Post Wednesday's meltdown, the Chinese market is up 6 percent in trade on Thursday. But the question is whether it is just a one day rebound or whether the sell-off in Chinese stocks is over.
Kevin Lai, chief economist, Asia ex-Japan, Daiwa Capital Markets, says from a macro perspective, China continues to remain weak. Market participants are expecting a monetary stimulus and for it to help, but hasn't happened, he says. Further, according to him, those investors who have taken massive risks in the Chinese market are under pressure. This in turn will result in more selling, he told CNBC-TV18.
Lai says over the last six months, the big picture in China has been deteriorating. The country is fighting against money outflow, deflation, etc.
He expects the US dollar to strengthen more leading to a further fall in commodity prices.
Below is the verbatim transcript of Kevin Lai's interview with Reema Tendulkar and Anuj Singhal on CNBC-TV18.
Reema: What have you made of this rebound today, is it only a one day wonder or do you think that we have reached selling exhaustion for the Chinese equities, what is the sense that you are getting?
A: From a macro perspective, the fundamentals are still very weak. There is a lot of illusion in the market. Market has been thinking about monetary stimulus and this stimulus will work and create a fundamental improvement but that hasn’t happened. We are also talking a lot about a lot people picking massive leverage, massive risk in the Chinese market and these people are under a very lateral pressure to cover their positions because they follow the money where they should pay back their money and naturally they should be selling. So, we may be seeing more pressure on the market. I think it was almost insane for the government to jump up the market in the first place. The corrosion we are seeing now is inevitable.
Anuj: The Shanghai market could remain quite volatile but what about H shares and the Hong Kong market, do you think there are some bargains there, is that market now a good buying opportunity?
A: I can’t say that from an economic perspective. Again, I want to highlight that fundamentally nothing has changed. Over the last six months the big picture in China has been deteriorating in fact and China is still fighting several big problems including money outflows, deflation and loss of export competiveness. So, I do think that we may see further downward pressure on GDP growth or the deflation pressure and these are not positive for the equity market in general.
Reema: Chinese economy is suffering from entrenched deflation, today we got the producer price numbers for June, it is down 4.8 percent, 40 straight months of a negative producer price number. Does that mean that maybe we are going to see more of a commodity sell-off? We already have seen it fall, we have seen commodities decline by 10-20 percent just in the last few months considering the deflation does it mean that commodities prices decline even more?
A: I think so; I think the dollar will continue to strengthen in this environment, I think the dollar is on the verge of further pickup on the upside. Bear in mind that the Fed hasn’t even started tightening; when it begins, it will send the dollar even higher and then push commodity prices further down. The other problem which the market has not fully factored in is further slowdown in China especially after the latest market rout. I think the growth momentum will be even down in the second half because of this massive disruption of wealth and that will put further deflationary pressure on China.
Anuj: Can we see a real slowdown of domestic consumption in China because that is going to impact a lot of economies, not just China?
A: I do think so. I do think that the stimulus whether it is fiscal or monetary stimulus in China, it is not working. If not forgiving the default or de facto and again in the early months of this year consumption was still holding up because the stock market was doing okay, was doing great. However, now the stock market is suffering so that will affect many households. I do think that many people in China have lost their money over the last couple of weeks so that will have a further negative lock-on effect on retail sales in general.
Reema: Is it quite likely that the Chinese GDP might even slip below 7 percent in this year or maybe next?
A: I will believe that but I will also believe that there is also a great likelihood for the government to massage the economical numbers especially the GDP number. The official number will be still pretty close to 7 percent or what the consensus expects. I have been a advising our clients to don\\'t just look at GDP number, look at what is going on in the real world, look at the initial regional trail on this for example look at Korean, Taiwan, Taiwan exports to China for example and those numbers look horrible.
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