The Week In Hindsight, 28 July 2014

Chinese equities closed out their fourth consecutive week of gains on Friday, driven by strong economic numbers and further steps toward liberalising capital markets within the world’s second largest economy.

In detail, the HSBC Flash Manufacturing PMI was revealed to have accelerated from 50.7 to 52.0 during July, representing an 18 month high. This was while overall manufacturing output also increased, with the manufacturing output index rising rapidly to reach a similar high of 16 months.   

Despite the better economic data, last week’s price action was largely driven by developments relating to a mutual access agreement between Shanghai and Hong Kong, which will see investors from both countries able to access segments of the others stock markets for the first time.

This is a particularly positive development for Chinese equities as foreign investors, through Hong Kong brokerage accounts, will for the first time be able to access a modest number of CNY denominated securities under the new agreement.

Consequently Chinese shares in general, but particularly those denominated in the local currency, could experience potentially significant inflows of capital toward the close of the year.

In addition to initial gains in the broader SSE Index the new agreement could also provide international investors, who have the requisite risk appetite, with an attractive alternative to developed market equities and other more junior emerging markets (EM’s).

With many junior EM’s vulnerable to capital flight as developed nations transition toward a rising rate environment, and many developed economies yet to reveal whether growth can return to pre crisis levels in a sustainable manner; it is not difficult to see how the ability to invest directly in Chinese shares would be an attractive proposition to some.

On another positive note for the Chinese economy, the nation’s benchmark SSE Composite Index sprinted higher at the open on Sunday (Monday – CNY) to gain 2.41% for the session, as data emerging from the National Bureau of Statistics revealed that total earnings for industrial firms in China increased by 17.9% during the year ending June 2014.  

In summary; recent data suggests that the Chinese economy has, at least for the time being, stabilised and should avoid a hard landing.

In addition to this, the outlook for CNY equities appears positive over the near term, with a stable economy and structural changes to rules governing capital markets supporting the likelihood of an extended run of positive performance.

While we remain concerned about leverage within the economy, the recent developments are positive for Chinese assets and also hold positive connotations for global investor sentiment over the near term.

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