Introducing our China Stress Index


Introducing our China Stress Index

A new proprietary index from NatWest Markets charts investor concerns regarding China. Even early results already make for fascinating reading.

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.

NatWest Markets China Stress Index

Source: NatWest Markets, Bloomberg. Data as at 31 July 2019.

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.


 

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

10th June 2019

Author:

Peiqian Liu
China Economist

This post was updated with data and commentary from 31 July 2019.

Set Tab for lightbox