Notes from Hong Kong: Signs of China Slowdown

Includes: EWH, FXI, PGJ
by: L. Desjardins

The Chinese PMI figures released on Sunday may again give the jitters to investors. The 51.2 reading is below expectations and shows that China’s manufacturing grew at the slowest pace in 17 months in July, according to Bloomberg. Earlier on Wednesday the People's Bank of China had soothing words for investors. According to the central bank, there is little chance of a “double dip” and interest rates are unlikely to go up in the near future as the inflation rate stabilises.

In the past week, Chinese and Hong Kong stocks have performed well on hopes that the Chinese economy would not slow down much and that the government would relax some rules introduced earlier to cool down the economy. The latest PMI certainly confirms a slowdown and could reassure the optimists that the economy's annual growth is stabilising at its historical level of 8%.

Local shares in Shanghai have been particularly strong in July after a dismal first half. The view from Hong Kong is that Chinese shares “A”, “B” and “H” shares will gradually recover at least until October.

Another source of concern is the quality of Chinese banks' portfolios. As the economy slows and especially as the property sector cools down, bad loans are expected to rise. News last week that China’s banks are facing serious default risks on more than one-fifth of the Rmb7,700bn ($1,135bn) they have lent to local governments across the country have pressured bank stocks. That concerns is partially been addressed through the numerous rise in capital by the Chinese banks.

CSI300 Energy 2.8% 17.4% -28.5%
CSI300 Materials 5.2% 18.3% -24.7%
CSI300 Industrials 3.4% 14.7% -13.5%
CSI300 Cons. Discretionary 2.6% 17.6% -14.5%
CSI300 Cons. Staples 2.2% 12.8% -11.3%
CSI300 Healthcare 4.1% 17.1% 2.3%
CSI300 Financials 1.9% 9.9% -22.8%
CSI300 Technology 4.1% 15.0% 6.1%
CSI300 Telecom 0.4% 10.2% -23.7%
CSI300 Utilities 2.4% 7.9% -15.2%
INDICES 1 week 4 weeks YTD
Hang Seng Index 1.0% 5.6% -3.9%
HS China Enterprises -0.1% 5.8% -6.9%
FTSE/Xinhua A50 1.9% 9.6% -23.1%
CSI 300 2.8% 13.4% -19.4%
EWH 0.7% 7.7% -0.8%
FXI -0.5% 4.7% -4.4%
PGJ 0.5% 7.5% -2.5%

FTSE Xinhua A50 is a market capitalization weighted index comprising the 50 largest “A” (domestic) shares listed in China. In Hong Kong the ETF 2823:HK tracks the index; in the US, FXI tracks a sister index including only the 25 largest mainland companies listed in Hong Kong. The Hang Seng China Enterprises Index covers 40 “H” shares issued by mainland companies listed in Hong Kong. In Hong Kong the ETF 2828:HK tracks the index. The Hang Seng Index currently covers the 43 largest Hong Kong listed companies by capitalization. These HK listed companies include a number of mainland Chinese companies. In Hong Kong the ETF 2800:HK tracks the index. In the US, EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index.

Disclosure: Long St/Xinhua "A" 50