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Hong Hao is a partner and chief economist of Si Rui Group and a director of the China Chief Economist Forum

This article is a transcript of the keynote speech delivered by Hong Hao, Chief Economist of Sirui Group, at the China Chief Economists Forum and the 3rd Greater Bay Area Economic Development Conference.

Hong Hao:Thank you all, and thank you to the Chief Economist Forum for giving me the opportunity to share with you my views on the recent market and economy. The Hong Kong market has performed poorly recently. In such a bleak market environment, the more important thing is the sense of relaxation, so I would like to talk about something happy as the last keynote speech. I hope to bring you a happy weekend.

Working in the market is different from working on economic fundamentals. Market transactions always reflect everyone's emotions about fundamentals in the form of prices every day. Our emotions may not be correct, so the price fluctuations we see every day have little to do with fundamentals, and this can be proved quantitatively. But when prices form trends and when emotions continue to strengthen themselves, the prices we see have meaning. Now we see that certain asset categories and trends are constantly going down, which implies that the market is expressing its expectations for the future through competitive bidding. If it goes down, we may not be particularly optimistic. If it goes up, we may have to rush to a bull market of 5,000 or 6,000 points. The price trend is more important than the daily price fluctuations.

Sometimes the market falls sharply like today. This type of decline includes the recent rotation of the Nasdaq technology sector and US small-cap stocks. The probability of these price fluctuations is outside the 4.5-5 times variance, which is about one in ten thousand. In other words, we trade once every 30-40 years, but we all know that the history of the US small-cap stock index is less than 40 years. Therefore, if you trade small-cap stocks for your whole life, you may not see a historical rotation like the recent one, but it happened. This is also what our market tells us through prices. The emotions reflected every day are mapped in the price, and the price that appears may not be correct.

We want to know how the high-frequency data trends reflect the economic fundamentals. First, we listed the changes in asset prices that are very sensitive to changes in liquidity conditions. The yellow one is Ethereum, the black one is Bitcoin, and the blue one is the Shanghai container shipping price. We all know that exports are very hot now. The latest export data shows that exports have far exceeded expectations. It is not only because China has become the world's most central supplier after three years of training during the epidemic, but more importantly, it is very likely that whether Trump, Harris or others come to power, Sino-US trade relations have changed greatly. China is no longer the largest trading partner of the United States, but Mexico and Canada. The upward trend of container shipping prices shows that overseas demand for Chinese goods is very strong, so overseas is constantly asking us to send containers, and rising demand drives up prices.

Ethereum and Bitcoin are highly speculative monetary assets, which reflect the sensitivity to marginal changes in liquidity. This chart tells us that both the liquidity in the United States and the macro liquidity in China are better than everyone thinks. For example, bank deposits are 350 trillion, for example, the inflation in the United States has returned to below 3, for example, the Federal Reserve will cut interest rates in September, and for example, the situation continues to deteriorate, and the interest rate will even be cut by 50 basis points or more in September and November. These are the main observations of changes in macro liquidity. These are reflected in the prices of assets that are very sensitive to liquidity, that is, the skyrocketing prices of container shipping.

Looking at China's own cycle, it is very interesting. I have a quantitative model to measure economic cycle fluctuations. After we process macro data across departments and across time and space, we see that China's economic cycle fluctuations have a very obvious pattern. Each short-term cycle fluctuation takes 3-4 years from the bottom to the top and then back to the bottom. Therefore, the blue line on the graph is business and politics, and the yellow limit is the economic cycle indicator. Each economic cycle takes 3-4 years from the bottom to the top and then back to the bottom. The epidemic in 2020 and the restart after the epidemic in 2023 all reflect the cyclical lows. It happens that 2024 is nearly 3 years away from March 2020. At the cycle low in 2024, we suddenly found that China's real estate sales have once again returned to a new historical low, and even similar to the real estate sales we saw in March 2020. This is very strange, because it is now obvious that no matter from the perspective of life or economic fundamentals data, it is not worse than that year.

Now the real estate sales data shows that we are slowly climbing out of the bottom. Recently, some data are changing marginally, especially the second-hand housing data in first-tier cities. In the first quarter of 2024 and the fourth quarter of 2023, the Chinese economy has returned to the bottom of the cycle again. As economists, we care about two changes when we make allocations: growth and inflation. Growth determines the return that can be obtained when investing. With the growth of China's economy at 10% and 15%, the return rate that A shares can give you is also very high, because the profit growth rate of listed companies is ultimately determined by the growth rate of economic fundamentals. Another indicator is inflation, which measures the amplitude of price fluctuations in the macro environment. The higher the inflation, the higher the uncertainty in the economy, because the price fluctuation is greater. When investing, whether from the perspective of interest rates, we get higher interest rates, so asset prices will be lower, or because in the macro environment, due to the increase in uncertainty, we need a higher risk premium, which leads to pressure on asset prices, etc. Therefore, growth and inflation determine our asset allocation, especially the relative proportion between risky assets and risk-free assets.

