How does Chinese New Year affect the markets?

What and when is Chinese New Year?

Also known as Lunar New Year, or the Spring Festival, the event sees Chinese people from around the world hold big family reunions, travel abroad, and give substantial gifts to those close to them.

However, as it is based on the lunar calendar (rather than the Gregorian one used by the West) the date of Chinese New Year differs annually – usually falling between 21 January and 20 February.

Each year is championed by one of 12 animals – one for each cycle of the Chinese Zodiac. For example, 2020 kickstarts the cycle once again with the year of the Rat. This will be followed by the year of the Ox before the cycle repeats twelve years from 2020 in 2032 with the year of the Rat.

While the public holiday is officially only seven days long, and the festival formally culminates on day 15, with an event known as the Lantern Festival, most Chinese take the majority (if not all) of their annual holiday over this time, often as block leaves. This means that people can be off work from two weeks before the start of the event, and return weeks after it has ended. The country, and practically all of its industries, can shut down for three, possibly even four weeks overall.

The holiday spreads far outside mainland China, and its effects are notable in other countries with large Chinese populations, including Indonesia, Singapore, Malaysia, South Korea, and the Philippines.

Chunyun: the world’s largest human migration

With people in China willing to search the length and breadth of the country for work, or even further afield by going abroad, Chinese New Year sparks the most gargantuan mass migration of people each year, as the vast majority of the country’s 1.4 billion strong population return home to reunite with their families.

That is just under a fifth of the world’s population travelling inside and outside China during chunyun – a 40-day period beginning 15 days before the start of the lunar year and ending 25 days after.

In 2019, almost three billion trips were completed during Chinese New Year, and there really isn’t any other event that comes close to rivalling this figure. Americans complete about 46 million trips over the Thanksgiving holiday each year, while the annual Hajj pilgrimage to Mecca attracts about two million Muslims each year.

While virtually all of China’s economy grinds to a halt, the few industries that go into overdrive in this period are transport, tourism, and retail. In the seven days from the start of the festival in 2017, the retail and catering industries in China saw an 11% rise in revenue from the prior year to 840 billion Chinese yen ($140 billion) – with marked lifts in sales for the leisure and entertainment sectors, and in sales of products like home appliances, digital products and jewellery.

Transport inside of China reaches its limits. It is estimated that in 2019, 408 million railway passenger trips had been made over the new year period and 73 million by air. Most of the 3 billion trips are however completed by car, translating to busy traffic situations across major city connectors.

The 2020 Chinese New Year festival is expected to see an uptick of 8% for both railway and flight trips in China, though this was before the latest SARS-like coronavirus hit the country in a significant manner. The city of Wuhan, a central transportation hub, saw lockdown whereby public transport and flights grinded to a halt, changing the typical economic patterns around the Chinese New Year period.

When are the markets closed?

Customarily, the eve of the Chinese New Year marks the reunion dinner night when families come together across distances to spend time together. This also means that depending on when it falls between the January and February period, the day often see to partial or full market closure across Chinese populated markets.

For 2020, the eve Chinese New Year had fallen upon Friday, January 24. Below outline the dates for the various market closures in relation to Chinese New Year. Do note that China and Taiwan markets closures extend beyond the key dates below for Chinese New Year.

Chinese New Year effects on the markets

1. Cash is king ahead of Chinese New Year

Cash is king during Chinese New Year, with gift-giving in the form of ‘red packets’ a major driver. Given that companies and stock markets are closed over the festivals, swathes of profit-taking take place to take vast sums of cash out of the system – causing fluctuations in stocks.

Migrant works will also often by paid ahead of their departure home for the Chinese New Year season and it is common practice for companies, particularly the vast manufacturing sector to pay up their workers prior to Chinese New Year. Many workers tend to get a bonus equal to a months’ wage and strikes are common at this time of year, usually over pay issues. This demand for cash have also led to a seasonal strengthening effect of the Chinese yuan at the start of the year, seeing USD/CNH ending January lower 60% of the time in the past five-years.

