A closer look under the hood of recent Chinese equity performance helps to explain why the Shanghai composite continues to slide despite signs of economic recovery.
Figures released this month on China's industrial production, retail sales and exports all came in at healthy levels that exceeded economist expectations. The country's main equity benchmark, however, has continued to fall. On Tuesday, the Shanghai composite slid below the 2,000 level for the first time since January, 2009.
The chart on the left shows why. Chinese industrial production (IP) may be improving but its 9.4 per cent year-over-year growth rate remains far below the 20 per cent it hit when the composite peaked in 2007. Equity investors appear to have foreseen the slowdown in growth that began in early 2011.
The performance of the subindexes of the Shanghai composite, seen in the graph at left, confirms that slowing manufacturing is the main culprit behind the stock market weakness. Losses have been focused in the economically sensitive resource and industrial sectors over the past 12 months. Dragged down by floundering steel companies, industrial stocks are 26 per cent lower, while energy and materials stocks have fallen by 23 per cent and 19 per cent, respectively.
There are some grounds for optimism. The composite has now fallen to the point where it seems to accurately reflect economic activity in the country. Recent data have been encouraging and if the numbers continue to strengthen, it could begin to move higher.
Scott Barlow