Data Diary

Signs of easing liquidity constraints in China

Posted on 07 November 2011

Been puzzling as to what might be driving the consolidation in Chinese equities. Sure global equity markets have bounced back from the Euro conundrum – and China may have been a beneficiary as much as anywhere – but one-size-fits-all explanations are suspiciously shallow aren’t they?

Looking at the price action, the strength of the selling had been fading since late September, giving rise to a positive divergence in the RSI. Should the weekly MACD crossover, we can probably expect the recent bounce to persist through to year-end at least. If nothing else, the 2300 level has grown in stature as an important line in the sand.

It’s interesting then to note that Chinese equities look like they may be ready to test their relative downtrends against the satellite economies of South Korea and Hong Kong.

And that the SSEC may even be able to summon the gumption to test the relative strength of commodities:

These pictures all suggest that the Chinese equity market may well have found a floor – at least for the near term.

Looking into the relative performance of industry sectors in the SSEC we can see that financials were the first to reverse course in October.

Note the financials have been in a downtrend since peaking in mid-2009. Their relative weighting in the Chinese market meant that the strength in commodities and energy was not sufficient to pull the SSEC index back to its highs in 2010 (#2). The recent bounce in the broader index was lead by financials (#3).

Now perhaps the recent strength in the SSEC begins to make sense – with some expectations for further near term outperformance - financial conditions are easing for Chinese banks. Looser money may be good for the banks, but may take time to flow through to the broader economy – hence the possibility that the SSEC could be set to outperform even while commodities struggle.