Economy

Special Report

Highlights If the current low oil price environment is transitory, temporary fiscal tightening can be used to preserve the exchange rate peg. In our view, low oil prices are structural - crude prices will likely average $40 and lower in the coming years. In such a scenario, fiscal tightening cannot be a solution because it will unleash eternal economic malaise. Hence, currency devaluation will become necessary. Even though Saudi Arabia’s currency devaluation is not imminent, the risk-reward of selling the SAR/USD in the forward market is attractive. We recommend investors sell Saudi Arabian riyals in the forward market as a long-term bet. Feature The plunge in oil prices has revived the debate on the sustainability of the Saudi currency peg. This report argues that currency devaluation is not imminent, given that Saudi authorities have sufficient foreign currency reserves to fund balance of payment (BoP) deficits for some time. Beyond that, if oil prices average $40 and lower, Saudi’s exchange rate peg will come under pressure. Depleting Foreign Exchange Reserves Chart I-1Saudi Arabia: Oil Prices And Balance Of Payments In this section, we estimate how oil prices will impact the level of Saudi Arabia’s gross foreign exchange (FX) reserves. Odds are that oil prices have experienced a structural breakdown and will average no more than $40 per barrel in the next three years.1 To preserve the riyal’s peg to the US dollar, the Saudi authorities will have to plug the gap in foreign funding requirements (FFR). We define the FFR as the sum of the current account balance and the capital account balance without taking into account government external borrowing. The nation’s current account balance and FFR along with oil prices are shown in Chart I-1. For the purpose of this simulation, we assume an average oil price of $40, $40, and $35 a barrel in 2020, 2021 and 2022, respectively. Our full set of assumptions for Table I-1 are provided in Box I-1. Our findings from the simulation are as follows: Saudi Arabia’s FFR deficits will amount to $94 billion in 2020, $96 billion in 2021 and $82 billion in 2022 (Table I-1, row G). We assume the government’s external (US dollar) borrowing will cover 50% of FFR in 2020, 2021, and 2022. The rest will be financed by drawdowns from the Saudi Arabian Monetary Authority’s (SAMA) gross FX reserves. The latter will decline by $47 billion in 2020, $48 billion in 2021 and $41 billion in 2022. Indeed, over the first three months of this year, the monetary authorities’ FX reserves have already dropped by around $26 billion. Hence, our forecasts for annual change in the central bank’s FX reserves are reasonable. Saudi Arabia’s gross FX reserves will drop to $360 billion by the end of 2022 from the current $471 billion (Table I-1, row J). This roughly represents a 23% decline. In terms of fiscal dynamics, the fiscal balance will register deficits of 14%, 16% and 17% of GDP in 2020, 2021 and 2022, respectively (Table I-1, row C). Assuming the government decides to fund 75% of the deficits by issuing bonds and the other 25% by drawing on FX reserves at SAMA, the public debt-to-GDP ratio will rise from around 23% currently to 61% by the end of 2022 (Table I-1, row D). Box I-1Simulation: Estimating Potential Drawdowns In Foreign Currency Reserves The Money Supply Coverage Ratio The Saudi Currency Law of 1959 stipulates that currency issued by SAMA must be backed by foreign currencies and gold. Indeed, Chart I-2 reveals that SAMA is in compliance with that law. Its holdings of gold and foreign currencies closely track the sum of currency in circulation and the cash stored in SAMA’s and banks’ vaults. This monetary construct made sense in the 1960s when much of the money supply was made up of cash currency, meaning that electronic money/bank deposits were still too small to matter. Odds are that oil prices have experienced a structural breakdown and will average no more than $40 per barrel in the next three years. Currently, currency in circulation makes up only 11% of the broad local currency money supply, hereafter referred to as the broad money supply. The latter is calculated as M3 minus foreign currency deposits and includes cash in circulation and all local currency deposits (electronic money). Demand deposits make up 63% of the broad money supply, while savings and time deposits account for 25% (Chart I-3). In a nutshell, the currency in circulation amounts to SAR 199 billion, while the broad money supply stands at SAR 1866 billion. Chart I-2The Monetary Rule That SAMA Follows Chart I-3Composition Of Broad Money Supply   Individuals, companies and foreigners can use the entire broad money supply - cash in circulation and all local currency deposits (electronic money) - to buy foreign currency in Saudi Arabia. In nutshell, time and savings deposits can be converted into demand deposits upon the expiration of their term or immediately after the payment of a penalty. Therefore, the proper formula for calculating the international FX reserves-to-money supply coverage ratio is as follows: Money coverage ratio = (central bank’s foreign exchange reserves) / (broad local currency money supply). For the reasons elaborated above, the denominator should be the broad money supply, not just the amount of currency in circulation. To calculate