A slowdown in Chinese economic growth, exacerbated by the trade war with the USA that has been unfolding since mid-2018, has been arguably the darkest cloud over financial markets for several months now. As such, it is no surprise that both Chinese and global equities have rallied today on positive data indicating a brighter than expected outlook for the country’s manufacturing sector.
Mainland China’s benchmark CSI 300 index surged 2.5% during the Asian session to reach its highest level in over a year and in Hong Kong, where many Chinese companies are also listed, the Hang Seng was up 1.6%. Tokyo’s Topix index also got a 1.5% boost. The positivity carried into Europe and the UK’s FTSE 100 is up over 0.6% into the afternoon session, Germany’s DAX 30 up over 1% and the Euro Stoxx 600 0.9%.
Two separate indicators, the official manufacturing purchasing managers’ index and another private survey both indicated that factory orders have returned to growth after three consecutive months of contraction. The growth rate was the fastest recorded in six months and represented a pleasant surprise when analysts had forecast another contraction.
China’s PMI index, and private alternatives which insure against the possibility of the centralist government polishing figures, are considered an important gauge of wider global economic health. China is still the world’s biggest manufacturing hub and factory orders dropping off indicates falling international consumption. The wider global economy also still, to a large extent, relies on Chinese growth which has been arguably its most significant driver for a couple of decades now.
It was always inevitable that after 30 years of double digit growth Chinese economic growth would start to tail off. But investors hope for the ‘soft landing’ a gradual decline would offer. And despite the many years of growth, China’s per capita average GDP and disposable income is still lower than in many other quickly growing Asian economies. That offers both hope that strong growth can continue for a long time and the worry that government efforts to raise domestic consumer spending haven’t been completely successful.
Chinese equities have had a particularly strong start to 2019, outperforming most every other major equities market in the world. The first quarter saw gains of 29%. The surge has been credited with particularly strong inflows of foreign capital. That can be at least partly attributed to capital flow resulting from the incorporation of Chinese A-shares into the MSCI emerging markets index after a slow start last year. $18 billion of foreign capital flowed into Chinese equities over January and February this year. However, there was a sharp drop off during March.