CHINA. Risk appetite is returning to Chinese shores with the Chinese Yuan strengthening and the stock market showing signs of life, writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung.

The Chinese Yuan is up against the US Dollar at a five-month high and the stock exchange is at a nine-month high. Both are recovering on the expectations that trade tensions with the US will ease following the signing of a long-awaited trade deal on 15 January.

Appreciation of the Chinese Yuan and a recovery in the stock market bodes well for Chinese traveller appetite to increase outbound travel and spending.

Consumer confidence: An increase in the stock market will likely lead to an increase in spending appetite among Chinese travellers

US President Donald Trump signalled that relations between China and the US may improve significantly this year with the official signing of an interim ‘Phase 1’ deal and beginning of talks for a ‘Phase 2’ deal. Vice Premier Liu He is set to visit Washington DC from the 13-15 of January to conclude an interim agreement that take steps towards ending the tariff war.

The increasing value of the Yuan and gains in the stock market both help the purchasing power of Chinese travellers and daigou outside of China, as the Chinese will again act as the key driver of growth in the world’s travel retail market in 2020.

Trade tensions between the world’s two biggest economies began with the Office of the United States Trade Representative initiating a section 301 investigation on China in August 2017. While it remains uncertain if critics in the US will be satisfied by the content of the agreement, as the Chinese are only expected to concede low hanging fruit, steps towards de-escalating tensions that have brewed since 2017 are positive. Risks associated with President Trump’s volatile foreign policy are well known in the market.

President Trump’s optimistic tweet on the ‘Phase 1’ agreement between the US and China. Source: Twitter.

The Chinese Yuan has depreciated from 6.67 on 14 August 2017, when President Trump initially tweeted about the US section 301 investigation on China. But it broke the psychological barrier of 7 Chinese Yuan to the Dollar on 6 August 2019 for the first time and stands marginally below the key 7 mark at 6.95 as of 7 January 2020.

The depreciation of the Chinese Yuan led to the US government officially declaring China a currency manipulator. But, interestingly, the IMF [International Monetary Fund] disagreed with this assessment and concluded that the Chinese Yuan had been “broadly stable” against other currencies in its yearly review in August 2019.

The strengthening of the Chinese Yuan, which has appreciated by +2.5% since the ‘Phase 1’ interim agreement announcement, also improves the risk appetite of daigou resellers, who purchase and sell to profit on arbitrage trade. Daigou resellers in Korea, seemingly unaffected by China’s decision to implement a new ecommerce law in January 2019, responded by increasing their orders.

 

Duty free sales in Korea increased +34.3% year-on-year in November 2019, with an all-time high in monthly sales recorded. Stakeholders in Korea’s fast-growing duty free industry believe that December is likely to see a repeat of the high growth levels recorded in November.

Trade tensions with the US and a slowdown in the economy were key reasons for the weakening of the Chinese Yuan in 2019. With trade tensions easing and an overall slowdown in the Chinese economy well anticipated, the Chinese Yuan is expected to recover in value. Chinese travellers and resellers are therefore well set to continue as a key growth driver in the world’s travel retail market in 2020.

Modest recovery in China’s benchmark equity indexes is ongoing, with shares rising for six straight weeks and the Shanghai Stock Exchange Composite Index at a nine-month high. Risk appetite is growing ahead of the US-China trade agreement and economic data points indicating improvements in the Chinese economy. Unlike other stock markets, retail investors account for over 80% of all stock trades in China, prompting the government to act in times of sharp share price declines to protect household wealth.

In 2015, following China’s ‘Black Monday’ stock market crash, Beijing accused “illegal short sellers” of causing the crash and proceeded to jail and replace the management at state-owned investment companies. The Chinese government continues to act to increase the value of the stock market and recently decided to inject liquidity in the stock market, urged share buybacks by major shareholders to help restore confidence, and institutionalised reforms for social security funds to engage in direct investments.

As a result, China’s Shanghai Composite finished 2019 up +22%, the best performance since the index recorded a +53% increase in 2014. China’s stock market began the year well in 2020, rallying +1.4% with the People’s Bank of China announcing fresh stimulus plans (lowering the bank’s reserve requirement ratio by 50 basis points) freeing up more liquidity for the economy.

Investors reached by The Moodie Davitt Report expect the recovery momentum to continue in China’s key benchmark indexes with corporate earnings growth picking up from just +8% year-on-year in 2019, deregulation of the financial market, and stabilisation of relations with the US.

Correlation between the Shanghai Stock Exchange and China’s consumer confidence. Source: National Bureau of Statistics, Moodie Davitt Business Intelligence.

Consumer confidence shows some correlation to the stock market, which is abundant with retail investor activity. An increase in the stock market will likely see an increase in spending appetite. Consumer confidence in China increased to 124.6 in November and will likely increase again for the month of December.

The increasing value of the Yuan and gains in the stock market both help the purchasing power of Chinese travellers and daigou outside of China, as the Chinese will again act as the key driver of growth in the world’s travel retail market in 2020.