Two big headlines crossed from China this morning: 1) China announced a schedule for its leadership transition and 2) the Communist Party of China booted disgraced former leader Bo Xilai.
"Simply put, the dust finally settled on new leadership," writes Bank of America's Ting Lu.
"These decisions will significantly reduce the political and economic risks perceived by both onshore and offshore investors. Note rumors about political infighting have significantly disturbed markets so far this year."
Lu notes that political uncertainty was a hindrance for the economy:
The policy paralysis due to political struggles this year is the very reason why it might take longer than usual for the Chinese economy to recover. With the fight for the politburo standing committee membership over, top politicians will have to re-focus on economic policy making. We don't expect a big stimulus, but policy easing/stimulus will stepped up.
He also expands on why the ousting of Bo Xilai is a positive:
David Fuller's view China's new leaders could learn a lesson
from reinvigorated Indian prime minister Manmohan Singh. Just hit the ground
running with sensible economic policies.
Then cut out all the sabre rattling in the South and East China Seas and quietly rebuild damaged relations with Japan.
Do this and investor confidence will improve significantly.
Re: "…traders fear a break below 2,000 would lead to a major drop", I disagree but this sentiment does ring a bell for contrarian thinkers. Also, China has already seen a big drop and is only just above its 2008 trough. China's economy has grown a lot since then, despite the slowdown, and stock market valuations are lower. Monetary policy is becoming more stimulative in China's usually incremental manner.