Investor confidence is at an all-time low in China – Will this be a continuing trend in 2014 and beyond?

Bloomberg News reported on February 03, 2014 that put options trading on one of the largest Chinese exchange-traded funds (ETF), iShares China Large-Cap ETF have been robust, where options trading activities suggesting that puts hedging are currently targeting a potential 10.0 percent move, and it costs 5.8 basis points (bps) more than calls trading targeting at a 10.0 month increase. This is according to a three-month implied volatility data compiled by Bloomberg News.

On a separate note, the official Chinese Purchasing Managers Index (PMI) showed a decline to 50.5 during the month of January 2014, largely unchanged from the consensus estimates, and a decline from the December 2013 figure of 51.4. The 50.0 threshold is signalling a neutral stance. The official Chinese Services PMI is scheduled to be released later during early Asian trading hours (February 03, 2014), and the forecast is calling for a reading of 54.6 for the month of January 2014, down from the reading of 56.0 in December’2013. If the Chinese authorities were to report a number below the forecast, it does provide some indications that China’s economic growth is starting to decelerate further, investor confidence might be thwarted further if the Chinese government fails to manage the economy well in a slowing economic environment.

With the slowdown in China’s economic growth much in focus recently, does the latest news coming out of the country spell the end of China’s growth story? Personally, I doubt so, although many might disagree. But, looking at the growth expectations of low 7.0 percent in 2014, it is still much higher than say, India, with growth expectations of 4.8 percent, and the United States at 2.8 percent, according to the latest January 21, 2014 World Economic Outlook published by the International Monetary Fund (IMF). Yes, it is true that the manufacturing picture in China is clearly showing a downward trend and it does point to what the Chinese policy makers have been guiding the economy to, which is a more stable and sustained growth momentum, rather than the previous 9.0 percent to 10.0 percent pace of economic growth. The focus of the Chinese government is centred mostly on maintaining social stability, greater wealth distribution, and slowly adopting more market-oriented economic policies. The current economic slowdown is a reflection of a transition of the Chinese economy to a more stabilised growth pace.

However, one cannot ignore the many ongoing issues arising from slow growth in China, and the impacts made to several emerging market economies, especially when the epic centre of the latest fallout in many emerging markets have been centred on China’s economic slowdown after the preliminary HSBC/Markit Economic Group Purchasing Managers Index (PMI) for the month of January 2014 showing a contraction to 49.5, which is below the 50.0 threshold. The data sparked off a global retreat out of emerging markets and into safe haven currencies such as the US Dollar, the Swiss Franc, and the Japanese Yen currencies. The global rout in January 2014 was further exacerbated by the latest conclusion of the US Federal Reserve (US Fed) meeting on January 28-29, 2014 indicating that monetary policy makers will be accelerating the ongoing monetary stimulus withdrawals to the tune of USD 65.0 billion a month, from the previously announced USD 75.0 billion back in the December 2013 meetings.

The global markets do have many concerns about China, namely its growing local government debt issues, the latest bailout of a major Trust fund which was part of the so-called ‘shadow’ banking system, multinational corporations relocating to other surrounding Asian countries such as Vietnam and the Indo-China region, among other issues that are posing threats to the viability and sustainability of China’s growth momentum. Investors have been concerned about China’s economic slowdown, and have been retreating from the Chinese financial markets in order to reduce their exposures. One of the major concerns is the likelihood of a permanent retreat, rather than a temporary measure in order to preserve capital. Given that the current risks outweighed many issues including the debt load China is currently holding, it appears that many fund managers have decided to lie low, and avoid making any major portfolio shifts. The valuations of many Chinese public-listed companies are at historical lows, but they do have risks of turning into the so-called value ‘traps’, where valuations are low, but the underlying fundamentals are not anchored on some differentiating factors, but rather, they are showing signs of increasing systemic risks, which does not bode well for the company if slowdown in growth persists.

It is no doubt that China’s economic growth is on a downtrend, but it is also important to understand the causes for such an economic slowdown, which are not necessarily entirely due to internal demand/supply factors, but the external economic environment where there are indications of gradual recoveries in many key nations in the Euro Zone, and the United States, which form the bulk of China’s external trading hubs for its domestically produced goods and services. China is also exploring other market potentials in economies such as the African region, markets such as Central Asia, and parts of Latin America as the next phase of economic development. The trade and economic development initiatives undertaken by the Chinese government are part of its overall plans to move away from greater reliance of domestic investments and consumption, and into the external global economic environment which is just starting to see some so-called ‘green shoots’ in terms of overall global economic growth. There is a need to think globally, rather than focusing too much on the largely domestic led economy.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

This entry was posted in Timizzer by Hock Meng Tay - Chief Editor, Asia-Pacific Region. Bookmark the permalink.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

LEAVE A COMMENT