and hard-working animal because it wakes up early in the morning and reminds people of working for their dream. We wish our investors a healthy and fruitful Year of Rooster. 


China’s major A share indices traded lower in the last month of 2016 mainly due to tighter liquidity and weaker investment sentiment. The interest rate hike by the US Federal Reserve coincided with the infamous Sealand Securities scandal caused year-end liquidity crunch.  China’s one-year interest rate swap (IRS) jumped to year highs at beginning of December on speculations that rising commodities prices increase inflation risk and the PBOC is determined to curb excessive lending. To make things worse, two key managers at Sealand Securities’ fixed income department went missing, leaving behind significant portfolio losses. Arguing that the stamp used to validate the contracts was forged, the brokerage house refused to accept the portfolio losses. The refusal shattered the market’s trust in OTC bond trading. Although Sealand Securities finally was forced to honor the portfolio losses, the damage had been done. The counterfeit stamp turmoil in bond market not only resulted in higher interest rate but also hurt investment sentiment. Therefore investors in both bond and equity markets chose to cash out and stay aside before year end.

Shenzhen - Hong Kong Stock Connect Scheme was finally launched in December and Mainland China’s authorities clarified taxation policies, exempting overseas A-share investors from income tax, value-added tax (VAT) and capital gain tax (CGT). The policies are very similar to those levied on transactions in the existing Shanghai – Hong Kong Stock Connect Scheme. As widely expected, the southbound trading has been more popular than northbound trading since the Shenzhen - Hong Kong Stock Connect debut, partially due to demand for overseas assets allocation. Interesting to note that neither Shenzhen – Hong Kong Stock Connect or Shanghai – Hong Kong Stock Connect has aggregate quota limits any more, which helps ease overseas investors’ capital control worries.

Looking forward into the new year, we expect China’s top policies makers to continue carefully pushing forward economic reforms. Property market is on top of the reform list and China’s central government changed tone from “reducing inventory” for 2016 to “preventing asset bubble” for 2017. First time in history, President Xi said the property market should only serve the purpose of providing accommodation instead of speculation. The central government also urged tier-1 city governments to increase land supply and tier-3/4 cities government to supply better public service (education and health care). 2017 will mark a crucial year for SOE reforms as private investments are encouraged in strategic sectors like utility generation, oil and gas, railway, commercial aviation, telecommunication and military. SOEs are expected to improve incentive systems and increase competitiveness after bringing more private investments. While the central government encourages corporations to further de-leverage in 2017, new measures will be introduced to render it easier for corporations to tap funding from the equity market to reduce bank borrowing. On monetary policy and fiscal deficit, 2017 will see the central government be more prudent.  Short-term pains may be inevitable in early 2017 as the government is determined to make more concrete steps on supply-side reforms. However, if successful, the reforms could bring China another decade of more-balanced growth. 


Trump winning the election also means that two of world’s largest economies, the U.S. and China, will be both under strong leadership, which may have a far-reaching impact on global economy, politics, and geopolitics in the mid and long term. There will be a contraction of US global presence and a policy shift back to domestic affairs, which helps relieve the pressure faced by China’s “One Belt, One Road” initiative. Moreover, Trump’s new national security advisor expressed that the opposition to the formation of China-led Asian Infrastructure Investment Bank (AIIB) is a “strategic mistake” and expected that the new administration gives “much warmer” response to China’s “One Belt, One Road” initiative.
Shenzhen-Hong Kong Stock Connect will be launched on December 5. We are looking forward to the changes this connect may bring to Hong Kong stock market before the festivals.


Interest rate hike was the main theme throughout September. Fed’s September FOMC decided not to make the move, which has temporarily lifted the volatility concern and downside risk that the market was facing, as the breathing window has been extended. However, the length of this window may be relatively limited because the meeting has also strengthened market expectation for a rate hike within the year. This will have supportive effects for risky asset prices, including those in emerging markets.

The Chinese economy has been stabilizing. Industrial enterprises financial data released by National Bureau of Statistics on 27 September showed that profits made by above designated size industrial enterprises from January to August have increased 8.4% YoY, 1.5% higher than the growth rate from January to July. August profits have increased by 19.5% YoY, the highest monthly growth rate for the year. September PMI recorded 50.4, which was unchanged from last month, while non-manufacturing PMI increased by 0.2% to 53.7. Overall, economic activities have been growing steadily at the moment.

With the Shenzhen Hong Kong Connect approaching, external funds have been flowing into Hong Kong, which will have supportive or promoting effects on Hong Kong stocks. 


High frequency data since August has shown stable industrial production. Prices for thread steel and cement continued to increase, and coal consumption by power plant has been growing rapidly. Overall, the accelerated declining in fixed asset investments since May has not yet caused any significant impact on industrial production, as they have been hedge by PPI recovery and inventory replenishment demand. On the other hand, accelerated increase in cement price may indicate a recovery from weak government investment in July, though there has been no clear sign of investment stabilization, especially private investments. It is expected that August industrial growth will stay the same as July with 6.0% YoY growth, while YoY increase in fixed asset investment and consumption record 7.8% and 10.3% respectively. 

August manufacturing PMI was 50.4%, rebounded 0.5% MoM back to prosperity interval, which was also the highest level in past one year. Looking at sub-index, improving demand was the main reason drove PMI back to above the threshold. August new order index recorded 51.3%, highest since April and only second to March. New expert orders also rebounded from 49.0% last month to 49.7%. Thus, August has seen a clear sign of rebound in both internal and external demand.

Continuous expansion has been seen on supply side. August production index rose 0.5% to 52.6%, the highest in past one year. Despite the accelerated expansion of production, finished goods inventory index dropped from 46.8% to 46.6%, reflecting strong demand as well. At the same time, manufacturing enterprises have shown strengthening confidence, given production and business activity expectation index increased by 2.9% to 58.2%, raw material inventory index increased by 0.3% to 47.5% and purchasing volume index increased sharply from 50.5% to 52.6% to reach the highest level since April.

Purchasing price index continued to rebound and PPI YoY decline will be further narrowed. August major raw material purchase price index increased 2.6% YoY and recorded 57.2%. This has indicated further improvement potential for PPI YoY growth rate, which will help improve enterprises’ profitability and stimulate investment demand in certain manufacturing industries.


China pushed forward SOE reforms as President Xi Jingping reiterated that SOE should grow bigger and more influential through reforms. China State-owned Assets Supervision and Administration Commission (SASAC) announced to start SOE reform in several sectors including coal, steel, NFM and property development. Seven central SOEs namely Shenhua Group, Baosteel Group, Wuhan Iron&Steel Group, China Minmetals Corp, China Merchants Group, China Poly Group and CCCC were ordered to create state-capital investment company. The set-up of state-capital investment company is to separate government administration from enterprise management to improve efficiency and competitiveness.  And Ploy Real Estate announced that its parent company Poly Group would acquire the real estate asset from China Aviation Industry Corporation.

China's Central Government showed clear intention to curb asset bubbles and to guide capital into real economy. Beijing was reported to plan raising down payment for the second home purchases. Meanwhile securities watchdog indicated stricter regulatory environment for stock market. Xintai Electric became the first company forced to delist due to falsified financial data in IPO process. The company will be delisted and cannot re-list again. What’s more, CBRC was reported to implement new rules on banks' wealth management products (WMPs). WMPs are banks' off-balance funding channels which usually offer return higher than saving rate. Investors in WMPs sometime consider the products as risk-free like banks' deposits, although the capital of WMPs could invest in risky assets like equities and non-standard fixed income assets. The CBRC's new rules, if announced, could force some investors out from WMPs back to mutual funds and banks to make provisions on the WMPs. The new rules are intended to prepare the banks for the potential defaults of the WMPs.

July was a month of roller-coaster for the Chinese currency. Both onshore CNY and offshore CNH fell to the weakest level in five years in the middle of the month but quickly rallied after the intervention by the central bank. After the sharp rally of the RMB, market players seem to reach the consensus for now that devaluation is probably done at 6.70. Separately, RMB Internationalization Report showed that RMB Internationalization Index (RII) reached 3.6, ten times that of 5 years ago. In 2015, the RII increased dramatically thanks to the demand from RMB direct investment and overseas loans. At current stage, RMB-denominated assets account for 1.1% of global foreign reserve. 


China’s A-share market outperformed regional peers in June. Premier Li stated China's economy would stabilize later this year during Davos Forum. Some positive signals for economy recovery were observed. New Yuan Loan data and M2 growth data came better than that of previous month and survey number thanks to the retail mortgage loans, which contributed more than half of the total New Yuan Loan. M2 grew below 12% YoY partially due to high base the year before but was within the PBOC's previous guidance. What’s more, large coal companies were reported to raise coal price for July.

After MSCI announced to postpone the inclusion of A-share in its EM index, CSRC stated that MSCI's decision was purely commercial and would not postpone China's progress to make its capital market more market-oriented and healthy. Shanghai Stock Exchange Composite Index jumped 1.58% higher on June 15 after the MSCI and CSRC’s announcements.

The Brexit is expected be marginally beneficial to China. UK may have less bargaining power in international affairs. And it will choose to strengthen its relations with China and to enhance London’s position as the offshore RMB center in Europe. Therefore investors expect more cooperation between the two countries. Based on historical data, A-share tends to outperform when there is global turmoil like Brexit. It partially explains why Shanghai Stock Exchange Composite Index outperformed S&P 500 Index by 2.29% on June 24th.

However, China’s economy is still facing some headwinds. On macro side, manufacturing activities continued to contract in June, as Caixin China Manufacturing PMI came at 48.6. China’s currency has been under depreciation pressure since Brexit vote on June 24th. Both off-shore CNH and onshore CNY weakened to five-year low. Some local economists forecast 5% more depreciation for the currency despite government officials insisted no basis for further depreciation.

The regulators’ actions to cool down the market may also increase investment risk. CSRC tightened M&A deal approval for A-share listed companies and it may be bad news for small-cap companies which were enjoying high valuing due to M&A deal speculation. As a result, four A-share companies that previously announced potential asset restructure or acquisition plans gave up their deals. CSRC also revised restructuring rules for listed companies and banned capital raising for back-door listing purpose. The new rules were to cool down speculation on shell companies.

As we enter the second half of 2016, investors may pay attention to several key developments as the government is determined to push forward for more opening up of capital market. PBOC announced its short-term work priorities. First is to launch QDII2 to make domestic residents' overseas investment more convenient; second is to allow qualified overseas companies to issue shares in A share market via CDR and to open up domestic fixed income market to overseas investors. By the end of 2016, US institutional investors will get RQFII licenses with total quota of RMB 250 billion (USD 37 billion), the size only similar to that of Hong Kong.  What’s more, Shenzhen-Hong Kong Stock Connect is expected to be announced soon and Shanghai-Hong Kong Stock Connect eligible stock pool is expected to expand.


China’s A share market was little changed in May despite of the pessimistic economic growth guidance from the top policy makers, tightened regulations and a weaker currency. Debate about economic growth between Chinese top policymakers went public. A top government official, who was believed to be a key advisor to President Xi, publicly mentioned that recovery of China's economy would be L shape, instead of U or V shape. L-shaped recovery means the growth will remain low for a period of at least one or two years. Meanwhile the official suggested to stop using aggressive monetary easing to deleverage the economy. However, another high official talked in another official media that supportive monetary and fiscal policies are still needed to smoothen the economic downturn. Local investors were confused and some investors chose to wait and see a clearer policy direction.

The government tightened regulations to push for more opening up of the capital market and economic reforms. First, it is reported that China's major exchanges are studying rules to tighten control on companies' suspension. If new rules are announced, listed companies may not be able to suspend trading for months without good reason. The move is to meet the MSCI’s requirements to include A share into its EM index. Second, securities regulator tightened control on backdoor listing. US-listed companies seeking to re-list in A share market might be more difficult. The move was to discourage companies to take advantage of valuation gap and hurt local sentiment. Third, CSRC banned large shareholders under certain condition from selling stake for 12 months again. Controlling shareholders which increased stake through M&A financing were asked not to sell previously-owned shares for 12 months. Last time the regulator ordered similar ban was mid-2015 till Jan 2016. Forth, State Council decided to cut 10% of coal and steel production by SOEs controlled by central government and market expect SOEs controlled by local government to follow suit. Meanwhile glass and cement enterprises were restricted to increase capacity by 2020 to push for supply-side reforms.
China's central bank weakened the RMB fixing in May in anticipation of US interest rate hike in June or July. The official CFETS USD/CNY mid-rate was  set at 6.5790 on the last day of the month, the weakest level since March 2011. The move was to cushion the potential impact of stronger dollar and triggered the depreciation speculation among some local investors. The currency may continue to have downward pressure given the aggressive monetary easing in the first 5 months and a stronger dollar.

However June may be a better month than May given improving macro data, the government’s fiscal stimulus and potential MSCI inclusion. PPI is expected to continue to recover and monetary supply growth may stay at double digits. On the fiscal policy side, RMB 77 billion were planned to be invested in the construction of civil aviation infrastructure. And PBOC announced to conduct monthly PSL to three policy banks from this month as the direct funding support to infrastructure and shanty town renovation. Last but not least, MSCI will announce its decision whether to include A share in its EM index on June 15th and we see 80% chance of inclusion given the recent progress and developments.


FTSE China A50 Index was little changed in April although macro data were better, government geared up stimulus policies and stabilized local currency. China Macro data flashed as monetary supply M1 had grown 22.1% YoY in March. The M1 growth pace had been the fastest since post-Lehman days. Meanwhile total social financing in 1Q2016 reached almost USD 1 trillion. It was very encouraging for A share investors given the government created money at such astonishing pace. However it was bad news for CNH which could depreciate given the monetary supply. While CPI data came stronger than expected due to rising food price, consumer sector may benefit from higher inflation.

China’s central government stepped up efforts to support the stock market. Firstly, early this month, the CSRC released circulars revising administrative measures for securities companies' risk control indicators, and adjusted the minimum net asset / liability ratio from 20% to 10% and the minimum net capital / net asset ratio from 40% to 20%. The move is expected to release more funds for brokerage firms to develop capital-intensive business such as margin financing and securities lending. Secondly, according to the local media’s reports, China Securities Finance Corporation repaid PBOC's loan with stocks transfer, which means that some stock position that had been purchased last year to stabilize market sentiment began to be managed by SAFE subsidiaries like Wutongshu. Thirdly, China may allow banks to convert RMB 1 trillion worth of bad loans into equity holdings in the initial phase of debt-to-equity swap plan. CDB, BOC, ICBC and CMB were reported to be involved. Fourthly, late this month, China's Ministry of Human Resources and Social Securities announced a plan to launch the stock investment of pension funds in 2H2016 and market expects RMB 1.25 trillion into equity market. As of April 23rd, Social Security Fund was listed as one of the top 10 shareholders in 157 companies.

China’s local currency was stable in April. On one hand, China set CNY fixing rate at $6.4589 which was the highest level against USD in 2016.  It showed Chinese government’s determination to stabilize its currency. On the other hand, the US Treasury issued a new report illustrating that China should not devalue its currency to gain an unfair trade and economic advantage. In other words, the US government also urged China to continue to appreciate its currency. These two governments’ recent messages may be bad news for investors who are holding a bearish view and betting the currency would depreciate significantly this year. We expect some investors to exit RMB short trade, and the currency to stabilize in coming months.


We believe two issues should be paid attention in April. Firstly, the sustainability of periodical recovery of China's economic growth. After entering into construction peak season, whether the industrial demand, particularly new infrastructure and real estate start, could continue to be stable, will be the most direct indication of micro-enterprises’ confidence recovery. If the industrial demand can continuously improve, investors’ confidence in China's economic recovery will be further enhanced. Once the market begun to doubt the sustainability of industrial demand, price rising trend of industrial products from February to March will come to an end. Only if the short-term macro-economic growth could enter into a stable region, Chinese government would have the power and courage to push further for reform measures that market has been looking forward to. Otherwise, the reform will have to make some concessions for steady growth. The second issue is Fed's monetary policy trend. In the March meeting, as widely expected, the interest rate has been maintained unchanged. By convention, there will be a Fed meeting held in April, and after this, the United States’ monetary policy will maintain a short-term stability for two months. Thus, the April’s meeting will play an important role in guiding the Q2’s global monetary policy and financial market risk preference. More importantly, investors haven’t formed consensus yet on whether Fed's April meeting will announce a rate hike or not, which means either to maintain interest rate unchanged or increases it will bring short-term volatilities. Increased global market risk appetite in March was mainly due to staged top out of USD and increase in commodity prices consequentially. At this stage, the commodity price has significant flexibility in reaction to market risk appetite. Once the Fed's monetary policy shifts and USD regain its upward trend, the risk preference may become lower again. Looking further ahead, this year is an election year in the United States, the Fed's monetary policy, as well as the economic and financial market volatility it brings about, may also influence the election to a certain extent. 

Starting from the second half of last year, global macroeconomic factors had an increasingly important influence on short-term direction of the capital market. From a global perspective, this is a transition period of global economic restructuring and rebalancing. From a longer-term point of view, this transitional period is temporary and will not be the "new norm" as the long-term macroeconomic environment should be relatively steady. Therefore, we believe that once the global economy pulls smoothly through this transitional period, the bottom-up stock selection strategy can still bring excess return for investors.


