Investors Try To Distill Mixed News From China's Head-Spinning Economic Data As Q4 Kick-Off Gets Underway

Data from the Chinese mainland showed that the domestic mainland economy went back into manufacturing expansion in September for the first time in six months as markets in Hong Kong and China were closed Monday.  

Latest China Economic Data

The purchasing manufacturers index (PMI) jumped last month to 50.2 from 49.7 while non-manufacturing activity climbed to 51.7 from 51, both indicators over the 50-mark which delineates growth or contraction.

The growth supports August data showing that industrial profits rose more than 17.2% for the first time in a year last month.

Although more bullish than analyst forecasts, that’s still some way off the 6-month ago levels which were 51.9 for manufacturing and 58.2 for non-manufacturing output. The slow rebound that is underway has investors intending to add to stock positions but still gloomy about the prospects for the domestic property markets.

How Investors Are Reacting

In a Bloomberg poll conducted of 15 fund managers, 40% of respondents said that the China property crisis is the most significant issue that stocks face right now. Overseas investors have unloaded around 37 billion yuan ($5.2 billion) in stocks so far this month extending 90 billion yuan in sales in August.

In the July to September period this year, Nikkei reported that foreign investors sold 80.1 billion yuan more stocks than they bought through StockConnect, which facilitates trades between Hong Kong, Shenzhen and Shanghai exchanges. That marks the largest amount of quarterly net selling on StockConnect since early 2014. The selling has also been reflected among the tepid number of IPOs in Hong Kong this year, which despite having a big week last week is set to potentially be the Hang Seng’s worst IPO market in two decades in 2023.

Still, fund managers polled by Bloomberg said that they would be adding to their positions over the rest of the calendar year, and forecast an average year-end benchmark of 20,500 points for the Hang Seng Index and 4,100 points for China’s leading mainland index the CSI 300 Index. In other words, in spite of the weakness, leading investors forecast a rise of 21% for Hong Kong shares and gains of 8.4% for mainland stocks. Year-to-date, the Hang Seng and CSI 300 indexes are 11.6% and 5.1% in the red, respectively.

The dichotomy between high levels of fear leading to recent sharp selling and a broadly optimistic outlook for equity prices has to do with turmoil in the Chinese property sector, which caused markets in Hong Kong and China to plunge sharply last week after one of the sector’s leading developers defaulted on debt and faced mounting legal woes.

Analysts expect there to be additional easing and stimulus measures being taken by the Chinese government in order to shore up real estate prices too. At the same time, the consequent sell-off and heavy focus on tech by the Chinese government has created attractive value particularly in innovation stocks such as Alibaba Group Holding Limited BABA, BYD Co Ltd BYDDY and Tencent Holdings Limited TCEHY that make for potential bargains.

Earnings For The Week Ahead

Natural Gas producer China LNG Group Limited, which was up 5% in Friday trading, announces earnings Monday.

Other notable companies releasing earnings this week include property developer CIFI Holdings Group Co Ltd. and subsidiary CIFI Ever Sunshine Services Group Limited, FSE Lifestyle Services Limited and HK$35 billion ($4.5 billion) Pacific Ports owner and real estate developer NWS Holdings Limited NWSZF. On the mainland, China Railway Construction Corporation Limited releases earnings too this week.

All these stocks will be on the radar of investors as they continue to monitor the extent of weakness in the Chinese property market and potential spill-off into the broader economy.