the Saudi Arabia’s money coverage ratio, we use not only SAMA’s holdings of gold and foreign currencies, but also all its foreign currency securities, including bonds, stocks and other foreign assets, including private equity investments. The top panel of Chart I-4 illustrates that the broad money supply is now equal to the central bank’s gross foreign exchange reserves, i.e., the nation’s money coverage ratio is currently close to one. Hence, in short, the level of FX reserves is currently adequate. Chart I-4Saudi Arabia: FX Reserves And Broad Money Supply Crucially, if SAMA chooses to maintain the economy’s broad money supply such that it is equal to its holdings of gross international FX reserves, then it will have to shrink the money supply substantially as its foreign exchange reserves are depleted considerably over the course of the next three years. Our projections in Table I-1 suggest that SAMA’s gross foreign exchange reserves will likely drop by about 25% between January 1, 2020 and the end of 2022. If Saudi authorities attempt to maintain the money coverage ratio at around one, the broad money supply will also have to shrink by the same order of magnitude. We reckon that it will be very painful economically and, thereby, socially and politically undesirable to follow a monetary regime that requires a 25% contraction in the nominal broad money supply over the next three years. Money supply will likely be allowed to exceed the authorities’ gross foreign exchange reserves. This will prompt doubts about the sustainability of the exchange rate peg. For instance, in 2015-2016, the broad money supply in Saudi Arabia actually expanded by 6% over a two year period even though gross international FX reserves declined by 27% (please refer to Chart I-5 on page 7). The difference between then and now is that gross international reserves in the 2015-2016 period were greater than the broad money supply, which means that the money coverage ratio was well above one (Chart I-4, bottom panel). Chart I-5Bank Credit/Money Growth Can Diverge From FX Reserves In brief, in 2015-16, SAMA had leeway to tolerate a major drop in its gross foreign exchange reserves without needing to shrink the broad money supply. However now with the money coverage ratio close to one, SAMA does not have that much room to maneuver. Odds are that the money supply will not be allowed to drop as low as the forthcoming drop in the central bank’s gross foreign exchange reserves given the enormous deflationary pressures that would be unleashed. Consequently, the nation’s money coverage ratio will likely drop well below one. This will likely prompt doubts about the sustainability of Saudi Arabia’s exchange rate peg. Bottom Line: Attempts by SAMA to maintain the money coverage ratio at or close to one – to ensure a solid currency peg –will entail a substantial shrinkage in the broad money supply. The latter will herald immense contractionary and deflationary pressures in the real economy. This scenario is economically, socially and politically unviable. Hence, money supply will likely be allowed to exceed the authorities’ gross foreign exchange reserves. This will prompt doubts about the sustainability of the exchange rate peg. A New Era Of Higher Currency Risk Premiums The simulation in Table I-1 projects that KSA’s foreign exchange reserves will drop by about 25% by the end of 2022. If the broad money supply grows even 5% per annum over the next three years (the current annual growth rate being 11%), the money coverage ratio will drop from its current 0.95 to about 0.61. As Saudi Arabia’s foreign exchange reserves increasingly fall short of its broad money supply, the currency peg will enter a new era where doubts about the currency peg’s sustainability will begin to grow. Consequently, currency forwards will start pricing in higher chances of devaluation. Given that a central bank’s sale of international FX reserves to non-banks shrinks the banks’ excess reserves and broad money supply,2 a pertinent question is: how and why can broad money supply still grow? The broad money supply can still expand even when the central bank sells its foreign exchange reserves. The local currency money supply expands when the central bank or commercial banks lend to or purchase assets from non-bank entities. This includes their purchases of government bonds on both the primary and secondary markets. Chart I-5 reveals that broad money supply growth in Saudi Arabia correlates with commercial banks’ assets and is not always aligned with SAMA’s gross FX reserves. Chart I-6Money Multiplier = Broad Money Supply / Banks' Excess Reserves Overall, it is possible for the broad money supply to expand in Saudi Arabia even if SAMA depletes its FX reserves to fund BoP deficits. For this to occur, banks and/or SAMA need to lend to or purchase securities from non-banks (including from the government) in greater amounts than SAMA’s sales of its FX reserves. Besides, the central bank may or may not need to provide funding (excess reserves) to the banking system to accommodate an expanding money supply (Chart I-6). Going forward, KSA’s broad money supply will be shaped by the following dynamics. On the one hand, sales of SAMA’s foreign exchange reserves will reduce its broad money supply. On the other hand, commercial banks’ lending to non-banks, alongside