Chinese markets fall on weaker data

KEY DEVELOPMENTS

Last week the Shanghai Composite Index fell below the critical psychological 3,000 level for the first time since November last year, down 3.3%, while the retail-oriented Shenzhen Composite Index extended its decline and finished down 5.0%. Chinese markets continued weaker today with Shanghai and Shenzhen down 1.5% and 1.9% respectively. Mixed data from the real economy and weak corporate earnings are the main reasons, along with the slow-motion property market collapse, with no further cuts anticipated in official interest rates.

China provided a vision of an economic corridor spanning the Eurasian continent and linking China and West Asia to Europe, with the yuan challenging the US dollar, at its Belt and Road Initiative (BRI) summit last week. China will increasingly focus on funding local debt issues, offloading over two hundred billion dollars of US Treasuries since March 2022 and being the largest seller this year.

GLOBAL IMPACT

The yuan continues to struggle as foreign investors shun Chinese investment and financial assets. Contrary to this trend, Chinese investors are emerging as significant sellers of US Treasuries and will increasingly be buyers of rising domestic debt.

As China re-orientates toward domestic interests, or at least works more closely with its BRI counterparts, it will remove the provision of import goods and capital support for the US and Europe.

MARKETS

• Chinese stock markets fell sharply last week, with the Shenzhen and Shanghai exchanges down 5.0% and 3.3%, respectively last week.
• The offshore yuan trended down last week, down 0.2%, at one point touching $/CNH 7.34. The yuan ended the week at $/CNH 7.3274, closing 7% lower in the year-to-date

The Shanghai Stock Exchange and index represent large, state-owned companies responsible for China's economic growth, with institutional investors holding the most significant stakes. The Shenzhen stock exchange is a smaller exchange and index, representing smaller growth-oriented stocks, and is favored by retail investors.

KEY EVENTS

Official rates unchanged

• China’s Central Bank kept the benchmark lending rate unchanged at the end of last week, as expected, at 3.45% for the 1-year Loan Prime Rate (LPR) and 4.2% for 5-year LPR
• Policymakers are letting previous stimulus measures play out, with economic data suggesting some signs of positive momentum: consumption excluding property remains strong, factory activity is gaining momentum, and the labor market is stabilizing
• China only needs a 4.4% growth in the last quarter to achieve its 5% growth target for the full year

Chinese tech stocks expected to report weaker Q3 earnings

• China’s corporate earnings are expected to fall by 12.7% year-on-year, according to HSBC investment analysts
• Alibaba Group, the bell-weather e-commerce giant, is forecast to grow revenue by 10% in Q3, slowing from 14% growth in the previous quarter
• Tech company JD. com’s sales barely grew 1%, even with a 10 billion yuan ($1.37 billion) discount offered to prompt sales

China’s BRI summit aims to compete with the US, Europe

• China’s top diplomat Wang Yi said that China saw the summit as an opportunity to form a broader international consensus and promote economic and financial developments
• Infrastructure is a significant goal. China and Russia will work with other BRI member countries to build logistic projects, including railways and roads
• China hopes BRI-related logistic infrastructures and economic connectivity could increase its trade in goods and services to more than $32 trillion and $5 trillion, respectively, in the next five years
• China also announced expanded financing support for BRI projects. The China Development Bank and the Export-Import Bank of China will each set up a 350 billion yuan ($48.75 billion) fund, with an additional 80 billion yuan ($11 billion) added to the Silk Road Fund
• Analysts believe that wealthy Middle Eastern countries will provide substantial funds, increasing the Chinese yuan’s influence in the global financial system
• The summit discussed cooperation in science and technology between BRI nations, promoting China’s cutting-edge technologies and competing with the US and Europe

China continues to cut US Treasury holding

• According to US Treasury Department data, China continued to cut its holdings in the US Treasury in August. China is the second largest foreign owner of US debt after Japan
• China offloaded $16.4 billion of US debt certificates in August, leading to its total holding hitting the lowest since 2009
• China has been the largest seller of the US Treasury, offloading $207.8 billion since March 2022 – this trend is likely to continue if China-US tensions escalate
• Japan, the largest foreign holder of the US Treasury debt, increased holding by $3.7 billion in the same period to a total of $1.16 trillion as of August

Q3 GDP beat expectations

• China’s Q3 GDP rose 4.9% year-on-year, beating market expectations, which ranged from 4.0% to 4.4%
• Q4 GDP growth of 4.4% would be enough to achieve the official annual growth target of 5%
• Investment in infrastructures grew 8.5% year-on-year, down from 8.8% in the first eight months of the year
• Fixed-asset investment combining properties and infrastructures rose just 3.1% year-on-year
• The property sector continues to be a significant economic drag, with investment in real estate falling 9.1% year-on-year in the first three quarters

Weak September property sales, despite government support

• Property sales and values extended their decline in September: sales were down 4.6% year-on-year in September, after 3.6% last month; prices fell 7.5% year-on-year, after 7.1% last month
• Unsold new houses in September were up 19.7% year-on-year, slightly down from 19% last month
• Cash-strapped house developers are increasingly financially strained, with many on the brink of default

Surprisingly strong September retail sales

• Retail sales for September rose by 5.5%, above the 4.9% expected and higher than the 4.6% growth in August
• Holiday spending and last year's low base will likely support this upbeat momentum

Jobs market improves

• The urban jobless rate fell from 5.2% in August to 5.0% in September, with more robust domestic consumption adding jobs service sector jobs
• A steady recovery in manufacturing also helped to get workers back into factories

Strong electricity consumption points to economic recovery

• Electricity consumption in China rose 9.9% year-on-year in September, a strong rebound from 3.9 % in August.
• This was the second most robust monthly increase this year, following the highest growth of 11% in February when pent-up demand supported a strong rebound after the Covid-19 reopening
• The service sector saw faster electricity growth of 10.1% year-on-year, while electricity use in manufacturing increased moderately at 5.5% year-on-year in the first three quarters

S&P points to capital problems for regional banks

• S&P Global Ratings estimates China’s small regional banks could suffer a capital shortfall of 2.2 trillion yuan ($301 billion) from a deepening local government debt crisis
• Local governments' revenue from land sales sharply cut by nearly 20% this year, leading to growing concerns over their ability to repay debts, and we are seeing default reports from a few local governments
• Small regional banks are closely connected to Chinese local government funding vehicles (LGFVs) – the authorities would step in to save smaller banks from default, assuming their debts

Disappointing Chinese loan growth rises

• Loan growth data was disappointing, as the market anticipated much stronger credit expansion from enterprises following China’s easing monetary policy of interest rate cut and bank reserve ratio reduction
• China’s new yuan loans were 2.31 trillion yuan ($316 billion) in September, less than the market expectation of 2.5 trillion yuan ($342 billion) but a significant increase from 1.36 trillion yuan ($187 billion) in August
• Medium- to long-term loans to enterprises, a measure of business confidence, nearly doubled from 644 billion yuan ($88 billion) in August to 1.25 trillion yuan ($171 billion) in September – but this was 7% lower than 1.35 trillion yuan ($185 billion) last year\
• Medium- to long-term loans to households, a leading measure of newly increased home loans, surged to 547 billion yuan ($75 billion) from 160 billion yuan ($22 billion) a month prior, and 58.28% higher than 346 billion yuan ($ 47 billion) last year
• This is a positive signal that property-targeting measures were encouraging house buying.
• The government issued 995 billion yuan ($136 billion) bonds in September, 80% up from last year, making it the second highest of this year, following a record-high level of 1.18 trillion ($161 billion) seen in August