Chinese Data, Prospects for Policy Reform Bodes Well for Emerging Markets

The usual raft of Chinese data has been flowing in since the month began and looks good in aggregate. Of note, the manufacturing Purchasing Managers Index (PMI) from both the public and private sector expanded, coming in ahead of both previous month figures and expectations. There does seem to be slowdown in growth in services, however, particularly from private sector sources. Overall, the Chinese economy seems to be growing at an acceptable rate and without the heavy state intervention seen earlier this decade. Per Matthew Peterson, Chief Wealth Strategist, “Though it’s likely going to look worse before it starts looking better, much of what is happening there are positive steps. Its markets are starting to function as true markets, ones that provide price discovery and reward analysis, rather than as a means to speculate on changes to government policy.“

In addition, the Chinese government’s latest attempt to increase access to mainland capital markets allows outsiders to purchase Chinese bonds via the Hong Kong market, an initiative similar to the “mutual market access” program linking the Hong Kong and Shanghai stock exchanges rolled out over the past few years. Like its equity predecessors, however, expectations for immediate market reaction remain fairly muted. The Chinese government also granted permission to foreign firms (after registering with the government) that compile information and issue ratings on Chinese bonds, which helps provide additional transparency and liquidity. First day trading (July 3) was a fairly robust $1 billion dollars, but despite high absolute yields (a two-year Chinese government bond can yield almost 4%), few investors are immediately expected to take the additional currency and governmental risk. However, participation should increase, especially as liquidity develops.

China plays the long game in everything. Whether it’s granting increased access to its bond and stock markets, gaining inclusion of the yuan into the International Monetary Fund’s Special Drawing Rights program, or lobbying to have MSCI include mainland China stocks in its Emerging Markets Index, the ultimate goal is to move China’s economy to the center of the global economy, and they’re willing to take a very slow and deliberate approach to achieving it.

 

IMPORTANT DISCLOSURES

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC

Tracking # 1-623198 (Exp. 07/18)