China to Allow Investors Access To Outside Stock Markets

China’s Monthly Trade Surplus Surges

Surprising analysts and the currency market, China’s monthly trade surplus swelled once again to $16.9 billion. The figure compares with lower consensus forecasts as economists expected the surplus to widen only slightly to $15 billion in the month of April. China exported $97.5 billion in the month, comparative to $80.57 billion imported into the country according to customs reports. Although positive for the economy, as it shows continued growth in the short term, the figure will formally weigh on trade disputes when Chinese officials set foot in
Washington at the end of May. Subsequently, the widened surplus will also likely lead the People’s Bank of China in increasing interest rates in the near term. Already lifting rates higher all but three weeks ago, policy makers continue to remain steadfastly hawkish on the 3 percent rate of inflation supported by excess cash liquidity. Subsequently, producer price index figures were released. For the month of April, producer prices advanced by 2.9 percent on a year on year basis according to the National Bureau of Statistics.


Allow Investors Access To Outside Markets

For the first time, China will allow domestic banks and investors the opportunity to invest abroad in foreign stock markets. The move comes under the qualified domestic institutional investors program, or QDII, where commercial banks are permitted to invest as much as 50 percent of funds in overseas markets. Subsequently, the decision will help cool the domestic stock market, which has recently made headlines on rampant advances. China’s CSI 300 Index has surged ahead by 81 percent this year after more than doubling in the previous year. Incidentally, by shifting focus outside of China, government officials are hoping to push some investment demand outside the borders, stabilizing what has been noted as a potentially bubble forming market. The decision will additionally help to alleviate pressure on the underlying currency as the Chinese yuan continues to break above at higher levels every day. Advancing by 7.5 percent since the fixed exchange regime was dropped, the underlying currency has broken through record levels, trading as low as 7.6766 in the overnight session.


China’s Stock Market Advances To Record


The Shanghai stock market advanced throughout the week as benchmark stocks continued to close at record highs, bolstered by momentum seen since last year. Closing slightly lower on Friday, the
Shanghai index overall was higher, hitting the 4,000 figure and advancing over 3 percent for the week. The move has purported comments by Chinese policy makers and, most notably, analysts at Goldman Sachs Group Inc. Seeing that “current valuations are demanding and seem to have outpaced the improvement in market fundamentals, analysts at the US based investment bank note that the “risk of market euphoria is building”. As a result, with prices running well above current earnings, forecasts are deeming a potential “correction” in the markets. Incidentally, Goldman’s comments follow on the heels of warnings by central bank Governor Zhou Xiaochuan that a bubble is likely forming in the stock market. But who can blame investors. Currently savings rates in Chinese based bank offer well below the inflationary 3 percent level, leaving many to look for higher returns elsewhere.


Kathy Lien is the Chief Currency Strategist at

Forex Capital Markets. Kathy is responsible for providing research and analysis
DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.