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Disappointing Economic Data Hurt China’s Stabilization Process

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Disappointing Economic Data Hurt China’s Stabilization Process PART 1 OF 6

Why Did the SSE Composite Index Fall Last Week?

SSE Composite Index fell

The SSE (Shanghai Stock Exchange) Composite Index fell by 1.4% to 2,885.1 from June 8 to June 17, 2016, after MSCI decided not to include China’s A-shares in its Emerging Market Index, or EMI, for the third consecutive year. Remy Briand, MSCI’s global head of research, said, “International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A-shares market before its inclusion.”

Why Did the SSE Composite Index Fall Last Week?

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However, MSCI has left the door open for China, and it will consider including A-shares in its 2017 review.

Another reason for the fall of Chinese stocks was the release of weaker-than-expected economic data, raising concerns about the health of the economy, which we’ll cover later in this series.

The SSE Composite Index includes all listed stocks (A-shares and B-shares) on the Shanghai and Shenzhen stock exchanges. A-shares are shares denominated in domestic currency (i.e., yuan) and are available only to local investors. On the other hand, B-shares are shares denominated in foreign currency, such as in US dollars on the Shanghai Stock Exchange and in Hong Kong dollars on the Shenzhen Stock Exchange, and are available to foreign investors.

China tightens scrutiny on IPOs

On June 17, the China Securities Regulatory Commission, or CSRC, announced new rules to tighten the scrutiny over IPOs (initial public offering) to eliminate any unqualified shares issued by new and existing companies. The tightening comes after MSCI denied inclusion of China’s A-shares in its EMI. Thus, China requires strict rules to fine-tune its policy to conform with international standards in a bid to attract foreign investors.

Deng Ge, spokesperson for the CSRC, said,“The securities regulator will now particularly look into fraudulent IPOs issued by companies that attempt to ‘whitewash’ their financial accounts in order to receive regulatory approval or hide critical information from investors.”

Returns of China-focused funds

For the week ending June 17, the Templeton China World Fund (TCWAX) fell by 3.3%. The John Hancock Greater China Opportunities Fund Class A (JCOAX) fell by 2.5%, while the Matthews China Fund Investor Class (MCHFX), the Clough China Fund Class A (CHNAX), and the Oberweis China Opportunities Fund (OBCHX) fell by 2.2%, 1.5%, and 1.0%, respectively, for the same period.

During the same week, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) rose by 0.2%, and the iShares MSCI China ETF (MCHI) fell by 1.9%.

The ADRs (American depositary receipts) of Alibaba Group Holding (BABA) and NetEase (NTES) rose by 1.4% and 0.7%, respectively, while JD.com (JD) and 58.com (WUBA) fell by 4.4% and 2.4%, respectively, for the week ending June 17.

In the next article in this series, we’ll look at why it’s important for China to be included in the MSCI EMI.

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