“Stocks (Eurostoxx) gained more than 1.1 per cent in Europe and no less than 2.5 per cent in the US (S&P500). The Nikkei soared 7.7 per cent for good measure. There wasn’t any particular driver of that move (in fact one could argue it was despite troubling trade figures from China released earlier), which in itself may be a sign that the market has adjusted itself to the new economic realities and lower growth outlook.

But those economic realities obviously remain far from reassuring. This point was driven home once again by comments from the World Bank, whose chief economist Kaushik Basu urged the Fed to delay a rate rise.

He said it will cause “panic and turmoil” because “[the] world economy is looking so troubled that if the US goes in for a very quick move [...] it is going to affect countries quite badly.”

The main economic news flow during the day came from the European mainland, with German trade figures suggesting that German exports actually held up well in July (+2.4 per cent) and the second estimate for Q2 Eurozone GDP growth coming in at 0.4 per cent from 0.3 per cent previously. Unfortunately, this was a typical case of data looking good from the outside, but not as good on closer inspection.

To be more specific, Eurozone investment spending fell 0.5 per cent in Q2. Although this followed an upward revision in Q1, the dynamics of that picture are more worrying. Assuming that some of the contraction in Q2 was due to fears about Greece we can be sure that concerns over China and broader emerging markets will also hold back companies’ investment plans in the third quarter.”

3:31pm: Hang Seng Index rose to 22,207.61, up 4.46 per cent, or 948.57 points, while its H-share index tracking mainland Chinese enterprises edged up 5.73 per cent, or 543.32 points, to 10,022.8. 

3:15pm: Mainland Chinese stocks maintained their morning gains into the afternoon, closing higher for the day.

The Shanghai Composite Index finished 2.29 per cent firmer, 72.64 points, at 3,243.09. The CSI 300 Index rose 1.96 per cent, 65.29 points, to 3,399.31. 

The Shenzhen Composite Index gained 3.29 per cent, 57.3 points for the day, closing at 1,798.84. The ChiNext Index rose 3.53 per cent, 70.56 points, to 2,071.72.

2:25pm: From Reuters:

South Korean shares had their biggest daily gain in almost four years on Wednesday, rallying in line with regional peers, while the won closed higher as risk appetites recovered following sharp rises in Wall Street and Europe.

The Korea Composite Stock Price Index (KOSPI) ended up 3 percent to 1,934.19 points, marking the biggest one-day percentage gain since December 21, 2011. The KOSPI had fallen the past three days.

2:20pm: Japanese markets closed higher after one of their strongest days in seven years. The Nikkei 225 Index leapt 7.71 per cent, 1,343.43 points to 18,770.51, its best one day performance since October 2008. The broader Topix index soared 6.40 percent to 1,507.37. 

2:09pm: Hang Seng Index rose 3.33 per cent, or 708.31 points, to 21,967.35, while its H-share index tracking mainland Chinese enterprises went up 4.7 per cent, or 445.13 points, to 9,924.61.

2:08pm: Shanghai Composite Index rose to 3,230.23 per cent, up 1.89 per cent, or 59.78 points, while CSI300 index edged up 1.68 per cent, or 56.14 points, to 3,390.16.

2:08pm: Shenzhen Composite Index went up 2.3 per cent, or 40.08 points, to 1,781.62 , while ChiNext index extended further to 2,052.92, up 2.59 per cent, or 51.76 points.

1:09pm: Hang Seng index opens afternoon session at 21,864.97, up 2.85 per cent, or 605.93 points, while its H-share index tracking mainland Chinese enterprises opened up 4.19 per cent , or 397.58 points, at 9,877.06.

1:09pm: Shanghai Composite Index opened the afternoon session at 3,224.57, up 1.71 per cent, or 54.12 points, while CSI300 index opened up 1.74 per cent, or 58.07 points, at 3392.09.

1:09pm: Shenzhen Composite Index opens afternoon session at 1,785.64, up 2.53 per cent, or 44.10 points, while ChiNext index opened up 3.11 per cent, or 62.28 points, at 2063.44.

12:39pm: Midday chart of Hang Seng Index (yellow) and H-shares index (purple) that tracks the Hong Kong listed Chinese companies. The percentage at the end shows the difference from the opening, not the previous close. Click to enlarge the chart.  

