Monday was not a good day for the China A50 and Hang Seng futures as they both closed sharply lower. The China A50 futures posted the biggest drop for the month, tumbling 1,225 points (-12.2%) to close at 8,815 points while the Hang Seng futures also plunged, down 1,360 points (-6.1%) to close at 21,128 points, extending its 7-day losing streak.
Macquarie Equities Research released a research note on Monday (24 August 2015), summarizing major macro news from the previous week. Read the excerpts from the report below…
 

• A brutal week driven by China fears: Last week A-shares slumped 12% while H-shares dropped down 8%. China was at the centre of the global market turmoil, as the disappointing Flash Purchasing Manufacturing Index (PMI) and the earlier RMB depreciation stoked hard landing fears. With slumping stock prices, many investors expected a Reserve Requirement Ratio (RRR) cut by the People Bank of China over the weekend, which did not happen. Instead, on Sunday (Aug 23), the State Council approved that China’s pension fund (RMB3.5tn) could invest in the stock market with total stock investment capped at 30% of its net assets.

• Take a grain of salt on August’s Flash PMI: Global market was hit heavily last Friday by the disappointing August Caixin Flash PMI, which dropped to 47.1, the lowest reading since March 2009. It is not the first time for the China Flash PMI, compiled by Markit, to stir the global financial market. However, its track record suggests that the Flash PMI tends to lag, instead of lead, the important turning points of the Chinese economy, such as September 2012 and July 2013. Meanwhile, the PMI is subject to seasonal adjustment, which is tricky to do. Just this February, the Flash PMI sent a questionably positive signal on China’s economy, which MER pointed out immediately back then. In any case, the over-interpretation of a single data point reflects the very weak sentiment in the global financial market at this moment. That is why few talks about the MNI China sentiment indicator released last Thursday, which rose to a one-year high in August. MER suggests investors not to read too much into any of them.

• The fear on China hard landing is overdone: Despite the market turbulence, MER remains comfortable with its call in 2H outlook that China’s economy would have a U-shaped recovery from 2Q15 to 4Q15 (GDP: 7.0%, 6.8% and 7.2% in yoy terms). In MER’s view, policy makers are serious about defending the 7% GDP growth target for this year. As such, they could ramp up policy supports, particularly funding supply to major investment projects. Meanwhile, with strong property sales since 2Q15, MER also expects some modest improvement in property investment from 4Q15. In Dec, policy makers might adjust next year’s target even lower, probably to 6.5%.

• More on China’s hard landing risks: Without doubt, China is more prone to hard landing risks compared with five years ago. During this period, China’s total GDP rose from 40% of the US’s to over 60%. China’s GDP per capita increased by 80% and labour wages could rise even more than that. The RMB has appreciated 30% against a basket of currencies. The property sector, which was described as “Dubai times 1000” back then, has added another 70mn units of new home supply. That said, MER reckons that it is still premature to say that policy makers have run out of ammunition. Rather, the key China risk for MER is not a cyclical hard landing, but a long-term structural slowdown. Old growth engines such as exports, property and low-end manufacturing have almost run out of steam. To be sure, infrastructure investment could still grow 20% this and next year. But the total size of China’s infrastructure investment this year might exceed US$2tn, or roughly the whole India economy. So it would slow down sooner or later. To sustain a 4-5% long-term growth rate, China needs to find new growth engines, which requires completely different capital/labour markets and has to be driven by the private sector. In other words, China’s past growth model needs a great overhaul, which is difficult both economically and politically to do.

Source: Macquarie Research - 25 Aug 2015