Chinese Economic Update – 20 October 2014

Chinese markets close lower after volatile week – follows 20% gain over five months

Chinese markets closed marginally lower this week after a volatile five days of trading as Chinese investors caught up with events across the rest of the globe.

The week’s price action follows a five month period which has seen the SSE Index gain 20.4% as investors positioned themselves for an influx of capital during October, when a second trial of the eagerly awaited mutual access agreement between mainland China and Hong Kong markets comes into play.

Key to the decline in CNY equities for the week was under performance of US retail sales numbers for the month of September. The dismal figures were released on Wednesday afternoon, prompting a sell off across developed markets which later sent the SSE Index into a tail spin at the opening of Asia trading.

The downward leg also came close on the heels of a sharp fall in Chinese inflation, which plummeted from 2% down to 1.6% in a straight line during September.

Considering the proximity of the release date for Chinese Q3 GDP data (tomorrow morning), the week’s US and CNY data prompted concerns among investors that the world’s two largest economies had run aground upon the same shaky patch of ground as the euro-zone economies.

Nevertheless, and despite the apparent air of doom and gloom, global equities managed to pare some losses by the close of the week. As such, the SSE index closed a mere four points lower while US and UK markets also closed the gap by a similar measure.

Looking ahead, the key event for global equities this week will be the release of Chinese Q3 GDP data which is due at 03.00 am tomorrow morning (London time). Official projections suggest a deceleration from 7.5% to 7.2% for the quarter.

Should this forecast arrive to be reliable then investors could once again begin to panic about the global growth outlook although, should the National Bureau of Statistics projection prove overly pessimistic it would not be for the first time this year.

While we continue to believe that Chinese shares should remain supported by government moves toward liberalisation, we acknowledge that they are not immune to any deterioration in the global economic environment.

As a result, we caution that a further knock to investor confidence in developed markets could prove to be the catalyst for a correction in CNY indices.

The attached link contains an overview by international law firm Baker McKenzie, detailing the implications for investors of the mutual access agreement. Click here.

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