12:03pm: The Hang Seng Index closed the morning session up 2.97 per cent, or 630.50 points, to stand at 21,889.54, while the H-share Index added 4.35 per cent, or 412.82 points, to 9,892.30.  

11:53am: Midday chart for the mainland Chinese stock markets.

Shanghai Composite Index (yellow), Shenzhen Composite Index (purple), CSI300 (green) which tracks big caps in Shanghai and Shenzhen, ChiNext (blue). The percentage at the end of the charts are differences from the opening, not the previous day's close.

Click chart to enlarge.  

 

11:46am: Top five turnover in the Hong Kong stock market.

Ping An saw turnover hit HK$1.36 billion, the biggest in Hong Kong this morning. Share price rose by 3.73 per cent to $38.9. Tencent’s turnover hit $1.23 billion, as share price rose by 1.7 per cent to $131.6.

The others include Industrial and Commercial Bank of China, which grew 4.69 per cent to   $4.69 with turnover reaching $997.26 million, China Construction Bank which strengthened 4.6 per cent to $5.45, with turnover at $935.29 million, and AIA, which rose 3.22 per cent to $43.4 and turnover at $921.49 million.

11:41am: Shares of companies controlled by Hong Kong’s richest man, Li Ka-shing, rose on Wednesday after its infrastructure arm Cheung Kong Infrastructure Holdings (CKI) announced the proposed merger with its international ultilties associate, Power Assets Holdings.

As of 11:15 am, CKI rose 5.84 per cent to HK$71.55 , while its associate Power Assets up 4.08 per cent to HK$68.85. CKI’s parent, CK Hutchison Holdings, rose 5.4 per cent to HK$109.2. Cheung Kong Property rose 1.07 per cent to HK$55.7.

11:33 am: The Shenzhen Composite ended the morning session at 1,788.51, up 2.70 per cent. The ChiNext Index added 3.49 per cent or 69.78 points to 2070.93 before the lunch break.

11:32am: The Shanghai Composite Index closed the morning trading up 1.693 per cent, or 53.67 points, to end the morning session at 3,224.12, and the CSI 300 Index stood at 3,390.25, up1.687 per cent, or 56.23 points. 

11:30am: The Hang Seng Index stood at 21,903.68, up 3.03 per cent or 644.64 points. The H-share Index climbed 4.20 per cent or 397.80 points to 9,877.28.

11:29am: Shares of troubled aluminium producer China Zhongwang rose 1.46 per cent to HK$2.78 Wednesday morning as investors appeared nonchalant about the latest report from short seller Dupre Analytics questioning Zhongwang’s finances. 

Dupre has doubled down on an earlier report from August, which accused Zhongwang’s chairman, Liu Zhongtian, and his family, of siphoning money from the company, while fabricating revenue numbers. In today’s report, Dupre provided further evidence to support its claim that Liu used a network of intermediaries to fraudulently move Zhongwang products to the US and elsewhere for reprocessing. 

11:27am: Brokerages rallied in mainland Chinese markets, with Dongxing Securities which is listed in Shanghai up 9.83 per cent to 17.78 yuan and Guoyuan Securities which is listed in Shenzhen gaining 6.67 per cent to 6.91 yuan. 

11:12am: Hong Kong dollar is trading Wednesday at 7.7507 against the US dollar, near upper end of the currency peg. Euro/dlr weakened by 0.22 per cent at 1.1178. Dlr/yen at 120.4, stronger by 0.49 per cent. Pound/dlr weaker by 0.01 per cent to 1.5349. Australian dollar to US dollar stronger by 0.57 per cent to 0.7057. 

11:00am: Finance, energy, and industrial companies are strongly lifting the Hang Seng Index in the morning.

The finance sector altogether added 328.68 points to the benchmark. AIA was up 3.1 per cent to HK$43.25, adding 52.77 points to the benchmark. And China Construction bank grew 3.84 per cent to HK$5.41, adding 50.2 points to the index.

SINOPEC surged 6.06 per cent to HK$5.25, lifted the index by 23.3 points. CKH Holdings was up 4.54 per cent to HK$4.7, and increased the benchmark 40.48 points. 

