The Shanghai Composite Index fell 45.95 points to 3,176.46 today, for a decline of 1.43 percent in a difficult day for China bulls. At one point, the Shanghai Composite Index was down by nearly 2.5 percent, and the Shenzhen Composite had fallen by over three percent, before buyers stepped in to stabilize the markets. The ChiNext board was hammered in early trading, with the Nasdaq-like bourse down nearly five percent at one point before recovering. The decline came despite a stronger-than-expected GDP growth rate, which came in at 6.9 percent for the second quarter, compared to year-ago numbers. The consensus estimate was for a 6.8 percent growth figure.
Today’s losses on the Shanghai exchange were the most in seven months, with small-cap shares taking it on the chin. The index is now down by 1.42 percent over the past three months, but still 2.35 percent in the black for the year-to-date, and up 4.37 percent over the past year.
Other Asia markets fared better today, with the Hong Kong Hang Seng Index gaining 0.31 percent, the Nikkei 225 up 0.09 percent and Taiwanese stocks, represented by the Taiwan TSEC 50 Index, up 0.13 percent.
Winners & Losers
The list of 10-percent max losers looks like a scene from “Gone With The Wind” today: Nanjing Panda Electronics, Arcplus Group, Sichuan Tuopai Shede Wine Co. Shanghai Tongda Venture Capital, Jiangsu Sopo Chemical Co., Shanghai Zhongyida Co., Changchun Yidong Clutch Co., Tianjin Global Magnetic Card Co., Shanghai Fenghwa Group And China National Software & Service Co. all fell by over 10 percent before market officials halted trading in those shares.
Beijing Wandong Medical Technology Co. fell by the 10 percent limit, as did Jiangsu Yuyue Supply Co., on news that Chairman Wu Guangming is facing investigation for insider trading.
The big winner today was Baotou Huazi Industry Co., which rose 9.92 percent in today’s trading. Inner Mongolia Eerduosi Resources Co. and China Railway Tielong Container Logistics Co., Ltd., was also up 4.33 percent, and the aluminum Corporation of China had 3.21 percent gains in the can.
China reported robust retail sales, up 11.0 percent in June compared to a year ago, and handily besting the analyst consensus estimate of 10.6 percent. Unemployment figures likewise improved, with 7.35 million new urban jobs created over the first half of the year, up 180,000 compared to the year-ago period. That’s 66.8 percent of the government’s official job creation target of 11 million new jobs for the entire calendar year. Moreover, the unemployment rate in 31 major Chinese cities remains below 5 percent, thanks to improvements in the service sector and upgrades and renewed profits in manufacturing.
Industrial output expanded strongly over the first six months of 2017, according to information from the National Bureau of Statistics. Industrial production growth was up to 7.6 percent compared to 6.5 percent for April and May, while overall value-added industrial output was up 6.9 percent on a year-over-year basis. The gains were led by the high-tech and equipment manufacturing sectors, which sported year-over-year gains of 13.1 percent and 11.5 percent over the first half of 2017, respectively.
Even new home sales showed strength, despite a massive effort to curb capital flowing into real estate over the past nine months. However, it was low-to-middle tier properties attracting the buyers, and the overall property market remains weak.
Fitch Ratings maintained an A+ rating on Chinese debt, with a stable outlook on Friday. “This time a year ago, things were a bit dicey with concerns about a growth slowdown and pressure on capital outflows and the currency, but as we expected in the lead-up to party congress, stability has reigned,” said Stephen Schwartz, head of the Asia-Pacific sovereign ratings desk at Fitch in an interview with CNBC. “Growth momentum has stayed pretty high and the authorities have really tamped down the pressures on the capital outflow.”
Chinese Politics and Policy
Policy matters weighed heavily on Chinese investor sentiment today, as the higher-than-expected GDP numbers give additional cover to Beijing officials who appear to intend to exert greater centralized control over the economy. In a major economic work conference that took place over the weekend, President Xi Jinping emphasized that the top priority for Chinese economic planners at this point was to reduce financial risks. Xi’s presence at the meeting, normally overseen by the Premier, now Li Keqiang, lent additional weight to the bearish reading.
The President indicated that the People’s Bank of China would take a more central role in diffusing financial risks.
Meanwhile, the chief Chinese stock market regulator gave a green light to nine new IPOs, the second consecutive week of 9 new public offerings. Excessive IPOs are seen to siphon money away from more seasoned investments, aside from the general bearish conclusion one might normally draw in any market from too many founders seeking to unload their shares on an unsuspecting public at the same time.
While the stronger-than-expected GDP growth provides top-cover for those wanting to take a more hawkish approach to monetary policy and efforts to deleverage, we consider the massive selling that caused so many companies to lose 10 percent or more of their value to be an overreaction. While some companies desperately needed a haircut, the overall news for the Chinese economy is good. The market is reacting to the best bunch of bad news any economy could ask for: Things are going well, and companies and government have an opportunity to deleverage.
Deleveraging tends to be bearish, from an econometric perspective, so risk-averse indexers may want to lighten their exposure. But stock-pickers should have a field day looking for bargains among stocks that were unjustly pummeled by news of solid economic growth.