Politburo Brightens Mood for China Stocks After Gloomy Month
Comment of the Day

May 03 2022

Commentary by Eoin Treacy

Politburo Brightens Mood for China Stocks After Gloomy Month

This article from Bloomberg may be of interest to subscribers. Here is a section:

“The meeting addressed most of the pressing issues in the economy and is intended to boost confidence and turn around negative sentiment,” said Xiong Yuan, chief economist at Guosheng Securities. “It’s a rare exception that the Politburo publishes the statement during the trading day. Clearly it’s meant to incentivize investors to hold on to positions ahead of the holiday.

China’s top leaders responded to calls from investors and analysts alike to revive an economy hurt by Covid lockdowns that this week spread to Beijing and Yiwu, disrupting business operations and roiling global supply chains. The Politburo’s readout -- which was released at the earliest time of day of any since at least January 2017 -- came ahead of a five-day break for onshore markets.

While headwinds for China’s economy and markets still remain, in particular the government’s adherence to Covid Zero, traders are now asking whether this can be the long-awaited market bottom. 

The CSI 300 Index jumped 2.4% Friday, trimming this year’s loss to 19%. That still makes it one of the world’s worst performing national benchmarks, far outpacing the 13% decline in MSCI Inc.’s Asia Pacific gauge.

Eoin Treacy's view

Mainland Chinese stock markets are closed until Thursday for the May holiday, but Hong Kong reopened today. Faced with the political impossibility of altering the COVID-zero program, the central government have little choice but to cede some ground on its recalibration of the economy. That should represent further progress in supporting the trend of the credit impulse.

The credit impulse is reported with a one-month lag and bottomed in October. It took a meaningful leg higher at the last update. That’s generally consistent with a recovery in the stock market. Liquidity creation helps to boost asset prices. We’ve seen plenty of examples of that over the last 14 years. That suggests there is scope for a significant rotation away from Wall Street, where liquidity is tightening, to China where liquidity is easing. The weakening Renminbi will also support China’s exporters. 

The CSI300 posted an upside key day reversal on Wednesday and followed through on the upside Thursday and Friday. That signals a low of at least near-term significance. A break in the sequence of lower rally highs would check the medium-term downward bias.
The ChiNext tech-heavy index is short-term oversold and showing initial signs of firming.

The Hang Seng China Enterprises Index has now posted a higher reaction low, for the first time in more than a year, to suggest more than short-term support in the region of the 2008 lows.

Back to top

You need to be logged in to comment.

New members registration