10:51am: ABN Amro sees promise in latest European data:

“Eurozone GDP growth was revised up by 0.1 percentage points in each of the previous two quarters. In annualised terms this equates to 1.4 per cent and 2.1 per cent respectively.

Given that eurozone trend growth is likely a little above 1 per cent this is consistent with an economy growing about its modest potential. This view is supported by falling unemployment and signs that core inflation has bottomed out. 

Although QE was only announced in January of this year and implemented in March, the effects started to kick in well before that as financial markets anticipated the policy. 

The resulting decline in market interest rates across the curve also pushed down bank lending rates, especially in the periphery. In addition, the euro fell sharply. Bank lending conditions have also eased.

Of course other important factors have also contributed to the recovery, such as the fall in oil prices, and the virtual ending of austerity.”

Click on chart to enlarge.

10:42am: Standard Life Investments emerging markets economist Alex Wolf says it’s a positive sign that labour markets are still stable:

“Over the first half of the year, as growth across emerging markets continued to disappoint, labour markets have yet to show significant signs of stress. With few exceptions, employment has held steady across a wide range of emerging markets.

In addition to Russia, unemployment rates across a swathe of EM countries, including the Philippines, Indonesia, Mexico, Taiwan, Czech Republic, Egypt and Poland, signal resilient labour markets.

Although factors regarding demographics and labour supply are unique to each country, the slowdown in EM growth rates have yet to affect labour markets in many of these economies.

China's labour market remains a bit of a puzzle, in no small part because employment data is notoriously unreliable. Using the available gauges of official unemployment rate, the job vacancy-to-seeker ratio and PMI employment index, among others, there is evidence that employment has softened recently but, overall, remains resilient.

Newly created urban jobs are on track to surpass this year's target and wage growth, although slowing, remains higher than nominal GDP. China's labour market is in structural decline, with the share of working age population having peaked in 2013 and the rural surplus having been mostly exhausted.

Structural changes will help dampen any negative pressures on employment as growth slows. Migrant workers, which constitute a third of the workforce, return to rural jobs in economic downturns. While this does not bode well for long-term urbanization goals, it can help serve as a buffer for urban labour markets during periods of economic stress.”

10:36am: Shenzhen Composite Index stands at 1,792.43, up 2.92 per cent or 50.90 points. 
ChiNext rises 4.05 per cent or 80.95 points to 2082.11.

10:34am: Shanghai Composite Index up 1.839 per cent or 58.31points to 3,228.76. CSI300 Index up by 1.822 per cent or 60.76 points to 3,394.78.

10:33am: Hang Seng Index climbs to 21,776.12, up 2.43 per cent or 517.08 points. H-shares Index up 311.77 points or by 3.29 per cent to 9,791.25. 

10:25am: Daiwa Capital Markets analysts Dennis Ip and Scottt Chui, who in July flagged the benefits of a merger between Cheung Kong Infrastructure (CKI) and Power Assets Holdings (PAH), evaluated the likelihood for the deal to get approved.

“Who might stop the deal? The PAH:CKI share-price ratio dropped from 1.3 multiples to 1.04 multiples [year  to date], which might push PAH’s minority shareholders to vote against the merger, for which CKI needs over 75 per cent supporting votes and less than 10 per cent opposing votes.

However, we should look at the PAH:CKI PER ratio, which has fairly returned to 1.2 multiples (pre-HEC’s IPO level), as the recent de-rating on the further disposal of Hong Kong Electric (HEC) and the opportunity cost of idle cash have offset the benefits from HEC’s IPO in 2014.

We believe the merger will allow PAH’s minority shareholders to enjoy a higher [earings per share] and [dividend per share] growth under CKIA, while avoiding continuous de-rating on PAH. We see this move as the first step for CKI’s business development over the next 10 years.“

Click on chart to enlarge.

10:22am: The benchmark Shanghai Composite Index reclaimed the 3,200-point mark in early trading, led by technology stocks.

All but two out of 146 stocks in this sector posted gains with around 20 of them soaring to their 10 per cent daily limit within one hour of morning trading. Beijing on Tuesday rolled out a plan on “pushing forward systemically innovative reforms in some regions” and called for more innovation in advanced technologies.

