China Stock Market Rallies as the Economy Shows Signs of Life. Global Broker Octa Looks at the Data

Chinese markets are rallying as the country's economy demonstrates signs of improvement. While the latest data offers some optimism, significant hurdles persist. Octa Broker analyses the situation and discusses the potential implications for the People's Bank of China's upcoming interest rate decision.

KUALA LUMPUR, MALAYSIA - Media OutReach Newswire - 19 October 2024 - China has just released a slew of macroeconomic statistics. Although it generally looks better than previously, the major risks and challenges remain in place. However, the market’s reaction has generally been positive so far. Overall, it is good news for the Asian economies, but the trend is not guaranteed to continue.

The importance China is the world's economic powerhouse. Depending on the calculation methodology used, it is either the world’s first or second-largest economy. In 2023, its Gross Domestic Product (GDP) almost reached the $25 trillion mark, underscoring its importance as a major export and import market for the world in general and the Asian nations in particular. Indeed, according to the Wilson Center, a U.S. think-tank, China is a top trading partner to over 120 countries. For example, in 2022, almost a quarter (22.6%) of all Indonesian exports went to China, while Malaysia directed some 14% of its goods and services to the country. The dependence is even more pronounced when it comes to imports, with Indonesia and Malaysia relying on China for 28.5% and 21.3% of their imports, respectively. These figures highlight the strong economic influence China has on the regional economies.

Equally, because China is also a major importer of pretty much every commodity in the world, its economic health and the growth rate of its aggregate demand can have a substantial impact on prices, especially that of crude oil.

Key insights China's economy accelerated in the third quarter (Q3), data showed on Friday, with GDP expanding by 0.9% quarter-on-quarter (q-o-q) from 0.7% in Q2, but the year-on-year (y-o-y) growth rate slowed to 4.6% from 4.7% in Q2. On a year-to-date (y-t-d) basis, GDP expanded by 4.8%, still below the government's official target of 5%. Generally, the data slightly missed the 1.0% q-o-q growth rate expected by the market, but there were still positive indicators within the data set. Retail sales increased by 3.1.% y-o-y in September, up from 2.1% in August, the unemployment rate fell to 5.1% (from 5.3%), while industrial output grew 5.4%, beating expectations for a 4.5% rise.

‘Among all the monthly figures released today, the highlight is a surge in industrial output, much better-than-expected retail sales and a drop in unemployment. The data clearly indicates that perhaps the government's stimulus measures are beginning to work,’ said Kar Yong Ang, a financial market analyst at Octa Broker. Indeed, weak domestic demand induced by rising unemployment and a property crisis was the main reason why the People's Bank of China (PBoC) cut its benchmark lending rates last July. The latest positive developments might offer some hope to policymakers as they work to revitalise the faltering economy in the closing months of the year.

Still, the economy needs to accelerate further if it is to reach the government's official growth target of 5% in 2024. ‘Today's reports were slightly better than the previous set of data released in July, but they do not indicate a significant turnaround in the economy. The risks are still present, the major one being deflation and the uncertainty surrounding the U.S. elections,’ said Kar Yong Ang. Indeed, China's exports and imports both slowed significantly in September, indicating that Chinese manufacturers may be reducing prices to clear inventory in anticipation of new tariffs imposed by various trading partners, not least by the United States (especially if Donald Trump becomes president). Furthermore, deflation is further fueled by an unbalanced economy, with domestic consumption falling behind industrial output. This might prompt the PBoC to implement additional interest rate cuts on Monday.

Market reactions to the latest data Chinese markets have reacted quite favourably to the latest economic data, with the CSI 3000 Index up more than 5.5% and the Shanghai Composite Index rising by more than 4%. Meanwhile, Chinese offshore yuan strengthened to 7.12, although the short-term trend in USDCNH remains bullish. As for the Asian currencies, the Malaysian ringgit (MYR) was relatively flat, while the Indonesian Rupiah (IDR) continued to appreciate, with USDIDR falling below 15,500. ‘In case, PBoC treats the latest economic data as not good enough to pause its monetary easing campaign, ringgit and rupiah may continue to appreciate but only slightly as the main driving force for them still is the U.S. monetary policy and the upcoming U.S. elections,’ said Kar Yong Ang, a financial market analyst at Octa Broker.

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