China’s A share had decent recovery in October after 5 months’ retreat, thanks to the central bank’s favorable monetary policy and government’s continued efforts to reform. China's central government’s stimulus policy on auto and property sectors set positive sentiment for the whole month. After announcing tax cut in the auto industry, China's central government lowered the first home down payment from 30% to 25%, except for tier 1 cities and Sanya. Meanwhile PBOC remained supportive as the central bank first expanded a pilot program on credit-asset pledged lending to allow banks to borrow from PBOC using credit asset as collateral. And then PBOC surprisingly cut both interest rate and required reserve ratio (RRR), earlier than market expectation. After the cut, study showed that one-year deposit rate at Chinese commercial banks during Oct 24 to Oct 26 had a weighted average interest rate of 2.02%, higher than CPI of 1.6%, implying positive real interest rate. Investors expected more room for further loosening.
October also saw the conclusion of the 5th plenary meeting of CPC during Oct 26 – 29. Economic blueprint for the next five years were discussed in the meeting. Although details about the blueprint is not yet disclosed, investors were cheered by the government’s determination to further reform economy. Premier Li Keqiang indicated that 6.5% annual growth rate is appropriate and China finally allowed second-child policy for all couples. We expect more details about the blueprint will be gradually released and positive changes will be made.
Investors may need to pay attention to MSCI semi-annual review on the decision to include A share in its EM index. The announcement date will be November 12, 2015. Over the past few years, China has made significant progress in allowing overseas investors to access the onshore capital market.  Given these developments, MSCI has indicated that the inclusion of China A shares in its popular index family could happen sooner than expected.  MSCI estimates that the inclusion would inject $400 billion of funds from asset managers, pensions and insurers into mainland China’s equity market over time.


FTSE China A50 Index had its second worst monthly performance in past 2 years but still largely outperformed most stocks thanks to government buying of blue-chip names. In the middle of the month,  PBoC surprisingly set weaker RMB fixing reference rate for three days in a row from 6.11 to 6.40, implying 4% depreciation. Weaker currency is good for exporters in general given the effective exchange rate of RMB has appreciated 14% in the past year. However the move caught global investors off guard and triggered the massive sell-off of risky assets from equity in developed markets to commodities. Meanwhile, Chinese government muscled up power to support market.  Top 50 brokers of China were reported to allocate another RMB 100 billion to CSFC for market stabilization purpose. CSFC is expected to use the funds to buy blue-chip names in the market. However the reality is that investors would dump small and medium names to chase blue-chip names the government money would go. Local investment sentiment was so weak that even PBoC’s cut of RRR and interest rate failed to bring back market confidence.


The A share investors experienced great volatility to see the market closed lower in July. FTSE China A50 Index jumped 13.35% lower, compared with -11.15% of ChiNext Index and -14.67% of CSI 300 Index. Investors’ weak sentiment was blamed for the sell-off even that the government continuously intervened to support market. At the beginning of the month, the liquidity problem caused by the cut of margin trading and the redemption of some domestic private funds and mutual funds pulled down the market. In this connection, PBOC promised to provide unlimited liquidity to the Central Securities Finance Corp (which is virtually the market maker of margin financing). Meanwhile, 21 securities firms announced to spend up to RMB 120 billion to buy ETFs, and several onshore mutual funds announced to buy their own equity funds to counter redemptions. Around 1,300 A share companies, or 29% of total market cap, halted trading after SSE Composite Index dropped 5.90% on July 8.
After July 8, the official margin financing balancing remained around RMB 1.4 trillion. China announced 2Q GDP at 7.0% and industrial production data at 6.80%, both higher than survey. Together with news that Shandong Province delegated National Social Security Fund to run its provincial pension fund on July 21, investors’ sentiment started to stabilize.
However, at the end of the month, the news that CSFC may exit the market hit the market sentiment badly, and FTSE China A50 Index dropped 8.62% on July 27. Investors were also concerning about rising food price, especially pork price, which may reduce the room for the government to ease monetary policy. The government soon announced that they would continue to support the market, but investors’ sentiment did not recover. We expect mild volatility of A share market in the short term.


FTSE China A50 Index outperformed other major A share indices in June thanks to the strong performance of financial sectors. The A50 index closed 5.29% lower, compared with -7.60% of CSI300 Index and -19.31% of ChiNext Index. Annualized tracking error for CSOP FTSE China A50 ETF was 0.96% in June. A share investors experienced the most volatile month since ’08 Financial Crisis after Chinese regulators decided to curb margin trading balance. Forced liquidation as well as profit-taking sale orders quickly sent A share lower. Many stocks, especially those growth names, traded continuous limit-down for consecutive trading sessions. Even at the end of the month, the balance for margin trading account was still above RMB 2 trillion. Margin calls occurs when the margin ratio (portfolio value / loan value) falls below 130%, and if margin calls are not met, forced liquidation starts. For example, assuming leverage is 1:1, a client puts in RMB 50 plus RMB 50 of borrowed money to buy RMB 100 worth of stocks. When stock value falls from RMB 100 to RMB 65 (130%*RMB 50), forced liquidation happens. For higher leverage, it would be much easier to trigger forced liquidation.
Aware of the potential downside of the stock meltdown, Chinese authorities announced several measures to boost market confidence.  First measure was unexpected cut of both interest-rate and RRR. It was quite rare even during ’08 Global Financial Crisis and 1-year deposit rate is at historical low of 2%. Second measure was to allow pension funds to invest in stock markets with cap of 30% of net asset value. It was estimated to bring in around 1 trillion RMB to the market. Third measure was to lower exchange trading fees. Some economists suggested to lower stamp duty too. Fourth measure was to loosen margin account rules and CSRC asked brokers to decide forced-sale level. Fifth measure was to buy directly in the secondary market. Local media reported that Central Huijin created onshore blue-chip ETFs to support sentiment. It was also expected that large size of IPO may be delayed till market sentiment turned positive and even PBOC may join its US/European/Japanese peers to buy assets directly in the secondary market.
China will announce key economic data for June and 2Q2015 in the coming month and we expect the picture will remain weak but continue to improve.  After all, the central government still has many tools in its fiscal package, like (1) accelerating key infrastructure projects, and improving efficiency of local governments’ use of fiscal budgets; (2) further relaxing property policies (such as lowering the down payment ratio, lowering mortgage rates, etc.), and encouraging larger-scale purchases of commodity housing by local governments; (3) speeding up SOE reforms; (4) boosting policy banks’ capital to provide additional and lower cost funding for infrastructure investment.


The picture of China’s economy still looks dim in the fifth month of the year. On monetary side, banks lent out less than expected. New Yuan Loans number was only RMB 707.9 billion and Money Supply M2 YoY 10.1%, both came below expectation and lower than prior month. One explanation is that people moved money out of banks into stock market and banks had to control loan amount given lower deposits. Another explanation is that borrowing demand was weaker given slower economic growth. In order to encourage lending to real economy, PBOC continued another round of PSL to targeted banks. The rate of PSL was lowered to 3.1% this time. On import and export side, the latest data looked pretty weak with export dropped 6.4% YoY and import did 16.2% YoY. Weak domestic demand as well as strong currency were blamed by the investors. However, after many years of criticism, the International Monetary Fund finally declared in late May that China’s currency is no longer undervalued. In other words, the appreciation of Yuan could take a break and it could be great news for exporters in China. We remain a conservative view on the economy growth in the near future but believe the slowdown will bottom later this year as monetary stimulus takes effect.
The FTSE China A50 Index representing blue-chip names dropped 4.90% in May while ChiNext Index representing New China concepts rallied almost 24%. Annualized tracking error for CSOP FTSE China A50 ETF was 0.11% in May. In May, we saw a big single-day correction which reminded people of correction at the end of May 2007. A share experienced correction back in June 2007, and afterwards the major index recorded new high. Local investors blamed two reasons for the sell-off. The first one was that Central Huijin cut position on CCB and ICBC. But Central Huijin made announcement after market to claim that they just reduced some position accumulated back in 2008. In other words, Central Huijin didn't sell its core holding of banking names. It was so rare for them to make such announcement that market players interpreted as top policy makers' intention to support the bull market. The second one was that CBRC asked commercial banks to report the flow into equity market, including wealth management's flows. Investors were concerned that the banking watchdog joined CSRC to regulate margin trading, which is the main driver behind the recent rally.  However saying that, mild correction may be good for a more healthy bull run for A share. Therefore we continue to hold a constructive view on China’s A share especially after FTSE announced transition to include China A shares in global indexes. The initial A shares weighting in the FTSE Emerging inclusion indexes will start at 5% and the percentage will increase to 32% finally after China A shares become fully available to international investors. Next month, MSCI is expected to make announce its decision whether to include A share in its EM index.


A share had another sharp rally in April backed by central government’s blessings. FTSE China A50 Index rose more than 18% in the month with record turnover. The daily value traded in Shanghai Stock Exchange exceeded RMB 1 trillion, reflecting the investors’ enthusiasm to participate the game. Central government supported the enthusiasm implicitly and explicitly. Firstly, Chinese official news media Xinhua News Agency published a report at beginning of the month to confirm the necessity of a bull market. Meanwhile it indicated that economic weakness needs strong support from stock market. Local investors considered it as a positive tone for equity market from China's top policy makers. Secondly, Premier Li Keqiang said that he was not against the idea of QE in China. PBOC is rumored to be considering direct purchase of local government bonds or even banks' assets through China's QE program. Thirdly, after announcing new regulations on umbrella trust and short sale, CSRC held a press conference to explain that they didn't have the intention to stop market rally. Meanwhile, PBOC announced to cut required reserve ratio (“RRR”) by 1% over the weekend. Previous RRR-cut was usually 0.25%, and last time PBOC made similar movement was during ‘08 Financial Crisis.
On the other side, the picture for economy still looks dim. China’s GDP figure came at 7% for 1Q2015, in line with survey but lower than prior one. And the exports and imports data were very disappointing to record double-digits decline YoY. Manufacturing PMI shows that China's manufacturing activities continued to contract in April. We don’t see good odds for the economy to bottom up in the short term. But we do see certain sectors like brokers and insurance companies reported shining 1Q results thanks to A share performance. The liquidity-driven rally could continue into another month as monetary condition stays favorable even without QE. However, given the market participants have already accumulated decent return, volatility is also highly possible as some investors take profit.


FTSE China A50 Index rallied 10.15% in March backed by strong credit data and blessings from top officials. Firstly, New Yuan Loans in February came at RMB 1,020 billion, much higher than expectation of RMB 750 billion. Meanwhile Money Supply M2 YoY reads 12.5%, also higher than expectation of 11.0%. Aggregate Financing was RMB 1,350 billion, compared with survey of RMB 1,000 billion. Investors were excited by the numbers as people didn't expect much for the month with Chinese Spring Festival. Secondly PBOC governor Mr. Zhou Xiaochuan said that credit funds flowing into stock market is good for economy because listed companies could raise money to fund expansion. He is one of the few top officials publicly talking about the topic. Previously, consensus view among top management was to forbid credit funds from entering stock market. The positive change of tone is considered to benefit blue chip names. What's more, One Belt & One Road general plan was officially released at Boao Forum. China will invest RMB 300 billion to 400 billion to support Silk Road and maritime route development. The plan involves 18 provinces and 15 harbors along the road. A-share investors are cheered as China pushes for both monetary and fiscal stimulus polices.


FTSE China A50 Index rallied 2.53% in October, especially in the last few trading days of the month. What’s important in October are the 4th plenary session of CPC Central Committee and Shanghai-Hong Kong Stock Connect. Local investors expected that the 4th plenary session will set the blueprint to create a better legal environment for China to deepen its reform. Meanwhile China is pushing for more and more favorable policies to spur economy, especially on domestic consumption. Internet, new energy, properties, tourism, education and social-security consumptions are given highest priorities. Investors considered these policies positive for the whole economy as China will enjoy a more balanced growth in the future. Meanwhile, market dropped initially due to the delay of Shanghai-Hong Kong Stock Connect. However, vice chairman of CSRC Yao Gang said on a financial forum at the end of the month that preparation for the Shanghai-Hong Kong Stock Connect is in the final stage, which could be viewed a relief by market. Shanghai-Hong Kong Stock Connect is considered as an important step by China to open its capital market to overseas investors.


MSCI China Index gained 4.18% in October and 5.39% year-to-date.
The Hong Kong market rebounded strongly from low levels in October, primarily driving by the Chinese government’s property easing rules which led to a surge of property sales of 40% and caused the property and financial sectors in the equity markets to rebound 6.8% in October; Meanwhile, utility sector, represented by thermal power and fuel gas, increased 6.8% as well, with the stimulation from power reform and lower oil prices. Telecommunications, IT, health care and industrials sectors followed with 4-6% gains, leaving the energy sector as the only laggard with a 4.3% decline due to the sharp decline of oil prices. There was a worldwide panic selling in mid-October for risk avoiding caused by the crash of European bonds, and it quieted down after the V-turn in the US stock market.
The stock market recovery in October is the start of a prolonged rebound for Q4. Bank of Japan and European Central Bank are increasing their quantitative easing magnitude, while PBOC is also continuing the easing monetary policy;  these loosening policies have been offsetting impact from liquidity withdrawn caused by Fed’s decision to terminate the Quantitative Easing program.   The US economy posted a strong growth in Q3, while China’s GDP is still bottom-seeking. Despite the weak economic growth, signals that a policy bottom has been formed in China are very clear and we think investor confidence will pick up gradually amid slow recovery of economic fundamentals in China. Given such, we remain optimistic on the performance of the stock market in Q4.
In our view, on a relative basis, strong cyclical sectors will most likely outperform in the short term on the backdrop of monetary policy easing. However the recovery of fundamentals of such cyclical sectors is not a genuine transformation but rather a relief from long-term structural deterioration. It is very difficult to capture precisely the instant investment opportunities from dramatic stock price fluctuations in the very short term.


A share rallied in September with FTSE China A50 Index closed 1.32% higher. August macro economy data was weak and GDP guidelines from Beidaihe meeting were below expectation, and both weighted heavily on the A share as investors considered the recovery story is losing steam in 3Q2014. However, China soon announced several measures to boost confidence. Firstly, China plans to further strengthen its support for small and micro-business through political and fiscal measures, including tax exemptions for companies with monthly sales of less than 30,000 yuan ($4,880). Private and small companies in China still provide employment for majority of the population and government knows the importance for the sector. Secondly, PBOC injected liquidity into the financial system to bring down 14-day Repo rate. Market participants consider the lower rate as another loosening signal after SLF. The new government is keen to bring the social funding cost lower. Thirdly, after market close of last trading day in September, PBOC eased criteria for 1st home purchase loans.  Meanwhile banks can extend loans to non-local home buyers and issue MBS to back the loans, and banks can lend money to property developers again. That’s very important as the policy will discourage property developers to use shadow banking. All the policies will help bring confidence back to the market. What’s more, SH-HK Stock Connect is also expected in late Oct, when more overseas money may flow into A share.


FTSE China A50 Index had the best monthly run since Jan 2013 to close 9.61% higher. Market was higher on Shanghai-HK Stock Connect news, ongoing reforms and improved economic data. Firstly, local media reported official launch date of the Shanghai-HK Stock Connect to be 13 Oct 2014 and A-H arbitrage strategy gained popularity again. Hang Seng China AH Premium Index dipped at 88.72 during the month, indicating more than 11.28% discount of A share vs. H share. Secondly, after a big move in the anti-corruption campaign, Mr. Xi showed his determination to implement his committed reform again. The State Council published the Hukou reform guidelines to indicate grant legal status of urban citizenship to 100 million migrant workers before 2020. It will help contribute at least 1% GDP per year for the coming 6 years till 2020. Thirdly, China announced June Exports YoY data at 7.2%, slightly higher than that of May 7.0%, while June Imports YoY data was back to positive territory 5.5%, compared with May -1.6%. Modest recovery of the economy is well expected as government gradually pushes stimulus policies. Last but not least, the month saw the increase of CSOP A50 ETF AUM by RMB 10 billion. The fund’s turnover was ranked top 3 among all the listed stocks and ETFs in Hong Kong Stock Exchange at end of the month.


FTSE China A50 Index traded 1.86% higher in April on the SSE/HKEX connection news, policy fine tuning and deepening SOE reforms.
First, China plans to connect the stock exchanges of Hong Kong and Shanghai as part of efforts to expand the nation’s capital markets. The following two categories of stocks will benefit the most: 1) unique sectors of A share and H share, such as military, Chinese spirit, Chinese medicine sectors of A share and technology, gaming, new energy sectors of H share; 2) A-H dual listed stocks, especially blue chips stocks of A share and small stocks of H share due to relative lower valuation.
Second, China pushed for stimulus policy in certain sectors after 2014Q1 GDP came at 7.4%. PBOC announced RRR cut of 50bp for rural cooperative banks and 200bp for rural commercial banks to support agriculture sector. There is also strong market expectation of property sector loosening as some leading property developers were the best performers in April. The sector could continue to win next month.
Third, State Council decided to invite private investors in infrastructure sectors, including railway, port, IT, new energy (i.e. solar, wind), natural gas and coal chemical. It is considered as another signal to stimulate economy and reform SOE. Besides, Sinopec announced to hire 4 financial advisors to restructure its marketing and retail sales business. With best talent pools and market resources, SOEs are just waiting for the right incentive to unlock the value. We see these reforming policies will favor A share blue chip names, such as those members of FTSE China A50 Index.


