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MQ Research: The state of China’s economy

MQ Research: The state of China’s economy
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Macquarie Equities Research (MQ Research) has issued a report, highlighting the major macro drivers for China. In the report, MQ Research covers the price of iron ore, a good barometer of China’s economy as well as the support that the Chinese property market and the US Fed has on the H-share market.

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Macro backdrop turning more volatile: China’s economy in 2017 has been quite different from that in 2014-16. While it exhibited a one-way movement in the past three years (down in 2014-15 and up in 2016), it has become more volatile this year. For instance, iron ore price, a good barometer of China’s economy, jumped 20% in Jan and Feb, slumped 40% in the next three months, then surged 30% again. Unsurprisingly, the client enquiries MQ Research received recently concentrate on the upside risks. However, with such a macro backdrop, investors should be cautious in extrapolating the existing trend, and trading opportunities often arise when markets run ahead of fundamentals. Regarding where we are in the cycle, MQ Research believes that the rebound since June is a short-lived one amid a broad slowdown. The recovery has already peaked in 1Q17 even though the pace of deceleration could vary from time to time.

That said, two macro pillars of the market remain supportive for now: The H-share market has been supported by two macro pillars: China property and the Fed. On the domestic side, the stronger-than-expected housing market not only made property stocks the best performer in MSCI China in July and year-to-date, but also drove the performance for materials and consumer discretionary such as auto and home appliances. On the external side, the Fed has been accommodative as it seems confused by the soft CPI inflation numbers. Abundant liquidity has fueled the rally in tech stocks in the US market, which has led to a rerating of China tech names. At this moment, these two pillars remain constructive. While the housing market in tier1/2 cities is cooling, that in tier 3/4 cities still runs steady. Meanwhile, the next FOMC meeting is 7 weeks away on Sep 19-20. Looking ahead, cooling of China’s property market and a tightening of the Fed policy are the two major risks for the market. And these two could happen together.

Eased liquidity concerns supportive to risky assets in mainland: Regarding Onshore China, liquidity has been the single most important driver. The correlation among stocks, bonds and commodities have risen to new highs this year, as they are all driven by liquidity considerations. Meanwhile, H-shares, which are driven by global instead of domestic liquidity, have vastly outperformed A-shares. Moreover, in the A-share market, liquidity concerns lowered the risk appetite and caused large caps to outperform small caps. That said, such concerns have eased since June and stocks, bonds and commodities have rebounded together. Looking ahead, we expect liquidity conditions to improve modestly in 2H17 vs. 1H17, as policy makers have to be more careful in tightening in the run-up to the Party Congress. However, they would not ease too much either given the current state of the economy. In addition, the National Financial Work Conference shows that top leaders have a more sobering understanding on the limitation of financial reforms.

Exposure to the China market via ACHIN50 warrants
Yesterday, the price of the iShare FTSE A50 China Index ETF (ACHIN50) fell 1.3% to HKD13.26, breaking its 4-day winning streak. Investors looking to gain exposure to movements in the China markets may consider the warrants over the ACHIN50 listed by Macquarie. The underlying, ACHIN50, is designed to track the performance of the 50 largest A-share companies listed on Shanghai and Shenzhen stock exchange, as measured by the FTSE China A50 Index.

SOURCE: Macquarie Equity Research

 

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