On July 22nd, the People's Bank of China unexpectedly cut interest rates, adjusting the open market 7-day reverse repo rate from the previous 1.8% to 1.7%. The benchmark 1-year and 5-year loan prime rates (LPR) were also reduced by 10 basis points respectively. From July 22nd to July 23rd, the offshore renminbi began to weaken, approaching the 7.3 level at one point. Northbound capital also showed a net outflow, with the Shanghai Composite Index falling 1.65% on the 23rd, closing at 2915.37 points.
As of 17:30 Beijing time on July 23rd, the USD/CNH was at 7.2867 (touching a high of 7.2973), and the USD/CNY was reported at 7.2743. On the same day, northbound capital saw a net outflow of nearly 4.2 billion yuan, with a cumulative net outflow of nearly 20 billion yuan for the month of July. After the dividend period, the previously popular high dividend and high payout concept began to correct, but bank stocks still rose against the trend on the 23rd, with the main driving force being the reduction in deposit interest rates.
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UBS China A-shares strategist Meng Lei told First Financial Daily reporters that public funds and foreign capital have relatively low holdings in the high dividend theme, with the main focus on insurance and ETFs. Although it is not ruled out that these two parties may take profits in the short term, facing the overall low bond yields and market interest rates, institutions find it difficult to find other alternatives.
Short-term weakening of the renminbi
On July 23rd, despite the decline in the overall market, bank stocks rose against the trend, with the three major state-owned banks reaching new highs, and the Bank ETF (512800) rising nearly 2% against the market. There are reports that state-owned large banks are considering lowering the listed deposit interest rates. Industry insiders mentioned that the market-oriented adjustment mechanism for deposit interest rates is still continuously releasing its effectiveness, and it is expected that banks will reasonably adjust the level of deposit interest rates according to changes in market interest rates, which is also conducive to the stability of net interest margins.
In addition to the impact of the interest rate cut, the recent rebound of the US dollar index has also put some pressure on the renminbi.
The US dollar index has fallen nearly 2% since June 28th, approaching the decrease during mid-April to mid-May. The selling of the US dollar was also accompanied by a decline in short-term US dollar interest rates, indicating that the market's confidence in the first interest rate cut by the Federal Reserve in September has increased. However, the US dollar index has recently rebounded from the 103 range to above 104.
Standard Chartered's Global Chief Strategist Eric Robertsen told reporters that even if the US interest rate cut cycle arrives, how much can the US dollar be expected to weaken? Currently, the 1-year/1-year US dollar overnight index swap rate (1Y1YOIS) is at 3.7%, which is about 100 basis points lower than the high in May, and the market is pricing the cumulative interest rate cut by the Federal Reserve before the end of 2025 at 165 basis points. "To make the depreciation of the US dollar last for a longer period, we believe that the Federal Reserve needs to cut interest rates by a larger margin in the future. In addition, we need to see better performance in the yen and other Asian currencies to promote a broad improvement in emerging market risk appetite."
For emerging market currencies such as the renminbi, the fundamentals of China's economy and the potential impact of external geopolitical factors have also dampened risk sentiment. Institutions believe that the potential increase in US tariffs may continue to drag down the performance of export-oriented economies' currencies, especially Asian currencies.
It is worth noting that the core PCE index will be released on Friday, "unless we see a significant deviation from the median forecast of a 0.2% sequential increase, otherwise the index may not become the main driver of the market as it used to be. The CPI and PPI data released earlier this month indicate that the data is unlikely to surprise on the upside. The focus is also on economic activity, so the preliminary report of the US second quarter GDP is more important." KCG Senior Strategist David Scutt told reporters.In his view, "from the daily chart, the US dollar/yuan has been rising continuously over the past two weeks, attracting buying interest as it fell below the 50-day moving average, and being capped by the resistance level of 7.29250. This resistance level has been limiting the increase since July 5th. If this resistance level is breached, it may retest the 2024 high of 7.3114."
A foreign exchange trader from a major Chinese bank also told reporters that from June to August each year, driven by seasonal foreign exchange demand such as dividends from Chinese companies listed overseas, profit remittances from foreign companies, and residents' summer travel abroad, the yuan often shows a phase of depreciation. After the end of the seasonal foreign exchange demand, it is expected that the yuan exchange rate will strengthen slightly in the fourth quarter, but it is also necessary to observe the changes in geopolitical risks in the fourth quarter.
Outflow of Northbound Capital and High Dividend Fluctuations
The direction of investment funds is also one of the reference indicators for exchange rates. Since June, northbound capital has shown a net outflow trend, with northbound capital net selling 5.979 billion yuan on July 22, and continuing to net sell nearly 4.2 billion yuan on the 23rd.
Data on the 23rd shows that the top five industries in the northbound capital's portfolio are food and beverages, electronics, banking, pharmaceuticals and biotechnology, and home appliances, accounting for 53.99% of the total portfolio value. The top three industries in terms of the increase in portfolio value compared to 20 trading days ago are building materials, national defense and military, and public utilities, with increases of 7.13%, 6.27%, and 3.24% respectively.
A clear trend has also attracted market attention. Since the beginning of the year, the high dividend style that has been leading the market has also shown a clear correction recently, especially in coal stocks, oil and gas stocks, and telecommunications stocks, which has once again sparked market discussions on whether the high dividend factor is "out of steam."
A private equity institution insider told reporters that the recent correction of the high dividend sector may not all be "attributed" to the dividend factor itself, but is more related to industry factors. In addition, after the high dividend factor has experienced a large increase in advance, it is also normal to have some retracement due to rotation, and it is advised to be cautious temporarily when the dividend yield is below 4% (below 5% for Hong Kong stocks). When screening for high dividends, it is necessary to focus on profitability and dividend capacity, rather than simply the high or low dividend yield. Therefore, those targets with stable profits and strong subsequent dividend capacity actually provide better layout opportunities in recent fluctuations.
Two weeks ago, Bank of America China Equity Strategist Winnie Wu said in an interview with the media that the state-owned enterprise theme driven by high dividends may take a breather, as the position has become somewhat crowded. "In the early years, few foreign investors wanted to buy banks, but now it has become a consensus configuration theme. Coal stocks have risen by 20% so far this year, and oil and gas stocks have risen by 40%. After the surge, the dividend yield is decreasing. Banks had a dividend yield as high as 10% in January, now less than 7%, and some are only 5%. In terms of timing, many related companies will not pay dividends in the next six months, and some oil and gas companies and telecommunications companies may pay interim dividends in September." She believes that high-quality companies should be added to the configuration at lower levels, and some internet companies are favored.
Meng Lei believes that high dividends are hard to replace, and the theme is still optimistic in the medium and long term. "From the industry level, for high dividend stocks such as coal and banks, the position of public funds is still underweight. Although banks have been added, they are still underweight, so this round of bank rebound lacks the participation of public funds, and the beneficiaries are more long-term capital, such as ETFs, insurance companies, etc."
"The long-term assessment attributes of ETF and insurance funds also mean that they are more pursuing long-term returns, needing a dividend of more than 5%, rather than pursuing stock price fluctuations. Therefore, we do not have to worry about the pressure of long-term capital withdrawing from the high dividend theme on a large scale." Meng Lei said that, in addition, the increase in public funds this year is not high, so the high dividend strategy is not very crowded, and there is still room for further improvement in the second half of the year.In terms of valuation, UBS research indicates that whether it is the price-to-earnings (PE) ratio or the price-to-book (PB) ratio, the valuation of state-owned enterprises is only about half that of private enterprises. Institutions believe that state-owned enterprises may still be significantly undervalued by investors at present.
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