John Woods

The View | Have Chinese equities bottomed out? Trade war talks, infrastructure spending and boosted production all point to better days ahead

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John Woods says the global production decline appears temporary and China’s own infrastructure spending is picking up. Combined with possible progress in the trade war, this points to a path of recovery for China’s equities

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A Chinese woman touches a bull statue on display outside a mall in Beijing, in June. Data from the Institute of International Finance for the first week of November showed inflows of US$5 billion into China equities, the largest weekly total in four years. Photo: AP

John Woods

Published: 11:30am, 22 Nov 2018Updated: 10:22pm, 22 Nov 2018

To understand how China’s equity markets could recover, we first need to understand why they fell. Summoning the courage to re-enter the market after an extended decline is not easy. To do so, one needs the clarity that can only come from taking apart and examining the major sell catalysts and determining whether they remain “live”.

Economics, of course, played a big part in the initial sell-off. The two key developments in this area were the slowdown in global industrial production and the failure of China’s economic data (especially credit and monetary data) to respond to or reflect fiscal and monetary stimulus unveiled in July. A closer look at both, however, suggests some encouragement going forward.

For starters, the weakness in global industrial production was not a broad-based slowdown but, rather, centred on discrete one-off factors, such as weather, strikes or manufacturing events. In particular, short-term emissions-related disruptions to the European and Japanese automobile sectors were pronounced, albeit temporary, and are now reversing.

In contrast, global industrial production, excluding autos, has actually been steady and this divergence suggests no broad deterioration in global demand. Once the temporary noise in auto production in Europe and Japan fades, a rebound in global industrial production and growth should become apparent in the next few months.

China’s October fixed-asset investment data, meanwhile, provided some tantalising hints of fiscal spending showing up in infrastructure. For one, the growth rate of infrastructure fixed-asset investment rebounded strongly in October. Potentially significant is that this coincides with a sharp rebound in the amount of both overall and infrastructure investment by state-owned enterprises. Additional supporting evidence came in the form of data on the monthly utilisation hours of construction equipment – which saw the first year-on-year increase since January 2018.