Core Viewpoint - The Hong Kong dollar (HKD) has recently experienced significant fluctuations against the US dollar, triggering both the "strong-side convertibility guarantee" and the "weak-side convertibility guarantee" due to changes in liquidity and interest rates [1][2]. Group 1: Currency Exchange and Monetary Policy - On April 30, the HKD/USD exchange rate hit 7.75, activating the "strong-side convertibility guarantee" [2]. - From May 3 to 6, the Hong Kong Monetary Authority (HKMA) injected a total of 129.4 billion HKD into the market, leading to an expansion of HKD liquidity [2]. - The injection of HKD significantly lowered the HIBOR rates, with the 1-month HIBOR dropping from 3.65% in April to 0.67%, and overnight rates approaching 0% [2]. Group 2: Market Reactions and Expectations - The widening of the HKD-USD interest rate differential (HIBOR-SOFR) has prompted carry trades, resulting in a depreciation of the HKD, which is now approaching the "weak-side convertibility guarantee" at 7.85 [2]. - The HKMA is expected to tighten liquidity in the short term, which may alleviate the depreciation pressure on the HKD as HIBOR rates rise again [2]. - Historically, the HKD has touched the "weak-side convertibility guarantee" four times since 2017, leading to pressure on the Hang Seng Index and Hang Seng Tech Index during those periods [2].

Group 1: Report Summary - Report Date: May 25, 2025 [1] - Report Title: "Microstructure Crowding High, Convertible Bonds Guard Against Phased Adjustment" [1] - Analysts: Chen Xi, Liu Wei [2] Group 2: Market Review Asset Performance - Shanghai Composite Index and Wind All-A Index declined by 0.57% and 0.63% respectively, with the daily average trading volume of the whole market reaching 1.17 trillion yuan. The April industrial added value increased by 6.1% year-on-year, and the total retail sales of consumer goods increased by 5.1% year-on-year, in line with expectations. However, high micro-cap stock crowding and the rapid rise of US Treasury bonds led to a market correction [2]. - S&P 500 and Nasdaq fell by 2.61% and 2.47% respectively, related to the rapid rise of US Treasury bonds [2]. - London gold price rose by 4.86%, related to Moody's downgrade of the US sovereign rating and the rise of US Treasury bonds [2]. Convertible Bond Market - CSI Convertible Bond Index dropped 0.11%. As of May 23, the median convertible bond price, conversion premium rate, and pure bond premium rate were 120 yuan, 30.21%, and 14.18% respectively [2]. - In terms of industries, Medicine & Biology, Nonferrous Metals, and Automobiles performed well. The good performance of medicine may be related to SSGJ - 707, and nonferrous metals were mainly related to the sharp rise of gold. The market continued to rotate rapidly, lacking a leading sector [2]. Convertible Bond Terms - Bojun, Borui, Rundong, and Hao 24 decided not to redeem, while Hongchang, Hangyin, Falang, and Outong are expected to meet the redemption conditions. Jingke, Xiangjia, Fangyuan, Wentai, Leizhi, Meijin, Wenke, and Jianyou will not adjust the conversion price downward [3]. Group 3: Market Dynamics Economic Data - On May 19, the National Bureau of Statistics released April economic data. The industrial added value of large - scale industries increased by 6.1% year - on - year, and the total retail sales of consumer goods increased by 5.1% year - on - year. From January to April, the national fixed - asset investment (excluding rural households) increased by 4.0% year - on - year, with infrastructure investment increasing by 5.8%, manufacturing investment by 8.8%, and real estate development investment decreasing by 10.3%. The April economic data was generally in line with expectations but slightly weakened month - on - month, mainly related to the weak production of export enterprises in April. Infrastructure remained the main driving force of the economy [4]. Corporate Events - On May 22, at the 15th - anniversary strategic new product launch of Xiaomi, the Xiaomi 15S Pro and Xiaomi Pad 7 Ultra will be the first to be equipped with the SoC chip Xuanjie O1, and the Xiaomi YU7 made its debut. The 3nm Xuanjie O1 is manufactured by TSMC, and the YU7 is the first SUV, but the price is expected to be announced in July [4]. International Events - On May 16, Moody's downgraded the US sovereign credit rating from Aaa to Aa1 due to the increase in the US government's debt and interest payment ratio. On May 19, the yield of 30 - year US Treasury bonds exceeded 5% during intraday trading. The rapid rise of US Treasury bonds may tighten global liquidity and increase market risk aversion [4]. Market Index Events - On May 21, the Beixin 50 and micro - cap stock index hit record highs, possibly related to market speculation on small - cap companies. However, the current micro - cap stock crowding is obvious. The