The Week In Hindsight, 07 July 2014

Chinese equities continued to rebound from their earlier lows over the last week as both Manufacturing and Non-manufacturing PMI surveys returned numbers which were largely in line with expectations, boosting confidence among both investors and traders.

Once into the new week, Chinese officials reiterated their support for the current economic strategy in their Q2 monetary policy statement. In detail, further stimulus in the form of reserve cuts and direct liquidity injections will be delivered in a steady manner as and when policy makers determine that it is necessary for financial stability.

This is while both the central bank as well as senior government officials remain comfortable with the growth outlook for the economy and continue to see limited downside risks to their baseline scenario that growth will be maintained at 7.5%.

Going forward, the week sees CPI and Trade Balance figures for June released. Official forecasts imply a minor reduction in inflation from 2.5% to 2.4%, while the trade surplus is expected to have pushed further ahead from its five year peak reached in May.

While a contraction in imports was largely responsible for May’s increase; higher exports, driven by a healing global economy, are believed to have driven the projected figure higher for the month of June.

All in all, recent economic data appears to point toward a period of stability for the CNY economy and as a result, CNY equities have recovered from their earlier lows while concerns surrounding the broader economy have began to recede. However, Q2 growth figures due out in the middle of July could potentially undermine this period of calm.

This is as early official forecasts for CNY GDP expect the National Bureau of Statistics to announce that the economy expanded at 7.4% during the second quarter.

Should actual growth come in at or below this level then the Chinese economy will need to undergo a notable acceleration during the second half of the year in order for it to achieve the government’s 7.5% growth target.

This could ultimately bring back to the fore concerns over broader term momentum behind a Chinese economic slowdown which has led many to fear a hard landing, that could potentially disrupt confidence and growth at the global level.