The Week In Hindsight – 09 June 2014

Data released on Monday showed the Chinese trade surplus surging to its highest level since 2009 during May, driven by a 1.6% contraction in imports over the month. The numbers prompted further concern among policy makers and economic observers over the near term path of Chinese consumption and the likely consequences for overall growth in 2014.

The numbers came a short time ahead of the PBOC’s announcement of details relating to a cut of the deposit reserve ratio for a wide range of Chinese financial institutions. The watered down stimulus is believed to have resulted from shifting sentiment toward the economy among policy makers at last week’s State Council meeting.

As a precursor to the measures, the nation’s Premier Li Keqiang spoke of the need for central bankers and politicians to be more creative in their support for the economy.

“Our government won’t use strong stimulus. We must be creative in economic policy should we want healthy economic development. Our policies must be more precise, selective and better targeted” – Li Keqiang

Following the announcement, orders from Chinese investors and traders sent the SSE index surging by 1% before a later pullback led the benchmark to give back most of its gains in time for the afternoon close.

Going forward, the main event for the week is CPI data which is set to emerge during the early hours of Tuesday morning (London time). This is followed on Friday by industrial production numbers for the month of May.

Given the downturn in consumption over the period, the present outlook for May CPI numbers is far from fixed. With recent policy maker statements indicating that there will be no broad scale easing of monetary policy, CNY equities are vulnerable to further downside going into the week as the risk that inflation numbers disappoint is above average. On a worst case scenario basis, the negative effect of any significantly lower than expected reading could also lead to weakness at the open for European markets on Tuesday morning.  

From a bigger picture perspective, the government’s program of structural reforms is now firmly underway following nearly eighteen months of new leadership, however; any tangible benefit in terms of economic stability and growth remains some distance off.

This is while policy makers continue to maintain their stance of opposition to broad based monetary stimulus as a means of supporting economic activity over the short term.  

As a result, we feel that downside risks to growth are likely to persist over the medium term, while the outlook for financial stability remains far from certain. For this reason, we continue to prefer observation from a safe distance over active involvement when it comes to Chinese equities at present.