The yellow line is China's upstream inflationPPI, China's manufacturing and producer index, the red line is China's 10-year treasury bonds are constantly hitting new lows, showing that the market is not worried about future inflation due to demand or we choose to invest in long-term treasury bonds. Now long-term treasury bonds give you 2.2%, 2.3% returns, which is still acceptable, especially in an environment without inflation. The blue line is the U.S.CPI, which is the downstream inflation in the United States. We lag the time points of China's PPI and US CPI by six months, and we see a very obvious correlation, which means that China's inflation cycle leads the US inflation cycle by about six months. So we see that both China's inflation and long-term yields are declining, indicating that the speed at which US inflation pressure disappears is much faster than market expectations. So the Federal Reserve should have cut interest rates the day before yesterday, but chose to stay put. This interest rate cycle is different from the previous ones. The Federal Reserve chose to postpone the pace of interest rate hikes. When US inflation reached 8% in 2022, it began to raise interest rates significantly, from 0 to 5.5%. Now the speed of interest rate cuts or the time window for interest rate cuts are also moving backwards. Obviously, the experience of the past few years has told us that the Fed's interest rate hikes have an increasing effect on domestic demand in the United States, rather than a reducing effect. Because the higher the interest rate, the more money the bank can get.Venture CapitalThe higher. Some time ago, I went to Hong Kong to open an account with HSBC or Standard Chartered, and they gave me an annualized interest rate of 8%, which was really scary. So why have we not seen inflation come down, or why the Fed is still reluctant to cut interest rates? It is because high interest rates are good for savers, and high interest rates are a transfer of value from producers to workers, so it is great for me to earn 8% interest at home, but it is obvious that in September and November, when the downward pressure of inflation becomes more and more obvious, we will see that the Fed will take relatively large actions.

Looking at the direction of capital flows, a more obvious pressure in the past few years is capital outflow. We see that capital outflows not only cause downward pressure on capital market prices, but also cause pressure on the depreciation of the RMB exchange rate, which is the bright blue line in the figure, which is the cross-border flow of capital. Starting from February 2021, the speed of capital entering and investing in China reached its peak, and returned to the bottom in the fourth quarter of 2022, and is now weakening marginally. Capital has not flowed back to the Chinese market, but the marginal outflow rate is slowing down. At the same time, we seeOffshore RMBBear the corresponding pressure.

Today we are at the bottom of the cycle, but it is obvious that this cycle bottom is different from the previous ones. In the past, when the cycle bottom was so struggling, our central bank cut interest rates and it came up. It was very simple. This is how the price increase to reduce inventory in 2016 came about, and this is how the 4 trillion yuan in 2008 came about. This is how the first exchange rate reform and the first share reform in 2005 came about. But this year is different. For stocks, if the profit margins and profitability of companies in the market increase, then we will increase the allocation to stocks. Whether the profit margins increase or not, we use the upstream inflation minus the upstream inflation, and the downstream pricing power minus the downstream pricing power, and we get the profitability of listed companies in the economy. The yellow line is China's profit margin cycle. Using the downstream price minus the upstream price as an indicator, we can see that the profit margin cycle has reached the cyclical high point. There is no company that is not profitable, especially large state-owned enterprises. But we see that the blue line, which is the relative performance of the cyclical sector, and the orange line, which is the performance of the growth sector, have been lying at a low point. This is very strange. If the economic cycle picks up and repairs, the profitability of listed companies is very strong and at a historical high, why would the growth sector underperform? Why do cyclical sectors underperform? This is obviously wrong. This is a historical split. We are waiting for a time window, an opportunity, a catalyst.

If we look at where the market opportunities are since last year, we just saw that the 10-year yield keeps hitting new lows, which reflects the market's view on the inflation outlook. The 10-year Treasury bond keeps hitting new lows, or the price of the 10-year Treasury bond keeps hitting new highs, and the Zhongzheng Bank and the state-owned enterprise index keep hitting new highs. Therefore, the market says that a certain bank bought at 6,000 points can be unwound at 2,900 points, because the bank's dividend rate is very high.

Finally, I will talk about my views on the coming months. There was a very good market in April and May this year. Hong Kong's Hang Seng Technology Index rose by 50%. In just a few weeks, Hong Kong went from the worst market in the world to the best market in the world. This market did happen in April and May. As old friends of trading, we all know that A-shares basically have two waves of market every year: spring and autumn. So we will see that in 2022, when the epidemic was at its darkest, we actually saw two waves of market: the convening of the two sessions in March 2022 and the restart at the end of December 2022. When it was restarted in 2022, China's A-shares rose by 30%, Hong Kong stocks rose by 50%, and technology stocks rose by 100%. Two waves of market every year are worth looking forward to. There is indeed not much that can be done now. The meeting has been held, the policy has been announced, and the shouting continues. But we are still looking for opportunities and waiting for this time window to open.

My time is up, thank you!