The Week In Hindsight; 30 June 2014

Last week’s manufacturing numbers pre-empted a number of positive developments for Chinese investors, as further policy revisions by the PBOC and fiscal data from the National Audit Office boosted sentiment toward local shares for the week.

The main policy announcement saw the PBOC further reduce the deposit/loan ratio for a wider range of banks as part of an effort to increase lending to the real economy and support growth.

Shortly after, data released by the National Audit Office indicated that growth in local government borrowing has recently begun to slow. The news follows a period of harsh rhetoric and policy campaigns, from the regulators and central government, directed at instilling greater prudence and fiscal responsibility into provincial governments.

Given that a large amount of leverage in China’s financial system, and consequently – risk, is attributable to local authority governments and other forms of state backed institution; the news will have came as a welcome relief to economy watchers.

Going forward, the main event for the week is once again manufacturing numbers. Tuesday morning sees June figures from the HSBC Final Manufacturing PMI follow closely after the same numbers from the Chinese Federation of  Logistics and Purchasing’s benchmark of the industry.

Current forecasts see both gauges remaining largely flat against their previous levels, within expansion territory, which is positive for the CNY equity outlook over the days ahead. However, both benchmarks have surprised to the downside repeatedly this year and as a result, could also disappoint again.

Should any notable underperformance in the above benchmarks occur then Chinese equity markets could become dislodged from their upward trajectory. This is while any at or above expectations readings will likely drive the SSE index higher for the week.  

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