Can Liquidity Injections Bring Back Sentiment in Risky Assets?

• The significant deceleration in economic activity, combined with rising contagion risk amid Evergrande's possible collapse and the regulatory crackdown on a number of sectors from technology to property and recently to gambling have all been weighing on domestic asset prices.
• China's CSI and Hong Kong's HSI indexes are both down 20% off their February high.
• The chart below shows that China 'liquidity', which we define as the annual change in the Total Social Financing (TSF) 12M sum, has been contracting sharply in the past 10 months, posing a threat to international asset prices (i.e. industrial metals such as copper).
• Hence, investor sentiment has fallen sharply in China and the elevated uncertainty about the economic outlook could prevent investors from 'buying the dip' even though a lot of sectors appear 'cheap' based on a range of value metrics (P/E ratio, Price-to-book).
• Hence, we think that investors will carefully watch PBoC policy before making a move to China as a looser policy combined with liquidity injections could offset the asset price deflation that Chinese assets have experienced in the past 6 months.

Source: Bloomberg/MNI