Those looking for evidence of “bottoming” in the Chinese economy got it on Friday in the form of the Caixin manufacturing PMI which, unlike its official counterpart, beat estimates, jumping to 49.9 from 48.3 in January.
That’s still in contraction territory (for a third straight month), but by the slimmest of margins. New orders rose over the prior month, hitting the highest level since November.
This came on a day when MSCI moved ahead with a decision to expand the weighting of A shares in global indices and on the heels of the best month for onshore stocks since the halcyon days of early 2015 before the crash. February was the best month for the ChiNext on record.
Read more about the MSCI decision
The MSCI decision will mean inflows into Mainland stocks and it will also mean that if you’re holding a fund that tracks any of the big indexes, well then, you’re about to be the proud owner of more A shares.
“On a pro-forma basis, we estimate China A would represent 10.4%/4.0%/3.3%/0.4% of MSCI China/AeJ/EM/AC World by end-Nov vs. 2.5%/0.9%/0.8%/0.1% now”, Goldman wrote Friday, adding that “at a 20% IF, Chinese equities in aggregate (China A + H + ADRs) would account for around 35%/39% of EM/AeJ and 4% of AC World.”
I suppose you could say the better-than-expected Caixin print combined with the favorable MSCI nod “boosted” onshore markets on Friday, but it’s worth noting that the gains came during the afternoon. One can’t help but wonder whether state-backed funds might have wanted to ensure the MSCI decision was followed by a day of gains, but that’s just speculation.
Whatever the case, it was another standout session, as the bull market in Mainland equities charged ahead. The SCHOMP rose 1.8% on the day and is now some 22% higher off the January 3 lows.
Friday’s gains cap off a week that began with the biggest rally in onshore markets in three years. On Monday, Mainland equities soared following Trump’s decision to extend the deadline on tariff increases.
Yesterday, reports indicated the US is finalizing a 150-page deal for Trump and Xi to sign this month.
The MSCI decision also means ChiNext shares will join indexes for the first time. The small cap/tech gauge scored a remarkable February and rose another 2.1% on Friday. It’s risen in seven of the last eight sessions.
In the wake of the MSCI decision and amid the ongoing rally, there are lingering questions about the onshore market which many still view as a casino.
Corporate governance is a major concern, for instance. “This is one of the most prevalent pushbacks from investors on A shares, and the concerns span a wide range of issues encompassing data disclosures, corporate communication, accounting framework and standards, management compensation and incentives, management checks and balances, and government influences on business decisions”, Goldman wrote Friday, in the same note cited above.
Other worries include the accessibility of markets and, of course, regulatory uncertainty, where that means folks are still a bit wary after nearly a third of the listed market cap (some 1,422 stocks) was halted during the 2015 crash. Here’s Goldman on that:
First, investors concerns about “self-suspension” continue to linger (eg, in Jul 2015 trading was halted for 31% of market cap, 51% of listed stocks), although the regulatory bodies have tightened the rules for the suspension threshold since 2015. Second, administrative measures (e.g. window guidance to discourage investor selling, and short-selling/liquidation restrictions) are often adopted during challenging times which may distort supply/demand, suppress price discovery, and impact market liquidity.
Whatever the case, this is what it is (so to speak) and for right now, what it is is an ongoing bull market in one of last year’s worst-performing locales.
As noted on Thursday, whether or not this can continue is anyone’s guess – after all, A shares are still a casino.