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Domestic Equities To Benefit From More Stimulus
CHINA MACRO MONITOR Domestic Equities To Benefit From More Stimulus
OCTOBER 2014. This publication is a monthly report focusing on macro developments in China relevant to investors across asset classes and markets.
Following another month of weakening data, more stimulus has been deployed. Domestic equities are likely to be the key beneficiary of this stimulus as economic growth responds.
Contrary to popular belief, reform and stimulus can and do go hand-in-hand.
An important step to address the current precarious system of local government financing was made by putting in place guidelines that allow local governments to borrow under their own name rather than through intermediaries. We believe the reform will reduce complexity and increase transparency of the financial system and thus go a long way to improve confidence in the sector.
With the completion of the Fourth Plenum meeting last week, we expect further reform to strengthen China’s institutional framework.
With financial intermediation migrating away from the shadow banking sector, the People’s Bank of China has been active in ensuring that the formal banking sector has ample liquidity by pumping in a further CNY200bn into 20 banks on top of the CNY500bn offered to the five largest banks the month before.
While most economic data has continued to weaken, a number of releases were notably better-than-expected, underscoring our view that worst seems to have been priced in. Q3 GDP growth, September industrial production and the October flash HSBC PMIs all came in above consensus expectations in sign that the subtle stimulus measures deployed in the past few months are gaining traction.
CHINA DELIVERS ON LOCAL GOVERNMENT FINANCING REFORM
As we have previously noted, China’s precarious system of local government financing needed urgent reform (see “China Macro Monitor, Is China at Risk of a Debt Crisis?”, July 2014) . On October 2nd, China delivered on that reform with the State Council providing guidelines on local government borrowing and debt management. In conjunction with its amendment to the budget law on 31st August 2014, which included a new legal framework for local governments to issue bonds directly, the reform paves the way for a more direct model of local government finance.
When local governments were prohibited from borrowing directly, they made extensive use of intermediaries called local government financing vehicles (LGFVs) which in turn borrowed from banks and trust companies. These arrangements have been unnecessarily complex and the lack of transparency has damaged confidence in the financial system. The timely reform has therefore been highly welcome.
Most of that LGFV borrowing fell under the category of shadow-banking, with even direct banks loans often taken off-balance sheet by ‘undiscounting’ bankers’ acceptances. A direct consequence of this reform will likely be a contraction in shadow banking activity – a trend we have already observed in the past quarter
A brand new paradigm
Under the guidelines set by the State Council, upper tier governments will be able issue “general obligation bonds” for social and public welfare projects that generate no revenue as well as “special purpose bonds” for projects that generate some revenues but not enough to be self-financing. Upper tier governments will be able to borrow to lend onto lower tier governments and to refinance maturing debt.
Additional requirements for disclosure will enhance transparency, which we believe is a key feature for boosting market confidence. The State Council set quotas on upper tier government borrowing and the Ministry of Finance will vet the subsequent on-lending to lower level governments, consolidating debt control measures.
PBoC remains active in driving liquidity into the financial system
With financial intermediation progressively shifting away from the shadow banking sector, the central bank has been keen to ensure ample liquidity has been maintained in the banking sector. This month the PBoC pumped CNY200bn into a broader range of 20 banks over and above the CNY500bn offered last month to the five largest banks.
As can be seen from the chart on page 1, growth in banking sector loans has also been negative and capital market financing has not been able to compensate for the shortfall in both areas. That underscores the PBoC’s urgency in making sure financing does not falter.
The central bank’s measures also will help address some of the weakness in the real economy as the government firmly maintains its target for 7-8% GDP growth this year.
In a bid to help the ailing housing market set free from a self-fulfilling negative spiral mortgage interest rates and downpayment levels were cut for some borrowers.
14-day repo rates were cut further to 3.4% from 3.5% in October further to the 20bps cut made in September.
FOURTH PLENUM SETS THE SCENE FOR FURTHER REFORM
The landmark Fourth Plenary Session of the Communist Party of China (CPC) Central Committee meeting last week placed the rule of law on the centre stage. The meeting underscored how serious the CPC is about the reforming institutions to deliver better results. A key development will be separate executive and judicial systems, in a move aimed to unencumber the system from corruption that has previously led to inefficient outcomes and delayed the implementation of decisions made by the central government.
We expect reform to continue to be implemented and economic stimulus will help the process of transition.
NEARING THE BOTTOM?
While GDP growth decelerated to 7.3% y-o-y in Q3 2014, it proved to be better than expected. More timely, industrial production data for September grew 8.0% y-o-y, rebounding from a five-year low of 6.9% y-o-y set in August. The flash October HSBC manufacturing PMI also came in higher than expected at 50.4 compared to 50.2 in September. While many other data points remain weak, the industrial data could mark a turning point as stimulus activity gains traction (for a summary of recent policy easing refer to table on page 10).
CHINA A-SHARES TEMPORARILY DIP AS SHANGHAI-HONG KONG CONNECT DELAYED
The Shanghai-Hong Kong Connect has been delayed, helping push the China A-Share market down 3.8% since its recent peak hit on 9th October (however the index is still up 10.6% in the past six months).
It appears that temporary factors have been behind the delay, though no definite time for implementation has yet been given.
State media reports imply that the reason for the delay is the pro-democracy protests in Hong Kong. There is also some speculation that Northbound brokers have requested more time for implementation. All indications point to the testing of the link having been successful, indicating there are no technical blockages to implementation.
In our view the implementation of the program is a matter of when not if, as there are no structural reasons for the delay and it is in the interests of the mainland China government and policy-makers to open up the domestic stock market to foreign investment and mainland flows into the Hong Kong stock exchange.
Therefore, we view the recent correction as a good opportunity for investors who missed the China A-Share rally between July and the beginning of October, to build positions.
For a more detailed overview of the Shanghai-Hong Kong Connect see “Shanghai-Hong Kong Stock Connect: A Boost For China A-Shares”
Although the premium of H-Shares over A-Shares had disappeared temporarily earlier this month, the premium has re-emerged. That opens opportunities to benefit from future arbitrage.
We believe that the recent pull-back in the China A-Share index will be regained on the opening of the Connect as Northbound flows accelerate. Furthermore, ratcheting up of stimulus by the government and central bank will help continue the positive momentum that has dominated the China A-Share index during the second half of this year.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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