their purchase of government securities, will expand the money supply. In aggregate, the money supply might grow modestly even as the country’s foreign currency reserves plummet. However, this implies that the FX reserves-to-money supply coverage ratio will drop well below one. This is unlikely to break the currency peg in the medium term. There is no theory or historical precedent to indicate the level at which the money coverage ratio causes the peg to crumble. It is often much more about confidence in the exchange rate regime than about the precise level of this ratio. Chart I-7 illustrates the money coverage ratio for different economies. KSA has the highest money coverage ratio among emerging markets. Chart I-7The Money Coverage Ratio: A Cross-Country Perspective However, there are several reasons why this ratio should structurally be higher in Saudi Arabia than in other EM economies: First, unlike the majority of EMs, KSA runs a currency peg and the latter warrants different standards regarding the money coverage ratio. Foreign exchange reserves falling well below the broad money supply will gradually undermine the integrity of its monetary regime and shake confidence in its sustainability. Chart I-8Saudi Arabia: FX Reserves And Interest Rates Second, the Impossible Trinity thesis suggests that in an economy with an open capital account, the central bank is forced to choose between controlling either the currency or interest rates. Since there are no capital controls in Saudi Arabia and the central bank fixes the riyal to the US dollar, SAMA has little control over interest rates. The country is therefore forced to import US interest rates. Provided US interest rates are now close to zero and the plunge in oil revenues has unleashed a recession in Saudi Arabia, the very low interest rates that Saudi Arabia imports from the US are currently adequate. This, however, does not mean that Saudi interest rates cannot deviate from US ones. Chart I-8 illustrates that SAMA’s sales of FX reserve assets could lead to a rise in local interbank rates in absolute terms or relative to US ones. This is because when the central bank is selling US dollars, it tends also to shrink the banking system’s excess reserves, which forces commercial banks to bid the price of inter-bank liquidity higher. Third, a central bank cannot simultaneously control the exchange rate and the quantity of monetary aggregates. In other words, SAMA cannot both peg the currency to the US dollar and have control over the level of money supply. This constraint is similar but not identical to the above point about the relationship between exchange and interest rates. To illustrate this trade-off: when SAMA draws down its international reserves to fund a BoP deficit, the money supply will shrink. If the authorities simultaneously encourage and allow the banks to lend to or purchase securities from non-banks, including the government, the money supply will expand. This newly created money could find its way to the currency market (in the form of greater imports or capital outflows) and could bid up the price of the US dollar versus SAR. To defend the peg, SAMA will have to sell more of its foreign currency reserves and purchase SAR, thereby, contracting the money supply again. In short, because of the currency peg, SAMA might not be able to simultaneously control the level of money supply and defend the peg. Finally, unlike many other EM economies, KSA has little domestic productive capacity and relies heavily on imports to satisfy domestic demand for goods and services. Given the nation’s high propensity to import, new riyals created by the banking system have a higher chance of flowing to the foreign exchange market, weighing on the value of the currency and jeopardizing the peg. In Saudi Arabia, fiscal policy is of paramount importance to upholding the currency peg when oil revenues plunge. Other EM economies like the Brazilian or Russian ones do not face such a constraint because they do not have pegged currency regimes. Other economies such as China’s and Korea’s have substantial domestic productive capacity to meet new domestic demand. So, in the latter economies only a small portion of new money creation flows to the foreign exchange market. Bottom Line: Given that it is operating a fixed exchange rate regime, KSA’s money coverage ratio should structurally be higher than that of many other emerging economies. As this ratio drops well below one in the next couple of years, the risk premium in SAR forwards will rise as the market moves to price a higher probability of devaluation. Fiscal-Monetary Nexus In Saudi Arabia, fiscal policy is of paramount importance to upholding the currency peg when oil revenues plunge (Chart I-9). The basis for this is the fact that in Saudi Arabia fiscal policy plays a larger role than monetary policy in driving domestic demand. Chart I-10 demonstrates that government spending amounts to 36% of GDP annually while new annual credit origination is only about 4% of GDP. Chart I-9Oil Prices And Government Spending Chart I-10Fiscal Spending Is Much More Important Than Credit Creation   Even though the government has already embarked on a considerable fiscal austerity program, the nation will continue to face very large fiscal deficits. Our simulation forecasts fiscal deficits of 