Patrik Schowitz

Even a trade war deal with the US won’t be a cure-all for China’s economy and stock market

A close look at the Shanghai benchmark index reveals investors were already less bullish before the latest trade war flare-up. Chinese investor sentiment is also closely linked to whether the central bank will take further stimulus measures

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Workers inspect overhead lines above railway tracks connecting Chengdu and Guiyang, in Bijie, Guizhou province. Economic data suggests Chinese investor sentiment has been affected not just by the trade war, but also by changing expectations of policy stimulus. Photo: Reuters

Patrik Schowitz

Published: 11:00am, 24 May 2019Updated: 10:44pm, 24 May 2019

After a strong start to 2019, China’s stock market rally has lost momentum. The Shanghai Composite Index is about 10 per cent down from its mid-April peak following a surge of more than 30 per cent since January. While the unexpected ratcheting up of US-China trade tensions has weighed heavily on investor sentiment in recent weeks, it has not been the only driver of weakness in Chinese equities.

A closer look at last month’s market indicates investors were already less bullish before the trade flare-up in early May. The Shanghai benchmark index pulled back more than 5 per cent in the second half of April, despite signs that economic growth momentum was stabilising.

As previous stimulus measures started to gain traction, the Chinese economy expanded faster than expected in the first quarter, at 6.4 per cent, with notable upside surprises in major activity indicators in March. Back then, the market’s focus was on the sustainability of the economic recovery.

With better-than-expected economic data, investors scaled back expectations of additional policy stimulus measures, calling into question whether the nascent growth recovery could last.

The disappointing set of data for April suggests investor concerns about the economic fundamentals were not unfounded. All major activity indicators came in below market expectations, with surprisingly weak industrial production and retail sales.