10:18am: Shares of China Yurun Food Group rose 25 per cent in the first 20 minutes of trade Wednesday as the meat product manufacturers' substantial shareholder is in talks to sell its shares in the company.

Willie Holdings, which owns about a 25.82 per cent stake in China Yurun, was in negotiations with an independent third party in relation to strategic cooperation to sell its shares, a filing by the company to the Hong Kong Stock Exchange said Tuesday.

Trading of China Yurun was halted with effect from 11:01 a.m. on September 7, 2015. It resumed trading on Wednesday morning.

10:13am: UBS explains China’s export decline and expects yuan to trade at no more than 6.5 against the dollar by year-end.

“We believe the following factors are to blame for the ongoing contraction of China's exports. First, global demand has remained lacklustre in general. Despite the upward revision on US Q2 GDP, manufacturing business sentiments in both US and Europe seem to have hit a soft patch. This, together with a structural downshift in trade intensity of global growth, has led to broad based weakness in global trade, with both Korea and Taiwan exports plunging by 15 per cent year-onyaer in August.

Secondly, CNY's notable appreciation against major trading partners and competitors during the past two years has pushed up China's export prices relative to prices of other [emerging markets] manufacturing prices as well as G3 domestic prices, which weakened demand for Chinese exports Moreover, the intensified expectations of RMB depreciation during the past month may have prompted some exporters to under-invoice outward shipments, though this is yet to be confirmed from counterparty data. 

What does a large and rising trade surplus and a shrinking FX reserves mean for the CNY? While sizable current account surplus certainly would provide fundamental support for the currency in the medium term, it is capital flows and market expectations that drive short-term exchange rate movement.

On that front, China’s domestic monetary easing, and market expectations for further CNY depreciation against a stronger USD, will continue to drive capital outflow and bring substantial depreciation pressures over CNY in the coming year.

However, we believe the policy makers are committed and still have tools to stabilise the USDCNY in the near term. Allowing further CNY depreciation could help boost exports and reduce inflationary pressure, but the impact could be limited by weak global demand and large accompanying depreciation elsewhere. In addition, further depreciation could destabilise domestic market expectations and trigger even larger outflows. The government is also still pursuing the internationalisation of RMB, which they believe requires a relative stability of the currency.

To maintain USDCNY stability, China's US$3.56 trillion reserves can help in the near term but is not viable in the long run, so the government has started, as we had expected, to tighten some FX controls. As such, we expect USDCNY to be kept at no more than 6.5 by end 2015.” 

10:10am: Chinese smartphone manufacturer Coolpad dropped 15.5 per cent to HK$1.2 after trading of its shares resumed on Wednesday. Coolpad is suffering from news its partner, US traded Qihoo 360, is seeking to dump its shares in their joint venture.

Qihoo 360 said Monday it intends to exercise a put option to sell its entire 49.5 per cent stake in a joint venture with Coolpad.

10:07am: Billionaire Li Ka-shing’s CK Hutchison holdings led the gainers in Hong Kong trading, rising 3.86 per cent to $107.6 by 10:06 am.  

Li’s Cheung Kong Infrastructure Holdings announced yesterday a proposed merger with associate Power Assets Holdings which would give the group's infrastructure and utilities arm a stronger balance sheet in order to capture global infrastructure opportunities.

10:02am: North Mining surged 26.26 per cent to HK$0.125 in the morning, leading the gainers in Hong Kong. The company resumed trading on Wednesday after disclosing a share placement plan with Driven Innovation Limited. The placing shares represent approximately 17.06 per cent of the existing issued share capital of North Mining.

9:57am: Capital Economics says China’s August inflation is likely to have picked up. 

“Concerns over deflation in China look increasingly misplaced, with consumer price inflation likely to have hit a one-year high in August and on course to rise further in the final months of this year.  

The rise will be almost entirely due to a further pick-up in food inflation. In particular, pork and vegetable prices, which together have a large weight in the index, rose faster last month than during the same period last year. Fruit prices fell in August, but by less than a year ago.

The role of weak demand in driving the recent falls in producer prices is overplayed. Instead, the main reason for the fall is that lower import prices have pushed down the price of industrial inputs, which make up a large part of the index. With the price of final consumption goods holding up much better, many firms are actually better off as a result.” 

