China recovery weak but strengthening
China stocks in July-August have been resilient to geopolitical driven risk aversion sell-off. The rationale is first the political and geographic distance from the epicentre in Eastern Europe and Middle East. And secondly, data from China has been a solid run highlighted by Q2 GDP at 7.5%. Exports and Industrial production are strong and pullback in PMI is manageable. The recovery in growth is primarily due to a series of focused policy easing measures to improved liquidity conditions, heavy
fiscal spending and bounce in domestic sentiment. That said, in order for policy makers to maintain their 7.5% target they will have to manage secular downtrend in the Chinese real estate market that continues to suppress domestic demand. The PBoC is likely to shift from targeted easing to broad interest rate cuts. China growing contribution level to global production has increased the correlation between volatility and economic data surprise. This is even more apparent in regional EM. So
while downside risk to China are apparent we suspect official support will smooth out any real decline.
Read the full report: FX Research