China

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China

Chinese Equity Market Returns                Q3            LTM

Hong Kong Hang Seng (Offshore)            -2.5%         4.4%

Shanghai Stock Exchange (Mainland)     -0.9%       -15.8%

MSCI China Index                                        -3.9%        1.3%

CSI China Securities 300                            -0.9%       -8.4%

Summary

  • Chinese manufacturers under pressure from trade disputes
  • Services PMI growth suggests domestic pick-up
  • Chinese government injects stimulus
  • Mainland Chinese equity market continues fall

Chinese manufacturers under pressure from trade disputes. The Caixin/Markit Manufacturing PMI for China fell to 50.0 - its lowest level since May 2017 - and is now in neutral after showing expansion for 15 months suggesting Chinese manufacturers are feeling some pain from the ongoing trade tensions with the US. Importantly, the Chinese Services PMI grew at its fastest clip in three months in September suggesting domestic demand is picking-up. The services sector lifted the composite PMI to 52.1 in September from 52.0 in August. The strengthening was largely driven by a jump in retail sales and construction in a sign the government’s fiscal and credit easing is beginning to gain traction. The faster domestic growth is a welcome development for the world’s second-largest economy as it faces rising headwinds from global trade. The services sector, now accounting for over half of China’s economy, grew +7.6%, easily outpacing overall GDP growth of +6.8% in the first half of year.

Chinese government inject stimulus into the economy to avert economic loss from US trade dispute. The IMF stated the Chinese economy may lose 1.6% of GDP should the US and China trade war escalate. In response China's central bank announced 1.0% cut to the amount of reserves that must be held by Chinese banks in an effort to stimulate lending to businesses and spur economic activity. Reserve requirement ratios for large financial institutions are currently 14.5% and 12.5% for small and medium-sized lenders, suggests there is room for further reductions to stimulate domestic demand. Beijing has also pledged to accelerate plans to invest billions in infrastructure projects and cut taxes. Ironically, the Chinese Renminbi has declined c.8% versus US dollar since trade dispute begun in March making Chinese exports more attractive to international buyers, as well as partially offsetting higher tariffs to US buyers. 

Mainland Chinese equity market continued to fall in the third quarter driven by fears around growth and trade. The Shanghai equity market is down -22.3% year-to-date as investors fled Chinese equities as trade tensions escalated. Chinese stocks are currently facing a crisis of confidence and hit a four-year low during the quarter.

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