•The Chinese economy is slowing, foreign trade data have weakened, the latest trends point more toward deflation than inflation, and there have been several recent squeezes in short-term bank funding markets. Concerns about Chinese debt have hit the headlines but the prospects of a systematic threat seem to be overplayed.
•We think this is a normal transition from an investment led growth economy to a consumption led economy in China. In term of market sentiment, we think weak growth, deflation and currency volatility have been priced in at this point that we are close to the bottom of this market. This is not the Leman moment for China. The weakness in Chinese economy is obvious that the government will stimulate earlier than market expected. We expect neither big fiscal stimulus nor significant monetary easing, but we do expect some growth supportive measures. We think growth to rebound in 2Q.
•The capitulation we are now seeing on the quality names in HK/China suggests we are entering the final phase of the stock market correction.
•We remain concern about 2H economic growth; we believe the government recognizes the need to let the economy slow with the flexible GDP target. Debt defaults will accelerate this year and impact will also likely be felt in 2H. 2H14 - 1H15 the next peak season for trust fund repayment.
•As investors start to overlook bad economic figures in the US that were weather-related, the market not only needs to see improvement, not just good but great economic data to lead the market higher. If we do get great economic data, then this could lead to earlier than expected rate hike. Yellen hinted the first rate hike could come as early as Mar 2015. We would make a further prediction here that not only the rate hike will come earlier than expected but also the magnitude of the rate hike will be larger than expected. We think the Fed could hike rate from the current 0.25% to 4% by 2018, that is 25bp rate hikes every quarter for 15 consecutive quarters.


•The MSCI China pulled back by 6.57% in the first month of 2014. Steel and cement outperformed in January with selected companies issuing profit alerts. TMT outperformed on strong internet services potentials. On the other hand, financials were dragged by liquidity concerns and fear of upcoming trust defaults. Industrials and autos also took a big hit on earning miss and poor market sentiment. China’s fundamentals showed clear slowing trends which is in line with our view that structural reform is negative growth.
•We believe the recent weakness presents itself as a trading buy opportunity of Chinese equities, based on seasonality (PMIs have typically been significantly higher in March and April than in the other 10 months over the past nine years) and all-time low valuations (12-month forward P/E of 8x). We could see 15-20% market rebound (implied 10x of P/E) in the coming weeks, once growth stabilizes and the market’s focus switches to structural reforms during the “two conferences” (NPC and CPPCC) in March. We could see more policy weapons from Chinese government, and the market will realize how well the Chinese government is positioned to tackle the systemic issues, such as the RRR, LDR, the massive FX reserve and all the restrictions on property markets. When market sentiment is extremely on one sided, I would rather look at the flip side. It is time to get greedy.
•On the macro level, we continue to think that the Fed is still in the macro risk management business, even if the threshold for altering the course of policy is a bit higher than we would like it to be due to differences on the Committee as to the costs of QE. Yellen should follow Bernanke's formula that QE is a "supplementary" tool layered on top of forward guidance on interest rates in order to add additional momentum to the recovery. We continue to expect a pullback in DM due to positioning.


After the rally in November on China reform hopes, the HSI declined by 2.4% and HSCEI by 5.46% in December. The HSI fared poorly in 7 out of 9 sectors, with only TECH (+6.2%) up for the month. Energy lagged the most, declining almost 8%. As for HSCEI, the sector which performed the worst was Consumer Discretionary (-9%) while Industrials and Energy also fell 7%.
The Chinese reforms are negative to growth such as closing down polluting factories, but the market has yet to fully discount this. We are cautious and believe market could have a V-shape year much like the last four years. The audit of local government debt showed Rmb17.9tn which is inline with market expectation. Our hedge fund was up 18.15% YTD outperforming MSCI China by 14.16%. We are overweight TECH, consumer, utilities, and selected financials. Underweight energy, and cyclicals.
On the global macro level, our view for 2014 is that global earnings growth will remain sluggish with developed markets (DM) growing at par with the emerging markets (EM). However, DM has rerated significantly last year, and hence carries a higher risk despite better fundamentals.


While China’s fundamentals remains resilient after a sharp growth recovery in 3Q13, the detailed Third Plenary reform announcement release on Nov 15 delivered a strong conviction and lift reform expectation. Key reform areas include market deregulation/financial reform; fiscal/tax; safety nets/demographics; urban/rural; SOE reform; and anti-corruption/government administration. The formation of National Security Council suggests the reformist led by President Xi is winning the power struggle between the left wing and the right wing. Xi was able to secure more centralized power in becoming as the Putin of China. Xi even told Putin that they have a lot in common when they met in person. Market treated this event much like iPhone 5s launch. Disappointment at the beginning with follow up details that surprised the market on the upside. We are increasing our participation in IPO market while we remain constructive on Chinese equities into 1Q14. 

The optimism towards China's structural outlook more than offset some cyclical concerns over the recent increase in bond yields and a weaker Nov HSBC flash PMI. Sector performance rankings were similar across onshore and offshore markets. Insurance and brokers gained the most due to high beta and favorable reform conviction. Gas also outperformed on better gas demand outlook and further commitment on gas pricing deregulation. On the flip side, property was hurt by the State Council decision to establish personal property ownership disclosure system.

On the global macro perspective, Yellen's testimony was extremely dovish.  While she did not directly address the rate path, her comments on the economy and monetary policy were consistent with our view that the Fed will not raise rates until early 2016. Yellen asserted that taper timing will be driven by economic data, in particular the growth outlook which drives the outlook for the labor market, rather than cost considerations related to balance sheet expansion.  She seemed to suggest that the cost for further Fed balance sheet expansion is low. Yellen will target to generate a lot of nominal GDP. One can argue it's a lot of real growth and little inflation or a lot inflation with a little real growth remains up for debate. Instead of focusing on the result on the long run, we think the path to either outcome involves the same thing: easy money and nominal asset price inflation for the short term. We think the rate will stay low for longer and higher risky asset prices are here to stay.


The first half of the month was dominated by the fears of a US debt default (shutdown) and the US jobless claims jumping to six-month highs. Those fears waned in the second half as US reached a budget agreement and tapering was delayed.  The negative effect of QE tapering might be less than we think.  

 In HK/China, 3Q earnings were broadly in line with  fewer companies posted earnings upgrades than expected. Towards month-end, investors started rotating out of year-to-date outperformers such as Macau and Internet names, and switching into reform themes as the Third Plenary session came into the spotlight. Banks and insurance names outperformed, as did Chinese property names. 

The Chinese economy remains healthy because private companies drive employment, investment and earnings growth. The rise of Chinese entrepreneurs puts pressure on the Communist Party to accelerate changes to the economic, social and legal structure.  The rise of the entrepreneur is a key factor behind my view that although the economy will continue to grow at a slower pace in coming years, rather than a hard landing.


In September, we saw sentiment picking up on the back of a better macro picture in China, with prints in IP, retail sales, FAI and lending data beating consensus. IP growth further accelerated to 10.4% yoy in August, compared with consensus of 9.9% and 9.7% in July. September HSBC/Market PMI flash reading rose to a 6-month high of 51.2, up from the August final reading of 50.1. Most of its sub-indexes showed signs of cyclical improvement. New orders and new exports orders rose significantly. However, the month-end final PMI reading of 50.2 came as a surprise versus consensus of 51.2.

With Shanghai Free Trade Zone (FTZ) under the spotlight, the central government unveiled the first batch of initiatives in a general plan that set the tone and scale of the Shanghai (FTZ). Five measures was introduced: (1) accelerating the transformation of government functions, (2) expanding the opening up in investments, (3) promoting the transformation of trade mode, (4) deepening the opening up and innovation of financial sectors and (5) perfecting the legal system. These initiatives touch on some key sectors representing major policy changes to facilitate the economic restructuring. On the financial front, the FTZ will encourage RMB convertibility, interest-rate liberalization, and further cross-border interaction.


Many emerging markets have had a difficult time since Fed tapering entered the radar screen in late May. The current weakness of Asian currencies have been capturing headlines in August. Recent price action in Asian currencies reflects three dominant themes. First, contagion seems to be spreading down the current account curve. Second, the markets seem to be questioning the willingness and/or ability of policy makers to defend currencies. And third, currency weakness is beginning to spill over into domestic asset markets. Emerging market funds saw weekly outflows swelled to US$3.7bn (vs. -$1.4bn in the prior week; YTD +$2.7bn) in the week through 28 August, while developed market funds recorded a slower pace of outflows at $1.1bn (-$11.1bn prior week; YTD +$159.5bn). Although most believe the cautious emerging market (especially in ASEAN) view is now the consensus, but I believe many investors are still positioned too optimistically than this "consensus" view would dictate. The major problem for emerging market is the pick-up in interest rate volatility. Indian Rupee (INR) fell to a record low -2.8% to 68.4. China A shares is now seen as safe haven given its closed capital account and healthy current account. China is better positioned against external shocks.

The official China manufacturing PMI for August improved further, along with the HSBC PMI. The official PMI was 51 for August, 0.7 ppts higher than the PMI for July, 1.8 ppts higher than the PMI for last August. The official PMI has been above 50 for 11 consecutive months. The stronger PMI for August was mainly driven by new orders and output. New export orders also improved. I believe that the Chinese economy has bottomed, but a significant re-acceleration is not the case…..yet. Overall 1H13 corporate earning result seen better than expected. I think stabilization itself is a good news, given how bearish market participants appear to be about China’s outlook.
China is implementing another round of mini stimulus packages with more focuses on bolstering demand. These mini stimulus includes social housing and facility infrastructure in western China, direct private capital into infrastructure construction, utility. Funding will come from local debt and corporate bonds issuance, policy bank supports and private sector capital.

Looking ahead, the Politburo of the Communist Party of China (CPC) Central Committee announced that the third plenary session of the 18th CPC Central Committee will be held in November in Beijing. This meeting is critical, as the new leaders of the CPC will lay out a package of structural reforms that could have a profound, long-term impact on the economy. I believe market will continue to rally from here into this November meeting.


Chinese equities were higher in July as the PBOC injected cash into the short term rate market and Chinese 10yr yields continue to sit near the recent highs. As the pace of growth continues to ease, China’s leadership appears to be showing some signs of nervousness, with the apparent deterioration in the labor market a key concern. Social stability remains a primary objective to the Chinese leadership, hence full employment is a critical factor in this socio-political equation. In response to increased growth concerns, Premier Li suggested that 7% is the “bottom line” for the government's growth tolerance which, taken literally, would suggest that leaders do not want growth to slow further (GDP in Q2 expanded by 7% on a seasonally-adjusted, annualized rate. China official July non-manufacturing PMI print came in 54.1. This comes modestly ahead of the market consensus of 53.9 and has spurred hopes that the Chinese economy might be stabilizing. The HSBC variant of the same report also came in line with expectations overnight at 51.3.
On July 24, the State Council announced three sets of the mini stimulus package to stabilize economic growth:

1. Micro firms (with monthly revenue below RMB20,000 per month) will be exempt from the VAT and business tax, effective from August 1. Assuming other fiscal measures are unchanged, this tax cut would generate an annual tax saving of about RMB30bn for firms. After taking into account the multiplier effect, it could boost GDP by about 0.1%. Six million micro firms will benefit and therefore one should expect some positive impact on confidence.

2. The government will set up a Railway Development Fund to speed up railway construction, especially in the central and western parts of China. The sources of the Railway Development Fund will include the fiscal budget and social sources (i.e., investments from firms and institutional/private investors). We believe that the government may be able to attract RMB200-300bn from social sources by offering some incentives to investors (such as guaranteeing a minimum investment return) and, as a result, the annual investment for railway construction can be enhanced by RMB100bn per year in the coming few years compared with the current plan (note that this year's budget is RMB520bn). The State Council also said that it would allow some innovation in bond financing for railway construction.

3. The government will take a few steps to support the export sectors. These include simplifying customs procedures, reducing fees and levies on import and export businesses, and stabilizing the RMB exchange rate.

While these policy measures may seem mild, but we think that these measures will provide some modest support for the economy and help increase the probability of an economic recovery 2H13. We also believe 2013 interim results are largely priced in on the negative side where the downside risks could be limited. Despite international investors may continue to be bearish on China, there would be much less growth concerns in the Chinese leaders’ policy agenda. It is almost certain that the incoming Beidaihe PSC meeting would review the drafting of the reform program, what is supposed to be formally adopted by the third plenum of the 18th party congress in Oct this year.
In the US, the tones of the discussions on QE tapering in the summary of the FOMC meeting and in the description of the Sep were much different. Bernanke commented “Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy” and “Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases”.
While the world focuses on UST 10y, let’s take a quick look at China’s 10y bond yield to see if this could be a leading indicator for equities.  Interestingly, 10y yield in China have moved higher as money market rates remain under control. This could be mean high equities ahead. The extreme negativity around China hard landing could set us up for a trading bounce here.


In the US, QE tapering expressed board uncertainty on global markets in June. We believe Bernanke will remain its lose monetary policy for the rest of 2013 but QE tapering could begin from September FOMC meeting. US economy is creating 200,000 jobs a month while US is implementing the most aggressive fiscal tightening in recent history. Stronger job market leads to normalization of interest rate and higher Treasury yields. The current yield of 2.7% is still too low to attract investors. We won’t be surprised to see 10-year yield at 3% by the end of 2013 and up to 4% by 2014. We will continue to see outflow of bond fund into equities.
Here in China, the spike in SHIBOR is not an accident but an intended move by PBOC. Why did the SHIBOR spike in June?
• This is not because Chinese banks no longer trust each other – it was the case for US banks in 2008.
• This is not because GDP growth is slowing.
• This is not because capital flight out of China.
SHIBOR was up because PBOC wanted to punish Chinese banks in order to create a more market-based, better regulated financial system with more transparency. Chinese banks rely on interbank funding to balance their books. PBOC is the only liquidity provider in size. This puts PBOC on the driving seat over SHIBOR. SHIBOR spike is intended to be a tool to slow down credit growth, but hardly a credit crunch.
This correction in June gave us an opportunity to buy as other investors remain nervous about PBOC’s efforts to rein in non-bank finance. While Chinese economy remains fragile, we are turning more positive on China for the following reasons:
• Expectation on political reforms to drive investment ahead of 2013 3rd Plenum Session of 18th National People’s Congress ;
• Slow down in overall economic outlook means potential policy easing in property;
• RMB appreciation may slow down following the rest of EM currencies;
• End of inventory destocking;
• Inflation remains mild;
• Resumption of A shares IPO removes uncertainties;
• Market positioning under-weight China.


Financial markets continue to see rising volatility. US treasury yields have been climbing higher steadily during the month, which could signal increasing confidence in the economy. In contrast to mixed data last month, the latest US economic data have been positive, fuelled by strong readings for housing permits, improving credit conditions and stronger job gains. One weak point is manufacturing, which is probably suffering somewhat due to softer demand from Europe and Asia. The other weak point is consumer expectations as consumers face high unemployment and stagnating wages despite of improving payrolls.  But markets were taken aback by the idea that if the US economy continues to strengthen, the Fed could “taper” or reduce the scale of its commitment to quantitative easing. The US dollar rallied and domestic equity and treasury prices declined amid much volatility following Bernanke’s testimony. Japanese stocks dropped 7.3% and European stocks also saw big losses. Weak economic data out of China may also have contributed to the pressure on Japanese shares. In Eurozone, the recession contrasts sharply with the sunny outlook in the US. The 17-member currency union’s aggregate economy shrunk by 0.2% in the first quarter, marking the sixth consecutive quarter of contraction—the longest negative spell in the Eurozone’s 14-year history. For now, the market is not contending with any macro-economic, political or geological disruptions, the concerns are on the implications of rising bond yields and the viability of Japan’s massive quantitative easing program. The much-anticipated asset rotation appears to be gathering momentum as money flows into the equities, primarily at the expense of cash and commodities.

In China, the latest economic data remain sluggish. But monetary policy stance is broadly unchanged and there is no indication of any intention to shift the monetary policy stance. Premier Li Keqiang’s comments reiterated no stimulus plan is in the works. It seems the government is determined to take structural reforms and transform into development mode. Hence, bears have taken charge in view of the many challenges ahead facing Chinese economy. 

MSCI China was down -1.3% in May, another month of lackluster performance. The best performing sectors are technology +14.1%, industrials +4.3% and healthcare +3.4%. The worst sectors are energy -5.9%, materials -3.9% and utilities -7.4%. 

We took a bearish view for the month of June. The rising bond yields and strengthening dollar have not been good for the emerging market, judging by the recent market actions. In general, the emerging economy is facing challenges of losing growth momentum, particularly in China. Central bank support has been the saving grace so far, but the support is weakening too. Without a pickup of growth momentum, it is prudent to stay on the sidelines. We continue to believe that systematic risks or tail risks are well contained.