trading volume ratio of CSI 2000 to SSE 50 has reached a historical high, second only to November 2023 and December 2024. Attention should be paid to the possible adjustment caused by the retreat of micro - cap stocks [5]. Upcoming Events - Next week, pay attention to the May PMI data and the Huawei Zunjie S800 press conference [5]. Group 4: Convertible Bond Views Market Situation Analysis - This week's key market events include the record highs of the Beixin 50 and micro - cap stock index and the sharp rise of US Treasury bonds. The recent rapid rotation of market styles and the significant increase in the micro - cap stock index have led to overly obvious small - cap crowding and poor microstructure. After hitting record highs on May 21, there was a significant correction on May 22. Coupled with the tightening of global liquidity caused by the rapid rise of overseas US Treasury bonds, it is further negative for micro - cap stocks sensitive to liquidity [6]. - The market has fully priced in the "reciprocal tariffs" and "tariff easing" since April and the expectations for domestic policies under the tariff background. Before the Sino - US joint statement, the market had basically returned to the level before the "reciprocal tariffs" in terms of total volume, and the sectors that were significantly affected by tariffs had also rebounded significantly [6]. Outlook - Looking ahead, the phased new logic may be "deterioration of microstructure and tightening of liquidity", which may lead to phased market self - adjustment and correction. On one hand, the microstructure has deteriorated significantly due to the continuous rapid rotation of styles and the speculation on small - cap stocks. On the other hand, historical experience shows that the rapid rise of US Treasury bonds may trigger an adjustment in micro - cap stocks. The current rise of US Treasury bonds caused by Moody's downgrade of the US sovereign rating may also lead to liquidity tightening and trigger an adjustment in micro - cap stocks [7]. Recommended Targets - Stable targets include Shangyin, Changyin, Hua'an, Lantian, Wenshi and other convertible bonds; elastic targets include Zhongchong Zhuan 2, Daotong, Yinlun, Jizhi, Limin, Qianglian, Anji, Dinglong and other convertible bonds [7]

Economic Challenges - Japan's economy faced two major challenges: weak consumer market performance and export impacts due to tariffs [2][8] - In Q1 2025, Japan's GDP contracted by 0.2% quarter-on-quarter, marking the first decline since Q2 2024, with annualized GDP shrinking by 0.7% [2] - Private consumption remained flat in Q1, contributing only 0.1 percentage points to GDP growth, while net exports negatively impacted GDP growth by 3.3 percentage points due to a 0.6% decline in exports [2][3] Inflation and Consumer Spending - High inflation has led to stagnation in consumer spending, with the GDP deflator index rising by 3.3% year-on-year in Q1, surpassing the previous year's 3.1% [2] - Despite a 4.3% increase in employee compensation in Q1, real disposable income for households fell by 2.5% year-on-year, marking the third consecutive month of negative growth [3] Export and Tariff Impacts - The appreciation of the yen and U.S. tariffs have significantly impacted Japan's exports, with a reported 8.2% appreciation against the dollar as of May 20 [3][4] - In March, Japan's export growth slowed to 5.6% year-on-year, down from 9% the previous year, indicating a decline in export performance [3] Automotive Industry and Tariffs - The U.S. imposed a 25% tariff on key automotive parts, which could severely affect Japan's automotive industry, a critical sector contributing 50% of manufacturing output and 30% of total exports [4] - Estimates suggest that U.S. tariffs could reduce Japan's GDP by 0.59% and lead to a potential profit loss of nearly $30 billion in the automotive sector [4] Monetary Policy and Market Conditions - The Bank of Japan is in a difficult position, needing to balance interest rate normalization with the risk of further economic suppression and currency depreciation [5] - As of May 10, the Bank of Japan's total assets decreased by 3.6% year-on-year, indicating tightening liquidity conditions [5][7] Bond Market and Liquidity Issues - Japan's bond market is experiencing significant sell-offs due to tariff impacts and quantitative tightening, leading to liquidity pressures [7] - The auction for 20-year government bonds on May 20 was the worst since 2012, with a bid-to-cover ratio dropping to 2.5 times, reflecting market concerns [7] Overall Market Outlook - Japan's economy is under pressure from weak consumption and tariff impacts, with the potential for significant risks in the stock market [8] - Investors may consider using micro Nikkei 225 index futures to hedge against these risks in the current economic climate [8]