You may have noticed that Chinese stocks have experienced a bumpy ride over the last couple of months. At the heart of the turbulence: concerns about whether the government can successfully engineer a soft landing for the world’s second-largest economy, with a market capitalization that accounts for around 20% of broad emerging markets.* Ultimately, we think there are more positives than negatives here.
The HSBC flash PMI figure – a key economic indicator that measures private sector performance data across manufacturing, construction, retail and service sectors — released in late November disappointed the markets, and last week’s official PMI reading of 50.2 confirmed a still expanding, but softening economy. (The PMI, or Purchasing Managers Index, measures manufacturing activity and is a widely watched economic growth indicator; anything over 50 points to expansion, anything under 50 to contraction.) Property prices also declined this fall, albeit at a slower pace than they had been. Finally, the highly anticipated launch in mid-November of Shanghai-Hong Kong Stock Connect, linking the two stock markets, was underwhelming (although adoption is likely to grow over time).
In response, policymakers took bold steps to bolster China’s GDP, using a range of levers. Last month, the People’s Bank of China cut interest rates for the first time in two years and only the third time since 2001. Combined with a $113 billion commitment to infrastructure and a reduction in reserve ratio for banks lending to small business, these measures should help support both the economy and China-related assets.
After shedding over 3% in the wake of the mediocre data, the MSCI China Index rose sharply for the remainder of November to finish the month up 1.57%. This positive performance helped offset weakness in other emerging market countries, as Brazil sold-off following its election and Russia slumped amid declining oil prices. The MSCI Emerging Market IMI Index slid -1.12% in November.