June trade data released today for Hong Kong saw the deficit expand to 16.5 HK Billion, with total exports increasing to 211 HK Billion a year-over-year decrease on 5.41% -a big sequential improvement over May. Shipments to the mainland increased by 10.18% (NSA) over last June and accounted for 52.5% of the total, continuing the trend that has held since February when the impact of Beijing’s stimulus was first felt and exports to “The Client” rose to more than 50%.
For us, this data is an excellent rear view mirror confirming the impact of Beijing’s plan, but is less valuable as an indication of future demand. Although the Export orders in neighboring markets like Taiwan suggest consumer spending in China is showing no signs of slowing anytime soon, Baltic Shipping indices (admittedly a volatile and imperfect measure) have pulled back in recent weeks as anecdotal evidence that stockpiles for base metals and other industrial commodities have built to surplus levels that may at least warrant a breather for heavy imports in August.
We view the Shanghai Composite’s current level as unsustainable as more easy credit finds its way into the hands of more first time equity investors and prices reach irrational highs. We also believe that the internal demand spurred by the stimulus will plateau for a period in the near term unless the nature of that demand shows signs of broadening more rapidly than it has thus far. Neither of these opinions makes us bearish on a long duration basis necessarily, we simply manage risk in real time and focus on the math first, the narrative second.