It has been China news these days as the China stocks swung with huge volatility. After a series of crushing losses, China rebounded and recovered the losses all in a day.
Hang Seng Tech Index rebounded 21% on 16 Mar. Mind you, it is an index, not one stock. I have seen an index tank 20% in a day but not one that goes up like this. Even the broader iShares MSCI China Index ETF (MCHI) was up 21% during US trading hours. KraneShares CSI China Internet ETF was up even more ridiculously by 40%.
What caused the China stocks to stage such a rebound?
It could be the positive affirmations from the Financial Stability and Development Committee meeting led by Vice Premier Liu He.
Previously I mentioned there were 6 risks that were possibly driving down the China stocks. 4 of these risks were addressed by the Committee.
First, the Committee said that the regulation of China tech stocks should be ended as soon as possible. Investors and the tech firms breathe a sigh of relief as this was a huge overhang that weighed down the tech stocks for the past one year.
Not only that, the China Banking and Insurance Regulatory Commission said that it would help financial companies to stabilize capital markets and support insurance companies to invest in domestic securities. This could fuel the buying demand.
Second, the China central bank is likely to go the other direction from the Fed – it is going to cut interest rate. This would give a boost to the China economy as it attempts to achieve the 5.5% GDP growth target and the added liquidity is good for stocks.
The financial committee reiterated that continuing economic development is the first priority of the Chinese Communist party. This is another much needed assurance against the common prosperity theme.
Third, the committee seemed to have softened the language around Covid zero policy – the meeting said that the policy may be tweaked to prevent business closures. Many investors felt that a Covid zero policy is going to hurt China’s economy and any relaxation of this goal should alleviate the concerns.
Lastly, China said she supports overseas listing – likely referring to the US ADRs. The fear of China stocks delisting from the US markets was assuaged by the government as they mentioned the discussions with Washington have achieved progress and that a cooperation plan would be finalised. This was opposite to the stance over data control issues for overseas listed companies previously. China ADR stocks rallied.
Why is China doing this and why now? This is not the first time that the government has publicly shore up confidence in the stock market. It could be because of the recent heavy declines in the stock market or to prove JPMorgan’s report wrong (it said China stocks being ‘uninvestible’ for the next 6 to 12 months). However, we can only speculate and only the insiders will know the real intention behind this.
Although no concrete actions were taken, the promises were enough for the markets to rally. Can this rally sustain or is this a dead cat bounce? The answer can only be known few weeks or even months from now. I still hold the view to buy long-term holdings at good prices and not trade short-term rebounds because the volatility can create huge losses.
Some investors are concerned about how much influence the Chinese government has on the financial markets. Any negative or positive comment could down or lift stocks easily. I would say the same for the US markets too, whereby the Fed’s interest rate policies could determine the direction of the stocks.
We are seeing greater impact from government’s intervention in the markets over the years, whether in the East or the West, and it has become the new normal.
