NatWest Markets has created a proprietary China Stress Index (‘the Index’) to capture investors’ general level of concern towards China – ranging from perception of the growth and policy outlook to reaction to discrete events, and from the impact of news headlines to critical data releases.
Components of the NatWest Markets China Stress Index (CHSI)
The China Stress Index is made up of six components. Each component is a market indicator for the Chinese economy and is weighted differently, as you can see in the table below.
We’ve identified these market indicators and their appropriate weighting using Principal Component Analysis (commonly known as PCA). PCA is a statistical approach that extracts the most striking features of a particular data set, which in this case, is the Chinese economy.
|
Market indicator |
China Stress Index weighting |
|
US dollar Chinese Yuan (USDCNY) spot |
5% |
|
Shanghai Composite Index |
16% |
|
Shanghai Interbank Offered Rate (SHIBOR) 3-month rate |
14% |
|
10-yr Chinese Government bond yield |
18% |
|
Copper spot prices |
28% |
|
Zinc spot prices |
19% |
|
|
100% |
Using the Index to measure historical stress
Although the Index was launched in May 2019, we have been able to use historical data from the six market indicators that comprise the Index, right back to 2005. As a result, we can select periods of extremely high or low stress as a comparison point.
Below are a selection of three key case studies as measured by the Index that paint an interesting picture of the way that stress towards China changes.
Case Study 1 (June 2018): A soaring start
When US-China trade tensions began to heat up in June 2018, stress according to the historical Index results soared, following the first round of tariffs – as you can see in the chart below. However, sentiment eventually mellowed and began to decline at a moderate rate from January 2019 in line with more amicable trade relations.
Case Study 2 (April-June 2019): Rapid deterioration in market sentiment
Since late April/early May 2019, the Index began to rise once more, when trade talks between the US and China broke down. This saw some sharp upward movements as a result. The same sharp spikes occurred again in June when markets were hit with a double whammy. Uncertainties in US-China trade relations were paired with the imminent risks of broader financial market disorders, which stemmed from a small commercial bank takeover by the People’s Bank of China in May.
However, the magnitude of the rise in stress was less overall between the April-June 2019 period than the increase seen in Case Study 1(mid-June to mid-July 2018), when the first round of tariffs were implemented.
You can read more about how the China Stress Index performed in June 2019 in an article from Bloomberg Opinion.
Case Study 3 (July 2019): Sentiment is sensitive and vulnerable to policy
The Index was mixed during July, seeing an initial climb before dropping back down and steadying out mid-month. The expectation that there may be a favourable outcome from the Politburo meeting at the end of the month was likely a driver in this stabilisation of the Index.
Politburo meeting outcomes
The Politburo of the Communist Party of China are the 25 leaders who make up the decision-making body of China. They meet regularly and look specifically at economic policy.
The meeting statement from the 30 July saw leaders acknowledge the downside growth risks in China over the near term. Leaders pledged more support to stabilise domestic demand with the focus on manufacturing, infrastructure and rural consumer sectors. The policy priority shifted to stabilise high quality and sustainable growth as the Politburo avoided mentioning ‘structural deleveraging’ in their statement.
Following this statement, the China stress Index experienced an initial jump upwards. We will be monitoring market commentary in response to the meeting statement and the Index movements closely over the next few days.
Where next for the Index?
As at 31 July, China stress – though higher than it has been for some time – doesn’t alarm us yet. Whist we have seen a small rise in the Index following the Poltiburo meeting, the market backdrop for China stress however, remains fluid. We will continue to use our proprietary China Stress Index to assess market sentiment in the wake of any developments.
Where to view the China Stress Index
Anyone with a Bloomberg terminal can find the Index ticker by searching “.NWMCHSI G Index”.
Watch this space for more updates about how the Index performs over the coming months.
Thanks to Sukriti Kalra for her contribution to this article.
