Shanghai Composite Index Reaches 1-Month High as Yuan Strengthens

The Shanghai SE Composite rose 42 points for a gain of 1.4 percent today, reaching a closing figure of 3,083.88 on volume of 182 million shares. The index started higher and kept going up throughout the day, hitting a one-month high at the closing bell.

Shares were up throughout Asia today, thanks to reduced expectations for an interest rate hike in the U.S. as the American industrial production data release was weak and well below expectations. Asia currencies, and the yuan in particular, had been under severe pressure as expectations of monetary tightening in the U.S. had been boosting the dollar and pushing down other currencies.

Yesterday, the big news wasn’t on the A-share side, where we normally concentrate our attention but on the dollar-denominated B-share side, which fell over 6 percent yesterday on yuan depreciation concerns.

The B-Shares recovered some of yesterday’s losses today, gaining 2.6 percent. The B-share price gains were aided by a strengthening yuan, as the People’s Bank of China boosted the daily mid-point rate to 6.7303 yuan to the dollar. – an increase of 76 basis points from yesterday’s peg.

Hong Kong led Asia markets higher, with the Hang Seng posting a gain of 1.55 percent. The Australian S&P/ASX was up 0.41 percent, the Korean Kospi was up 0.63 percent, and the Nikkei Stock Average gained 0.38 percent.

SSEC Winners and Losers

Industrial shares dominated the market today in China, as engineering, construction and industrial production shares surged.

Gem-Year Industrial gained 10.05 percent in today’s trading, hitting the maximum allowable movement on the Shanghai Stock Exchange. They make nuts, bolts and fasteners, including railway fastener systems. Lathe manufacturer Qinghai Huading Industrial Co., Ltd. was also up by 10.03 percent, China Railway Erju Co. gained 10.03, Sanlian Commercial Co, a household appliance retailer also topped the 10 percent threshold, as did Shanghai Xingtonglian Packaging Co and Shanghai Golden Bridge InfoTech. China Railway Group gained 8.5 percent, China Communications Construction gained 7.3 percent, and China Railway Construction also gained 5.8 percent.

Macau resort and casino stocks did well today, with MGM China Holdings up 3.4 percent, Wynn Macau up 4 percent and Sands China gaining 0.89 percent.

China State Construction Engineering Corporation was up 2.76 percent, CITIC Securities gained 2.53 percent, China Pacific Insurance Group gained 2.34 percent and Wuliangye Yibin was up 1.77 percent.

Losers included Duzhe Publishing and Media Co., which lost 9.17 percent in today’s trading, P2P Financial Information Service Co., Ltd. which was down 4.62 percent at the end of the day, and newspaper printing company Zhongmin Energy was down 4.24 percent at market close.

Earnings News

China Life, the Chinese insurance giant, has issued a nasty profit warning, letting investors know it anticipates posting a 60 percent year-over-year drop in net earnings over the first three quarters of the year. That would drive earnings per share from 1.2 yuan down to 0.48 yuan. The news comes after China Life posted a profit decline of 67 percent over the first half of the year. China Life gained 1.47 percent for the day, but the profit warning came out after the close of trading, so expect the stock to take a hit tomorrow.

Chinese Economics

The International Monetary Fund is again sounding the alarm on Chinese economic prospects. An IMF working paper held that credit growth in China has been very rapid by global standards, and the company lacks a comprehensive strategy to deal with the debt overhang – now topping $18 trillion.

The IMF says that risks of a banking crisis were mounting, and that Beijing should act soon before the problem turns systemic.

“Just cleaning up the banks by moving bad loans off bank balance sheet and recapitalizing the banks, or allowing companies to go bankrupt without recapitalizing banks would not revitalize economic activity,” wrote the paper’s authors – a position we have held all year.

Nevertheless, China’s new yuan lending has been surging, according to the People’s Bank of China, which reported that Chinese banks lent out 1.22 trillion yuan ($183.3 billion) in new loans in the month of September – handily beating expectations and setting a new three month high.

China’s Politics & Policy

China’s central government has directed some 51 enterprises to establish a $1.8 billion fund to invest in the country’s poorest regions – a fine thing for the Chinese people, but not a fine thing for investors: If this were the optimal use of investors’ capital, we presume Beijing wouldn’t have to tell them to do it.

China’s cabinet also announced a new fund to invest in hydropower and mineral projects in China’s poorest areas.

The former vice president of the China’s Supreme People’s Court (SPC), Xi Xiaoming, has been indicted for graft, as has a former vice governor of Jilin Province, Gu Chunli, reports official Chinese news agency Xinhua. Few indictments in China at this level result in acquittals.

Chinese Dealmaking

Honda is betting on a continued Chinese expansion, according to Reuters, which is reporting that two people familiar with the matter say that the carmaker is planning to open a new factory in China to start production in 2019.

China’s Economic Outlook

Yesterday we posted we believe the split between A and B-shares was potentially exploitable. That’s still the case, though the window has narrowed somewhat with today’s B-share gains. Stay tuned for the Chinese GDP reports.

Donald is a strategist for He specializes in a fundamental approach while informing traders of relevant economic data. Actively trading since university, Donald trades indices and commodities. He earned his Bachelor's in Finance from Baruch College's Zicklin School of Business in New York City.