Last week, the dramatic fall in crude oil prices as well as the rally in Chinese shares grabbed the market headlines. Chinese indices had finished the week 8% higher with turnover in China A-shares on Friday hitting a record high of RMB710 billion (USD116 billon). Crude oil futures on the other hand, tumbled nearly 16% over the week to trade below US$65 per barrel, its lowest in more than 5 years.

In a research note covering these two events, Macquarie Equities Research (MER) commented that the lower oil prices would benefit the Chinese economy…

Here are some excerpts from the report published this morning on 1 December.

Major macro themes of the past week
 
A great week for A-shares: The Shanghai Composite Index finished the week 8% higher, led by brokers (+19%), insurers (+16%), banks (+14%) and property (+12%). Last Friday, A-share turnover hit a record high of RMB710 billion (USD116 billion). Meanwhile, the H-share market was much calmer, with HSI only up 2%. Such divergence might be partly due to the difference in investor composition between these two markets: While the retail-driven A-share market gets self-enforced by upward index momentum and surging turnover, the institution-driven H-share market remains concerned about weakening economic fundamentals.
 
Continued policy support amid soft fundamentals: Pretty much every economic data report in the past three weeks has disappointed. MER expects that the economy stayed weak for the month of November and growth momentum might slide sharply in the first quarter of 2015. Earnings growth for listed companies could slow further in the fourth quarter. That said, policy has been turning more expansionary over the past few weeks. Last Tuesday, the Peoples’ Bank of China (PBoC) cut repo rate by another 20 basis points to guide interbank rates lower. Market is now expecting that the central bank would cut the required reserve ratio and/or relax the loan-to-deposit ratio by year-end. Yesterday on 30 November, the PBoC posted a draft rule on deposit insurance on its website, seeking feedback through December 30. As expected, the scheme will insure up to RMB500,000 per saver, covering 98% of deposits in banks.
 
Lower oil price overall positive for China: Last week, arguably the biggest economic event out of China was the slumping oil price. Overall, MER believes lower oil prices would benefit the Chinese economy. First, as the world’s largest oil importer, China could benefit directly from cheaper oil prices. A 20% decline in oil price in 2015 versus 2014 could save China roughly USD45bn in oil imports, or 0.5% of China’s annual GDP. Second, 20% lower oil price will cause China’s CPI inflation to be lowered by around 0.4 percentage points, leaving more room for policy easing. Third, falling commodity prices would also give more room for the PBoC to guide RMB lower without the fear of importing inflation.

Source: Macquarie Research - 1 Dec 2014