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"Sell China" narrative poignant amid key data releases

Thu, 09/28/2023 - 13:15

After the latest Consumer Price Index figures were released in the US last week, our focus now turns to Asia, where local traders and investors are hotly anticipating some key data publications of their own. The correlation between Chinese and US stocks has been particularly low over the past couple of years, though both regions have suffered quite badly since 2021.

Whereas the S&P 500 and Nasdaq had a precipitous crash that has now been replaced by renewed growth, the Hang Seng and Shanghai Composite have been on a long period of slow decline that still is yet to reverse. The Hong Kong flagship index is down over 40% since the summer of 2021, while the S&P 500 has managed to actually gain around 10% over the same period. Chinese indices have fared slightly better but are still down an average of 15% since June 2021. 

In fact, a recent uptrend in Asian markets was cut short last week on 18 September as several key markets posted losses ahead of a raft of major central bank releases this week. After the Reserve Bank of Australia released its policy meeting minutes on 19 September, in which it ultimately decided to hold rates steady, stocks across Asia remained more or less steady.

However, 21 September was the big one: the US Federal Reserve's decision. The trading world held its breath in anticipation of the US regulator's next move, with its pronouncement having the potential to impact everything from stocks to forex and even commodities. In this article, we'll explore what could now happen to equities in Asia and beyond, helping traders and investors prepare for the coming months.

The ripple effect

While Asian stocks, Chinese especially, exhibit a low correlation with US stocks on the whole, this doesn't mean that they aren't sensitive to US monetary policy. After all, for the time being, the US dollar remains the world reserve currency, and most (if not all) Chinese and other Asian manufacturers deal with non-domestic customers in dollars. Thus, when the greenback moves, this affects Asian business. The same is true of poor economic conditions for US companies, which then, in turn, cut back on trade with the East. And while the Fed's decision to keep rates steady within the current range of between 5.25% and 5.5% is more desirable than a hike, it's more the subtext that has markets spooked.

Both the RBA and Federal Reserve boards have noted that they are still very much in "wait-and-see" mode, which means that a further interest rate increase can feasibly be expected before the year is out. The knock-on effect of such a move would likely be negative for equities in general, as investors would be left with even less spare money for investing at the end of the month. While this slight pullback of around 1% on the Hang Seng and 0.5% on the Shanghai Composite are rather minor in the grand scheme of things, they could reveal a hint of what's to come if the US regulator does turn more hawkish in the near future.

It's all political

Beyond normal market forces, there are additional factors at play when it comes to Chinese stocks just now. First, in August, the US House Select Committee levelled accusations at major investment fund Blackrock of profiting from companies that help the Chinese military, prompting significant outflows from many of its China-focused funds. The $21.6-billion iShares MSCI Emerging Markets exchange-traded fund experienced the biggest outflows, losing $1.9 billion over the course of the month, followed by outflows of $89 million from the iShares MSCI China ETF. Meanwhile, the $290-million iShares MSCI China A ETF saw outflows of $14 million in moves that could not help but affect the value of the underlying instruments.

While there's no evidence to suggest the US government will be taking concrete anti-China action, we will all surely remember the delisting fiasco of 2021 that has dragged on for over two years already. The Chinese government's hardline elements will now only accelerate efforts to decouple its stock market from the rest of the world as the "avoid China" mentality gains currency in the West. What's more, China has its own economic problems that will have to take precedence for the CCP, such as the continuing housing market crisis and associated debt deflation. The ever-weaker yuan will also likely lead to problems down the line as dollar-denominated oil continues to increase in price, stifling any attempts to boost industrial output and thus holding back equities' growth.

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