While the Chinese stockmarkets notched up their strongest daily gains since early August on Friday, it was a one day wonder and couldn’t help them to erase the losses of another week of miserable trading.
The rebound happened more for the words of support about the health of markets, the economy and for investors from Chinese authorities, from the head of the central bank to the head of the securities industry regulator and senior ministers who are becoming worried the continuing sell-off is reaching worrying levels.
Investors used these confidence-boosting words to support their move back into the markets and enabled them to ignore weaker than expected third-quarter GDP and other economic data.
China reported third-quarter GDP rose at an annual rate of 6.5%, lower than the 6.6% forecast and the 6.7% in the second quarter. It was China’s weakest quarterly growth figure since the depths of the 2008-09 GFC but because of the stronger growth in the first half, the government remains on track to exceed its full-year growth target of 6.5% in 2018.
Despite that the Shanghai Composite jumped 2.6% for its strongest day since August 7, while the Shenzhen Composite also ended up 2.6%, representing its best session since August 9.
Both indexes were down solidly to start Friday’s session but rebounded strongly as news of the statements from the various officials and the government spread.
But as strong as Friday’s gains were the Shanghai market lost 2.2%, falling for a second week in a row and is now down 9.6% so far in October (it was 11.2% at the end of Thursday’s session). As big as the fall is, it is nowhere near the 23% plunge over January 2016.
The Shenzhen market lost 2.5% for its third weekly loss in a row and is looking at a monthly slump of 12.3%.
Chinese Vice Premier Liu said in an interview with the state-run Xinhua News Agency that the government values a healthy stock market, and financial regulators have recently announced new reform measures.
He said China attaches importance to the health of its stock market and said U.S.-China trade clashes were affecting sentiment. “Frankly, the psychological impact is bigger than the actual impact,” he claimed.
Liu’s comments follow those from People’s Bank of China governor and banking and securities regulators, who all called on investors to maintain their composure. Guo Shuqing, the banking and insurance chief, said recent “abnormal fluctuations” in Chinese stock markets don’t reflect the country’s economic fundamentals and “stable financial system,” Chinese media reported on Friday.
Third quarter growth was dragged down by the weakest factory output since February 2016 in September as automobile makers cut production by over 10 percent amid a sales slowdown – but that doesn’t include steel which is booming, along with aluminum.
On a quarterly basis, GDP growth slowed 1.6% from a revised 1.7% in the second quarter (1.8% originally reported), in line with forecasts for 1.6% growth.
Separate data released on Friday showed China’s factory output growth weakened to 5.8% in September from a year earlier, missing forecasts while fixed-asset investment expanded at a slightly faster-than-expected 5.4% in the first nine months of the year. These gains those are at multi-year lows and that’s reflected in weakening producer price pressures in recent months.
Infrastructure investment rose 3.3% year-on-year for Jan-Sep, slower than 4.2% growth in the first eight months of the year.
Retail sales rose 9.2% in September from a year earlier, bouncing back after several months of weak growth. Consumer price inflation rose to an annual rate of 2.5% in September thanks to rising prices for food (not pork) and energy.
Importantly, second-quarter sequential growth was revised down from the previously reported 1.8 percent, suggesting the economy carried over less momentum into the second half than many analysts had expected.
While US President Donald Trump has imposed tariffs on more than half of all Chinese exports to the US, the largest tranche was imposed in late September, with the next escalation not expected until January. “There hasn’t been any real impact from the trade war yet,” said Andrew Polk at Trivium, a Beijing-based consultancy, the Financial Times reported.
Chinese exports have also been supported by the booming US economy and a weakening renminbi, which has fallen 10% against the dollar since April (and remember the Aussie dollar is down around 8% against the greenback in 2018 – in both cases it is the strength of the US dollar that is driving its value higher)
But analysts now expect Chinese growth to weaken in the current quarter and into 2019 as exports slow (because importers, such as US retailers had brought forward their orders for the Thanksgiving-Christmas Black Friday shopping seasons and into 2019 so as to beat the start of the new tariff regimes).
The Chinese government has been moving to boost activity through relaxing controls on pollution in the coming northern winter (which will not hit steel and other polluting industries as hard as previously thought), more spending plans have been announced and in the 4th move of its kind this year, China’s central bank lowered the amount of reserves that Chinese banks are required to keep on deposit, freeing up more than $100 billion in additional financing.
The Financial Times also reported that “Local governments have also been encouraged to issue more bonds to fund growth-boosting infrastructure projects, countering some of the effects of a long-running crackdown on the off-balance sheet vehicles they previously used to raise funds.”
Seeing that has been the biggest crackdown this year on high debt financing operations in China, it’s a sign of how worried the central government and communist party must be about the state of the economy and its outlook.
