Photo: Stuck in Customs on flickr
The top explanation for the sharp fall in China is inflation and tightening fears, although the reaction feels a little delayed, since that’s been a story all week (and actually, for months and months).One interesting thing to note: Yesterday Goldman Sachs came out with a SELL call on China.
Specifically, they wrote, via ZeroHedge:
Yesterday we closed our long China (HSCEI) equities recommendation and long EEM/SPX recommendation with potential gains of roughly 11.3% and 2.3% respectively. With the US cyclical data (ISM and Payrolls) surprising on the upside last week, initial jobless claims continuing to trend lower, and inflation and policy tightening back squarely on the EM policy agenda, the near term outlook for this type of relative trade versus the US is more muddied than it has been for some time. The China (HSCEI) equities top trade too has moved up strongly in the last few months on the back of better cyclical data and easier policy. With successive inflation prints above the policymakers’ comfort zone, another hike in the reserve rate earlier today, and more policy tightening likely in the works, the near-term risk/reward for this position also looks unappealing as we approach the year-end ‘roll-off’. This “risk-management” aside, we continue to like the long-term outlook for EM equities: growth remains robust, and low interest rates in the majors should continue to exert downward pressure on the cost of funding for EM corporates. In the near term the inflation risk in some EM economies is growing and real, but as long as it is dealt with, equities should remain broadly well-supported, but after a strong run since September, it will be important to be more selective going forward.