Financial markets have been volatile during the month. The high volatility in commodity prices is remarkable: gold lost 14% in two days, a rare black-swan event. Declining inflation, reduced global macro risks and a stronger US dollar were the potential drivers of lower gold demand. Oil and industrial metals declined due to seasonally lower demand and weaker economic data. Indeed, recent data out of US are sluggish in contrast to upbeat data in the first quarter. Latest employment report was a clear disappointment, and gauges of manufacturing activity are suggesting slowdown. Elsewhere, economic data remain lackluster and weakness in China and Europe PMIs are dampening the overall global growth outlook together with the soft data out of US. Against the poor backdrop, it is surprising to see that equity market managed to climb a wall of many worries and recovered towards the end of the month. Conducive liquidity environment is the main driver, in our view. Bank of Japan announced plans to double monetary base and expand its balance sheet by a whopping 1% of GDP per month with a goal of generating 2% inflation within about two years. The efforts dwarf the easing measures of the U.S. Federal Reserve and the ECB on a relative basis. In Europe, expectations of more policy support are rising in response to deteriorating growth rates such as a rate cut by European Central Bank and looser fiscal policies. The benign Chinese inflation data were also viewed as lessening the chances of the tightening policies to keep the economy from overheating. Consequently, risk appetite has fully recovered from earlier gold plunge.
In China, recent economic data continued recent softening trend. While inflation pressure moderated and liquidity supply was much higher than expectations, overall economic growth has slowed more than expected. On the other hand, investors started to contemplate any government moves to stabilize the economy.
We remain neutral and expect another lack-luster month for May. In spite of poor reading of economic data out of China, Europe and US, global equity markets have managed to stay afloat and left many investors wondering why. The remarkable resilience is driven by rising optimism over central bank actions, ie, more bad news will increase the chance of favorable policy actions. Considering the abundant liquidity, we continue to believe that systematic risks or tail risks are well contained. However, we don’t think market could run too far ahead in view of sluggish growth prospects. Expectations of help from central banks could provide some support to the market, but we are not convinced it is sustainable and like to view the market resilience with caution. We continue to prefer selective cyclical and internet companies in addition to consumer, gas and utilities.


 Global markets have been struggling during the month, but ended the month with small gains. The resilience is quite amazing by considering the events in Cyprus, threats like the fiscal cliff, the debt ceiling debate, the sequester and the ongoing budget negotiations. Indeed, US has been the star year-to-date with S&P ended the first quarter up by 10%, beating peers in both developed and emerging markets. Economic data around the world has been sluggish, however, things have been better than expected in the US such as encouraging corporate earnings, strong balance sheets, and upbeat readings of economic indicators including jobs, consumer confidence. Further, the Federal Reserve has reaffirmed monetary easing stance in line with many central banks overseas. Such accommodating monetary policies have helped to push investors back to risk assets in spite of the Cyprus headlines. The eventual bailout of Cyprus by the European Central Bank (ECB), the European Union and the International Monetary Fund has avoided an imminent default and an unprecedented exit from the Eurozone. However, the Cyprus’s example of “temporary” capital controls and “taxing” deposits will urge markets to reassess the risk of bank runs in other Eurozone countries. Noticeably, risk appetite has been dampened with commodities weaker and major emerging market indices retreated substantially.

In China, recent economic data has come in below expectations, even though overall trend is still intact. On top of concerns of slowing growth momentum that is evident in the soft data such as industrial production, retail sales and power consumption, market confidence was undermined further by two events: 1) CBRC issued guidelines to further regulate banks' WMP(Wealth Management Product) business; 2) State Council reiterated additional details on policy tightening including the 20% capital gain tax on second-hand property transactions, possible  expansion in home purchase restrictions and property tax pilot program, and possible mortgage lending tightening.

In the coming month, we take a neutral stance in response to the fast deteriorating sentiment. While market ought to see a rebound as recent sell-off appears overdone, we think the overall slowdown of global growth momentum may keep the bounce in check. Further, geopolitical risks in Korean peninsula and news of Eurozone debt crisis will help to deter bulls, especially so when looking at the decent gains year-to-date. Meanwhile, we continue to believe that systematic risks or tail risks are still contained. Hence, we expect market to be stuck in consolidation till further decisive events. With support of accommodating global central banks, equities remain attractive in a world of ultra-low interest rates and flush liquidity. Long-term investors will continue to add by taking advantage of current consolidation and we will focus on bottom-up research to generate stock ideas. We continue to prefer selective cyclical and internet companies in addition to consumer, gas and utilities.


Global markets entered a phase of consolidation after posting solid gains in the past three months. Investment flows into equities have been strong since November last year and it is supported by an absence of bad news, easing of central banks around the world, and attractive valuations. However, investors are concerned of a pullback as a number of indicators suggest that the current rally is getting long in the tooth. Hence, the correction seen in the past weeks is not only expected but also viewed as welcome and good opportunity to buy. Excuses used by market for the pullback include concerns on Fed’s commitment to continue buying Treasuries at the current pace, the looming $1.2 trillion in federal budget cuts known as the “sequester,” a close Italian election campaign that could return Silvio Berlusconi to power, the nomination of a new Bank of Japan governor and concerns that China is entering a tightening cycle. All these negative news flows caused market to pause and have a reality check on global economic prospects, which continue to pick up as suggested by recent surveys and economic data. Disappointing readings on Eurozone and Japanese fourth-quarter GDP rounded out a generally poor showing across the developed world - the Eurozone contracted an annualized 0.6% in the fourth quarter, and 0.9% year-over-year, Japan shrunk 0.1% in the quarter, and 0.4% year-over-year. But forward-looking gauges of economic momentum, such as PMI surveys, have registered a broadly-based improvement over the past few weeks in all of the major regions of the world, including the Eurozone. It appears that global economy continues to grow at a sluggish but meaningful pace.

In China, recent economic data came in with no surprised and continue to show steady recovery momentum. While there is less concerns on growth, market is focusing on policy risks ahead of National People’s Congress on 5 March. Particularly, market is worried about tightening policies aimed at property sectors in view of rising property prices. Indeed, a nervous market needs more clarity on policies ahead.

In the coming month, we are expecting a rebound after the sharp pullback in February. However, we think consolidation will continue. The strong flows into equities took a breather in recent weeks, we think it is more of a pause than a reversal. Equities remain attractive and the correction provided an opportunity to buy. Technically, the market is healthier with current consolidation, which may last a bit longer. Looking at economic data, global economy continues to move in the right direction. But growth optimism is contained by concerns of negative policy actions, notably China’s tightening policies against property and US budget debate. Despite of market concerns on Italian election, US sequester and China’s policy tightening, systematic risks or tail risks remain anchored. We view current consolidation as a good opportunity to buy and we will focus on bottom-up research to generate stock ideas. We continue to prefer selective cyclical and internet companies in addition to consumer, gas and utilities.


Global markets made a strong start to the year, powered by seasonal bullishness, the US budget deal, easing Eurozone tensions, continued central bank largesse and signs of improvement in the US and Chinese economies. Markets started the New Year strongly on news of the fiscal cliff deal in US, which markets have been anxious and pay close attention in the past two weeks. Further, economic data are consistent with modest growth for the year ahead. Manufacturing activity is improving in the world’s largest economies. The PMIs in U.S. and China have risen in recent months and are now above the important 50-threshold between expansion and contraction. In Europe, the economic data is weak, but for now the crisis is not getting worse. Countries continue to make progress on structural reforms, as evidenced by improvements in the current account balances in peripheral countries. Further, steps to create a credible lender of last resort and moves towards tighter banking and fiscal unions are encouraging. Euro hit its strongest level in nine months against the US dollar as ECB keep rates on hold. ECB focuses on inflation, while Fed focuses on recovery. Japan introduced 10 trillion Yen stimulus package and Abe’s 2% inflation target fueled sell Yen, which provided further liquidity that is already abundant. Notably, core bond yields – including German Bunds and UK gilts – are rising in recent weeks on improving global economic growth prospects as well as rotation from fixed income into equities. While equity valuations have risen in the past few months, few major markets appear overvalued by historical standards. Many, particularly in Europe, actually still trade at a steep historical discount. Clearly, however, investor sentiment has turned more bullish, as indicated by surveys and data showing the flow of investment funds into various asset categories.

In China, most recent data reinforced the perception that Chinese growth has bottomed and a reacceleration is afoot. GDP rose a greater-than-expected 7.9% for the year ended December 2012. Other data were also encouraging, such as industrial production, retail sales. China seems poised to expand at a solid, sustainable pace once again.

The portfolio is positioned for an up market at the beginning of the month in line with our positive view. As market climbed up along with global equity markets, we strengthened stock selection to emphasize on quality and earnings delivery. We reduced materials and increased exposure to consumer discretionary and energy. Stock selection has contributed positively to fund’s performance.


Global markets recorded a strong finish in the last month of the year. In the US, fiscal cliff negotiations were proceeding and market was paying close attention on its progress. Market has been sanguine on the outcome before year-end, but the difficulty at the 11th-hour caused volatilities in the last few trading sessions. Apart from fiscal cliff, the FED unexpectedly replaced calendar-based forward guidance with outcome-based guidance, i.e., the rates will be kept low as long as unemployment remains above 6.5% or if inflation between one and two years ahead is projected to be no more than 2.5%, which aided market sentiment further that is already very positive. Risk assets enjoyed a good run. Meanwhile, economic data are supportive of the positive mood. Manufacturing activity is improving in the world’s largest economies.  Purchasing managers’ indices in US and China have risen in recent months and are now above the important 50-threshold between expansion and contraction. In fact, 70% of PMIs around the globe rose month-over-month in November, the most in almost two years. Emerging markets were standouts; nine of the 13 countries showing expansion last month are developing nations—including each of the BRICs. Unsurprisingly, fund flows keep flowing into risk assets despite of the correction on concerns of fiscal cliff negations in US.

In China, November data show further broad-based improvement in economic activity, suggesting that recent economic recovery continues on track. The sustained improving trend in China’s PMI, in particular, has significantly boosted market confidence. The readings from other emerging economies are further evidence to confirm China’s recovery. In addition,  the  annual  Economic Work Conference and recent speeches by the incoming new leaders have boosted  expectations  that  economic  restructuring  will  make  more meaningful  progress  going  forward.

The portfolio was positioned for an up market at the beginning of the month in line with our positive view. Further, the fund executed a series of trades to focus on insurance, industrials, consumer discretionary and gas names. Stock selection has contributed positively to fund’s performance.

In the coming month, we maintain our positive stance. After a strong finish towards the year end, we believe investors will taking a more positive view on equities in response to an improving global macro backdrop. Volatility has receded in the past few quarters and it appears now tail risks are well contained in the new year despite the possibility of short spike-up on various events. The pick-up of growth momentum in emerging economies, led by China, prompts more fund flows into emerging economies. Equities should do well given attractive valuation, synchronized QE and low inflation risks. We continue to focus on stock selection to generate returns and prefer selective cyclical and internet companies in addition to consumer, gas and utilities.


Global markets experienced a roller-coaster ride in November. As soon as US election ended, market shifted gear to focus on the grim reality of "fiscal cliff", which triggered a broad sell-off of global equities. It is nothing surprising and probably a welcome correction in the eyes of many investors, given the exuberant summer and stellar performance year-to-date. Indeed, market has been pampered with multiple good news in the past months, ranging from synchronized quantitative easing, robust readings of US economic data to increasing evidence that China has avoided hard-landing. Meanwhile, tensions are building in the Middle East, the Eurozone is re-entering recession and Eurozone crisis is alive and kicking again.

Hence, it is not hard to imagine for market to pause and have a reality check. US corporate earnings have managed to deliver in the third quarter, but they are clearly losing momentum. On U.S. economy, investors showed serious concerns on risks of fiscal cliff despite of the healing housing sector, rosy employment numbers, and confident consumers.

In Europe, the Eurozone finally tipped into recession in the third quarter on slowing German and French economies and contracting Netherlands — its second recession since 2009. Unfortunately, austerity measures have harmed growth, especially in struggling Southern European countries, adding concerns to the progress of Eurozone debt crisis. But all these risks appears to be temporary, market quickly erased the losses in the later part of the month as optimism on fiscal cliff negotiations gathers momentum.

In China, economic data provided reassuring signs of improving economy, which was well received by the market. Both the independent HSBC PMI and the official PMI entered into growth territory on top of improvement in the previous months. Additionally, the China National Bureau of Statistics' leading indicator index made gains, suggesting continued improvement in economic conditions ahead. The dust of political transition also settles as Xi Jinping took over leadership of the Communist Party of China. In contrast to the good performance of Hong Kong, onshore Chinese equities dipped below post-crisis lows.

MSCI China inched up 1.8% in November, mainly helped by index heavy weight financials. The best performing sectors are consumer discretionary 8.2%, utilities 6.24% and financials 3.34%%. The worst sectors are healthcare -10%, technology -4.2% and materials -0.5%.


Global markets traded sideways in October after a strong rally in the previous month. Fears over Eurozone crisis continue to abate since the European Central Bank (ECB) agreed to provide an unlimited liquidity support as evidenced by the falling yields on the sovereign debt of beleaguered countries like Spain. Recent U.S. economic data have generally been positive and suggests continued moderate economic growth such as preliminary third-quarter GDP report, housing starts, non-farm payrolls, motor vehicle sales, manufacturing and services-sector reports. With optimism growing on central bank easing measures around the world and positive economic data, investors have good reasons to be cautious after a strong run of risk assets. Global growth challenges caught market attention again as the IMF cut its 2012 global growth forecast from 3.5% to 3.3%, and lowered expectations for 2013 to 3.6% from 3.9%, citing fragile financial conditions worldwide, a contracting Eurozone, the danger of the fiscal cliff in the U.S., and both internal and external pressures on many emerging economies.

The market appears too complacent on U.S. fiscal cliff as U.S. faces a $600 billion combination of automatic tax hikes and spending cuts on January 1, 2013 unless Congress hammers out an agreement to avoid it. Although third quarter US corporate earnings results have come in better than lowered forecasts, it is clear that companies face real challenges in growing sales. Therefore, a pullback or consolidation is justified as investors look for new directions.

In China, economic data trend continue to be stabilizing and improving, though not in a big way. The latest PMI readings suggest that China is not out of the woods yet, but it is moving in the right direction. Meanwhile, other recent data suggest slow improvement as well such as retail sales, fixed investment growth and exports. All these provided relief to help China rebound off lows and outperformed peers.

MSCI China jumped 5.67% in October, on top of strong gains recorded last month. The best performing sectors are industrials 9.85%, materials 8.2% and financials 8%. The worst sectors are consumer staples 1.98%, utilities 1.23% and telecom 0.19%.


Global markets enjoyed a strong rally in September. Optimism on abating Eurozone fears and hopes of central banks' easing actions have lifted market sentiment for the past months. The rally accelerated powerfully on news of Mario Draghi, President of the European Central Bank (ECB) committed to potentially unlimited bond purchases to ease financing pressure on struggling countries like Spain and Italy, known as Outright Monetary Transactions, or OMT. Ben Bernanke followed with announcement of open-ended monetary stimulus measures, called QE3 or QE infinity, which powered global markets rally further. All these central bank actions trigged a broad and powerful "risk-on" rally.

Stocks soared globally, particularly in Europe and bond yields for many peripheral European countries fell sharply as investors moved into riskier assets. Gold also continued to rise, while volatility measures sank. Economic data out of Eurozone and China are weak, while U.S. economic data indicated continued modest growth, despite weak payroll growth and manufacturing data. For now, investors played down lackluster economic data and stayed in "risk-on" mode.

In China, economic data trend remain lackluster on an absolute basis but many areas are stabilizing. Policy easing has started to gain traction, particularly public investment which has increased significantly in recent months in areas like infrastructure and railway etc. This reflects the fact that many large projects have been approved in the last five months by the National Development and Reform Commission. However, the manufacturing continued to slow on weak domestic demand and destocking. On the external front, the exports sector continued to suffer on Eurozone weaknesses. Further, political uncertainties surrounding the leadership transition and implications of escalating Sino-Japanese tensions over Diaoyu islands also cast a shadow on the economy.

MSCI China jumped 5.97% in September, benefiting from improved risk-appetite globally. The best performing sectors are materials 16.2% and technology 10%. The worst sectors are consumer staples 1.7%, consumer discretionary 3.7% and telecom 3.9%.


Looking back into 2016, we have experienced the circuit-breaker, the implementation of the new IPO policy, Brexit, the Federal Reserve to raise interest rates, leverage buyout by insurance companies and the launch of Shenzhen-Hong Kong Connect. This is a colorful year for China's capital market, and a year of more complicated and integrated global capital markets. We try to earn as much as excess returns for our investors under the premise of ensuring the safety of investor assets. The fund is optimistic about the long-term prosperity and development of China's new economy and the sectors associated with new economy will form the spiral upward trend along with some structural adjustments. 


