Chinese Economic Update – 11 August 2014

Chinese equities buck the global trend once again; hold ground gained earlier

Chinese equities held onto their earlier gains last week despite substantial weakness across other global indices.

The downward movement in global indices was largely the result of a build up of Russian troop numbers on the border with Ukraine and confirmed reports that the US had, first ordered, and then carried out air strikes against insurgents in Iraq. Oil, gold and safe haven treasuries were also higher on the week.

The out-performance in Chinese shares came amidst a quiet week for economic data, with just CPI and Trade Balance figures scheduled in the calendar. Both of these pointed toward a Chinese economy that is continuing to stabilise, with CPI inflation remaining at 2.3% and the nation’s trade surplus increasing off of higher exports for the month of July.

In addition to macroeconomic data, the PBOC also contributed toward the week’s price action. Here, the Chinese central bank announced further support for the agricultural sector as well as small and medium sized businesses, with a 12 billion yuan re-discount and re lending facility which is intended to support banks lending to small businesses by improving liquidity.

All in all, the earnings environment remains favourable for many Chinese companies as a result of a strengthening recovery in the US. At the macroeconomic level, policy makers appear to have been able to avert a hard landing of the economy so far.

While we continue to hold concerns over leverage within the domestic financial system, with further defaults in the corporate credit environment likely before the year is out, CNY equities look set to continue their nascent out-performance for the time being.

The current week sees industrial production, fixed asset investment, retail sales and foreign direct investment figures dominate the economic data calendar for the period.

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