Click on chart to enlarge.

9:47am: Onshore yuan trades at 6.3645 to the dollar, stronger by 0.02 per cent from previous close at 6.3657. Offshore yuan trades at 6.4474 to the dollar, firmer by 0.01 per cent from the previous close at 6.4536.

9:36am: PBOC sets yuan mid-price at 6.3632 to the dollar, compared to mid-price on Tuesday at 6.3639. The onshore yuan closed on Tuesday at 6.3657.

9:35am: The Shenzhen Composite Index trades at 1,745.83, up 0.25 per cent, or 4.30 points. The NASDAQ-style ChiNext Price Index advances 0.91 per cent, or 18.17 points to trade at 2,019.33.

9:34am: Shanghai Composite Index inches up 12.54 points, or 0.396 per cent, to 3,182.99 at the preopening session. CSI300 Index gained 14.16 points, or 0.425 per cent at 3,348.18.

9:32am: The Hang Seng Index opens at 21,630.42, up 1.75 per cent or 371.38 points. The China Enterprises Index (H-share index), which track Hong Kong listed Chinese companies, opens at 9,705.26, up by 2.38 per cent or 225.78 points.  

9:25am: Reorient report: 

"The yuan devaluation in August has adversely impacted imports but had a mild effect on exports. The EUR appreciated as much as 2.6 per cent against the yuan in August and that has held up Chinese manufacturers from placing orders from the Germans, which takes up half of the imports from EU. Meanwhile, the renewed softness in intake volume of basic commodities suggests a challenging trade outlook.

As for exports, the breakdown of exported products shows that computer equipment and electrical goods were two major laggards, although both saw a mild month-on-month recovery in August compared with their worse July data.  But the slight recovery is still in doubt, since strong RMB depreciation by the PBOC in first half of August may largely help reverse the falling momentum of electrical goods exports, which represent a large chunk of China’s foreign exports.

More monetary easing is expected from the PBOC to attempt to revitalize domestic demand amid a global economy slowdown."

Click chart to enlarge.

9:11am: Rabobank expects the yuan to weaken further against the US dollar and Shanghai indexd performance:

"Official data for August published on Monday revealed that the PBOC burnt through hard currencies to support Chinese yuan in just one month as FX reserves fell sharply by USD93.9 billion to USD3.56 trllion – the biggest monthly drop on record. The fact that USD/CNY is trading well below the year-to-date high at 6.4489 set on August 12 (after the PBOC devalued the yuan on August 11) reflects Chinese officials’ determination to prevent excessive CNY’s depreciation against the USD.

Spending more than US$90 billion per month, however, is an unsustainable long-term strategy. Hence, we expect USD/CNY to trend higher at 6.80 in 3m and 7.20 over the 6m horizon.

In the last hour of trading, China’s Shanghai Composite Index surged and ended yet another volatile session well above the 3,000 level, which seems to be a new line in the sand for Chinese authorities.

While PBOC Governor Zhou Xiaochuan declared over the weekend that the stock market has almost completed its correction, cautious approach may prevail until we witness a far more convincing rebound in the SHCOMP. A close above the August 28 high at 3,235.84 would be a constructive signal, but to shift the bias to the upside the 3,400 pivot would have to be cleared."

9:07am: Shanghai Composite Index inches down 0.24 points or 0.008 per cent to 3,170.21 in preopening session. CSI300 Index gained 0.75 points, or 0.022 per cent at 3,333.27.

9:06am: Logan Property Holdings said its contracted sales for the eight months ended August 31, 2015 was 11.65 billion yuan,representing an increase of 54.4 per cent compared with the same period in 2014.

The contracted saleable gross floor area was 1.66 million square metres. In the month of August 2015, the contracted sales of the Group was up 56.1 per cent to 1.56 billion yuan, representing an increase of 56.1 per cent as compared with the corresponding period of 2014. The corresponding contracted saleable gross floor area was 210,000 sq metres. 

9:03am: The Hang Seng Index futures spot September contract loses 1.02 per cent or 218 points to 21,086 in the pre-opening session. 

