China market round-up: GDP trouble, soaring RMB holdings for global investors, Mainland bourses expand overseas ties
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Asia

China market round-up: GDP trouble, soaring RMB holdings for global investors, Mainland bourses expand overseas ties

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China recorded a larger than expected fall in its third quarter GDP, foreigners are still piling into Chinese stocks and bonds despite volatile currency, and the Shanghai and Shenzhen stock exchanges signed co-operation agreements with their French and Russian counterparts.

China's real GDP for the 2018 third quarter was 6.5%, falling below market consensus of a 6.6% reading, according to data released on Friday. 

"This suggests the economy further moderated amid the escalation of trade war and domestic deleveraging," wrote Dong Jinyue, an economist with BBVA. "We expect monetary and fiscal policy to become more pro-growth in the rest of year."

The reading was 0.2% lower than the previous quarter and the lowest since March 2009, when China was confronted with the fallout from the global financial crisis.

"We believe GDP growth could remain around 6.5% [year-on-year] in Q4 2018 due to a frontloading of exports (in fear of further tariff hikes in January 2019) and a loosening of restrictions on the anti-pollution campaign this winter, but then it should slow much further in 2019, as the frontloading effect ends," wrote Ting Lu, China economist at Nomura. "So far, Beijing’s stimulus has been limited in scope and scale but, with the worsening sentiment, tumbling stock markets and rising growth headwinds, we expect Beijing to take more actions.”

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Foreigners continue to pile into RMB assets despite the drop in the stock market and the weakening of the currency's exchange rate against the dollar. Foreign investors added Rmb56bn ($8.1bn) to their A-share holding, pushing the total to Rmb1.278tr in September. Holdings of A-shares have been volatile in the past few months after hitting an all-time high of Rmb1.323tr in May. The September levels are 8.9% higher than end-2017. MSCI's index inclusion of onshore equities has been a key driver of the purchases in recent months after the index provider added A-shares to its emerging markets products in June.

In the bond markets, foreign holdings hit a new historical high of Rmb1.745tr, an uptick of Rmb6bn from a month earlier. Holdings have nearly doubled since June 2017, the month before the launch of the China-Hong Kong Bond Connect.

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The Moscow Exchange took a step further in building ties with the Chinese financial markets by inking a co-operation agreement with the Shenzhen Stock Exchange on October 16, Moex said in a press release.

"The MoU provides for joint marketing events for Russian and Chinese investors and facilitation of mutual access to the markets of the two countries, including possible creation of a trading and clearing link between Moscow and Shenzhen as well as cross-listing of ETFs that track Russian and Chinese equity indices," Moex wrote.

The Russian bourse already has agreements in place with four other Chinese exchanges, namely Shanghai Stock Exchange (SSE), China Financial Futures Exchange, Dalian Commodity Exchange and the Shanghai Gold Exchange.

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The SSE also signed its own memorandum of understanding this week with Euronext, the pan European exchange.

"[Both] sides will jointly promote the development of the CAC40 [the most established French stock index] ETF products, which will help to enrich the supply of cross-border ETF products on the SSE and further expand and deepen the co-operation between the two exchanges," SSE said in a Tuesday statement.

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Another agreement was signed this week between Chinese conglomerate Fosun and French investment bank Natixis, according to a press release issued on October 16.

"Under the agreement, Natixis will provide Fosun with a wide range of global financial services including corporate restructuring, asset/liability restructuring, initial public offering, bond issuance, asset securitization, investment banking products such as syndicated loans and structured financing, as well as risk management and solutions such as currency, interest rates and commodity derivatives in the global capital market," Fosun said in the statement.

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HSBC and the Frankfurt-based China Europe International Exchange (Ceinex) announced the launch of the MSCI China A Inclusion UCITS exchange-traded fund on Tuesday. The fund tracks the inclusion of A-shares in the MSCI global benchmarks through the Stock Connect. The fund trades in euro and has an expense ratio of 0.6% per annum, Ceinex noted in a press release.

"The inclusion of China A-shares in global benchmarks is a significant recognition of how open China’s stock markets have become," Chen Zhiyong, executive board member for product development at Ceinex, said in the statement.

Ceinex was also in the news this week thanks to Haier's listing on the platform as the debut D-share issuer. The new asset class aims to offer Chinese blue-chip firms' stocks to European investors.

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Bank of China released the September Credits Investment and Financing Environment Difference Index (Cifed) on October 18. The index captures the differences between, and changes of, offshore and onshore renminbi bond yields.

For September, the Cifed index fell into negative territory and stood at minus 22.6, down 32.9 points from August, indicating that onshore yields are lower than offshore yields.

In the onshore bond market, yields in real estate, non-state owned, and infrastructure firms decreased.

Looking forward, BOC expects the index to keep declining due to the ongoing trade tensions and sluggish domestic economic growth. The bank also anticipates onshore bond yields to decline slightly and the offshore RMB to become weaker. Lastly, given the still-high credit risk in the onshore debt market, there are still roadblocks on the intended policy transition from monetary to credit easing.

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