Shanghai Composite Index Drops 0.79 Percent But 2016 Growth On Target

The Shanghai Composite Index dropped 24.92 points today, or 0.79 percent in midweek trading to close at 3,136.75 on volume of 178 million shares. The Index rallied to an early high of 3,167 before sliding most of the rest of the day. Wednesday’s low came at the closing bell. The Shenzhen Composite Index also fell by 1.05 percent and the Nasdaq-style ChiNext fell 0.72 percent. Today’s performance took the 5-day trailing return of the Shanghai Composite Index into negative territory – down 0.7 percent over the period. It is still up 6.35 percent over the trailing 12-months and ahead 1.07 percent year to date.

Chinese markets were defying a bullish trend in Asia today, as most other indexes closed higher. The Korean Kospi gained 1.47 percent to lead Asian markets higher, while the Nikkei 225 gained 0.33 percent. The Australian S&P/ASX 200 gained 0.19 percent and the Hong Kong Hang Seng Index gained 0.84 percent.

SSEC Winners & Losers

Henan Ancai Hi-Tech Co., Ltd., gained 10.03 percent, and Hubei Yangfan Holding Co. Ltd. gained 10.01 percent – topping the daily limit on gains that results in exchange officials halting trading for the day. Beijing Vantone Real Estate also gained 5.72 percent, Zhonghang Heibao Co. gained 4.99 percent, Minmetals Development Co. ironed out a gain of 4.69 percent, Zhuzhou Qiangjin Pharmaceutical Co. popped up 4.26 percent, Fangda Special Steel Technology forged a gain of 4.08 percent, and Guizhou Wire Rope Co. gained 3.93 percent.

Nobody lost 10 percent today, but Anhui Expressway Co. ran into a 9.97 percent pothole. Tianjin Tianhai Investment Co. lost 9.90 percent, and China United Network Communications lost 8.48 percent. Linhai Co. fell 7.63 percent, Tianjin Tianhai Investment Co. Ltd. B shares slipped 7.19 percent, and Geo-Jade Petroleum Corp. fell 7.11 percent. Shen Ma Industry Co. fell 6.81 percent and SDIC Zhonglu Fruit Juice Co. fell 6.57 percent.

Chinese Economy

China’s top economic planner is projecting an overall economic growth rate of 6.7 percent in 2016 – well within the 6.5 to 7 percent target set by Chinese policymakers early this year. Xu Shaoshi, director of the National Development and Reform Commission, cited an International Monetary Fund Report that concluded China is expected to be the biggest engine of global growth, contributing 1.2 percentage points, or over 30 percent, of all the economic growth in the world in 2016. In contrast, the United States is expected to contribute 0.3 percentage points of total global economic growth.

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Over the first three quarters of 2016, China’s service sector accounted for 52.8 percent of value-added industrial output, an edge of 13.3 percentage points over secondary industry. Consumption growth accounted for 71 percent of the economic expansion, an increase of 13 percentage points over the year-ago period.

The 5.5 percent year-over-year increase in the Chinese Producer Price Index also indicated demand heating up.

Chinese state-owned automaker FAW Group reported wholesale vehicle deliveries of 3.106 million last year – a new record and better than 2015’s numbers by 9.2 percent, with an active year of nine new product launches.

Last year’s vehicle sales growth saw the biggest annual gains since 2013, but analysts expect the Chinese auto industry boom to run out of gas this year. According to the China Passenger Car Association, dealers moved 23.9 million units last year for a 15.9 percent year-over-year gain. But the Secretary General of the CPCA, Cui Dongshu, says that was mostly because of a 50 percent tax cut on cars with engines 1.6 liters or smaller, and because of the popularity of SUVs, which saw sales increases of 43.6 percent year-over-year in 2016.

The 50 percent tax cut shrinks to 25 percent this year, but that’s still enough to force customers to pay 5,000 yuan ($710) extra for a typical car around the 200,000 yuan price point.

Passenger car sales are expected to rise, but much more moderately in 2017, and likely around 7.2 percent, per the China Auto Industry Report, a publication of Swiss firm UBS.

Forex reserves declined for the sixth consecutive month, to US$3.01 trillion in December, a decline from $US3.05 trillion in November and $US3.12 trillion as of the end of October, indicating China has been selling foreign currency in order to buy yuan to support the exchange rate. China has been piling up foreign currency reserves for years through substantial trade surpluses, and reached a peak of $US3.99 trillion in 2014.

While reserves have been slipping, and may well soon fall below the $US3 trillion mark, that’s just a psychological barrier. Forex reserves are still more than adequate to fend off foreign threats, and the decline in Forex reserves is also a natural consequence of China opening its markets to foreigners.

China’s Politics & Policy

China is raising the anti-dumping tax on U.S. distillers dried grains following a year-long investigation. The tax will consist of an anti-dumping tax of 42.2 to 53.7 percent anti-dumping tax and an 11.2 to 12 percent anti-subsidy tax over the next five years. That’s a big increase from the 33.8 percent anti-dumping tax and 10 to 10.7 percent anti-subsidy tax in place since September. The move could provoke retaliation from the incoming Trump administration, which has been hawkish on matters of international trade. And the matter could be a bargaining chip in future trade negotiations.

Chinese Currency Overview

The People’s Bank of China set the central parity rate of the yuan lower against the dollar by one basis point, to 6.9235 on Wednesday. Traders in Mainland China are allowed to trade dollars and yuan within 2 percent of the central parity point, though offshore traders are free to set their own rates.

China’s Economic Outlook

All eyes are on tomorrow’s scheduled release for new yuan loans and outstanding yuan growth, as well as the M2 Money Supply and total social financing. We are also due to get the vehicle sales report year-over-year for December. Later, we’ll see the import and export figures from December and year-over-year.

Then Friday we will see the Foreign Domestic Investment reports.

All indications are for continued economic growth in 2017, though at an increasingly moderate pace as the economy gradually decelerates to a more sustainable rate of expansion. A hard landing does not appear to be in the cards at this point, though we are mindful of high debt levels throughout the Chinese corporate world.

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Donald is a strategist for economiccalendar.com. 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.