9:00am: Patrick Chovanec at Silvercrest Asset Management says resilience in the US economy will withstand China's stock market tumble:

"Despite deep market concern, most US economic data remains positive and points to continued growth which should support corporate earnings. 

This month's drop in share prices was not entirely unexpected. We have warned for several months that US equity valuations had become stretched and that the consensus has been overestimating corporate earnings, making the market fragile and vulnerable to a correction.

Now that correction has taken place, bringing the 12-month trailing P/E ratio for the S&P 500 down from 19.6x operating earnings to 17.2x at its recent low point, 18.2x at month's end. This reset in prices, sparked by uncertain and often misplaced fears—not deteriorating economic fundamentals—should cause savvy investors to start looking for value, rather than run for the exits. 

China's economic difficulties are real, and they matter. But the broad global sell-off they triggered was a knee-jerk reaction that failed to draw much distinction between who wins and who loses from this sea change in the global economy. The US economy is not done growing yet, and neither are significant parts of this market."

8:48am: ING has revised down its China full year GDP growth projection to 6.8 per cent from 6.9 per cent:

"We credit market support ops for the uninterrupted afternoon rally. Our baseline scenario is that what’s going on in the stock market is largely irrelevant to the broader economy but, again, we’re mindful of an alternative scenario in which the stock market crash was the beginning of a rolling crisis that now has engulfed the FX market and soon will be evident in an economic crash.

Avoiding this scenario depends on sustaining strong manufacturing growth. Old fashioned stimulus is the order of the day. Investment financing will come from three sources, with bank lending expected to remain the mainstay. The recent removal of the loan-to-deposit ratio requirement will ease funding constraints.

Bottom line: We have revised our full-year GDP growth forecast to 6.8 per cent from 6.9 per cent (Bloomberg consensus 6.9 per cent)."

8:47am: Four Shanghai listed A-share companies will resume trading today and two companies applied for voluntary suspension in the trading of their shares. The number of companies in trading suspension in Shanghai is 118 on Wednesday, representing 11.02 per cent of the total.

Fifteen Shenzhen listed A-share companies resume trading today while four companies suspended trading in its shares. The number of suspended companies in Shenzhen is 209 on Wednesday, representing 12.61 per cent of the total. 

8:45am: Sincere Watch (Hong Kong), a Hong Kong-based luxury watch distributor, said its controlling shareholder had disposed 29 per cent of issued share capital of the company to mainland-China based Harvest Fund Management.

The company said on Tuesday night that the new major shareholder would help the company to explore potential investment opportunities in health care and medical tourism in the mainland. 

According to the websites of Harvest Fund, it was established in Beijing in 1999 as one of the first asset management companies in mainland China. The shareholders are China Credit Trust, Lixin Investment Co., Ltd. and Deutsche Asset Management (Asia). 

8:41am: China Nonferrous Mining Corp said the production of copper mines operated by ist subsidiary in Zambia has been suspended since September 8, 2015 as a result of a force majeure event where Zambia has reduced power supply by approximately 30 per cent.

The production volume of copper is expected to fall by about 6,000 tonnes by the end of the year, according to the company’s filings to Hong Kong Stock Exchange today.

According to the declaration of a force majeure event by ZESCO and Copperbelt Energy Corporation PLC, the power shortage may last till April 2016.  

8:27am: China’s 16 brokerages in August registered combined net profits of 5.054 billion yuan, down 25 per cent from July, Shanghai Securities News reported. The combined operating revenue for the same period also fell 23 per cent from a month earlier, it said.  

8:26am: There were a total of 199,300 newly registered stock investors in China over the last week, down 43 per cent from a week earlier, according to data from China Securities Depository and Clearing Corporation. 

8:25am: People’s Bank of China said Tuesday the record fall in foreign exchange reserves in August is mainly due to the fact that the central bank had injected liquidity into the foreign exchange market and the new rule that imposed a 20 per cent deposit requirement on currency forwards transactions. It said the new rule should be interpreted as a measure of “capital control.”

8:23am: Shares in Coolpad Group will start trading again on Wednesday after the smartphone maker pushed back against allegations that it had breached obligations in a joint venture agreement with internet company Qihoo 360.