Far and away, November’s biggest news is Trump’s victory in the US presidential election. Although speculation is rampant and wide-reaching about the President-elect’s potential China policy, we believe risk is concentrated on the export side, with hostile trade policy and a volatile RMB the most likely outcomes. Trump has threatened to impose a 45% tariff on goods imported from China, a move that would harm sectors like steel that face import competition. While we are doubtful such steep measures will be imposed, the consequences are not apocalyptic in the event that the threats do manifest. Although China is the United States’ largest trade partner, China’s export value to the US represents a slim 3% of China’s GDP. And because the TPP now appears dead on arrival, it is likely that China will attempt to fill the vacuum left by abandoned US leadership and bolster economic ties with neighbors through measures like One Belt, One Road and the Regional Comprehensive Economic Partnership. Most critically, though, Trump’s proposed tariffs will likely impose more damage on the US than China. The trade restrictions would punish US companies who manufacture in China (i.e. Apple), US companies who rely on international supply chains, and—perhaps most critically—middle and working-class US consumers who are accustomed to high-quality, low-cost goods and appliances.
On the currency side, Trump has threatened to label China as a currency manipulator and appreciate the RMB by force. However, judging from the historical inefficacy of the ‘currency manipulator’ stamp, it is likely that the rhetoric lacks teeth and is merely employed to placate supporters. The historical examples speak volumes. The US has used the epithet with Japan in 1988, Taiwan in 1988 and 1992, and China from 1992 – 1994. In the China case, the country unified official and market exchange rates at the end of 1993, effectively weakening its currency from RMB 5.8 per USD to RMB 8.7 per USD. Moreover, the US trade deficit with China has increased every year since 1988, showing the futility of the currency manipulator label. Perhaps most critically, US law prohibits the president from unilaterally and immediately imposing punitive tariffs on manipulators, an action further constrained by US commitments to the WTO. Even if the most hawkish scenario were to play out, China is not without defenses. President Xi is the most powerful leader in recent history and is armed with over USD 1.1 trillion of US Treasury bonds purchased with the proceeds of the country’s trade surplus. Liquidating these assets could put downward pressure on the US dollar, strengthening the RMB by comparison.
A depreciating dollar would be potentially useful for China, as the RMB has depreciated more than 3% since the currency’s October SDR inclusion. The slide left investors questioning whether authorities would step in at the 6.8 level to defend the currency against the USD. In a widely quoted remark, a former regulator at the State Administration of Foreign Exchange argued that China’s monetary policy should prioritize economic growth over exchange rate defense “if there is a conflict between the two.” Airline companies and property developers are among the biggest losers of the currency slippage; the sectors are burdened with heavy USD-denominated debts. On the contrary, export-dependent companies expect positive impact on their profitability thanks to the competitive environment brought upon by the weaker currency. In the past 12 months, China’s Central Bank was often seen as actively intervening in the market when the currency depreciated too fast. However, the PBOC has made no such effort since October, a signal that the Bank is tolerating the quick deprecation. Explanations for the decline abound, though concern about ramifications of a potential trade war between China and the US has emerged as the leading theory. However, some investors think that the depreciation is more purposeful, with the Chinese government exploiting the opportunity to deleverage the country’s economy.
Although no one knows with certainty just how far the RMB will slip, onlookers are watching anxiously. A primary conclusion is that, in exchange for stepping in to defend the currency, policy makers are charting a new course and using restraints on capital outflows as a way to assert monetary dominance. Reports trickled out during the last week of November that SAFE would require foreign corporations to secure authorization when moving any amount over USD 5 million out of the country. Moreover, murmurs abound that regulators are halting approval of overseas purchases, bringing an end to a yearlong binge that saw China become the world’s second largest buyer of overseas assets.


China’s August economic data came better than expectations, suggesting a rebound from a lackluster 1H2016. Investors will find several takeaways particularly heartening. The first one is that industrial output rose 6.3%, surpassing July's 6.0% growth and analyst expectations of 6.1%. Secondly, the fixed income investment and money supply growth showed moderate recovery. Third, fixed asset investment also improved in August, suggested by a trend spearheaded from state-owned enterprises and government infrastructure investments. Last but not least, aggregate financing levels beat July's data threefold, coming in at RMB 1470 billion. Some onlookers, however, were less enthusiastic; the better-than-expected data may reduce policymaker incentives to impose further stimulus. Naysayers also suggest that August’s figures are an aberration, speculating a September downturn attributable to lost productivity from the Mid-Autumn Festival holiday and G20 shutdowns. However, a third interpretation surmises that a muted September might be the outlier, citing the buoying effect that stimulative1H2016 fixed income investment will have on Q4 numbers.
On the regulations side, China pushed forward to further open up its capital market. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) announced new RQFII rules. There are two major improvements which investors should pay attention to. Firstly, segregate account lock-up period has been shortened to 3 months, and the period will be calculated from the time stamp when inward capital reaches 100 million RMB. Secondly, the regulators defined base quota as in following formulas:
(1) For entities with major assets outside of China,
RQFII quota = 100 million USD + 0.2% * The 3-year average of AUM in USD – QFII quota granted in USD
(2) For entities with major assets within China,
RQFII quota = 5 billion RMB + 80% * Last year’s AUM in RMB  – QFII quota granted in RMB
What’s more, China’s regulators verbally loosened restrictions on QFII scheme. There were no written restrictions on the limit of QFII investment in equity, but in practice QFII usually have to invest in more than 50% of total quota in equity. The China Securities Regulatory Commission (CSRC) verbally informed custodian banks which may further notice their clients that the 50% limit is cancelled. In other words, QFII now can invest in equity at less than 50% of total quota. Meanwhile the restriction that QFII cannot hold more than 20% of total quota in cash assets was also canceled. However the regulators didn’t change the following two restrictions: 1) single QFII cannot hold more than 10% of total shares outstanding in any public company; 2) the total shares outstanding held by QFII together cannot be more than 30% in any public company.

RMB’s inclusion in the SDR will be effective on Oct 1, 2016. China may learn some lessons from Japan’s past. In late 1973, Japanese Yen (JPY) was included in the SDR basket. Although the 1974 oil crisis hit Japan's economy badly, forcing a currency depreciation, JPY actually appreciated more than 30% in the five years following SDR inclusion. Like China’s accession to the WTO in 2001, the inclusion of RMB in the SDR basket is heavily symbolic. It formally signifies the IMF’s recognition of China’s role as a key global financial player. Because RMB will account for 10.92% of the SDR basket, the demand for RMB is expected to increase by around SDR 22.29 billion (or RMB 211 billion) thanks to the allocation demand for RMB- denominated assets from IMF member counties in the next few years. However, in the short term, RMB may depreciate slightly given China's lukewarm export data and double-digit monetary supply growth. But as China’s Premier Li Keqiang said during his UN speech, there is no basis for continued RMB depreciation.


The biggest news in August is the announcement of Shenzhen-Hong Kong Stock Connect, which boosted the market sentiment and sent the index close to year-high in 2016. Number of eligible stock universe for northbound is 880 stocks of the SZSE Component Index (399001) and the SZSE Small/Mid Cap Innovation Index (399015) with at least RMB 6 billion market cap, plus A/H dual listed names on the Shenzhen Stock Exchange. While number of eligible stock universe for southbound is 417 constituent stocks of the Hang Seng Composite LargeCap Index, Hang Seng Composite MidCap Index, and any constituent stock of Hang Seng Composite SmallCap Index (with at least HKD 5 billion market cap), plus A/H dual listed stocks on The Stock Exchange of Hong Kong Limited. Meanwhile aggregate quota for both Shenzhen-Hong Kong Stock Connect and Shanghai-Hong Kong Stock Connect are abolished, while keeping the daily quotas. What’s more, ChiNext Stocks are open only to institutional professional investors as defined by relevant rules and regulations in HK and ETFs will be eligible at a later stage pending relevant conditions are met after the start of Shenzhen-Hong Kong Stock Connect. The announcement shows that China’s stock market is almost fully open for overseas given no aggregate quota. Major China A share indices jumped more than 3% on the news.

Property developer sector was the winner of the month, thanks to the strong performance of sector leader Vanke (000002), the recent panic buying in key cities of China and the expected individual income tax reforms. Several investors including another large Chinese property developer Evergrande was aggressively bidding the shares of Vanke. Valuations of A share blue-chip names are reasonable and leverage is relatively low, offering investors good risk-reward ratio. Meanwhile Key cities like Shanghai and Hong Kong saw buyers rushed back into market. Average price of 10 blue-chip Hong Kong properties has rebounded 10% from year-low while Shanghai property jumped 27% in July year-on-year on average.  In Shanghai, it is reported that buyers were panic buying properties before the possible increase of down payments. And the individual income tax reform plan has been submitted to the State Council and the mortgage interest payments may be deducted from taxable income under the new scheme. All the news above helped lift the investor sentiment in the property developer sector.

August also saw more evidences that China’s government is actively stimulating economy. China’s State Council unveiled detailed plans to lower business costs reasonably for enterprises within 3 years as the goal. The plans include 1) lower tax burden by RMB 500 billion per year and also waive certain administrative charges for companies; 2) lower financing cost by cutting borrowing cost and financial intermediaries’ service charges; 3) lower administrative cost by making the approval process more transparent and standardized; 4) lower labor cost by controlling the wage growth rate; 5) lower energy cost by reforming utility (electricity and gas) markets; 6) lower logistics cost by improving the logistics efficiency. These measures, if well implemented, will help companies to lower operating cost and survive the current struggling environment. 


The performance of major economies in July including U.S. failed to meet market’s expectations. Last month, the expectations of interest rate hike from FED weakened, the Bank of England cut interest rate, the global market showed liquidity flooding, the commodity market were on a roller coaster and the stock market kept climbing. The growth rate of China’s economy maintained stable and government implemented tighter regulations on the financial market.

In July, the A-share market showed divergences in different sectors, the CSI 300 Total Return Index advanced 2.62% while SME (Small and Medium Enterprises) Index went down by 2.27% and ChiNext Index slumped 4.73%. For the Hong Kong market, the Hang Seng Index and HSCI (Hang Seng China Index) increased by 5.28% and 2.82%, respectively. As a result, the AH premium closed at 128.83, declining by 2.17%.

As the end of July, the Shanghai A-share, Shenzhen mainboard, SME and ChiNext were traded at 14.48, 23.94, 47.85, 68.87 times of P/E ratio, respectively. Among the blue chips, the bank sector was valued at 6.44 times of P/E ratio and 0.98 times of P/B ratio. The yields of Treasury bonds and the spread between bonds interest in different sectors continued to fall. The Hang Seng Index and HSCI were value at 10.86 and 7.06 times of P/E ratio, which were still at the historical bottom level.

The rebounding commodity price and heating up real estate market indicated that the economy had reached its bottom in the first quarter of 2016. We expect gradual improvements in economy data in coming quarters. With the attractive low-valuation of blue chips and the flood of liquidity in the market, we are optimistic about the future performance of H-share and A-share market.


Based on overseas history, stock market would show a “J-shape” upward trend when the economy is at a shift period of an “L-shape” economic growth. Initial growth is mainly from easing monetary policies and the later stage growth is mainly from the success of economic structural change. As the China economic growth slows down during the structural change and Fed enters an interest rate hike cycle, driving force of H-shares market will depend on whether China could successfully implement the supply-side reforms, whether liquidity will be a support during reforms, and whether improving total factor productivity will be set as a goal while the economy is bottoming during the “L-shape” instead of using liquidity injection as a sole support for short term developments.

Entering into second half of the year, Chinese economy trend will become clearer. Regulation details of Shen Zhen Hong Kong Stock Connect scheme are being discussed, probability of not launching is low. Quota of Shanghai Hong Kong Stock Connect scheme is reaching the cap, discussion to increase quota has to be on agenda, which is beneficial to Hong Kong market’s capital flow. As mid-year financial reports will be published by companies, there will be structural investment opportunities.


High frequency data showed increasing production capacity utilization and fast paced sales in real estate market, economic recovery is in process. Clearly increased demand and price of industrial goods improved enterprises’ profits and investment activities. Stabilizing economy and growing real economy financing means capital is flowing to real economic activities.
After the correction from 2015H1 to now, valuation of growth companies listed in Hong Kong is back at a relatively lower level and these companies has the biggest discount to A-shares market. Shenzhen-Hong Kong Stock Connect is written into the government work report this year, and therefore is a very probable event. As time goes on, market expectation of Shenzhen-Hong Kong Stock Connect launch will be stronger. Different from Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect will include the growth SME companies listed in Hong Kong. It will also attract more capital to Hong Kong market, beneficial to valuation of H-shares.
In conclusions, we hold positive outlook in Hong Kong and China market from a top down perspective. Inclusion of A-shares into MSCI index has been a positive catalyst to both A-and H-shares markets. Both Taiwan and Korea experienced large increase when they were included into MSCI index, so a round of A-shares rally is worth looking forward to after the inclusion. From the bottom-up perspective, new economy sectors will have a new round of market. Lower valuation of H-shares will act as a cushion to downside risks.


May and June are expected to be in a policy vacuum. First of all, FED won’t have the discussion on rate hike until June, which means US monetary policy will remain unchanged temporarily. Secondly, Chinese government will evaluate macro policy effect in 2016H1, making it unlikely to have any significant changes at the current stage. We will pay close attention to the Fifth National Finance Work Conference to be held in June. In accordance with past practice, the conference will be held every five years, and the fourth one was held in 2012. Domestic media reported that this year’s National Finance Work Conference will be held in advance to the summer, and if so, it’s a clear signal that after the sharp fluctuations in equity market and currency exchange rate in 2015-2016, Chinese government has gradually realized the structural problem in financial system and overall regulation effectiveness. Plus, there have been shocks in onshore bond market, with investors’ confidence being negatively affected by default cases and early repayments. In this particular time point, an overall review of China’s financial market structure and regulation system appears necessary.

In addition, we will pay more attention to inflation in the coming months. Given PBoC’s easing policies and periodic stabilization of macro-economy, increasing concerns on inflation has become a major factor that holds back equity market performance in April. However, market expectation may not be true, and further analysis and monitoring are needed. We believe the possibility for continuous vicious inflation is very low given current macro background. Firstly, easing monetary policy or increasing base money does not necessarily lead to inflation; there are two important factors in the transmission mechanism, one is money multiplier, namely the turnover of money, the other is asset price. While the central bank implements easing policies, if the turnover of money decreased due to shrunk demand, eventually there’s no increase in real money supply. That is why we have seen several rounds of monetary easing in US and EU in the past five years, but haven’t seen significant increase in inflation. Another factor is asset price, especially real estate price in China. Increasing money supply may not bring inflation to the economy if real estate acts as a reservoir; real situation in China has largely reflected that, as real estate market gradually evolved into a phenomenon of money supply. As a result, easing monetary policy may not necessarily lead to inflation, especially in China where many industries are facing absolute excess capacity. In fact, increase in CPI in February and March mainly came from increase in food price; March CPI increased by 2.3% YoY, of which fresh vegetables and livestock meat have 0.92% and 0.69% impact respectively. As we know, vegetables and meat have fixed production cycle, i.e. a complete pork production period takes 2-3 years. Thus, we believe there’s no sufficient reason to worry about overall inflation trend in China and market concern over inflation or even “stagflation” should be eased in the following months. If so, with continuous improvement of China’s macro-economic growth and industrial demand, Hong Kong stock market may expect an upward trend in near future.


FTSE China A50 Index rallied in March due to the government’s stimulus policies and improved economic growth expectation. China’s top leaders gathered to discuss the next 5-year plan for the country at beginning of the month and the conclusion seemed that China decided to give higher priority to growth over reform. Premier's Li Keqiang's government work report confirmed monetary easing bias and emphasized the importance of investment and property to China’s economy. Meanwhile previously-anticipated IPO registration reform and strategic emerging industries board were not mentioned and both may be postponed. Market players considered it as one of the measures to stabilize local stock market as the IPO registration reform and strategic emerging industries board would increase new stock supply and increase the market pressure.  However, it is reported that China will launch Shenzhen-Hong Kong Stock Connect this year and ChiNext stocks may be eligible for the scheme.

The central bank of China also actively announced policies to support the market. PBOC was said to allow commercial banks to convert companies' bad loans into shareholding of the borrowers. But some investors were worried that the aggressive policy may deteriorate banks' asset quality. Later this month, local investors were talking that China may lower bad loan coverage ratio for commercial banks. The current bad loan coverage ratio is 150% and China may lower that ratio to 130% for big state-owned banks and 140% for smaller names. Both measures would improve banks' earning result if announced. Meanwhile some domestic financial institutions restarted to offer up to three times leverage for stock financing. And evidences are showing that un-official margin finance demand also picked up as investors were rushing back to equity market.

We remain a constructive view on China’s local equity market in April as dovish view from Fed will reduce the depreciation pressure on RMB and give PBOC more room for monetary easing. Although we observed some tightening measures on property markets in certain tier-1 cities like Shanghai and Shenzhen, the government’s stance property market will remain supportive in most tier-2 and tier-3 cities. Finally, local brokers and regulators are reported to loosen equity margin buying, a similar pattern that was observed in early 2015 and a reversal from the last 4 months.


