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Global Macro: Selloff in Chinese Equities

NEW YORK ( TheStreet) -- Chinese data for September have been a mixed bag, but domestic policy has induced a panic sell in Chinese equities.

The chart below is of iShares FTSE China 25 Index (FXI).

Chinese PMI numbers released Wednesday were the best in seven months. The data, however, couldn't overcome the negative sentiment surrounding rising short-term rates.

The Chinese seven-day repo rate rose to around 5% on Thursday, its largest move since earlier this year. That rates have climbed so much signals to investors that the People's Bank of China fully intends on tightening monetary policy.
[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/12064248/1/fords-growth-in-china-takes-off-using-mulallys-oneford-blueprint.html"><em>Ford's Growth in China Takes Off, Using Mulally's OneFord Blueprint</em></a>]

The PBOC's decision to tighten policy is in an effort to curb lending and cut off inflation. Inflation currently runs around 2.5%, but anything in the range of 3% is unwanted by the central bank.

As is seen in the chart below, Chinese equities tightly consolidated, then broke lower earlier this week.

Among world equity indices, China has been one of the weakest performers. Along with tighter policy measures, besides the strong PMI number Wednesday night, Chinese data has been a mixed bag.
[Read: <a target="blank" data-add-tracking="true" href="http://www.mainstreet.com/article/retirement/401k/401k-savers-go-deeper-debt"><em>401(k) Savers Go Deeper in Debt</em></a>]

Export growth was weak for September, and weak guidance from Caterpillar (CAT) suggests industrial production won't be that great in the fourth quarter.

Equity investors have been looking for a correction lower in global markets all year, and China seems to be the first piece to crack.

Although other developed economies may not correct lower as drastically as China has, look for negative sentiment surrounding the region to weigh down a bullish thesis for the fourth quarter.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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