After halting trading in its shares in Hong Kong on Tuesday, Coolpad said after trading hours that it received letters from parties involved in the JV, called Coolpad E-commerce, stating that Coolpad must buy back 45.9 per cent of the shares in the JV for a cost nearly US$1.5 billion.

8:20am: Onshore yuan (CNY) closed at 6.3657 on Tuesday, weaker by 0.02 per cent from the previous close. Offshore yuan (CNH) traded at 6.4544, versus Monday's 6.4779. The People’s Bank of China set the mid-price yesterday at 6.3639 to the dollar. 

8:13am: JPMorgan on China trade data:

“China’s August exports came in line with expectation, but imports were much weaker than expected. The weak imports in part reflected the price effect and in part reflected weak domestic demand. Trade surplus rose to US$60.2 billion in August. 

The government announced a trade growth target of 6 per cent for this year. It cannot be achieved. Trade surplus very likely will print a new historical high, but this is mainly due to weak imports, driven by both global commodity price decline and weak domestic demand. 

On the export front, onshore yuan (CNY) appreciation in real effective exchange rate (REER) term, as well as relatively weak emerging market demand, has imposed pressure on China’s export sector.

On August 11, the People’s Bank of China (PBOC) announced to devalue the CNY central parity rate by 1.9 per cent and reform the daily fixing regime. USD/CNY rose from 6.21 to 6.45 in the next few days and then stabilized at around 6.40 with PBOC intervention (at 6.37 today, or 2.5 per cent depreciation since August 11).

In our view, the intervention is not sustainable and eventually CNY will be allowed to respond to market flows and weaken further, moving towards 6.50-6.60 before the end of the year.

Nonetheless, the impact of August devaluation tends to be limited. First, the depreciation is too modest to have any meaningful impact on economy. We estimate that a 3 per cent CNY REER depreciation will support export growth by 3.5 percentage point, but only boost GDP growth by 0.28 percentage point.

It will depend on the next move in PBOC’s CNY policy. Second, it usually takes about 6 months for CNY REER movements to affect exports. That means, near-term exports will not be affected by recent CNY movements.”

Click to enlarge the three charts below.

 

8:07am: One day chart of the Shanghai Composite Index (yellow), Shenzhen Composite Index (purple), CSI300 (green) which tracks large cap shares in Shanghai and Shenzhen, and ChiNext (blue). The percentage shows the differences from the opening, not from the previous close. Click to enlarge chart.

 

8:03am: One day chart of the Hang Seng Index (yellow) and H-shares index (purple), which tracks Hong Kong listed Chinese companies. Click to enlarge.

 

8:00am: Barclays analyst Chang Jian said:

“China’s August trade report showed another month of deterioration. Exports continue to contract, falling by a further 5.5 per cent year on year in US dollar terms after the 8.3 per cent decline in July.

Import volume growth of major commodities falls amid the weak commodity prices. Crude oil imports by volume in August totalled 6.3mb/d, decreasing by 974kb/d m/m after the strong pickup in July. China’s crude exports were 52kb/d, down from 78kb/d in July.

Overall, the impact of lower oil prices remains significant (oil imports by value declined by 35.1 per cent year on year) and continues to weigh on nominal import growth. We expect the negative price effect to gradually phase out in second half of 2015.

Regional breakdown shows trade flows with most destinations remaining under pressure. Exports to major markets fell further, with exports to the US falling by 1.0 per cent, the second monthly fall since March. The contraction in exports to EU and Japan slowed in August, with shipments down by 7.5 per cent and 5.9 per cent respectively.

We believe tepid domestic demand and uncertainties in global demand will continue to weigh on China's near-term growth outlook. Looking ahead, we expect both exports and imports to remain weak, as suggested by the new orders and import indices of the PMIs.

As China's economy still faces strong headwinds from excess capacity in many industries, oversupply in the housing market, and high debt burdens (especially among local governments), we believe downside risks are materialising for second half of 2015 and first half of 2016.

We added one more benchmark rate cut forecast of 25 basis point in the fourth quarter, due to likely weaker-than-expected the third quarter growth, and look for two more 50 basis point RRR cuts in the fourth quarter 2015, given our expectation of sustained capital outflows.”

Click to enlarge both charts.