Recent economic data points to further deflationary pressure on China’s economy after exports fell 8.9 percent and the producer price index slid 5.4 percent in July.
The figures compare with a 1.6 percent increase in the consumer price index due to higher pork and vegetable prices.
With expectations growing that the Chinese government will unveil fresh measures to boost economic growth, investors piled into the stock market on both sides of the border.
On Monday, A shares rallied in Shanghai while Hong Kong’s benchmark Hang Seng Index saw some support.
Equity markets and economic cycles are linked in the medium to long term.
But in the short term, economic performance is usually an “excuse” to speculate on the stock market.
Faltering economic growth is forcing Beijing’s hand to cut interest rates and the reserve requirement ratio, weaken the renminbi or widen its trading band.
Beijing is ramping up support for traditional industries and pressing ahead with reform and industrial consolidation.
The move has stabilized A shares, with the Shanghai Composite Index trading between 3,600 and 4,200 points.
Hong Kong investors have been bearish on China’s economy and have been treating H shares as a cash machine.
However, the strong exchange rate for the Hong Kong dollar shows there has been no significant outflow.
Given the trend, short-term investors could bet on some oversold stocks which can benefit from the government’s market rescue measures.
They have been immune from a US correction amid a potential interest rate hike in September by the Federal Reserve.
And with the era of easy money coming to an end, the US market is expected to pick up in the fourth quarter.
Beijing is set to announce further moves to stimulate economic growth and steady the equity market in the next one to two months.
Investors should not be too bearish about A shares if they want to take advantage of these developments.
Also, concerns about a capital outflow may be exaggerated.
Foreign investors have not increased their investment in China by any considerable amount over the past couple of years.
In the third quarter, the stock market is likely to trade sideways amid a mix of good and bad news.
The Hang Seng Index may trade around 23,800 to 25,300 points.
Investors should focus on individual stocks rather than make any sweeping market moves.
The market has given up most of its gains in July and turnover remains sluggish.
The global shipping market is still grappling with excessive supply.
Meanwhile, global trade has been moderating as reflected in China’s latest import and export data.
The trade sector is stuck in a downturn despite an uptick in the Baltic Dry Bulk Index.
A wave of recent mergers in the shipping industry will affect different companies in different ways.
For some, these will help improve efficiency and reduce competition.
Others will benefit to a certain degree in the future under China’s planned “One Belt, One Road” economic corridor.
A number of shipping stocks that have halted trading may outperform in the near term.
Consolidation in the shipping sector took place 18 months after state rail giants China CNR Corp. and CSR Corp. merged into CRRC Corp. (01766.HK).
It takes patience and luck to bet on companies with consolidation potential because it takes time before the hype around these companies dissipates.
Beijing is set to speed up SOE reform given that a large number of steel, coal and agriculture enterprises are grappling with oversupply and huge losses.
Coal, cement, steel, nuclear, export, aerospace and free-trade-zone stocks have recently become attractive.
The government is refocusing on traditional sectors as the new economy has yet to play a bigger role.
Investors should target good stocks in lagging sectors.
This article appeared in the Hong Kong Economic Journal on Aug 11.
Translation by Julie Zhu
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