The stock exchange link up will create a market larger than London's or Tokyo's, but will it support a slowing economy?
Photograph by Brent Lewin — Bloomberg/Getty Images

Economy still slowing, but markets take cheer from link-up between Shanghai and Hong Kong Stock Exchanges.

By Geoffrey Smith
November 10, 2014

China’s economy gave another cough and splutter Monday, with a couple of price reports suggesting that it may not be immune to the deflation bug that has spooked Europe and Japan this year.

The National Bureau of Statistics said consumer prices stagnated in October after rising 0.5% in September, while factory gate prices fell for the 32nd month in a row, and are now down 2.2% on the year. Consumer inflation is now running at an annual 1.6%, its lowest since early 2010.

The figures come on the heels of others released Friday that showed almost all of China’s regions showing a slowdown in growth and missing their own targets.

The world’s second-largest economy is already growing at its slowest rate since 2009, with gross domestic product up “only” 7.3% in the year through the second quarter.

At the weekend, Chinese President Xi Jinping added to speculation that Beijing may formally lower its growth target for next year to 7%, telling an audience of business leaders at the Asia-Pacific Economic Cooperation summit in Beijing not to worry at the prospect of a slowdown.

“Some people are worried about a further slowdown in economic growth. They wonder if the economy would face a bumpy road ahead. Such risks indeed exist, but they aren’t so scary,” the South China Morning Post reported Xi as saying. “Even growth of around 7% would make China a leading economy in the world – in terms of either speed or size.”

Analysts at ANZ bank in Hong Kong said the risk of deflation, driven by the collapse of a housing boom and widespread over-capacity in industry after years of state-directed investment, has risen significantly.

China’s financial markets were unfazed by the news though. They were more focused on the announcement that a long-awaited link between the Hong Kong and Shanghai stock exchanges will go live November 17, effectively creating the world’s third-biggest stock market after the New York Stock Exchange and NASDAQ with a total capitalization of $5.6 trillion.

The link is the first scheme to allow institutional investors into mainland markets without having to get individual approval from regulators.

The scheme was first announced in April, but has been delayed for a number of reasons, most recently the pro-democracy protests in Hong Kong.

The Shanghai market rose 2.3% on the news, while the Hong Kong market rose 0.8%.

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