Shanghai Composite Index Climb on Strong Manufacturing Data

The Shanghai Composite Index gained 23.27 points today, to close at 3,273.31, for a gain of 0.72 percent on volume of 237 million shares.

Stocks were up all over Asia on a surprise announcement that the Organization of Petroleum Exporting Countries (OPEC) reached a deal to cut back on production by about 1 percent. The region’s biggest gainer today was the Nikkei Stock Average, which added 1.12 percent for the day, outstripping their January 4th high and closing at 18,513.12. The Australian S&P/ASX 200 also closed higher, gaining 1.10 percent, while the Singapore Straits Times rose 0.81 percent and the Hong Kong Hang Seng Index gained 0.39 percent.

Energy-related shares did well on the news.

Chinese Economics

China had some good news on the manufacturing front yesterday evening, with the announcement that the official manufacturing Purchasing Managers Index rose from 51.2 in October to 51.2. That’s the fourth consecutive month the manufacturing PMI has remained in expansionary territory, and handily trounced a median forecast among 10 economists polled by the Wall Street Journal of 51.0.

The new orders subindex also climbed from 52.8 to 53.2, and the production subindex likewise strengthened from 53.3 to 53.9.

The nonmanufacturing PMI numbers announced yesterday were strong, too, with the official PMI rising from 54.0 last month to 54.7 in October.

SSEC Winners & Losers

The biggest gainers today included Panda Financial Holding Corp., Nanning Department Store Co. and Guizhou Wire Rope Co., which each gained 10 percent in today’s trading. Hangxiao Steel Structure gained 9.89 percent, China United Network Communications was up 9.57 percent, China Sports Industry Group rose 7.92 percent, Anhui Leimingkehua Co., was up 7.77 percent, Beijing Capital Development Co. rose 6.96 percent, Yinchuan Xinhua Commercial (Group) was up 6.55 percent and Changchun Sinoenergy Corp gained 6.38 percent. ENN Ecological Holdings rose 6.10 percent, Luenmei Quantum Co. rose 5.87 percent, and Geo-Jade Petroleum Corp. rose 5.6 percent.

The biggest loser today was CEC Corecast Corp, which lost 10.26 percent today. Giti Tire Corp. went flat at -4.99 percent, shares in Atlantic China Welding Consumables cooled off by 4.32 percent, and Hangzhou Tian-Mu-Shan Pharmaceutical Enterprise Co. shares were a downer, losing 3.60 percent.

China’s Politics

With the economy strengthening, Beijing is looking for revenue, and has begun soaking the rich to do it. China is slapping luxury cars with an extra 10 percent surtax on any models costing US$188,852 (1.3 million yuan). The tax will affect top-end models from BMW, Daimler AG, Audi, Aston-Martin and Rolls-Royce.

Car execs shrugged off the news, saying wealthy Chinese already spending that much on a luxury car would not be deterred by another 10 percent tax.

President Xi Jinping has been discouraging flaunting wealth over the last few years, and has cracked down on Communist government officials, humble servants of the people drawn from the ranks of the proletariat, owning super-expensive luxury automobiles. He’s also been trying to roll back ostentatious consumption among officials, exhorting them to travel “without pomp,” don’t take on too many staff and not to take too many holidays in a general crackdown on “extravagance, hedonism and bureaucratism.” The government issued a series of new rules on Wednesday, limiting holidays, and announcing that the extravagant expenditures of relatives and employees should be “strictly constrained.”

Chinese Dealmaking

Baoshan Iron and Steel Group (Baosteel) and Wuhan Iron and Steel are married now and picking out drapes. They formally completed their merger with a ceremony in Shanghai today, with the new entity claiming the title of China’s biggest steelmaker, Baowu Steel Group, with $106 billion in assets and 228,000 employees.

China has been encouraging mergers and acquisitions in its steel industry, as it hopes to put 60 percent of steel production capacity in the top 10 firms in the country by 2025, while reducing the footprint of state-owned enterprises. Look for more consolidation activity and acquisitions over the next year. If you like small manufacturing stocks, now may be a good time to look at potential acquisition targets in China.

McDonald’s stores in China are up for sale – and it looks like the front runner among bidders is a consortium led by Carlyle Group and Citic Group Corp., as reports say they are nearing a $3 billion deal to purchase them.

Chinese Currency Overview

November has been the worst month for U.S. treasuries since 2009, but that means rising yields for new buyers. The higher interest rates on U.S. government securities have been attracting capital from all over the world – including from China. The resulting outflows have driven the yuan to new 8-year lows, and prompted restrictions on capital migration from Beijing. Further, the People’s Bank of China has now set a cap on overseas lending in order to slow down the currency’s depreciation against the dollar. Remittances by China-domiciled companies will now be capped at 30 percent of equity, the PBOC announced today.

Traders say the downward pressure on the renminbi will continue, though the pace of the yuan’s decline against the dollar may slow as we head into 2017.

China’s Economic Outlook

Asian shares should benefit from the continued bull market in the U.S. and Europe, which has been raging since Donald Trump won the U.S. Presidential election on November 5th.

A strengthening economy makes the Chinese burden situation easier to bear and should give authorities more freedom of action to cut deficits, increase taxes and unload state interest in SOEs at a favorable price.

The environment is favorable for a move up to the 3,400 or 3,500 level, though we would suggest some profit taking as the Shanghai Composite approaches its 52-week high of 3,685 as the Index has found resistance near that figure in late 2015.

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.