The above-consensus growth numbers reinforced the view that China’s economy is showing stabilisation, which naturally is positive for commodity exporters such as Australia. We saw AUD/USD strengthened towards 0.75. On the other hand, better growth indicated there is less urgency for the government to do more in terms of stimulus support.
As we all know, easing measures translate to more upside for share prices, and lower prospects of more easing moves dampened the appetite for Chinese stocks. There was a fall across the board in the local equity markets. The A50 dropped 0.5%, accompanied by 3.5% in CSI 300. and 5% in ChiNext Index. However, volatility in the Shanghai Composite remained lower compared to last week.
While the Chinese policymakers’ steps to prop up the market appeared to have some effect, with the CSI 300 seeing a 15% rebound in the three sessions through to 13 July, I feel that there could still be downside pressure in the pipes. The rapid run up in Chinese A shares was driven by a surge in margin financing. Despite having corrected significantly since mid-June, outstanding margin debt is still at CNY 1.44 trillion, or about 3.4% of China’s market capitalisation, according to Bloomberg estimates. This is slightly lower than the 3.6% seen on 12 June 2015, before the stock reversal. Furthermore, these estimates did not take into account ‘hidden’ leverage, which are underground lending, or the so-called umbrella trusts. Goldman Sachs estimated that margin financing and hidden leverage amounted between 5.0% and 5.8% of GDP.
The ‘slow’ progress of deleveraging, if you look at it from a proportion of free-float, suggests that we may see a further unwind. With the absolute level of margin debt still at an elevated level, there could be more selling pressure in the A shares. On a related note, a few international asset managers reckon that mainland stocks are still too expensive, which led them to look at Chinese stocks listed outside of China, such as the H Shares. As of 14 July, H shares are trading at a 41% discount to A shares. Furthermore, foreign funds have offloaded Chinese shares through the Shanghai-Hong Kong stock connect over the past seven days, selling $7.1 billion worth of A shares.
Greek vote and Yellen-speak
Meanwhile, market watchers will focus on the Greek parliamentary vote (22:00 Athens time) on the interim bailout agreement as well as Federal Reserve chair Janet Yellen’s address to the Congress later today. European traders are cautiously optimistic, if we look at the positive open in European equity indices. However, there is still an evenly split risk of the deal falling apart, and Greece being forced out of the currency bloc. Across the Atlantic, market will hang on to every word that Janet Yellen say, digging for clues on the timing of the first rate hike. The Fed chairperson said last Friday, 10 July, that she still expects to raise interest rates this year and reiterated that the pace of increases will be gradual. Of note will also be the Fed’s view of the recent global developments – Greece debt crisis, China’s stock market correction, and fresh declines in energy prices. Hints of hawkishness will no doubt boost demand for the greenback.