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Homeworld marketsChina's markets have had an incredibly strong summer — but troubles loom

China’s markets have had an incredibly strong summer — but troubles loom

  • The Shanghai Composite rose 3 percent in August, pushing the index's gains to more than 8 percent in 2017
  • China's yuan just recorded its strongest month in 2017, appreciating 2 percent against the U.S. dollar
  • China's stock markets have been buoyed by strong performance in the financial sector, with the biggest four state-owned banks capping August with decent earnings

China's markets sizzled this summer, but experts say numerous risks loom — so keep the champagne on ice.

The Shanghai Composite rose 3 percent in August, extending July's rise and pushing the benchmark index's gains to more than 8 percent in 2017. Similarly, China's yuan recorded its strongest month in 2017, appreciating 2 percent against the U.S. dollar as the currency accelerated to 5 percent year-to-date.

A woman at the security trading floor in Shenyang, Liaoning province of China.Getty Images

Experts have attributed the boost in Chinese markets to better-than-expected growth in the world's second-largest economy. Stronger growth has been largely due to Beijing's meddling in the markets and economy to prevent embarrassing swings ahead of a major leadership transition in the fall, experts say — but that playbook can't be sustained.

"While state buying can support equities in the short term, over the medium term, the government's interventionist mindset won't help the market," said Chang Liu, China economist with Capital Economics.

"With valuations no longer cheap, we believe the upside for A-shares is limited," he added, using a term to describe stocks traded in the mainland.

China's stock markets have also been buoyed by strong performance in the financial sector, with the biggest four state-owned banks capping August with decent earnings. All of them — Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China — reported faster profit growth for the first half of the year.

ICBC, the world's largest bank by assets, saw net profit rise 1.8 percent to 153 billion yuan, versus a 0.4 percent growth in 2016. Bank of China posted the biggest boost, with net profit spiking 11.5 percent to 104 billion yuan, versus a 1.9 percent increase last year.

Net interest income rose at the banks, led by a 7.1 percent rise at ICBC to 251 billion yuan. Asset quality also improved with non-performing loan ratios largely ticking down, apart from at China Construction Bank, where they were flat.

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