This guest article was written by Hangfu Zou, Senior Analyst at AETOS Capital Group.
The Chinese market has created a miracle in economic growth in the past 15 years. During this time, there were amazing expectations coming from the financial markets, that anything related to this mysterious country could give you a totally different kind of financial opportunity.
This article will be mainly introducing the current and future trading opportunities in the Chinese market.
The Chinese stock market is somehow quite different from the international stock market. It’s like a baby who really wants to grow up fast and become strong enough to take over everything by himself. However, due to incomplete market policies, the lack of knowledge of normal traders, government intervention and the selfishness of financial institutions, this stock market experienced a crash in June 2015 and also more recently.
In contrast to the international stock market, the unopened Chinese market strongly requires government intervention, which we can call ‘liquidity from the government pocket’. Therefore, whenever the price hits a historical low like 2850 in the Shanghai composite index, there is strong buying power in order to bring the stock market back up. However, because market sentiment could not be easily recovered from the stock market crash, the recovery trend will meet resistance at 3300, 3500 in the Shanghai composite index. This kind of recovery period will be continued over and over again in the next 2 years due to the slowing Chinese economy.
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As you know, the Chinese GDP strongly depends on exports, therefore the currency rate becomes really important in keeping the GDP at a stable level. Since the Federal Reserve is considering an age of rising interest rates, the US dollar will somehow become the relatively strongest currency in the international market. This increases the speed of depreciation of the other currencies including the RMB. The depreciation of the RMB will be the main trend of China in 2016, but the speed should be slow, stable, and constant.
However, the shorting forces in the market are always looking for speculating opportunities, including in the forex market, and this time they are targeting the RMB in order to achieve magnificent profit. In contrast to past experiences, this time they have a strong competitor which is the Chinese government.
According to the price chart, whenever the price drops too fast, government intervention will come out with strong liquidity and new government policies. This market discipline will not be changed in a short period of time, thus trading strategies based on this will prove to be a good opportunity to be part of the market.
As we mentioned before, the Chinese market brings opportunities to the international market, but the biggest advantage has been taken by the Hong Kong market. The Hong Kong market has been totally different since 1997. Currently, the Hong Kong financial market is like a bridge between China and the international market.
People in China call the Hong Kong stock market the ‘tri-ply wood’, as it is affected by three different powers, but a vicious crash is not accepted by the Chinese government. Therefore, the recent drop in both the stock market and the forex market could be considered as an act of international forces. Because of the co-movement between the Chinese and Hong Kong markets, this kind of short price changing is not to be considered reasonable. Therefore, it will be affected by the incoming intervention of both China and Hong Kong. The short-term rebound should be considered as a trading opportunity based on the current situation.
Although the Chinese economy is not as strong as in the past, the absolute number is still much higher than other countries including most developed countries. Therefore, the trading opportunities in the short-term are still open to the market.