HKComp loses 1,5%. Chinese economy in deflation risk?

Sentiment around Asian indices has been weakening. CHNComp and HKComp contracts were heavily discounted today due to weaker Chinese economy.

• China's real estate sector has been experiencing a continued slowdown, and one of the country's largest real estate developers, Country Garden (nearly $70 billion in annual revenues), has teetered on the brink of insolvency after failing to make interest payments to bondholders (the market estimates its Q2 losses at more than $7 billion). The company is now likely to restructure and renegotiate contracts with creditors;
• China's home sales fell more than 30% in July putting a huge question mark over the ongoing health of consumers and their propensity to consume amid broader uncertainty. Chinese citizens remain uncertain about the economy's continued post-pandemic rebound and remain reluctant to spend;
• Data from China's National Bureau of Statistics on new home prices in July showed an average annual seasonally adjusted month-on-month decline of 2.5% for 70 key cities. Home prices in top urban locations also fell. 49 of the 70 cities surveyed reported declines in new home prices in July, much more than 5 in March - fueling concerns about potential deflation in the economy;
• On Tuesday, the PBoC unexpectedly cut interest rates for the second time in three months in a bid to salvage momentum. The bank cut the interest rate on annual medium-term loans (MLF) worth about $55 billion to China's largest institutions by 15 basis points to 2.50% from 2.65% previously.
• The Communist Party of China's target is 5% y/y GDP growth but analysts are beginning to doubt whether this scale is realistic, with JP Morgan recently significantly lowering its forecast for China's 2023 GDP from 6.4% to 4.8% - below the 'minimum target'.

Meanwhile, in the U.S., the retail sales report indicated a stronger-than-expected acceleration in July, strengthening the dollar and the chances of another 25-bp Fed rate hike. Even if the Federal Reserve does not do so, it is almost certain that rates will remain high for a much longer period. Yields on treasuries rose after the retail sales report and approached their highest levels since the 2007-09 crisis, the Chinese yuan weakened against the U.S. dollar, falling near its 16-year lows. Investors are looking increasingly cautiously toward emerging markets, among which China has led the way for many years.

CHNComp and HKComp contracts (gold chart) are approaching October 2022 levels. Source: xStation5