Investment Review
Many companies have issued Q3 reports in October, and we have seen the 「Q3 report」 for Chinese economy as well. The main logic behind 「short China」 view is still from the top-down macro perspective. For instance, GDP growth rate has been declining from 7% in Q1 and Q2 to 6.9% in Q3. The downside trend has caused concerns among market investors although there was only 0.1% drop – in fact, many believe the credibility of GDP growth is still questionable. In addition, PPI index representing China’s industrial product price has seen negative YoY growth for 43 consecutive months; power generation data which represents China’s industrial demand used to stay around 8-10% YoY growth rate, but has seen fell to 3% in the past two years and even touched 3.1% negative YoY growth in September. More and more investors started to doubt the potential growth range of Chinese economy in the medium to long run; shall the market expect something like 5% or even lower? Although the Chinese government and officials repeatedly expressed that 「steady progress and steady upward trend has not changed」 and 「relatively rapid growth potential in medium to long run has not changed」, but many investors believe these statements are used for the purpose of building market confidence.
However, if you see Chinese economy from a bottom-up micro perspective, it is a different story. In 2015H1, number of domestic tourism passengers has increased by 9.9% to 2.024 billion, total domestic tourism consumption has increased by 14.5% to 1.66 trillion RMB, which is 4.1% higher than the growth rate of total consumer goods retails sales – we have seen a clear trend from goods consumption to service consumption. Tourism consumption has developed into a market with 3 trillion RMB in size and double digits in growth rate, and is expected to grow into a market of 5 to 10 trillion RMB in near future. Compared to domestic tours, overseas trips has had an explosive growth in the past two years; the theme of Wechat theme of 「Golden Week holidays」 has switch from 「watching the crowds」 previously to 「world photography exhibition」 recently. Over 50 countries (regions) have allowed no visa or landing visa for Chinese passport holders, making it much easier for the Chinese to go for an overseas trip. Another example would be the e-commerce industry of which the retails sales has increased almost 50% and reached 2.8 trillion RMB in 2014, accounts for 11% of total social consumer goods retail sales. More importantly, the growth trend of this industry is still on, and the penetration continues to third or fourth line cities with a expectation of maintaining 20% - 30% growth rate. Six years ago, a so called 「double eleven bachelor festival」 became popular among young people, with e-commerce marketing, it has now developed into China’s largest commercial activity and became well-known; November 11th is also called 「Consumer Day」 in China. That is why it is not so difficult to understand how Alibaba achieved a market cap of 200 billion USD and JD achieved a market cap of 40 billion USD without making profits. Six years is not a long time, but it has witnessed the rise of a new industry in China, and that is the real case of China’s economic transition.
Excess return of the fund mainly comes from our judgment on market opportunities in September and our deep long-term research on the underlying investments. Market participants have been focusing on China’s bailout policies and portfolio exposures instead of industries or stocks. This phenomenon itself can prove the market was abnormal at that time, because investors beat the market through security and industry selection, not position level. One of the main characteristic of September’s Hong Kong market was that trading became more active. For example, automobile companies’ stock price became more sensitive to the changes in industry sales and policies; internet companies’ stock price started to reflect the growth in active users and GMV data; although price adjustment policy has not been introduced yet, gas operators’ stock price has started to move following policy expectation. All of the above were strong signals showing market is gradually back to normal. We adhere to the oversold opportunities in blue-chip ADRs based on our judgment on the long-term trend and industry structure of China’s internet sector. First of all, there is still a lot of room for internet sector to improve its penetration in China and the growth pattern is sustainable; the business model has become more mature and 「internet plus」 is no longer a mere slogan in many areas. Some people think China’s internet sector is having serious bubble; one phenomenon is that a start-up internet company can easily get billions of financing even without much customer traffic. We agree with this opinion to a certain extent, but we believe more attentions should be paid to the blue chip companies with large customer base and matured profit model. Internet searching leader Baidu, E-commerce leader Alibaba, Entertainment and social media leader Tencent; these companies have acquired leading positions in their corresponding areas which is very difficult to shake as long as they don’t jump into huge strategic failure, and this is the basic structure of China’s internet industry. Besides, due to in depth involvement of capitals and fusion of different internet companies, vertical areas of internet sector will develop into a healthier direction, while the old model of expanding market size through 「burning money」 and price competition cannot be sustainable. That is why we have seen many mergers and acquisitions in the vertical fields of internet sector. We have also added position in city gas operators in October. We have learned from on-site visits that the gas sales volume has been suppressed due to weak industrial demand this year. From supply perspective, price adjustment in gas industry appears necessary. In October, the government has announced to gradually release goods and service prices in competitive industries and has set timeline to achieve this goal. Gas was considered the most environmentally friendly fossil energy and gas operators has natural monopoly power; as long as the pricing mechanism can be formed, we see the growth potential of this sector as relatively certain.
Market Outlook
From either an economic perspective or a social perspective, China is standing at the crossroad of its development. The last time we have seen a crossroad for China can be dated back to the year of 1978, right before the 「Reform and Open-up」 policy was introduced. In 1978, China was just out of the shadow of political movements, the reform has brought rapid economic growth and significant improvements in living standards. Now China is facing a bottleneck of continuous growth and a shackle in mechanism, and the transition of Chinese economy, the restructure of system and the innovation of mechanism matters a lot for the social and economic development in the following 20 to 30 years in China. Of course, the resistance and conflict of interests we are facing today are so different from 30 years ago, but standing at this historical point, we see more opportunities than challenges for China .
The Fifth Plenary Session has been held in October as well, attracting much attention from the market and the society. The 「Thirteen Five Plan」 which will be disclosed in full detail soon acts as a microcosm of China’s next five years’ restructuring. What we can conclude now is the determination and confidence to carry on economic transformation and the direction and intensity to promote market-oriented reform. In the whole structural transformation and reform process, opening up of financial system and reform of capital market will play a role as booster. In the past 20 years, Chinese economy and companies use fixed assets investments or use fixed assets as collateral to get financing from banks to expand. At this stage, support from financial industry to real economy was mainly reflected in banking system and the indirect financial channel related. However, China’s economic structure upgrades is a process from heavy assets to light assets, and the light assets business model will become the main theme. Given the limitation of indirect bank financing, capital market, especially stock market will play an important role in the transformation; this was determined by the stage of China’s economic development. After the 「crash」 in June, investors believe the China government will hold a very cautious attitude towards capital market reform and financial market open-up, some even believe the steps will be stopped. However, the recent rate cut by PBoC has removed the interest rate cap, which means interest rate liberalization has been completed in China; PBoC has also made it very clear that free convertibility of capital accounts will be implemented in Shanghai Free Trade Zone; QDII2 has also been transformed from a proposal to a discussion issue at the State Council Executive Meeting. We believe the curtain of China’s capital market development has just opened with a lot more to expect.
From market perspective, we believe H-share will be playing a very important role in the stage of China’s capital market development. Hong Kong is the bright linking the capital demand of Chinese enterprises when they go out to global market, just as the role Hong Kong has been playing in the early stage of 「Reform and Open-up」. With more and more channels linking onshore and offshore capital markets, we are optimistic about Hong Kong stock market in the medium to long-term.


MSCI China Index decreased by 11.70% in August and 9.53% this year till end of August. Hong Kong stock market has continued to perform poorly over the past 3 months, and Hang Seng Index has fallen to record lows since August 7th. We think there are four main reasons: Firstly, China A-share market continually tumbled in August, so Hong Kong investors were more suspicious about the China economy, A share market and the series of government intervention in the stock market. Secondly, PBOC announced to depreciate RMB by 2% on 11 August, which was for the first time in the past decade. The devaluation was beyond the market’s expectations, so it made equity investors in Hong Kong worry even more about stability of China’s economy and RMB exchange rate. Thirdly, due to the uncertain prospects of economic condition in China as well as in other emerging markets like Brazil, the investors began to doubt the leading roles of emerging markets as the principal driver of global economic growth and thereby threaten global economic stability. Emerging stock markets stumbled in tandem with developed stock markets, so investors have a sharply decreased appetite for risk. Fourthly, the increased uncertainty over if the US Federal Reserve will raise interest rates has raised Hong Kong investor’s concern about capital flows, which further decreasing their risk appetite. Although there have been large corrections in the market in August, growth stocks, especially those in the “new economy” sector, has gained significant excess returns. Some industries in the “new economy” sector have showed the defensive characteristics in the market downturn.
In August, China’s economy has showed a pattern of slowing down growth, and the foundation of a stable economy is not solid yet. To start with, by looking into the leading factor PMI, China’s PMI in August is 49.7, which is below the tipping point. It has been the first time that PMI is below the tipping point in 6 months, which is a sign for a slowdown in economy. According to the data announced by National Bureau of Statistics in August, the industrial value-added in July has decreased month-on-month, putting an end to the continuous growth since April (the added value of industries above a designated scale dropped by 0.8% in July month-on-month). China’s economic growth in the first half of the year was partly contributed by the increase in capital market, but will receive more challenges in the second half of the year due to the fluctuations in stock markets and shrinks in market value. As a result, we’ve seen more proactive monetary policies and fiscal policies. On Aug 26th, PBOC performed a simultaneous cut in RRR and interest rate again to hedge the risks of economic downturn. On Aug 31st, the three Ministries jointly announced to lower the minimum down payment of second house by using public reserve funds from 30% to 20%. Meanwhile, on Sep 1st, the State Council organized a meeting and lowered the capital requirement of fixed assets investment programs in some construction industries. It has been the first time since 2009 that the capital requirement of fixed assets investment programs was lowered. Ministry of Finance has also confirmed to make some investment programs before schedule and the quota of the third-round replacement of local government bonds scheduled in 2016. The measures above can be regarded as the signals that the governments wish more positive functions of monetary policies, construction industry and financial policies in the future.
We hold a positive view on China’s economy in the medium to long run. First of all, Chinese economy is in the worst case over the past 10 years with both electricity output and domestic consumption data unfavorable, indeed slower than the average growth rate over the last decade. However, the potential economic growth rate is still higher than most countries compared to the rest of the world. The golden era of resources- and labor-arbitrage opportunities in China has come to a halt, but demographically consumptive dividend will come from huge population, demographically intelligent asset will come from education and social activities, and institutional dividend will release from the reforms instead. The overall structure of China’s economy has improved a lot throughout the past three years as economic reforms occurred and overcapacity along with leverage eliminated in every industry and sector. It provides China a new impetus for economic development. Meanwhile, the structuring reforms and adjustments of China’s economy remains a work in progress, which can be considered as the largest institutional dividend for China’s economic development. We believe that China, the world’s second-largest economy, will successfully overcome the middle-income trap and break through the bottleneck of resources, environment, and slowing population growth. In fact, such processes will not go smoothly, and institutional reforms will also be difficult because of special interest groups. The challenges in Chinese economy this year is an epitome of difficulties in restructuring the economy. However, it provides inspiration and strength as the nation cope with challenges and it sometimes help the implementation of policy reform. China’s economic development has reached a critical point.
In terms of the operations, the investment team actively managed the positions based on market conditions. The fund rarely has such position adjustment, because we always believe the fund’s long-term excess returns come from our manager’s investment choice through in-depth industry and stock analysis. However, the market is in a very special situation in the second half of 2015, and since the increasing correlation between H share and A share markets, the fluctuations in A share markets also have a significant influence on the H share, which is viewed as irrational in the short run. Under the current market circumstances, we have to adjust the fund position in response to the market actively, mitigate the risk of market downturns for investors, and create short-term excess returns. On the other hand, we continue to focus on the booming “new economy” sector during the market correction, and grasp investment opportunities when the market declines. Currently, the H share “new economy” appears to be a very attractive investment sector in terms of future growth potential and valuation level, so we will increase the equity allocations for these potential companies accordingly.
Market Outlook
In terms of macroeconomics, we believe that we’ve seen Chinese government’s policy direction in the second half of the year, which is hedging the risk of economic downturn by boosting infrastructure investment. Next, we may expect to see a series of positive monetary and fiscal policies in supporting the economy. Meanwhile, it is probable that we will see more implements of structural adjustment and detailed reform policies, such as a basket of SOE top-level design reforms. With the effectiveness of these policies, we believe the investors’ appetites for risk will rise, and the current negative market sentiment will be relieved gradually. The bull market in China A share that began last year is not only due to capital allocation to equity market from residential real estate and savings, but also because of the investor expectation for further China reforms. With that being said, we will expect positive changes in market expectation and market condition that brought by the actual effectiveness of reforms. The “Fifth Congress” in October may have reform measures released. Therefore, we do not believe that the China’s economy will crush in the medium- to long-run, there is a huge potential for both economic growth and capital markets development.
From the market perspective, the recent fluctuation in China mainland A-share market led to temporary government interventions, including China Securities Finance Corporation acted as “stabilization fund” to direct buy stocks in the market. These policies were necessary when market was lack of liquidity and facing tendency stampede drop in order to avoid systematic risk. As the market gradually recovered and leverage rate sharply decreased, the possibility of systematic crisis has been lowered down significantly, and these temporary measures may gradually exit so that investors can make rational judgment on valuation of the market and the companies without much interference. We saw that the mainland securities regulator has clarified that CSFC will no longer make direct executions, and will not cut positions of the stocks bought previously in a relatively long period of time. In the meantime, the mainland securities regulator has introduced various laws and regulations, in order to clarify the timetable for OTC lending and umbrella trust funds to exit and strictly prohibit the future inflows of OTC lending and umbrella trust funds into the Chinese stock market, which will fundamentally block the inflow channel of bank funds and control the market leverage. With the decline in A-share market, the overall market valuation has dropped to a relatively reasonable level. The valuation of Hong Kong stock market has been pushed to the lowest level and almost the lowest globally, with P/E ratio of both MSCI China Index and Hang Seng Index back to 7x and many blue chip names getting close to historic lows. Hence it has little room for further decrease.
For the concerns about the interest rate hike by the US Fed, we believe that the Fed will keep close communication to the market before and after any large monetary policy change, for example the Fed has communicated to the market about this round rate hike for more than three years, so that the market has gotten enough expectations of the direction and time for the rate rise. Therefore, when the Fed hikes interest rate, we think that it will not hit the market substantially. Simultaneously, the US rate hike will be relatively slow and gradual so that its impact on capital flow of Hong Kong market will be minimal. The recent strength of Hong Kong currency against US dollar also reflects the same trend. We will continue to achieve excess returns for the fund investors through our in-depth research and survey.


MSCI China Index decreased by -10.94% MTD in the past July.
Fluctuations caused by the leveraged bull market in A-share started with sharp decrease since mid-June and continued until July, during which period both A-share and Hong Kong stock market has seen continuous rare large volatility; in fact, Shanghai Composite Index has seen movement over 3% for 10 out of the 23 trading days in July, including the biggest single day drop of 8.48% in 8 years. Saying that, some small cap stocks in Hong Kong market have seen over 20% decrease per day at the beginning of the month. Trading volume also became weak since mid-July with Hang Seng Index’s turnover shrink from HKD 236 billion per day earlier to HKD 77.7 billion by the end of the month; rebound is facing pressures as a result. We believe there is still room to further release margin trading risks given the balance is still around 1.3 trillion RMB; A-share has become the biggest uncertainty for Asia pacific or even global stock market. How does the Chinese government deal with pressure coming from both economic fundamentals and capital market in the coming few months will have direct impact on Hong Kong market sentiment.
Investment Review
From macro perspective, GDP of 7.0% in Q2 was beyond market expectation of 6.8%, but key factors such as power generation and fixed asset investment stays weak, which has made the GDP data less convincing. With a combination of stimulating policies in the first half of the year, overall deflation pressure has been released a bit, but the economy is still in the early stage of cyclical recovery, which means easing monetary and fiscal policies remain necessary for the next few quarters so that the government will be able guide GDP to stabilize within an acceptable range. The market expects more RRR cut and interest rate cut in the second half of the year to consolidate enterprises’ profitability and maintain good macro environment for reforms.
From valuation point of view, we’ve seen a deeper valuation gap between A-share and Hong Kong stock market, given A-share still has 40% premium after large correction. P/E ratio of MSCI China Index, which is represented by blue chip names, has fall to as low as 9.5x and closed at 9.9x by the end of July – that means 24% discount compared to other major index in Asia pacific region. This valuation is also much lower than the average level in the past 10 years and close to historical low; we believe this is a remarkable safety margin for investors to pay attention. 


As mentioned in May, we observed some positive signs in China’s macro economy, which was proved by the economic data and activities published in June. From PMI perspective (which is a forward looking indicator to a certain extent), 50.2 PMI in June remained the same as in May, stabilized for two consecutive months. According to the data published by National Bureau of Statistics in June, there was once again a MoM growth in Industrial Added Value (increased by 0.2% from May), and this is the second consecutive month with moderate increase. However, the economic growth is still lack of driving forces. For example, growth in real estate development investments from January to May declined relative to January to April, while power generation from January to May only increased 0.2% YoY. These were the weakest macro-economic data in ten years. Therefore, even with positive signs for improvements, the economy is not expected to recover rapidly; in fact, even stabilization with policy support is already an achievement, this was determined by the current stage and reform mode of China’s economic growth.
In June, most attentions from global investors were paid to A-share due to the sharp correction. Shanghai Composite Index dropped by nearly 30% from the 5178 high (which is also the record high of this round of A-share rally), which is the biggest adjustment since the rally started at 2000 points in July 2014; the fall of 7.4% on 26 June was also the fifth largest single day drop for Shanghai Composite Index since 2000. Besides, ChiNext Index also dropped by almost 40% from the 4037 high in June, which is the largest correction since the rally started at 585 points in December 2012; the fall of 8.9% on 26 June was also the biggest single day drop ever in ChiNext Index’s history. We believe excessive leverage was the main reason triggering the correction in A-share. In fact, this is the first ever A-share bull market with massive leverage, thus a decline trend may easily cause inertia downturn and stampede. Given such background, PBoC announced to cut interest rate by 25bps, together with a targeted RRR (required reserve ratio) cut. It is rare to see monetary policy adjustment on a Saturday with RRR cut and interest rate cut at the same time; the last time we’ve seen this was during 2008 Global Financial Crisis. Further, CSRC has revised policies on margin trading business in order to smooth leverage risk. With the leverage rate being lowered down, valuation of listed companies will return to reasonable level and A-share will move forward afterwards.


