Chinese equities lower

It would be tempting to pin the decline in Chinese equities today on economic data miss. However, it is good to bear in mind that Wednesday’s pullback came after the Shanghai Composite rebounded a cumulative 7.2%, during the past three sessions.

Chinese national flag on a ferry crossing the Chang Jiang river in Wuhan, China
Source: Bloomberg

On a year-to-date basis urban fixed asset investment slowed to the weakest pace in over 14 years in April, at 12.0% year-on-year. The market was looking for 13.5%.

If going by recent reactions to weak data, the rally in Chinese markets should be given new fuel as the market will view any signs of economic weakness as fodder for more stimulus measures.

The CSI 300 fell 0.6% while we see a deeper decrease in the A50 at -1.4%. Naturally, the negative sentiment was transmitted to the Hong Kong stock exchange where the Hang Seng Index slid 0.6%, dragged by a 0.8% decline in H-shares.

The Chinese stock market is perhaps more volatile than other more established markets because retail traders massively outweigh institutional investors. Retail investors account for 80% of the trading volume. Most of these investors do not have insight into economic impact or earnings growth. If the share price goes up, they will follow.

It is of little wonder that the Chinese securities regulator is focusing on taming the impact of stock speculation by tightening margin trading. Outstanding margin debt in Chinese equities has more than quadrupled over the past year to CNY 1.9 trillion.

This is equivalent to almost 9% of the free-float market capitalisation in China, compared to 2.5% in the US and 1% for Australia.

Shanghai-Shenzhen disconnect

Interestingly, disconnect between the Shanghai Composite (SHCOMP) and the Shenzhen Composite (SZCOMP) is appearing. While the SHCOMP fell 0.6% today, the SZCOMP went in the opposite direction, gaining 0.8%.

Much of this disparity is hinged on the establishment of the Shenzhen-Hong Kong Stock Connect. Investors expect this trading link to provide a shot in the arm for equities listed on the Shenzhen Stock Exchange.

This expectation helps drive the stronger performance in SZCOMP, which surged over 70% on a year-to-date basis, doubling that for SHCOMP. Charles Li, the CEO of HKEx said that the financial system for the launch of the new trading link with the Shenzhen Stock Exchange will be ready in July, but he was also quick to add that the central government will have the final say on when the link will begin

Asian markets mostly firmer

Apart from Chinese equities, markets in Asia traded mostly higher as the bond market seemed to have stabilised.

In addition, the ECB’s decision not to tighten the terms of Emergency Liquidity Assistance (ELA) for Greece and raise the cap on funding to €80 billion helped sentiments. However, liquidity remains a big issue for Greece and risks of a debt default will continue to pressure European markets.

Major bourses in Europe showed a recovery in early hours despite a lower-than-expected Germany Q1 GDP growth. A German 10-year bond auction due at 0930GMT, will be of interest given the recent volatility in the bond markets.

Ahead of the US trade, we are calling US indices firmer – DJIA 18135 +67; SPX 2107 +8. April retail sales will be the main release in the US session.

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