The release of Chinese Q2 GDP data, which saw growth hold firm at 7.0% y/y for a second straight quarter, failed to provide mainland equity markets with adequate support. Instead both the Shanghai Composite and CSI 300 extended declines for a second day, losing 3% and 3.5% respectively. Investors were right to approach equity markets with renewed caution as recent efforts to stimulate the Chinese economy and reverse mounting deflationary pressures saw a significant spike in volatility.
Mainland stocks, having rallied over 60% since the start of the year, plummeted over 30% throughout June and the first half of this month, only to reverse direction once again and post a double digit rebound higher. However, appetite has been relatively subdued so far this week and we suspect that the tighter margin loan rules implemented by brokers have limited excessive risk taking over fears of an equity bubble.
Putting aside the recent volatility in the equity market it seems that the efforts of central bankers at the People’s Bank of China (PBOC) are finally starting to bear fruit. After an aggressive (and at times surprising) programme of reserve requirement ratio (RRR) and 1-year lending rate cuts in an effort to boost liquidity, key macro data out earlier today points towards emerging fundamental stability.
PBOC moves to stimulate the economy have seen M2 money supply, which has increased exponentially since the mid 90’s, rebound strongly in 2015. After dropping steadily throughout the second half of 2014, as growth fears saw investors park money overseas in safe havens, the recent rate cuts from Beijing have seen M2 money supply push back above 200% of GDP throughout H1 2015. In a market awash with cheaper credit, output was bound to improve and indeed we have seen this in today’s data releases. Retail sales saw growth increase to 10.6% y/y in June while industrial production posted faster growth for the third straight month, coming in at 6.8% y/y in June.
Accordingly, market participants are quietly optimistic that targets set by Beijing for 2015 can be achieved and with global economic conditions steadily improving as the geopolitical risks of Iran’s nuclear programme and Greek contagion fears subside, the potential obstacles standing in the way of global growth are starting to fade.
However, headwinds still prevail with year-to-date fixed assets investment flat at 11.4% y/y in June and a failure of China’s official manufacturing PMI gauge to lift materially above 50.00, posting readings of 50.1, 50.2 and 50.2 for April, May and June respectively, indicative of the cautious approach adopted by many market participants. The China manufacturing PMI New Orders sub index offers further insight into the tentative response to today’s macro data releases with Markit data showing new orders have fallen consistently over the past three months, posting their fastest declines for the year in April.
Chinese crude steel production, a proxy for the nation’s construction activity, dropped 1.3% y/y in H1 and with output expected to fall further in July owing to a sluggish demand outlook the rout which has seen Chinese domestic steel prices hit their lowest levels in more than two decades could extend further. While today’s key data releases suggest the easing measures pushed by policymakers is slowly working, investor sentiment remains subdued and as the economy struggles to gain momentum we could see the PBOC step up stimulative efforts.