Today Chinese indices will resume trading after a five-day hiatus known as Golden Week. While Chinese markets were shut, the Chinese government made some major announcements which influenced Chinese shares listed in Hong Kong (H-shares). In a research piece released on 6 October, Macquarie Equities Research’s (MER) recaps the major macro themes concerning China and what investors may look out…

Here are excerpts from the MER report published on 6 October:
 
Market hit by politics: Last week, the market continued its strong sell-off mode on Monday and Tuesday but saw a strong intraday reverse on Friday. HSI dropped 3% and closed at 23, 074. HK property was the worst performing sector due to Occupy Central, while China property was the best performing one boosted by property easing on Tuesday. Both National Bureau of Statistics of China and HSBC’s manufacturing PMIs remained flat in September, suggesting stabilized, yet still weak, growth momentum. MER expects economic growth to improve modestly in September, leaving August the trough of the third quarter (3Q) and 3Q the trough of the year. Looking forward, key events in Oct include the 4th plenum (Oct 20 to 23) and the upcoming Stock Connect. Of course, all eyes will continue to be on the protest in HK.
 
Mortgage policy finally eased: Last week, the most important news was Tuesday’s property easing. The gist is to increase mortgage availability for various kinds of home buyers. It is significant because it was announced at the central government level, while the previous eases of home purchase restrictions (HPR) were all done at local level. Top leaders, who prefer a supply-based approach, clearly don’t want to waste the current down-cycle to scrap those demand curbs issued by the previous government. With eased mortgage and HPR, MER expects home sales growth to start improving in the fourth quarter of 2014, while prices may bottom after the Chinese New Year.
 
Beijing gets firmer on local government debt: On Thursday, China’s cabinet said it will not bail out local governments if they could not repay their debts. Certainly, it is a positive move to harden local governments’ “soft budget constraint”. Given the low transparency and accountability of local government debt, the best solution is to leverage up the central government while deleveraging local governments. However, the short-term impact is limited, in MER’s view: for existing local government debt , MER does not expect significant rise of default risks, as Beijing has always put stability as a priority, sometimes even at the cost of credibility. That said, going forward, for new debt issued, local officials will be held more accountable than before.
 
Chart of the Week: GDP growth, target versus actual
China lowered its annual growth target in early 1999 when it was negatively impacted by East Asia Financial crisis. This December, the Party is set to lower next year’s target again, likely to 7%. For 2014, mini-stimulus rules. With a lowered growth target, hopefully top leaders will be less obliged to stimulate the economy time and again like this year.

Source: CEIC, Macquarie Research, October 2014