14% of GDP in 2020, 16% in 2021 and 17% of GDP in 2022 (please refer to row C in Table I-1 on page 3). Chart I-11Fiscal Spending Drives Imports Saudi imports are very sensitive to government spending while government revenues correlate with exports (Chart I-11). Swelling fiscal deficits can be funded by issuing both foreign and local currency bonds. However, each type of borrowing has different implications for the exchange rate, interest rates and the money supply. There are several ways in which the fiscal-monetary nexus can play out in Saudi Arabia.3 The government can draw down on its FX reserves at SAMA to fund the fiscal deficit. This will quickly erode the central bank’s gross FX reserves and, consequently, undermine confidence in the currency peg. The government can borrow externally (in foreign currency) to cover both the budget and BoP deficits. However, in this case, the government’s foreign currency debt will mushroom and the nation’s sovereign credit risk and, thereby, cost of external borrowing will rise.  The fiscal deficit can be funded by issuing local currency bonds sold to non-banks only. Given the sheer size of required government funding over the next couple of years, local interest rates will rise significantly as the government competes to attract a limited amount of existing deposits. Overall, this will crowd out the private sector which will have negative ramifications on the economy. However, the currency peg will not be jeopardized as the money supply will shrink dramatically in this scenario. The government can fund itself by borrowing from domestic commercial banks, i.e., by issuing local currency paper to be bought by banks. The government will get new local currency deposits and will not compete for existing deposits. This will not produce a crowding out effect and interest rates will not rise. As we have discussed in past reports, commercial banks do not require deposits or savings to lend money or to purchase securities. Everywhere, commercial banks – with regulatory forbearance and shareholder consent – can purchase literally an unlimited amount of government bonds thereby financing the nation’s large fiscal deficits. Critically, when commercial banks buy local currency government bonds, they create new local currency deposits “out of thin air”. This scenario would be equivalent to the monetization of public debt. Money supply will expand briskly and the money coverage ratio will drop. The outcome will produce downward pressure on the currency’s value as new money/deposits created by commercial banks will end up eating into the country’s finite foreign exchange reserves via imports and capital outflows, as discussed above. While commercial banks can easily fund the fiscal deficit by creating money “out of thin air”, the former will likely bolster demand for dollars and endanger the currency peg. Bottom Line: The Saudi government will likely resort to all four mechanisms to fund itself. Given the large size of its fiscal deficit, financing it entirely via external borrowing or the depletion of FX reserves is unattainable. Therefore, issuance of local bonds will continue at a rapid pace, with the following implications: If local bonds are bought by non-banks, local interest rates will be pushed higher, crowding out the private sector with negative ramifications for the economy; or If local bonds are bought by commercial banks, the money supply will expand meaningfully, thereby drastically reducing the money coverage ratio and exerting substantial pressure on the currency peg. Neither of these scenarios can be sustained in the long run. Investment Conclusions Chart I-12SAR/USD Forwards And Oil Prices If the era of low oil prices is transitory, temporary fiscal tightening can be used to preserve the peg. In our view, low oil prices are structural – crude prices will likely average at most $40 per barrel in the coming years. In such a scenario, fiscal tightening cannot be a solution because it will unleash eternal economic malaise. Hence, currency devaluation will be unavoidable. Critically, the longer the authorities preserve the peg in the face of lower oil prices, the larger the devaluation will ultimately be. Based on historical experiences of other economies that delayed their own currency adjustments, the devaluations that they eventually faced were between 30-50%. Despite the collapse in oil prices, the SAR/USD long-term forwards are underpricing the risk of devaluation (Chart I-12). If the downshift in oil prices is more permanent than the one in 2015 – as we believe it will be – the SAR/USD long-term forwards offer a good opportunity. As a structural trade, we recommend investors to sell the 3-year SAR/USD forward. The current entry point is attractive. Ayman Kawtharani Editor/Strategist ayman@bcaresearch.com Arthur Budaghyan Chief Emerging Markets Strategist arthurb@bcaresearch.com   Footnotes   1  This is the view of BCA’s Emerging Markets Strategy service and it differs from the view of BCA’s Commodities and Energy Strategy service. 2  Commercial banks’ excess reserves are not part of the broad money supply. This applies to all economies, regardless of their exchange rate regime. 3  By that we mean the interplay between government financing/borrowing and the resulting changes in money supply, interest rates and the exchange rate.  