Market and Investment Review:
We did see some positive changes in China’s macro economy. Real estate sales in first line cities rebounded and housing price started to stabilize. According to the data released by China Index Academy, there is a YoY increase in average selling price of residential real estate in 100 cities. Real estate sector has a long industrial chain; improvement in sales and pricing is likely to lead to more industrial investments. According to the National Bureau of Statistics, there is a MoM growth in industrial added value (increased by +0.57% from April), which is for the first time in five consecutive months, showing that Chinese economy started to stabilize after a series of “steady growth” policies, especially the monetary and industrial ones. However, the economic structure and growth momentum has been shifted already, thus we believe the economy will not recover rapidly in the short-run and will not return to 8% or above growth rate even in the medium to long run. New economy sectors will benefit from the macro background by attracting inflows continuously, and the capital and attention will help the new economy names optimize their business model and profitability.
PBOC had a rate cut by 25 bps again in May. In fact, adjustment in interest rate and required reserve ratio has become a normal monetary policy tool, appeared alternately. However, policy impacts on index/cyclical sectors are in sequential decline, illustrating that investors generally believe there is little investment opportunities in traditional cyclical sectors. In this market consensus, Hong Kong stock market fluctuated in May with trading volume and daily stock connect quota usage rate less than April’s data, showing capital inflow into Hong Kong was slowing down. We did see individual stocks continued to perform actively with lots of investment opportunities though.
CSRC announced “Mutual Recognition” of Hong Kong and mainland funds in May, with an initial quota of RMB 300 billion; in addition, QDII 2 is about to be introduced, which will enable individual investors to invest into overseas market directly. As a result, stock values and investment opportunities in Hong Kong market are becoming clear. On the other hand, the concept of “Internet plus” has been accepted by a variety of sectors given policy support and has been changing the production and sales function in many senses.
Market Outlook:
We expect clearer signals for bottoming out and stabilization of Chinese economy in June. As June is the last month for the first half, Chinese government of all levels will review the effect of macroeconomic policies and plan for the second half of the year. A series of important meetings will be held in the next two months, thus, economic policies for the second half of the year will be determined during this period. We believe there won’t be major changes in macro policy, but monetary and fiscal policies will not be as intense as the first half and will focus more on targeted fine-tune as the economy stabilizes.
From market perspective, both A-share and Hong Kong stock market fluctuated repeatedly in May. By looking at the recovery after fluctuation, investors were not affected either psychologically or behaviorally, and even started to get used to it. Given that, we believe both the frequency and the volatility of such fluctuation will be accelerating in the future as index level gradually increases, but such momentum will be beneficial for quality sectors and stocks as long as investors’ expectation towards the market are not being fundamentally reversed. Taking our analysis on macro economy together with sector style, we believe market attention on growth stocks and new economy sectors will continue. ChiNext sectors in A-share serve as a meaningful indicator. In the medium-to-long run, Hong Kong stock market can expect for a historical investment opportunity as Chinese government is going to gradually open the channel for mainland capitals to invest into Hong Kong.


From macroeconomic perspective, April is the month in which March and Q1 economic data were released. China’s GDP growth fell to 7% in Q1, touched the floor of economic growth target set by the government. Given that, PBOC announced to cut RRR (required reserve ratio) by 100bps again in April, right after the interest rate cut in March. The last RRR cut over 100bps happened in 2008 during the Financial Crisis. Looking at the generating capacity data (which has decreased by 3.7% YoY in March), we see no sign of economic recovery in the short-run. Meanwhile, funds outstanding for foreign exchange dropped significantly by RMB 156.5 billion, indicating a clear capital outflow. Chinese economy is now facing the greatest downward pressure in recent years. We’ve seen the Chinese economy recovered quickly in 2008 Financial Crisis due to short-term monetary and fiscal policy support, but not this time even after a series of easing policies; the reason for that is closely related to the growth model and restructuring in recent years. In the current market condition, we believe investors will remain enthusiastic for new economy sectors in the short-run, while in the long-run, these sectors also have great growth potential. In fact, China’s growth structure is gradually changing and our research feedback clearly shows that listed companies in new economy sectors are becoming more active with increasing market values and more opportunities for merges and acquisitions. The Fund has been and will continue to focus on new economy sectors which represent the future of China’s economic growth.
In March, the strong rally in A-share and relatively weak performance in H-share has brought up a view that H-share will be marginalized by A-share. We were against this view and had clearly stated the reason in last month’s commentary. Why Hong Kong market suddenly saw a strong rally in April? The turning point was 27 March when CSRC announced to allow mainland mutual funds to invest in Hong Kong stock market through “Shanghai Hong Kong Through Train” on the Friday regular press conference. Currently, mainland mutual funds have an AUM over RMB 5 trillion, among which equity or partial equity funds totaled RMB 1.6 trillion. Taking an estimate of 20% were allocated to Hong Kong market means RMB 320 billion incremental capitals, excluding any newly issued funds. This event has triggered investors’ enthusiasm in investing into H-share and the wealth effect from the rally has attracted more mainland capitals to Hong Kong via the Through Train. We saw southbound quota used up for the first time since the launch of the Through Train and Hong Kong stock market has achieved historical high turnover of close to 300 billion HKD.
Market Outlook:
Looking into May, we believe it’s less likely for the economy to recover in the short-run and thus monetary policy will continue to target “stable growth” with a combination of interest rate cut and RRR cut. However, we see a small possibility of a Chinese version of quantitative easing (“QE”) regardless of the market rumors because the major problem of Chinese economy is the lack of demand in real economy during transition period, instead of a lack of capital or liquidity in real economy. Under such macroeconomic background, we believe there will be few systematic investment opportunities in cyclical sectors represented by old economy while new economy sectors will remain active.
From market perspective though, we also observed the fact that both A-share and H-share have experienced big rally already. As a result, regulators’ tolerance for rapid growth will be decreasing and CSRC has been continuously reminding for market risk, once even during trading hour; on the other hand, investors’ attitude may also change after accumulating large return. Thus, volatilities or even wide shock can be reasonably expected. However, regulatory support towards a healthy and rational market rally is undeniable and we will catch short-term adjustment opportunities to increase allocation to companies with growth potential in new economy sectors. Meanwhile, we believe Hong Kong stock market is in a changing period and the trend for capital inflow from mainland will not be reversed in the short-run.  We’ve already seen some historical record in Hong Kong market such as 300 billion HKD daily turnover and we expect to see more in the near future. While the investment philosophy, stock selection rationale and valuation systems are experiencing significant changes in Hong Kong stock market, we, as a Chinese asset manager facing global clients, will use our advantages and take this historical opportunity to achieve excess return for our investors.


Chinese economy follows seasonal patterns; infrastructure construction and enterprise operation usually starts in March after Lunar New Year in January or February. However, macro economy is still experiencing a weak recovery by looking at official data published such as PMI (49.9 in February which is only 0.1 better than January and still lower than 50 midpoint), 10-day generating capacity data and housing price data (only 2 out of the 70 medium to large cities in China has MoM growth in housing price; decrease in new commercial residential housing still didn’t see any signs of narrowing); feedbacks on-site visits and follow up information from our research team also supports this point. Based on this understanding, the PM believed market was likely to stay weak and volatile without any transformational trend in large caps and cyclical sectors, which have decisive effect on index performance; however, market situation will favor new economy sectors by improving valuation and attracting capitals. We still hold the view that the certainty of growth for brokers is the highest in modern financial sector; the logic behind is that indirect financing has come to the hurdle in China with ineffective funds/capitals/assets flow; neither capital efficiency nor resources allocation has been achieved, leading to huge waste and high sunk costs in real economy. Development of direct financing is the method to solve this problem and provide direct financing channel and price discovery platform for economic transformation and regulatory reform. We see large potential for Chinese brokerage companies, and will increase allocation to this sector while balancing risk return ratio.
PBOC cut interest rate this month, which was for the first time in 2015; however, market reaction differed a lot from the rate cut in November 2014. In fact, we have seen a temporary fall in A-share which we believe mainly due to doubt of short-term economic recovery in China. As stated earlier in this comment, March economic recovery was indeed pretty weak, and the interest rate has now been decreased significantly even after the RRR (required reserve ratio) cut in February and the interest rate cut in March. Given that, A-share has favored small to medium caps and new economy sectors year-to-date, and the wealth effect in A-share and record highs in Europe/US stocks market has led to capital outflow from Hong Kong stock.


MSCI China Index decreased by 6.18% MTD and MSCI China Index increased by 1.16%. Hong Kong stock market has seen decline since early September due to three main reasons. Firstly, weak macro data, especially real estate sales, has caused hard landing concerns of the Chinese economy. Secondly, market was disappointed by Sinopec’s announcement on downstream retail reform plan, leading to sharp decrease in stock prices of large SOEs, which have been the main driven forces of the upward trends YTD. Thirdly, “Occupy Central” in late September has further depressed the market and caused some foreign capital outflows. From sector perspective, almost all sectors have suffered from big losses except for HealthCare which has increased by 6.6%. Among those losing sectors, Energy had the largest decrease of 9.83%. Although decline in September has written off most of the positive returns gained by MSCI China Index YTD, we remain optimistic on the fourth quarter for the following reasons:
• PBOC and CBRC jointly announced the most remarkable easing policy since 2010 on mainland China’s MBS restrictions. Thus we expect considerable recovery in the real estate in the fourth quarter, which may also help macro economy rebound from the bottom.• More market reform measures are expected in the coming 4thPlenary Session of 18th CPC National Congress in late October, which may further decrease the risk premium level of China stock market.• The “Shanghai Hong Kong Through Train” will be implemented in late October and bring active onshore capitals to Hong Kong market.• The “Occupy Central” event will gradually calm down as Hong Kong is a society with rule of law. “Occupy Central” will not fundamentally affect Hong Kong’s position as an international financial center given its advantages in talents, capital and system, nor affect the profitability of most Chinese companies listed on the Stock Exchange of Hong Kong, though short-term impact on local retail business and tourism is anticipated. We will catch market correction opportunity by increasing allocation to under-valued or policy-driven sectors, and continue to research on long-term growth stocks with good quality, return potential and favorable valuation, in order to achieve better long-term investment returns for investors.


MSCI China Index increased by 8.16% month-to-date (“MTD”) and 7.57% year-to-date (“YTD”).
The Hong Kong Stock market increased dramatically in July due to continuous influx of peripheral funds. The large-cap blue chip stocks soared, among which the three largest telecom stocks increased over 13%; material sector increased almost 13%; financial sector represented by real estate, securities, and insurance increased nearly 12%; and the rise in Information Technology sector represented by Tencent, Industrial sector represented by railway equipment and Consumer Discretionary sector represented by automobile all exceeded 6%. The domestic macroeconomic data is getting better; housing purchase restrictions in many cities have been withdrawn; PBOC implemented easing monetary policy, leading some overseas funds to increase allocation to China; beta stocks have increased substantially.
From domestic macroeconomic perspective, what has been confirmed is that the government macroeconomic policy is changing. Leading indicators of real economy have been showing a positive trend and the coincident indicators will improve gradually in the following months as time goes by. Since the allocation of China stocks in global fund is still relatively low, the persistent influx of peripheral funds is expected to continue. The market will keep amending the low valuations of beta industries in the future.
The fund increased allocations of some beta industries whose fundamentals have been improved recently, such as securities, insurance, and real estate. We also participated in Initial Public Offering (“IPO”) subscriptions actively and have achieved positive return.
We will stick to our investment philosophy consistently with confidence in the new economy in the long run. We will also increase allocations of beta industries with improved fundamentals appropriately, while keeping balance of the portfolio and reduce volatility of the net asset value. We will try to continuously provide investors with better return.


  • MSCI China Index increased by 4.71% month-to-date (“MTD”) while the fund increased by 0.22% MTD. MSCI China Index decreased by 3.68% year-to-date (“YTD”) while the fund decreased by 10.20% YTD. The fund’s net asset value continued to underperform MSCI China Index this month.
  • In May, Hong Kong stock market carried on the trend of sector differentiation as previous two months; value stocks, especially large cap blue chips such as banking, telecommunication, petrochemicals and energy kept outperforming growth and small-to-medium stocks. Rebound has taken place in new economy sectors such as Chinese medicine and TMT (Technology, Media and Telecom) hardware/software sectors. While market focus is still on large cap blue-chip value stocks, differentiation between old and new economies were slowing down compared to previous two months.
  • The fundamentals of domestic macro-economic data indicated more cautiousness than hope. Domestic real estate sales slumped and came to a turning point, and RMB exchange rate was still depreciating; despite the fact that official Purchase Management Income has been rising slightly for three consecutive months and short-term rate kept low in capital market, the macro-economy is still struggling in a transition process. Endogenous recovery and growth of the economy instead of macro policy will become the most important driver for future market movements.
  • Oversea markets such as U.S. and Germany hit record highs while domestic stock market remains sluggish; thus the future of Hong Kong stocks remains uncertain and volatile.
  • Valuation of new economy is becoming more and more reasonable with the adjustments in the recent three months, and long-term structural growth opportunity of the fundamentals is without any doubt. Hong Kong stocks will have to rely on the rising momentum of the new economy in the future to get rid of the pattern of oscillation.
  • We will stick to our consistent investment philosophy and keeping optimistic about the long-term structural growth opportunities in China’s new economy. We will continue to hold a high proportion of quality leading stocks of emerging industries to provide investors with better return in the premise of controlling large fluctuations in the portfolio’s net asset value.


  • MSCI China Index decreased by 2.32% Month-to-Date (“MTD”) while the fund decreased by 8.28% MTD. MSCI China Index decreased by 8.01% Year-to-Date (“YTD”) while the fund decreased by 10.40% YTD. The fund fell behind MSCI China Index by a relatively large extent for two consecutive months.
  • In April, H share continued the trend in March with a clear feature of shift between market structures; new economy, represented by internet, health care, new energy and environment protection continued to drop sharply, among which the IT and health care each declined by 11.56% and 10.07% respectively; old economy represented by large-cap stocks such as telecommunication, oil and petrochemicals rallied substantially due to favorable policies such as state-owned enterprise reform and restructure and preferred stock trial, of which telecommunication and energy each rose by 6.06% and 2.53% respectively. The old and new economy further differentiated.
  • Given weakened momentum of domestic economy, the government will fine tune the macro policy to ensure growth but large scale stimulating or loosening fiscal and monetary policies are not expected. The rebound of old economy is due to valuation correction which is unsustainable because the structural challenges confronting the real economy will last long. For new economy, valuation level was further rationalized through the past two months’ adjustments and its good growth fundamentals will not be changed by short-term policy shocks such as clean up internet activities, internet finance regulations or anti-corruptions.
  • The connection of Shanghai and Hong Kong stock exchanges announced in April will exert a profound influence on the future trend of H share and the following four categories will benefit the most: 1) unique quality underlying assets in H share such as Tencent, gaming, first-line international consumer brand and wind farms; 2) Securities sectors such as the Stock Exchange of Hong Kong and Chinese H share brokers; 3) A-H dual listed stocks with spread; 4) Mid and small cap stocks. Quality stocks within these sectors will have revaluation opportunities in the long-run.
  • We will stick to our consistent investment philosophy over the past three years regardless of the short-term market fluctuations. We will continue being optimistic about the long-term structural development opportunities in China’s rising industries while optimizing our portfolio to provide investors with consistent excess returns on the premise of proper risk control.


•MSCI China Index decreased by 1.73% MTD while the fund decreased by 7.18%. MSCI China Index decreased by 5.82% YTD while the fund decreased by 2.3%. The fund fell behind MSCI China Index by a relatively large extent in this month.
•The most important feature of H-share in March was the shift between old and new economy. New economy sectors, including internet, new energy, environmental protection and health care, dropped significantly due to over rising and overvaluation. While on the other hand, given low valuation and the expected government policies on SOE reform, preferred share trial, easing housing purchase restrictions and removal of real estate companies’ capital market financing restrictions, old economies represented by banking, real estate, cement and construction machinery sharply rebounded.
•As important indicators such as PMI, March housing sales and electricity generating capacity all illustrated a clear sluggish trend in China’s economic growth, the government would gradually introduce mini stimulations, including housing reconstruction in shanty towns, accelerating government-leaded infrastructure investments such as rail way construction, cutting SME taxation and etc., in order to maintain 7% lower limit of GDP growth.
•Therefore, we cannot exclude any possibility of further rebound in old economy sectors in the future, but we do believe those rebounds will not last long. In fact, valuation gap between old and new economy stocks only narrowed to a certain extent; this relatively large adjustment has made the valuation of new economies represented by internet, health care, new energy, environmental protection and consumption upgrades more reasonable to grow in a healthier and more stable manner in the future.
•The fund fell behind the index by a relatively large extent this month, which we believe this would be temporary as new economy is still the most promising sectors not only for China but also for the world in the coming future. In the long-term of coming five to ten years, internet, health care, new energy, environment protection and consumption upgrading will be sectors with the largest growth potential, best operational efficiency and most policy support in China; thus we believe our portfolio is the one that represents the future China and future industries.
•We will continue to select quality companies to optimize the portfolio in order to provide long-term excess return for the investors.


