Shanghai Composite Index Posts 1% Decline, But Green Industry and Rural Areas Show Promise

The Shanghai Composite Index fell 32.89 points today to close at 3,250.03 points for a loss of 1 percent as oil prices slipped to a two week low. Trading volume today was 244 million shares.

Shanghai shares, which had dodged a rough day in Asian markets yesterday, bucked a positive trend in the region today, as the Nikkei closed roughly flat at +0.01 percent but the Hang Seng Index and the Korean Kospi closed up 0.23 percent and 0.26 percent, respectively. Australian shares fell 0.31 percent.

Shanghai’s rough day came despite a positive day on Wall Street, with all three major U.S. indexes in the green after Tuesday’s trading yesterday, thanks in part to a positive announcement from the U.S. Commerce Department that the U.S. GDP grew at a seasonally-adjusted annual rate of 3.2 percent in the third quarter – the best showing in two years.

Chinese metal producers were hit as exchange officials clamped down on overheating speculation, sending Wuhan Iron & Steel down by 1.72 percent.

Winners & Losers

Winners on the Shanghai Stock Exchange today were led by Shanghai Broadband Technology and Guizhou Wire Rope Co., which both gained the maximum allowable 10 percent for the day. China United Network Communications was up 8.78 percent, Qinghai Spring Medicinal Resources Technology Co. gained 6.57 percent, Chongqing Three Gorges Water Conservancy & Electric Power Co. was up 5.88 percent, and Changchungjinkai (Group) Co. rose 5.27 percent.

Today’s biggest losers were Shaanxi Baoguang Vacuum Electronic Apparatus Co., which fell 9.29 percent, Yunnan Chihong Zinc & Germanium Co. fell 8.07 percent, Shanghai No. 1 Pharmacy Co. Ltd. A was down 7.31 percent, Taiyuan Chemical Industry Co. slipped 6.21 percent and Shanghai Lingang Holdings declined 6.08 percent.

China’s Economy

Looking for economic growth in the Chinese economy? Consider green stocks – that is, the rapidly expanding Chinese environmental protection and energy savings technology and services industry. The National Development and Reform Commission has released a projection that the Chinese green industry will expand from 4.5 trillion yuan last year to more than 10 trillion yuan by 2020, expanding from 2.1 percent to 3 percent of Mainland China’s gross domestic product.

Total investment in pollution prevention is expected to reach 8-10 trillion yuan over the 2016-2020 period, according to analysts with Everbright Securities. Spending stood at 4.3 trillion yuan over the previous five years, amounting to 1.45 percent of GDP, according to a Reuters report.

The Organization for Economic Cooperation and Development projects that China’s economy will expand at a 6.7 percent clip this year, but that rate of growth will slow next year to 6.4 percent, and to 6.1 percent in 2018.

Chi Fulin, president of the China Institute for Reform and Development, said the messages in the OECD report were quite positive and China’s continuing economic restructuring would also benefit from the upside projections of the global economy and advanced countries.

“There is no problem for China to keep its target of an average rate of 6.5 percent of economic growth during the 2016-2020 period. Plus, China has much untapped potential to maintain a medium and high rate, given such a populous and mature market,” said Chi, a leading policy adviser for the government to editors of official Chinese English-language news outlet China Daily.

China’s government has announced a goal of achieving a 6.5 percent annualized rate of growth between 2016 and 2020 in pursuit of its objective of doubling per capita income by 2020 compared to 2010 levels. The OECD also projected Japanese growth of 1 percent in 2017 and 0.8 percent in 2018. The Japanese don’t seem to be buying much growth with their negative interest rates.

“The global economy has the prospect of modestly higher growth, after five years of disappointingly weak outcomes,” OECD Secretary-General Angel Gurria said, while launching the report in Paris. “In light of the current context of low interest rates, policymakers have a unique window of opportunity to make more active use of fiscal levers to boost growth and reduce inequality without compromising debt levels. We urge them to do so.”

Beware of inflated housing valuations. China’s Academy of Social Sciences has identified inflated real estate assessments as a prominent source of risk in Mainland China housing markets, with Shenzhen, Xiamen and Shanghai at the top of the list for riskiest markets.

China’s Politics & Policy

Officials in Beijing are now encouraging Chinese in rural areas to explore innovation and entrepreneurship, reports the Shanghai Daily. The State Council has released a document stating the government will use policy to encourage college graduates, retired military, technicians, scientists and even migrant laborers to start up businesses to boost rural economic development in central and western China and other underdeveloped areas.

The government will also encourage family farms, co-ops and online businesses. Potential policy measures include supporting financial services in these areas, boosting fiscal support, providing classes and training in entrepreneurship, and strengthening the social safety net, according to the released document.

Chinese Economic Outlook

This last development mentioned would be a terrific development if Beijing follows through, as it would result in a rapid expansion of the Chinese consumer in rural parts of the country, where there is still a great deal of room for expansion and economic growth left untapped. This is a much better indicator in our view than a simple increase in fiscal stimulus because it taps into the power of millions of Chinese people and seeks to unleash it in economic activity and ultimately wealthbuilding.

Later today we will receive the results of the National Bureau of Statistics Manufacturing and Non-Manufacturing PMI as well as the Caixin Manufacturing PMI. The consensus manufacturing numbers are below the previous month’s numbers for both the NBS and Caixin PMIs. Given recent momentum in economic activity, including the stronger than expected earnings numbers reported recently by industrials, suspect the numbers will be better than projected, but stay tuned.

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.