China A50 support comes from Chinas policy response

In June of this year, China A-shares were officially included in the MSCI Emerging Markets Index for the first time, as noted in this article https://www.cityindex.com.au/market-analysis/china-a-shares-included-in-msci/ While the initial China A-share weighting accounts for less than 1% on the MSCI Emerging Markets Index, it is expected China A-shares will account for 20% of the index by 2030. 

The timing of the MSCI inclusion was perhaps unfortunate, given it coincided with two events which have conspired to drag Chinese stock markets firmly into bear market territory in 2018. The first of course was the escalation of trade tensions between the U.S. and China. The second was the continued deceleration of the Chinese economy highlighted by soft retail sales and Q2 GDP growth at +6.7% back to 2016 levels.

As can be viewed on the chart below, China’s growth has fallen a long way from the heady days of +12% growth achieved early on in 2010. In recent years, Chinese policy makers have stated an aim for a growth number “around +6.5%” with a focus on a higher quality of growth, rather than on an unsustainably high headline number. Of course, growth of +6.5% is still very impressive by global standards. As a guide, only the U.S. out of the major economies will come even close to that number when its GDP number is released this Friday night with the market looking for a number in excess of 4.0% growth yoy.

Moves by Chinese authorities over the past week suggest there is a growing concern that U.S. tariffs on Chinese goods will cause Chinese growth numbers to slip below their target and have introduced measures to fend of stalling growth. These include a combination of more proactive fiscal and financing policies designed to accelerate local government bond issuance and intended to encourage banks' lending and investment in AA-rated bonds. This also confirms a growing sense of urgency as, earlier today the PBOC eased capital requirements to further support bank lending.

In my experience when Chinese authorities implement economic policies to stabilise or boost growth such as the ones mentioned above, they are usually very effective from a medium-term perspective. As President Donald Trump’s deal with the European Commission President Jean-Claude Juncker proved last night a trade war can still be averted.

In view of the above, should the China A50 break up through the band of resistance 12000-12300 it would be a positive development from a technical perspective and confirm that a medium-term low is in place at the July 10822 low. It would also confirm that policy makers response has gained traction and that further upside towards the former highs 13950 area is likely in the medium term. An important criteria, before this can take place is a stabilisation in the USD/CNY exchange rate.

Source Tradingview. The figures stated are as of the 26th of July 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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