Highlights The current pace in the recovery of China’s domestic demand has not been robust enough to fully offset the impact from the collapse in exports. The level of industrial inventory jumped to a five-year high, but it will likely be transitional. We expect the inventory overhang to subside when the recovery speed in demand catches up with supply in H2.  While the gap is widening between stock prices and economic fundamentals in the US, Chinese equity prices have been more “well behaved” in the past month. We continue to overweight Chinese stocks in the next 6 to 12 months and favor Chinese onshore corporate bonds overall and SOEs in particular. Feature China’s Caixin and official PMIs in April highlighted the knock-on effects on the Chinese economy from a collapse in external demand. Although China’s domestic economy continued its rebound, the pace of the improvement has not been robust enough to offset rapidly weakening exports. This was evident in the widening gap between supply and demand in April. The sharp contraction in the global economy in Q1 will likely deepen in Q2 because the lockdowns in Europe and the US started in the later part of Q1 and have mostly remained in place through end-April. We expect global demand to significantly worsen in April and May, generating strong headwinds to China’s near-term recovery. Chinese authorities have been prompted to step up their stimulus efforts due to a fast deterioration in global growth. The government recently approved an additional 1-trillion yuan in local government special-purpose bond issuance, which is scheduled to be fully dispersed by the end of May. China’s stimulus, strongly focused on boosting investment and economic growth, should fuel Chinese stock and industrial metal prices in the next 6 to 12 months. Tables 1 and 2 below highlight key developments in China’s economic and financial market performance in the past month. Table 1China Macro Data Summary Table 2China Financial Market Performance Summary Chart 1Construction Sector Has Seen The Strongest Rebound China’s domestic demand partially offset a collapse in exports in April. The official manufacturing PMI slipped to 50.8 in April from 52 in the previous month. The Caixin PMI survey, which is skewed towards smaller and more export-oriented firms, returned to contractionary territory in April following a brief rebound in March. The retreat in both PMI readings highlights how a worldwide lockdown of businesses has shaken China’s manufacturing sector (Chart 1, top panel). This exogenous negative impact will likely worsen in Q2. China's domestic economy continued its slow recovery through April. The official PMI’s new orders subcomponent declined by only 2 percentage points, despite a collapse of new export orders to 33.5. Moreover, the new orders subcomponent of the non-manufacturing PMI survey increased from 49.2 to 52.1, with the construction subcomponent reverting to its pre-pandemic level. The construction employment subcomponent also confirms that the industry has shown the strongest rebound among sectors in the Chinese economy (Chart 1, middle and bottom panels). Chart 2Home Sales Are Likely To Accelerate China’s housing market also continued to improve in April. Chart 2 (top panel) shows that the demand for both residential housing and floor space started rebounding in March. The high frequency data indicate the year-over-year growth rate in home sales in China’s 30 large- and medium-sized cities turned positive in April (Chart 2, middle panel). The rapid expansion in home sales in the past weeks may be due to recent discount promotions, but we anticipate housing prices to remain stable this year in line with the Chinese leadership’s policy direction (“houses are for living, not for speculation”). We also expect that the number of home sales will accelerate.  Local governments will significantly ramp up land sales this year to make up for their large revenue shortfalls.  The central government will continue to gradually relax real estate purchase restrictions. The more property market-friendly policies, coupled with extremely accommodative monetary conditions, will encourage a healthy rally in property market investment and housing demand in H2 (Chart 2, bottom panel). So far most improvement in China’s domestic demand seems to be concentrated in the construction sector.  The slow pace of manufacturers’ capacity utilization suggests that China’s industrial output growth is unlikely to return to its pre-pandemic rate in Q2. As of April 25, among the official PMI surveyed enterprises, the resumption rate of large- and medium-sized enterprises was 98.5%. However, only 77.3% of them reported that they were operating at 80% or higher of their usual capacity utilization rates.1 Chart 3Pressure On Inventory Should Start To Ease In H2 The imbalance in the recoveries of China’s supply and demand has led to a pileup in inventory, the highest level in five years (Chart 3).  