Here’s why Shanghai index, Hang Seng rose after weak China data

The Shanghai Index and the Hang Seng drifted upwards on Thursday as investors ignored the weak economic data from China. Hong Kong’s Hang Seng index jumped by 2.60% while the Shanghai rose by 0.86%.

US inflation and slowing China growth

The main theme in the market this week is on China’s and US economic slowdown. There are signs that the Chinese economy is recovering at a significantly slow pace than expected.

Data published this week showed that China’s inflation dropped to 0% in June. As a result, there is a likelihood that the country’s inflation will move to the negative zone in the coming months. While low inflation is encouraging, it also provides signs that an economy is losing momentum.

A separate report on Thursday revealed that China’s exports and imports continued falling in June. Exports dropped by 12.4% in June after falling by 7.5% in the previous month. Imports, on the other hand, declined by 6.8% after falling by 4.8% in May. As a result, the trade surplus widened to $70 billion.

Analysts believe that China’s economy is doing worse than what official numbers are saying. They cite the ongoing weakness in the commodity market and falling shipping costs. As I wrote on Monday, ocean shipping costs have tumbled to 2019 lows.

In a recent note, a well-known analyst warned that China was moving to a balance sheet recession. A balance sheet recession is where companies and individuals focus on lowering their debts instead of spending. As such, he compared China’s economy to that of Japan, which has stagnated recently.

US inflation softening

The main catalyst for the Hang Seng and the Shanghai index is the recent American consumer inflation data. As we wrote here, inflation dropped to 3.0% in June while core inflation dropped to 4.8%. The latter moved below 5% for the first time in months.

Therefore, these numbers mean that the Federal Reserve will likely start pivoting in the coming months since the labor market is also softening. As such, there is a likelihood that this month’s rate hike will be the final one this year.

Global indices tend to do well when the Fed is becoming dovish. For one, a dovish Fed leads to a weaker US dollar and a risk-on sentiment in the market.

The top movers in Shanghai index were ARTS Group, Dalian Thermal Plant, Fujian Raynen Tech, and Cybrid Technologies. All these shares jumped by more than 5%. In Hong Kong, the biggest movers were companies like AIA Group, Alibaba, Alibaba Health Information, ANTA Sports, and Baidu. All these shares rose by over 5%.