China: Sentiment improving -  Danske

According to analysts from Danske Bank stronger equitiy markets and rising commodity prices point to improving sentiment for the Chinese economy.

Key Quotes:

“Chinese offshore stocks have performed well in recent weeks, reaching their highest level since equities started to plummet in early January. Decent Chinese data and more global monetary easing is underpinning stocks. The onshore market has underperformed offshore stocks but is closing in on the highs in July. Industrial profits rose 5.1% y/y in June – the fourth monthly rise following two years of declines.”

“We continue to recommend an overweight in Chinese equities as valuations are fairly cheap and the macro environment has improved.

“CNY has strengthened slightly since mid-July following a month of renewed depreciation. We continue to look for CNY to weaken on a structural basis in the coming years due to a fragile macro environment and gradual rate increases by the Fed.”

“Iron ore prices have continued to rally. It is likely fuelled by stronger Chinese demand as indicated by Chinese imports of iron ore that have risen by close to 10% on average so far this year compared to last year.”

“The construction recovery and infrastructure spending are likely to be the main driver of this.”

“China's central bank indicated last Friday that further cuts to interest rates and the reserve requirement ratio are unlikely for now. The PBoC said it would add too much liquidity to the financial system and lead to expectations of yuan depreciation.!

“Export growth (CNY) for July was close to expectations at 2.9% y/y (consensus 2.3% y/y). Imports were weaker than expected at -5.7% y/y (consensus -1.1% y/y). However, we do not focus much on Chinese trade data as it is extremely volatile and often distorted due to problems with over/under invoicing.”