•MSCI China Index decreased by 6.57% MTD while the fund decreased by 1.46%; the fund outperformed MSCI China Index by 5 percentage points.
•H-share declined sharply in January, hit by two negative factors: 1. Emerging markets such as Argentina and Turkey have experienced significant currency devaluation due to QE tapering and H-share was negatively affected by large capital outflow from emerging markets; 2. Domestic PMI fell below 50; CCT defaults to certain extent, making it even worse for HK stocks. Almost all previous hot sectors experienced substantial decline.
•H-share has been fluctuating within a relatively tight range in the past three years.  Investment related sectors representing “old economy” including infrastructure, materials, energy, bank are trending down while consumption upgrade related sectors representing “new economy” including Internet, healthcare, tourism, brand/luxury consumption, new energy and environmental protection trending up.  CNBO has set “consumption upgrade” as fund theme since inception with a focus on new economy and new technology.  Utilizing bottom up method as the key tool to conduct fundamental analysis, we would select good quality companies and avoid “value trap” as well as “growth trap”. We would continue to avoid companies with little business prospects or core competitiveness, or with poor historical credit record. The fund will maintain such investment methodology and continue to deliver excess return to investors.
•The fund’s holdings are still concentrated in consumer discretionary, information technology, utilities and industrials.
•Market volatility will continue next month which will test the confidence and patience of H-share investors; capital outflow from emerging markets is not over yet and thus we cannot rule out the possibility of further decline. Domestic market is expected to have relatively ample liquidity and individual trust default is unlikely to cause systematic financial risk; thus we believe domestic capital market will not have panic sell-off compared to overseas markets. The fund will hold certain portion of cash to catch market adjustment opportunities, hunting for quality companies with reasonable valuation.


The fund outperformed MSCI China Index by 26.6% in 2013; in the past three years, the fund achieved an excess return of 62.72% given MSCI China Index only returned 3.11%
HK stock market finished lower in Dec. HK stocks gradually decline from Nov high under the pressure as domestic bond yields climbed in the middle of the month; despite funds inflow from other countries, adjustments in China A-share has dragged down HK stock rally; however, selected sectors (i.e. Internet, Natural Gas, Lottery, Environmental, Health Care, etc.) continue to rise
Best performers in Dec are Health Care (+4.07%) and Utilities (+3.96%); other sectors all decline, especially IT (-14.14%), Energy (-7.33%), Telecommunications (-5.67%) and Financials (-5.65%)
The fund continues to increase subscription to IPO deals in the US and HK and achieved relatively good return. Current holding is concentrate in: Consumer Discretionary, IT, Utilities and Financials
Market will continue to fluctuate in the next two months, but volatility will be narrowed due to holiday seasons. Market will wait until March to decide on future development direction when macroeconomic policies and fundamentals become clearer


•       Hong Kong stock market took a dive before coming up in November. The stock market was under pressure as domestic bond yields climbed earlier this month. In middle of the month, as measures of the third Plenum were announced, investor confidence (especially overseas investors) was boosted. However, domestic stock market momentum weakened later, capping further increase of HK stock market.

•       Best performers in November are Health Care (+16.91%), Utilities (+7.66%), Industrials(+6.99%),Materials (+5.63%) while Consumer Discretionary (-0.36%) and IT (+2.02%) are lagging behind.

•       The fund increased subscriptions to IPO deals this month, achieving relatively good return. The fund reduced holdings in SOE restructuring sector and some small-mid cap stocks, increased investments in brokers and insurance companies. Current holding is concentrated in: Consumer Discretionary, IT, Utilities and Financials.

•       Cyclical sectors are at the bottom of valuation range and finance sector continue to re-rate. In conclusion, market would rise in last month of the year to shorten the performance gap with other global stock markets.


HK stock market continued the upward trend since September with accelerating capital inflows. There are large possibilities that it would catch up with gains in the last two months. The uncertain factors are short term movements in domestic market.

Best performers in October are Consumer Discretionary (+6.26%), Utilities (+4.95%), IT(+4.58%),Pharmaceuticals (+4.26%) while Telecom Services (+1.81%), and Finance (+2.38%) are lagging behind.

The fund continued to increase stock holding this month, adding Internet sector (including leading major Internet companies listed in US) and reducing holding in finance sector. Our sector allocation is mainly in Consumer Discretionary, IT, Utilities and Finance.

We expect the market to move up gradually in a volatile environment. Internet, New Energy, Dairy, Gaming, Automobile and Environment Protection would still lead the market. Focus of the month is the third plenary session of the 18th CPC Central Committee to be held on Nov 9-12th where major reform policies in macroeconomic systems will be announced.


Hong Kong stock market continued to show rebounds in September on: The Fed’s announcement to put QE tapering on hold, Larry Summers withdrawal from Fed consideration, official launch of Shanghai free trade zone and continued upward momentum of domestic macro data.

Best performing sectors are consumer discretionary (+9.84%), information technology (+8.66%) and consumer staples (+4.22%). Worst performing sectors are healthcare (-3.17%) and telecommunications (-2.97%).

We are more positive on the short term trend now, and we believe that the market will gradually climb despite the fluctuations. However, we should pay attention to the audit report on China’s LGFVs to be released this month and monitor whether the result has been priced in. Before the Third Plenary Session of the 18th Central Committee of the Communist, there will be no significant fundamental changes in macroeconomic policies, and the Hong Kong stock market will be more liquidity-driven.


MSCI China Index increased by 2.38% MTD and fell by 7.56% YTD.
Hong Kong stock market saw continuous gains this month after large cap stocks led a rebound in July. This is supported fundamentally by: 1. China’s PMI index saw a sustainable recovery in August; new housing starts yoy growth rate turned positive from flat, automobile & electricity consumption data keep a strong increasing momentum. 2. During roadshows after half year results, management of most companies believe the worst time in fundamentals has been gone, and are relatively optimistic about the second half. 3. Compared with other emerging markets, China enjoyed an obvious advantage in macroeconomics, corporate fundamentals and valuations. So there is no significant influence on HK stock market despite capital outflows from emerging markets.
Best performers in August are Automobiles in Consumer Discretionary (+10%), Gold and other non-ferrous metals in Materials (+8.1%) and real estate (+6.3%), while Utilities (-4.3%), Pharmaceuticals (-3.7%), and Retails (-0.1%) are lagging behind.
Generally speaking, our market outlook remains the same. We continue to believe that 3Q domestic liquidity would remain relatively tight. As both real economy and financial system are in the process of deleveraging, there will be limited opportunity for a systematic trend reversal. However, the possibility of policy tightening and macro economy worsening is low as well as the Third Plenary Session of the 18th Central Committee of the Communist is drawing near. The market would continue to be fluctuating within a range. Investment opportunities will be concentrated in those few sectors with sustained industry growth, significant industry structural changes and policy support, such as new energy, environmental protection, military, mobile network, natural gas, free trade zone and consumer upgrade sections.


MSCI China Index increased by 3.93% MTD and fell by 9.71% YTD.
The Hong Kong stock market saw a major rebound driven by large cap stocks in July. The increase was fueled by several fundamental themes: 1. Chinese Premier’s statement on the lowest acceptable level of GDP growth, emphasizing government policy will be focusing on stable growth and economic restructuring; 2. PBoC took actions to ease the tension in interbank market, which drove down short-term interest rates to their normal levels; 3. The reform of natural gas prices in China led to a surge in large cap stocks. PetroChina, CNOOC, and Sinopec rose by 9.94%, 6.38% and 5.68% respectively; 4. rapid development of China’s Mobile Internet sector fueled a 15.65% MTD increase in Tencent and a 10% MTD increase in China Unicom; China Overseas (9.83%) and China Shenhua Energy (13.13%) are other two representatives of the July boom for large cap. By contrast, MSCI China SMID Cap Index has only increased by a mild 1.89% this month.

From a bigger picture, we believe the onshore money market liquidity will remain relatively tight in Q3; as both real economy and financial system are in the process of deleveraging, there will be limited likelihood for a systematic trend reversal. Investment opportunities will emerge in those sectors with continuous growth, structural changes and government policies support.


MSCI China Index fell by 8.9% MTD and 13.1% YTD.
The Hong Kong stock market took two major hits in June. First, the tapering of QE in the U.S. became more evident, causing accelerated capital outflow from emerging markets; Second, onshore interbank money market suffered from a rare sharp increase in interest rate, causing a temporary liquidity crunch; as a result, massive panic sells emerged in both stock and bond markets, and the market turns to a risk-off status for fear of a Chinese version of Lehman Crisis. Most sectors tumbled to a certain extent, including materials (-15.53%), consumer discretionary (-11.83%), energy (-8.82%), information technology (-8.79%), industrials (-8.46%) and financials (-7.94%); utilities (-0.35%), consumer staples (-3.39%) and health care (-3.55%) appeared to be more defensive. Telecommunication was the only survivor in Jun, neither gains nor losses. Prior to June 7, the Fund has reduced the stock position to around 60% of the portfolio, and significantly lowered the weight of high-beta small/mid cap stocks, while increased the holdings of Hong Kong government bonds to 20%. In the second half of June, the Fund traded in the rebound of oversold stocks from information technology, renewable energy, real estate and utilities sectors, and pocketed considerable short run return.
We believe the short-term market sentiment will be driven by a series of factors. Onshore money market liquidity will remain relatively tight in the near future; the negative impact of shadow banking regulation will gradually take effect; the deleveraging process of real economy will speed up, coupled with the deterioration of listed companies’ earning power and balance sheet outlook. In July, we will remain cautious and focus on defending against the elevating systematic risks. We may sell the stocks bought in June at reasonable highs and continue to reduce our overall stock position, so as to protect the YTD return, curb NAV volatility, and wait for the next market opportunity.


MSCI China index fell by 1.28% MTD and 4.59% YTD.
Hang Seng index entered correction territory in May with pressure coming from potential end of QE in US, soaring 10-year US government bond yield, and the slump of Japan’s equity and bond markets. Nevertheless  small and mid-cap names in sectors such as smart phones, mobile internet, oil service, renewable energy, environmental protection and automobiles rose sharply as hot money is chasing few industries with visible earnings growth outlook as well as government support. Information technology (+14.1%), automobiles (+8.3%), and shipping sectors (+4.8%) performed the best, while utilities (-7.4%), retails (-6.4%) and energy sectors (-5.9%) performed the worst.
In June, we will continue to pay close attention to the global capital flows and the potentially tightening liquidity in China. We expect to see profit-taking on hot sectors, and we will increase the cash position and reduce the holdings that have shown a spectacular rise lately. We will gradually move to defensive sectors to avoid short term market fluctuations.


MSCI CHINA index rose by 1.10% MTD and fell by 3.35% YTD.
Companies listed in Hong Kong have already reported their financial reports. Most Hong Kong listed companies have reported results for the first quarter. Banking sector recorded better-than-expected 12% earnings growth YOY, while other sectors missed market expectation, especially the FAI related sectors. The macroeconomic data showed that the sales of real estates and automobiles have improved in the first quarter, while the power generation, industrial production and exports did not perform well. The huge aggregate social financing volume in the first quarter did not stimulate China’s GDP effectively, causing market’s doubts on the sustainability of China’s current economic growth model. China's new government is still in the stage of researching thoroughly on the economic situation, major relevant policies will not be introduced until this fall when the third plenary meeting of the 18th Central Committee of the Party is held. The stock market will fluctuate in range in the next several months.
In May, we will continue to pay close attention on the trends of macro and industry data, and actively look for short-term market opportunities in individual stocks and cyclical sectors such as cement, heavy trucks and construction machinery.


MSCI CHINA index dropped by 4.48% MTD and YTD MSCI CHINA index fell by 4.4%.

There are two piece of bad news in March. First, investors are worried that banking crisis in Cyprus will spread to other Eurozone countries, and rising risk aversion drove haven demand. Second, China's State Council issued measures to rein in the real estate sector, and CBRC announced new regulation to limit wealth management products’ exposure to shadow banking. Both of which, led to concern on the domestic monetary tightening. Sentiment was further hit by weak earnings growth announced during the result season and MSCI CHINA index had its second consecutive monthly decline. While the utility and healthcare sector continued the upward trend and increased by 7% and 2% this month, the remaining sectors experienced a decline, with the largest decline in insurance (-11%), retail (10%), information technology (-9% ), raw materials (-8%), and real estate (-7%).

April is a critical month, which marks the beginning of the new leadership and the high season of new construction of infrastructure and real estate projects, as well as the real estate sales season. We will pay close attention to the trend of macro and industry data, be flexible, and actively look for opportunities in individual stocks and sectors after the correction.


MSCI China Index dropped by 3.94% MTD and YTD MSCI China Index rose by 0.08%.

There are three bad news in February. First, the remarks of some Fed governors worried market that Federal Reserve will exit QE earlier; second, investors were concerned that Italy’s inconclusive election would hinder the execution of austerity policy in Europe; third, China drained a record amount of cash from the economy via open market operation and tightened its grip on the property sector which further hit the bulls. Inflows into Hong Kong declined as well. All sectors in Hong Kong delivered negative returns in February except utility (+3.2%) and healthcare (+2.2%). Worst performing sectors were retail (-13.2%), insurance (-8%), energy (-5.5%), property (-5%), and banks (-5%).

Companies enter result season in March, and majority of them are going to disappoint. The National People’s Congress and the Chinese People’s Political Consultative Conference will be held, and environmental protection, property price and anti-corruption will become hot topics. Globally European debt issue and US recovery remain uncertain. We expect the market to swing widely in March, and the 5 months rally will come to a temporary end.


MSCI China Index gained 4.18% MTD.

BoJ announced a new round of quantitative easing, injecting further liquidity into global capital market. Inflows into equity and Hong Kong keep increasing. HK market has rallied for 6 months in a row since September and A-share 3 months. Investors are optimistic, themes like B share, 2nd and 3rd tier names, asset injection vehicles, environmental protection and renewable energy sectors kept popping up. The rally has mainly been driven by valuation expansion and expectations of improving fundamentals.

The Lunar New Year holidays fall in February and thus a shorter trading period this month. Annual result season will start in March, so is the change of government officials. We expect little change in liquidity and the market to maintain momentum.


MSCI China Index gained 4.83% MTD and 18.74%.

Quantitative easing policies undertaken by the world’s central banks injected a great amount of liquidity into the system, and HK market has rallied for 5 month in a row since September. Domestically China’s economy maintains its upturn, the new leadership stokes economic reform hopes in China, and A-shares enjoy strong rebound after languishing for much of last year. Both domestic and international factors led to the rally in HK market, which has been driven by valuation expansion, expectation on improvement of companies’ fundamentals, as well as liquidity.
How far the valuation re-rating rally could go ultimately depends on the improvement of fundamentals. Nevertheless, liquidity will remain the most important force in January and February due to lack of data point from listed companies before annual results announcement in March, and lack of new policies from government. Market sees upside as US fiscal cliff is avoided.


MSCI China Index gained 1.85% MTD and 13.26% YTD.

QE3 injected a great amount of liquidity in the system, and HK market rallied for 4 months in a row. The strong inflows of money into HK and bottoming of domestic economy further fueled investor optimism. Sectors which outperformed early this month including city gas operator, equipment, oil and gas, property, mobile internet and IPP sustained the strong momentum, and many 2nd and 3rd tier companies’ share prices reached historical high.

The rally in last four months was mainly driven by overseas markets, while the weak A-share market has been a drag. In the future the situation is probably going to reverse, ie, A-share will become a positive contributor while overseas market may lag. We maintain the view that HK market will be volatile in the next two to three months.


MSCI China Index gained 5.67% MTD and 12.62% YTD.

In October HK market continued the rally in September, driven by fund inflows. Although most listed companies reported further declines in earnings in third quarter with poor prospects ahead, investors believe that the macro economy has bottomed out in third quarter and expect gradual improvement in fourth quarter. As a result, investors are chasing cyclical sectors aggressively such as cement, non-ferrous metals, machinery, coal, banking, property and industrials become even more popular.

A market driven by fund flows is more vulnerable to market sentiment and policy changes. Given that Hong Kong market had reversed the underperformance YTD, the recovery of domestic economy is going to take a long time, and further stimulus package is not realistic, we expect the market will be volatile for the rest of the year.


MSCI China Index increased by 2.38% MTD and fell by 7.56% YTD.

Hong Kong stock market saw continuous gains this month after large cap stocks led a rebound in July. This is supported fundamentally by: 1. China’s PMI index saw a sustainable recovery in August; new housing starts yoy growth rate turned positive from flat, automobile & electricity consumption data keep a strong increasing momentum. 2. During roadshows after half year results, management of most companies believe the worst time in fundamentals has been gone, and are relatively optimistic about the second half. 3. Compared with other emerging markets, China enjoyed an obvious advantage in macroeconomics, corporate fundamentals and valuations. So there is no significant influence on HK stock market despite capital outflows from emerging markets.

Best performers in August are Automobiles in Consumer Discretionary (+10%), Gold and other non-ferrous metals in Materials (+8.1%) and real estate (+6.3%), while Utilities (-4.3%), Pharmaceuticals (-3.7%), and Retails (-0.1%) are lagging behind.

Generally speaking, our market outlook remains the same. We continue to believe that 3Q domestic liquidity would remain relatively tight. As both real economy and financial system are in the process of deleveraging, there will be limited opportunity for a systematic trend reversal. However, the possibility of policy tightening and macro economy worsening is low as well as the Third Plenary Session of the 18th Central Committee of the Communist is drawing near. The market would continue to be fluctuating within a range. Investment opportunities will be concentrated in those few sectors with sustained industry growth, significant industry structural changes and policy support, such as new energy, environmental protection, military, mobile network, natural gas, free trade zone and consumer upgrade sections.