Shanghai Composite Index: Chinese Equities Slide Despite Asian Gains

The Shanghai Composite Index slipped 5.32 points today, or 0.17 percent, but it’s still over the 3,200 level, closing at 3,212.63 for the day. The benchmark is up 0.52 percent over the past five trading days, and up 2.32 percent for the trailing month. It’s up year-to-date and over the trailing twelve months, too, by 3.51 percent and 7.27 percent, respectively. The Shenzhen Component Index fell by 58.12 points, today, for a loss of 0.55 percent. The Shenzhen has barely broken even over the last five days, though it’s up 3.74 percent over the last month. Year to date the Shenzhen Composite Index is underwater by 3.24 percent, and by 4.78 percent over the past year.

Most of Asia gained ground today after a difficult week last week, thanks to a positive U.S. jobs report, which boosted the outlook for exporters all over Asia, and the Group of 20 meeting was less disruptive to business as usual than some had expected. A strengthening dollar helped push the Nikkei up 0.76 percent, back above the 20,000 mark. The Australian S&P/ASX 200 also closed higher by 0.36 percent, and Hong Kong’s Hang Seng was up by 0.6 percent.

The Taiwan TSEC 50 fell 7.34 percent, but the Mumbai Sensex gained 1.13 percent.

The Chinese stock market has benefited from improved sentiment over the past week as Chines investors expressed their growing optimism for continued economic growth. The State Council released guidelines to commercial pension funds encouraging them to invest in financial markets, which could result in significant inflows.

China’s electronics exporters have come roaring back, showing an annual growth rate of 12.5 percent over the first five months of this year. That’s a huge improvement from the numbers we saw a year ago at this time, which showed a contraction of 3.6 percent.

Integrated circuit makers saw growth of over 25 percent, while growth in electronics manufacturing hit 13.5 percent, an increase of 4.9 percentage points compared to a year ago. Smartphone production was up 7.5 percent year-over-year.

Winners & Losers

Today’s big winners on the Shanghai Composite were Tianjin Tianhai Investment Co. and Shanghai Belling Co., which both topped the maximum ten percent gain for the day before officials halt trading in those shares. The Harbin High-Tech (Group) Co. was right behind, gaining 9.97 percent, and Shanghai Lingang Holdings gained 8.54 percent. Xinjiang Bayi Iron & Steel Co. gained 8.34 percent, Baotou Huazi Industry Co. was up 7.93 percent, Cangzhou Dahua Co. was up 7.81 percent, and Dongfeng Electronic Technology surged 7.28 percent.

Today’s biggest losers were China National Medicines Corp., down 9.43 percent, followed by Huayu Automotive Systems which fell 7.58 percent and Anxin Trust Co., down 5.69 percent.

Chinese Economy

The Chinese Consumer Price Index rose 1.5 percent year-over-year as of the end of June, the same modest pace we saw as of May and the fifth consecutive reading below 2 percent, according to a release from the National Bureau of Statistics. Non-food prices were up 2.2 percent year-over year thanks to increases in medical services, education, transport and housing. But food prices fell by 1.6 percent as egg and pork prices saw declines.

Likewise, the Producer Price Index, measuring the price of goods as they roll out of the factory gate, increased by 5.5 percent year-over-year as of the end of June, again the same rate as it was as of May, and the lowest reading since the end of last year. In the producer side, we say lower prices in petroleum, coal and steel and iron.

The modest data provides enough cover for the People’s Bank of China to continue to pursue a relatively hawkish posture in order to deleverage the debt-saddled Chinese economy.

China’s Politics & Policy

Chinese securities regulators continue to crack down on market manipulation and trading shenanigans. The China Securities Regulatory Commission investigated 140 incidents of possible insider trading over the first six months of 2017, reports Xinhua. 104 of them were preliminary investigations and the remaining 36 were formal investigations. In all, the Commission conducted 302 investigations over the first half of the year, including all different kinds of market manipulation, including insider trading and disclosure failures.

Meanwhile, regulators are implementing stricter listing rules designed to kill off so-called ‘zombie’ companies – companies that keep skirting the edge of mandatory delisting but somehow never manage to disappear thanks to window-dressing of their financial statements or other questionable accounting practices that keep them on the exchanges.

If they are successful in reducing these questionable listings, it could free up more capital to flow into more legitimate listings that are actually creating wealth, and remove distortions in the market. We could feel these effects in the smallcap and micro-cap space, as these are the listings that compete most directly with the zombie market and ‘shell company’ speculation world for scarce capital.

Currency

The yuan strengthened today, thanks to a statement from the State Administration of Foreign Exchange stating they had no intention of devaluing the renminbi. The strengthening on the open market came despite the slight lowering of the daily midpoint from the People’s Bank of China on Monday.

China’s Economic Outlook

The combination of very modest inflation and positive outlook for exporters gives the People’s Bank of China a lot of flexibility, which should be good for Chinese equities – though the heady days of double-digit growth are likely gone for good. We are anticipating China’s economy to grow about 6.8 percent this year, despite continued pressure on pricy property markets thanks to a series of capital curbs imposed at the city and province level.

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.