Shanghai Composite Index Ekes Out Small Gain as Global Growth Prospects Improve

Shanghai stocks were slightly higher today, gaining 5.92 points, or 0.18 percent to close at 3,282.92 on relatively heavy volume of 321 million shares. The Index managed to buck the overall trend in Asia, which sent most markets lower as investors fretted over oil prices and a pending referendum in Italy.

Chinese investors were also taking some profits after euphoria over the pending opening of the Shenzhen-Hong Kong trading connection wore off. The Shenzhen Composite Index fell 0.8 percent to 2,110.36, while the ChiNext fell 0.3 percent to close at 2,160.35.

The Nikkei Stock Average fell 0.27 percent, with financial and electronics shares paving the way down. The Australian S&P/ASX 200 fell 0.13 percent and the Hang Seng Index, representing Hong Kong stocks, fell 0.41 percent. The Singapore Straits Times Index gained 0.16 and the Korean Kospi was essentially flat, gaining just 0.01 percent today.

Overall, the Shanghai Composite Index has gained 5.14 percent over the last month and 6.77 percent over the last three months on a strengthening economy and hopes that a Trump Administration will lead to fiscal stimulus and increased trade. Year to date the Index is underwater by 7.24 percent, and down by 5.02 percent over the past year.

SSEC Winners & Losers

Henan Oriental Silver Star Investment Co. led the Shanghai Exchange higher, gaining 9.91 percent in Tuesday’s action. Sichuan Road & Bridge Co. rose 8.96 percent, Inner Mongolia Yili Industrial Group gained 8.59 percent, Guangzhou Development Group was up 7.48 percent, Qinghai Spring Medicinal Resources Technology Co. was up 6.6 percent and Fujian Dongbai (Group) Co. gained 6.54 percent. Beijing Bashi Media Co. gained 5.87 percent and the SAIC Motor Corp. gained 5.18 percent.

Chinese shipbuilding and railway companies marked gains today:

China Shipbuilding Industry gained 4 percent, China Railway Group gained 4.1 percent, and China Communications Construction gained 1.8 percent. China CSSC Holdings gained 2.6 percent and CSSC Offshore And Marine Engineering Group gained 1.9 percent.

Today’s losers included Shanghai Broadband Technology, which fell 9.97 percent, Shanghai Lingang Holdings, down 9.96 percent, Anhui Expressway, down 9.78 percent, Shanghai SMI Holding Co., down 9.7 percent, Shanghai Chinafortune, down 8.05 percent, Tibet Summit Industry Co., down 7.87 percent and Xinjiang Urban Construction (Group) Co., down 7.73 percent. Shanxi Antai Group Co. fell 7.72 percent, Yunnan Wenshan Electric Power Co. fell 7.48 percent and Shanghai Young Sun Investment Co. fell 7.21 percent.

Chinese Economics

The Peoples’ Bank of China injected cash into the economy over the weekend – 40 billion yuan’s worth (US$5.78 billion) in response to tight liquidity thanks to seasonal demands for funds, as well as weakness in the yuan.

This injection of liquidity follows last week’s much more substantial infusion of 425 billion yuan, reports Reuters.

Moody’s has expressed confidence in China’s property market – not projecting any major growth, but saying disaster in China’s frothy real estate market is unlikely in the next year. The ratings company projects a flat year for 2017 property markets, in the wake of data showing marked cooling in China’s overheating real estate markets.

Real estate and related industries accounted for nearly 20 per cent of gross domestic product in the first three quarters of this year, according to BOCI Securities estimates.

China’s Politics & Policy

Beijing is getting weary of capital fleeing the country to escape a falling yuan (and an oppressive communist, authoritarian one-party state, for that matter), and is responding the way authoritarians always do: By tightening controls on Chinese companies and restricting their ability to invest capital outside the country, reports Reuters.

Sources are telling the wire service that the State Council will shortly announce a number of measures tightening regulatory oversight of companies trying to purchase or build assets outside of Mainland China, including “strict controls” on any foreign acquisition worth $10 billion or more. The proposed measures would also include restrictions on state-owned companies that want to make overseas property investments over $1 billion.

The regulatory changes will also affect investments in overseas-listed companies that are less than 10 percent of total equity of the targeted firms, direct investments made by limited partnerships and any Chinese capital seeking to participate in the delisting of overseas-listed Chinese Companies, according to reporting by the Wall Street Journal.

In a welcome move, however, the State Council also announced that it would be working with state agencies to increase protection of private property rights, reported Reuters. This is becoming a contentious issue as most home sales in China are technically leases – the homeowner effectively purchases the right to use the land for a period of time, and many such homes are now nearing the end of their lease agreements.

Per Reuters:

“The guidelines call for equal treatment under the law for all property holders, and for fair and clear laws when land or homes are requisitioned. Limits on compensation for violating intellectual copyright laws should be increased, including allowing for punitive damages, the guidelines said. Research should be conducted into a system to extend rights to residential property when the initial period granted expires, in order to foster expectations that property rights will be respected long term, according to the guidelines.”

Chinese Dealmaking

China Evergrande is increasing its investment in Chinese homebuilding giant China Vanke to 14 percent of its equity, having spent over 12 billion yuan to buy A shares over the last few days, reports the South China Morning. China Vanke shares slipped 0.83 percent on Tuesday to 26.16 yuan on the Shenzhen exchange, while its Hong Kong-listed shares closed at HK$23.40, down 0.64 per cent.

Meanwhile, Chongqing Casin Enterprise Group has been trying to buy a 49.5 percent stake in the Chicago Stock Exchange. It now looks like that deal has hit a regulatory snag in China, as Beijing tightens capital controls on money invested outside of Mainland China.

China’s Economic Outlook

The Chinese economy continues to stabilize and our assessment of downside risk continues to fall for the time being. No doubt, it is times like this where caution is most justified! However, a healthy skepticism of one’s own market-timing acumen is always a good thing.

However, we’re not alone in this assessment (another dangerous thing, of course) – the Organization for Economic Cooperation and Development has estimated that global growth will improve from 2.9 percent this year to 3.3 percent in 2017, and reach 3.6 percent in 2018, buoyed by stimulus in the U.S. as a Trump administration seeks to spend on infrastructure, while cutting corporate taxes. The Paris organization expects growth rates in the U.S. to improve from 2.1 percent today to 2.3 percent in 2017 and 3.0 percent in 2018, pushing U.S. unemployment down from 4.9 percent this year to 4.5 percent in 2018.

This may weigh heavily on bonds, as central banks work to contain inflationary pressures and grant some needed relief to savers by increasing interest rates. But it may provide a nice tailwind for equities in China and elsewhere in the developing world.

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.