Shanghai Composite Index: China GDP Hits Target, but Problems Persist

The Shanghai Composite eked out a gain of a fraction of a single point today, clawing 0.03 percent upwards to a closing level of 3,084.72 on volume of 182.47 million shares.

Year to date, the Shanghai Composite has netted investors negative 12.84 percent, and has lost 7.03 percent over the trailing twelve months.

Shares around Asia were mixed today with the Australian ASX All Ordinaries Index gaining 0.48 percent, the Nikkei 225 gaining 0.21 percent and the Taiwan TSEC 50 up 0.67 points.

The Mumbai Sensex was down by 0.24 percent, and Hong Kong’s Hang Seng Index was down by 0.38 percent.

Chinese Economics

China’s National Bureau of Statistics reported a steady growth rate of 6.7 percent for the third quarter, which puts the official economic numbers on pace to meet the full year economic growth target set by the Beijing central government of between 6 and 7 percent.

Analyst attribute the healthy official top line growth numbers to increased fiscal stimulus through government spending, bank lending at a record high and a crazy property market, which now represents about 15 percent of the Chinese gross domestic product. We are not terribly excited about that growth level and structure, though, for reasons we set forth below in the ‘Outlook’ section.

Exports and private investment numbers remain dismal, however. Yes, private investment growth ratcheted up to 4.5 percent in September, but that was only after falling to record lows over the summer. And it is still woefully behind the investment numbers by the state-owned firms, who are investing with taxpayers’ money, not their own.

China’s debt now amounts to more than 250 percent of its GDP – even at these growth rates – and the Bank for International Settlements is warning of a banking crisis in China within the next three years, reports Reuters.

Industrial output slipped to 6.1 percent growth, surprising analysts who expected growth of 6.4 percent.

There were some other bright spots in the economy, though, according to the new economic data release: Chinese authorities have been trying to find ways to boost domestic consumption for years. Consumption represented 71 percent of GDP over the first three quarters of the year, compared to 66 percent for the same period a year ago. Retail sales were also up healthily year-over-year, gaining 10.7 percent for the month of September, though some portion of that is displaced sales from 2017 and beyond as consumers race to take advantage of tax subsidies in the automobile industry that expire at year-end.

Meanwhile, Chinese companies are doing everything they can to get their own investment portfolios the heck away from China: Overseas direct investment (ODI) has skyrocketed 53.7 percent over the last 9 months, according to official Chinese news agency Xinhua, as Chinese investors looked for growth opportunities and to hedge themselves away from the renminbi, though part of that figure represented investment in the Belt and Road Initiative.

At any rate, Chinese companies completed 521 overseas merger and acquisition projects during the first three quarters of 2016, in deals worth $US67.44 billion, easily beating the number for all of last year.

Speaking of acquisitions, China Life’s purchase of Starwood Hotels is a go.

SSEC Winners & Losers

Today’s big winners on the Shanghai Exchange include CECEP Wind Power Corporation, Hebei Jinniu Chemical Industry Co., Citic Guoan Wine Co, Fujian Longxi Bearing Group Co., Guizhou Guihang Automotive Components Co., Changhchun Yidon Clutch Co and Shanghai Golden Bridge InfoTech Co., which all gained the maximum 10 percent allowed under Shanghai Stock Exchange rules. Qinghai Huading Industrial Co. also gained 9.99 percent for the day.

The day’s biggest losers on the Shanghai Exchange were Guangzhou Yuetai Group Co. a real estate development company, down 4.81 percent for the day, Xiamen Overseas Chinese Electronic Co., down 4.42 percent, Kama Co., an engine development company, down 4.15 percent, the Shanghai Lingyun Curtain Wall Science and Technology Co., down 4.09 percent and Shanghai Huili Building Materials Co., which was down 4 percent, even.

China’s Economic Outlook

While we believe Chinese equities – ex property developers – will likely benefit from a migration of capital out of the real estate sector in the short run, (and the Chinese government is trying to engineer precisely that), the Chinese economy is perched precariously on an unsound foundation. China is now relying on deficit spending, lending and a property market the government is trying to pop for its economic growth prospects. Meanwhile exports and investment – which should be two of the support beams of a Chinese economy that’s not built on a house of cards – are still sluggish at best, and by some measures falling like rocks.

Meanwhile, the economy is chipping away even at the foundations of the property market: Investment growth was up 7.8 percent in September, and property sales were up 34 percent, but new construction starts were down 19.4 percent as the construction and development firms themselves read the tea leaves in Beijing.

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.