What moves the Chinese stock market?

The Chinese stock market

Huge swings over 2015 and 2016 had probably not been distant memory when talking about the Chinese stock market. This is more so for those who have witnessed the likes of the Shanghai Composite (SHCOMP) falling through from over 5000 points in June 2015 to sub-3000 in the span of two months. The index later went on to repeatedly trigger its circuit breaker, used to suspend market operations to smoothen operations, in January 2016. With less than 10% of the country’s population reported to own stocks and retail investors holding more than three quarters of the A-share market the Chinese market had often been likened to a giant casino.

Despite all these, the growing importance of the world’s second-largest stock market had propelled its A-shares to be considered and later included by Morgan Stanley Capital International (MSCI) in its emerging market index in June 2017. The inclusion is of high significance for a group of shares which are often overlooked by asset managers managing a diversified portfolio. The question, however, is what triggers the movements for these indices.

History of China stock market

Going into the history of the China stock market, the country’s exchange dates back over 100 years to 1866. This took place after the First Opium War in China with the establishment of the International Settlement area in Shanghai which also saw foreign markets and securities trading emerge. However, due to historical and cultural events including revolution and war, suspensions were seen in between. The notable one would be in 1949 with the Cultural Revolution. While the Cultural Revolution concluded in the early 1970s, the Chinese economy took years to reopen to foreigners and likewise for its stock market, whereby even until today, one is not able to access the China stock market like one would with other regional Asia stock markets. Operations formally resumed in the 1990 for the Shanghai stock exchange and a second mainland stock exchange in Shenzhen likewise commenced operations.

List of China stock exchanges

Two primary exchanges operate in mainland China - the Shanghai Stock Exchange and the Shenzhen Stock Exchange. A third exchange, the Hong Kong Stock Exchange, operates in the Special Administrative Region of Hong Kong.

Fundamental factors

As the IG glossary had listed, fundamental analysis is a method of evaluating the intrinsic value of an asset and analysing the factors that could influence its price in the future. It is based on external events and influences, as well as financial statements and industry trends. In short, it refers to the factors outside of the price movements of the asset itself.

One way to look at the company’s fundamentals is to view it in terms of the company’s return with regard to earnings. This is made up by both the earnings base and the expectation for future inflow. Some of the indicators used to assess these includes the earnings per share (EPS) or price-to-equity (P/E) ratio. Based on the analysis of the changes here, the market may alter their perception towards the current price level and hence drive movements within the market. Read more about fundamental analysis here or start a course on IG Academy on fundamental analysis.

Technical factors

Comparatively, technical analysis is another popular type of market assessment that drives movements within the stock market. Technical analysis is the examination and prediction of price movements in the financial market through using historical price charts and market statistics. Various assumptions are made in the process, including that prices move in trends and that others within the market are looking at the same trends for historical trends to repeat themselves.

Some of the more popular indicators often used in technical analysis includes moving averages such as the often-noted death cross pattern, typically the sinking of the 50-day simple moving average (SMA) below the longer-term 200-day SMA, pre-empting a bear market. Others includes MACD, RSI and Bollinger Bands are also common ones used.

Sentiment

As told above, sentiment plays a significant role for Chinese markets considering the large retail base. Investors’ psychology can have a strong impact upon prices for the Chinese market. Using a recent example to illustrate this, a disappointing set of Chinese manufacturing purchasing managers index (PMI) in April 2019 ought to have sunk prices on the day. Instead, markets rose upon the release, with the broad perception that the Chinese government would not kick back stimulus that would help the market ascend. Such beliefs feed into the market sentiment that can sometimes be strong forces with the Chinese market.

Conclusion

With China certainly looking towards more foreign participation, beyond the current 2% of the A-share market as the vice-chair of the China Securities Regulatory Commission (CSRC) had been quoted saying, expect the stock market movements to resemble more of its western counterparts. However, the strong sentiment driver for the broad retail-based Chinese market may well keep prices relatively more volatile compared to its various western counterparts. One can take a position on the likes of the CHN300 and A50 on the IG platform, which mirrors the CSI 300 and A50 respectively.