Weekly Wisdom – July 6, 2023

By Hightower Great Lakes on July 6, 2023

Defending the Yuan

While US markets were closed for Independence Day, the Chinese state banks lowered their dollar deposit rates for the second time in a month.[1] The move largely came to discourage the Yuan from falling further.

Interest rates offered by their ‘big five’ state-owned lenders have now capped dollar deposits at 2.8%, down from 4.3% previously. The ‘big five’ is represented by the Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China, China Construction Bank, and the Bank of Communications.

Investors have been eager to listen to PBOC announcements, largely under the expectation that there will be a large stimulus package in the coming months. There have been rumors that such a stimulus package would support nearly a dozen different measures in areas such as real estate and domestic demand. 

China’s services sector has also been facing slower growth, as the latest PMI reading gave the lowest reading in the last 5 months at 53.9, down from 57.1 in the prior month. As a reminder, a reading above 50 indicates an expansion in activity, while a number below that signals a contraction. China has had 6 straight months above 50. The Caixin PMI report revealed that business activity and new orders both expanded at slower rates last month than the May report.[2]

Consumers Are Spending

Something that has caught the attention of the market is the rapid recovery of China’s gaming region in Macau, which is a trend we have been watching for the better part of a year. An important metric in this space is measuring ‘GGR,’ or Gross Gaming Revenue.

Throughout the first six months of 2023, GGR stands at a healthy $9.93b, which has largely outpaced the prior year that totaled $5.3b for all of 2022. This has largely pointed to a recovery of premium players, as high spending has outpaced the mass table recovery. The mass table segment was last measured at a 90% recovery of 2019 levels.

The Chinese consumer’s will to spend is not limited to gaming, as the May retail sales data came in hotter than expected at +12.7% growth y/y. A couple of the strongest categories were the catering industry at +35.1% growth y/y, telecommunication equipment at +27.4%, motor vehicles at +24.2%, and clothes/shoes/textiles at +17.6% growth.

Using these data points above, we can see the consumer is willing to spend on consumer goods and services alike. We also heard this on the Nike (NKE) earnings call last week, as the company posted +16% sales growth y/y in the Greater China region. Another tidbit we pulled from the earnings call was that visits to Nike stores in China were up 19% y/y, while online visits were down 12%. The consumer wants to shop in person.

Race for Chips

The Chinese/US relationship has been tense for several years given China’s increasing global influence and the United States’ effort to stymie it. The US has accused China of unfair trade practices, cyberwarfare and human rights abuses, while continuing to be at odds over Taiwan and Hong Kong’s sovereignty.

Relations did not improve during the COVID-19 pandemic. Regarding semiconductor technology, the relationship has been a back and forth spat. While both nations are implementing bans on the other, they are treading lightly and avoiding all-out bans due to the interdependent nature of the industry.

In October 2022, The US Department of Commerce’s Bureau of Industry and Security implemented a series of targeted sanctions on leading-edge semiconductors in the form of export bans to protect US national security and foreign policy interests. In an effort to circumvent this ban, Nvidia (NVDA), an American company, created a less powerful version of their Flagship H100 GPU in the form of H800 to maintain a Chinese presence.

It was recently reported that the US is considering a further ban on chips, which would ban the altered H800 as well. In a retaliation effort, China has worked to ban US-based memory-chip-producer Micron (MU) from partaking in any Chinese infrastructure projects; just this week, China leveraged its large raw material advantage to implement restrictions on key materials needed to produce semiconductors.

A Mixed Oil Recovery

Some investors have had high hopes for energy stocks amid China’s reopening, considering China is the world’s seconds largest crude oil consumer behind the US.[3] China also is the clear leader when it comes to petrochemical sales, accounting for nearly half of the $554 billion petrochemical market.[4]

Petrochemicals are often overlooked since many people think of transportation when crude oil comes to mind. But in fact, 40% of global oil demand does not go towards transportation.[5] China’s oil consumption hasn’t exactly seen the V-shaped recovery that some were hoping for, but it hasn’t remained at COVID-19 lockdown levels either.

Charts 1 and 2: World Oil Demand Ex-China and Ex-Jet Fuel[6]

A large issue when looking at China’s crude oil demand is the quality of the data, due to the rather secretive policies under which the country operates. There is about a 500 thousand barrel per day difference between the highest and lowest estimates across various providers of this crude oil data.⁶

Current forecasts from Morgan Stanley show China’s oil demand is on track to grow 1.2 million barrels per day this year, while demand outside of China is growing 800,000 barrels per day compared to last year. So, China is forecast to grow at a greater scale than the rest of the world due to its delayed reopening after COVID-19.

This crude oil demand can be broken out further into refined product demand. China’s refineries have produced at record levels for the first 5 months of this year, which suggests there is strong demand for refined petroleum products within the country.[7] The refined product that many investors have especially had their eye on for China is jet fuel.

Jet fuel consumption has been so closely watched because China was the world’s second largest consumer of jet fuel in 2019.[8] Jet fuel was also one of the refined products that saw the largest dip as a direct result of the lockdowns. China’s jet fuel demand could grow another 1 million barrels a day, or 700 thousand barrels a day when you exclude China’s jet fuel.⁶

An upcoming government stimulus out of China could potentially catalyze further crude consumption. So far this year, China’s government has only increased its spending by less than 1%, compared to this same time last year.[9] This stimulus would most likely be focused on the infrastructure segment of the economy, which could result in elevated diesel fuel usage.

Click here to read last week’s Weekly Wisdom (6/29).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Reuters. As of July 4.

[2] Caixin PMI report – China. As of July 2.

[3] Wisevoter.com. As of March 8, 2023.

[4] Statista.com. As of March 24, 2023.

[5] Chevron Exchange 2022 Q&A. As of September 9, 2022.

[6] The Oil Manual (Morgan Stanley Research). As of July 5, 2023.

[7] Reuters.com. As of June 30, 2023.

[8] Theglobaleconomy.com. As of March 8, 2023.

[9] Bloomberg.com. As of June 16, 2023.