China Market Thoughts – Downside earnings risk to MSCI China due to the economic deceleration $CAF

• China Market Thoughts – Downside earnings risk to MSCI China due to the economic deceleration due to the combined ripple effect of the crackdown on the property sector and the slowdown in banks’ lending to local government-funded investment projects; 
• Policy risks such as the resource tax, which may hurt earnings of and de-rate multiples of energy and upstream resources companies;  tight liquidity situation in China
• Possible additional tightening measures in property and FAI areas. The uncertainties on domestic and external front, you should continue to stick to sectors with most visible growth, such as consumer staples, and low- and middle-end consumer discretionary sectors whose sales are least affected by the economic slowdown. 

The Shanghai index extended its declines, falling another (-6%) this week; China is now off (~27%) YTD, by far the worst performing major global equity market.  There were two main concerns that weighed on prices: 1) liquidity and 2) growth.  On the former, investors are anticipating capital raisings by China’s banks and freeing up capital to participate (this has contributed to the decline in prices).  For growth, the June PMIs out this week fell short of expectations, signaling that manufacturing activity in the region continues to ease moderately (although remains north of the 50 expansionary threshold).  Tues morning, a China Leading Economic Indicator reading was revised lower (this helped knock the Shanghai index 4.27% on Tues and contributed to the sp500’s 3.1% that day).