Shanghai Composite Index Edges Higher On Positive PMI Data

The Shanghai Composite rose 3.48 points today, or 0.11 percent, to reach a closing level of 3,195.91 for the day. The Index is up – 0.33 percent over the past five trading days, and 3.37 percent over the past month, though it’s lost 0.83 percent over the past 3 months. Year to date, the index has gained 2.97 percent and it’s up 6.94 percent over the trailing twelve months.

The Shenzhen board gained 0.40 percent, recovering from a 0.2 percent loss in the morning.

Other Asia markets were mixed today, with the Nikkei up 0.11 percent, and the South Korean Kospi trading up 0.11 as well. The Taiex, representing Taiwan stocks, gained 0.17 percent, and Singapore’s Straits Times Index slipped 0.09 percent for the day. Australian shares, represented by the S&P/ASX 200 Index, fell 0.65 percent.

Winners & Losers

Xi’an Qujiang Cultural Tourism topped today’s market winners in Shanghai, with a gain of 10.01 percent, the only ten-popper on the day. Right behind it were Xinjiang Bayi Iron & Steel, up 9.92 percent, Maanshan Iron & Steel, up 9.89 percent, and Join In (Holding) Company, which gained 8.93 percent today. Other notables included Shanghai Chlor-Alkali Chemical Co., up 7.76 percent and Tongwei Co., which gained 7.35 percent.

Today’s losers included Sanan Optoelectronics Co., down 6.14 percent, Angel Yeast Co., which sank 5.83 percent, and Baida Group, which fell 5.19 percent.

The Chinese Economy

The big economic news in China was today’s release of the Caixin Purchasing Managers Index for the month of June, which came in at 50.4 – in expansionary territory and reversing last months’ slight contraction, when the Caixin PMI read 49.6 for May. The June reading was the highest of the last three months, and handily beat the market expectation of 49.5.

The PMI was buoyed by a big increase in new orders, and prices were higher for both inputs and outputs though inflation appears to have cooled off slightly compared to the beginning of the year.

The Caixin PMI numbers confirmed last Friday’s official National Bureau of Statistics PMI readings, which came in at 51.7 for June, also improving compared to May’s 51.2 level.

The NBS numbers are weighted towards large caps, industrials and state-owned enterprises, while the Caixin PMI sample captures more small and mid-sized Chinese companies as well as more service and technology. The NBS PMI has been in expansionary territory for the 11th month in a row.

That said, manufacturers are reducing inventories and beginning to streamline their workforces again, predicting leaner times ahead. Sentiment is at its lowest ebb so far this year.

A new direct bond-trading link between mainland China and Hong Kong opened up today, as well – a development that could bring in an additional inflow of up to $250 billion, estimates Ping An Asset Management.

China’s Politics & Policy

The China Securities Regulatory Commission is cracking down harder on market irregularities and violations, handing out 149 percent more fines this year so far compared to the first half last year. The CSRC reports having dealt with 24 instances of insider trading, 14 cases of market manipulation and 24 cases of failure to disclose. “Supervision and law enforcement apply to all fields, all links of businesses, and all market players. There is no blind spot in the net of justice, and for criminals, there is nowhere to hide,” the CSRC said in a statement.

MSCI has agreed to include Chinese equities in its popular emerging markets index product, but the company still has concerns about the Chinese market and accessibility to foreign investors. Official restrictions on capital repatriation and a significant number of trading suspensions are causes of concern for investors seeking to access China’s $7 trillion stock market according to MSCI Managing Director Chia Chin Ping.

Chinese Real Estate

Look for China real estate to continue to cook off as capital curbs in dozens of cities nationwide continue to bite. Fitch Ratings is predicting that capital restrictions and an overall tighter market for credit will take the air out of the China property market as we move into the second half of the year. Prices in tier one cities are expected to hold up better than prices in smaller cities and inland, which have weaker demand and higher inventories.

Chinese home prices have stalled relative to last year: Prices gained 3.6 percent over the first five months of 2017, compared to 2016’s gains of 28.7 percent. The volume of deals is down significantly as well.

China’s Economic Outlook

China stocks have benefitted from a nice tailwind of rising oil prices in recent days. Asia stocks generally correlate well with rising oil prices. We may see the tailwind turn to a headwind as a report from earlier today indicates that Libya has substantially increased oil production, which could weigh on oil prices.

BlackRock analysts have a positive view of Chinese equity prospects in the medium term, however, pointing to a number of productive reforms and progress the central government has made in addressing long term structural problems in the Chinese economy. “The result has been a “virtuous feedback loop”: An improving global economy provides leeway for reforms and structural improvements, which raises economic expectations and ultimately real growth potential in China. Already we’ve seen increased earnings in the manufacturing sector, and overall consumer confidence is up,” writes Martin Small of the BlackRock Blog for Business Insider.

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.