The combination of excessive inventory and low demand has weakened China’s factory pricing power and profit growth. However, in our view, the inventory overhang will be temporary, and the factory price contraction is unlikely to turn into a deep deflation such as the one in 2009 or the long-lasting deflationary cycle from 2012-2015. The level of industrial inventory has been much lower than it was during the four years leading to the 2008/2009 global financial crisis (GFC) and the 2015/2016 deep deflationary cycle. The deflation in factory prices also has been relatively mild compared with the two previous phases. Moreover, an extremely tight monetary policy and protracted inventory destocking period that contributed to the collapse in global raw material prices in 2012 are not present. Declines in China’s manufacturing, raw material and mining prices are synchronized, echoing the GFC when global demands nose-dived and pushed international oil and raw material prices into deep contractions. Our baseline scenario of an incremental re-opening of the global economy, a peak in the US dollar, and a recovery in the oil market in H2, all support our view that the deflation in China’s producer prices should not last beyond Q3. Given that exports’ share to China’s GDP is currently half of what it was in 2008, the weakness in global demand will be much less of a drag on China’s domestic manufacturing sector than during the GFC. Chart 4Logistics Bottleneck Still In Place Additionally, the drawdown in April’s raw material inventory and an increase in the official PMI’s supplier delivery subcomponents suggest that some lingering logistical bottlenecks may be at play, preventing China’s domestic business operations from recuperating at full speed (Chart 4). We expect a further relaxation of intra- and inter-provincial travel restrictions following the National People’s Congress (NPC) on May 22 in Beijing. This easing should help to accelerate the normalization in both manufacturing activities and inventory levels. The outperformance of Chinese equity prices versus global stocks has eased significantly in the past month (Table 3 and Chart 5). The moderation suggests that investors may be starting to factor in a slower-than-expected economic recovery in China. Near-term risks are still high for further selloffs in both Chinese and global stocks. Nevertheless, we think the rapid advancement in global stock prices in the past month, particularly the SPX, means that Chinese stocks are not as overbought as in February and March. The widening gap between US equity prices and economic fundamentals makes the SPX more vulnerable to near-term uncertainties surrounding global economic recovery. We maintain our view that a combination of massive Chinese stimulus and the momentum in China’s economic recovery in H2 should support an outperformance in Chinese stocks in the next 6 to 12 months. Table 3Chinese Stocks Advanced Much Less Than SPX In April Chart 5Chinese Stocks Less Overbought Now The bull steepening in the government bond yield curve since March 23 flattened a bit in the last week of April, but it remains heightened with the short end of the yield curve falling much faster than the long end (Chart 6). This suggests that domestic investors expect China’s ultra-easy monetary policy to remain in place in the near term due to uncertainties surrounding the global pandemic and a slow economic upturn. At the same time, investors do not believe the weakness in the Chinese economy will persist long enough to warrant a sustained easy monetary policy regime. In addition, China’s 10-year government bond yield fell by 60bps so far this year, about half of the drop in the 10-year US Treasury bond yield (Chart 6, bottom panel). Even though we think the long end of the government bond yield curve has yet to bottom,2 the relatively stable return and RMB exchange rate make Chinese government bonds a safe bet for global investors seeking less risky assets. Chart 6Chinese 10-Year Government Bond Yield Has Not Capitulated Chart 7Chinese Onshore Corporate Bonds Still Offer Solid Returns Chart 7 highlights that the ChinaBond Corporate Bond total return index remains in a solid uptrend in both local currency and USD terms, despite the incredible strength in the USD since March. We continue to recommend onshore corporate bond positions in the coming 6-12 months.For domestic investors, we favor a diversified portfolio of SOE corporate bonds. Even though bond defaults will likely rise in the next 6-12 months, they will probably remain lower than what the market is  currently pricing in.     Qingyun Xu, CFA Senior Analyst qingyunx@bcaresearch.com   Jing Sima China Strategist jings@bcaresearch.com   Footnotes 1NBS’s interpretation of China April PMI.  http://www.stats.gov.cn/tjsj/sjjd/202004/t20200430_1742576.html  2Please see China Investment Strategy Weekly Report "Three Questions Following The Coronacrisis," dated April 23, 2020, available at cis.bcaresearch.com Cyclical Investment Stance Equity Sector Recommendations