2. Lowered liquidity during the festive period

Looking at the Shanghai Stock Exchange over last 2017’s holiday season, there was a notable drop off in trading volumes in the one to two weeks before the market closed, at which point it steadily declined before bottoming out on the first day of trading after the break.

The curve represents the volume between 16 January and 10 February, while the red box highlights the volume on the last day of trading before the holiday and the first day of trading when Shanghai reopened.

Trading volumes on 17 January were over 47% lower than the day before – marking the start of the slump leading up to the holiday. When Shanghai reopened on 3 February, trading volumes hit their lowest level of 2017, only returning to normalised volumes on 10 February. Volumes at the low of the curve were two-thirds lower than the peak.

The data suggests there is a cycle of about 15 trading days over the holiday period, with a slowdown in trading evident during the ten trading days before the exchange closes and taking around seven trading days to recover after reopening.

3. Economic impact with Chinese New Year

The biggest impact of the holiday outside of China spawns from the near-complete cessation of the country’s industry, with China having been the world’s biggest manufacturer since 2010. China’s factories tasked with supplying the world with its cheap manufactured goods can be shut for over a month, and the ramp-up on return can be slow due to backlogged orders, capacity constraints and a smaller workforce. This can then force larger firms to subcontract smaller factories, which can impact prices and quality.

Many employees choose to change jobs over the period, meaning many firms are left shorthanded while having to spend time training new staff. Product designer and manufacturer Genimex, that works with big-name clients like Aldi, Costco, Wholefoods, Walmart and Target, say some firms can see just 35% of their employees return after Chinese New Year.

This trickles down to retailers and importers reliant on Chinese products. With many rushing to get orders out of the country in enough time, shipping and logistics come under immense strain, which in turn can impact oil prices.

US freight forwarder and customs brokerage Flexport says ocean and air freights began seeing significant rises from the middle of December, but says rates should start to ease one to two weeks after the holiday. All in all, Flexport says, factories are closed, or operating at diminished capacity for at least four weeks.

There is a clear pattern in Chinese trade that can be partly explained by Chinese New Year. As is evident, particularly in exports, there is an annual drop in output at the start of the year, followed by another fall in the middle of the year which can be put down to the second biggest event in the Chinese Lunar calendar, the Mid-Autumn Festival. The date of this holiday also varies each year, and the fact it is only two days long is demonstrated by the quicker recovery in the middle of the year compared to the recovery after the longer Chinese New Year.

In turn with economic data, the irregularities caused by the Chinese New Year festival also see to economists and investors taking the readings with a pinch of salt, often opting to await the release of data from March onwards for a clearer read on the economic situation in China. In fact, China combines the January and February activity data such as industrial production releases with the aim of smoothing out the distortions from the Chinese New Year holidays. Arguably, these distortions can also cause inefficiencies within the Chinese equity market that remains very sentiment driven.

4. Commodity prices finds seasonal Chinese New Year fluctuations

China is the biggest producer and consumer of gold in the world, and Chinese New Year pushes demand up, as people look to give gold and jewellery as gifts. The influence this has on gold prices early on in the calendar year is notable.

Other metals are affected too. The London Metal Exchange saw trading volumes in certain copper futures on the first trading day after the start of Chinese New Year in 2017 fall by 50%, compared to the average volume during the preceding 12 months, and reports also imply that traders of other metals like aluminium and nickel, which are hugely influenced by China, can struggle to operate during the holiday season.

With Chinese investors thin on the ground during the period, brokerages may also refrain from taking any big bets whilst liquidity is so low.

With construction in China the main driver of demand for many commodities, the shutdown in activity can cause subdued demand, and therefore prices, for the likes of steel. Steel is particularly prominent this year, as China has vowed to cut its own steel production in 2018, something it started to do in 2016 and will continue to do until 2020.

The holiday season can also mean there is a shortage of raw materials when factories resume operation, which compounds the delays caused by backlogged orders.

With so much volatility in markets before and after the holiday, investors can be presented with opportunities that would not have otherwise emerged. As an old Chinese proverb goes, ‘in every crisis, there is opportunity’.

Speculate on the stock and commodity prices before and after Chinese New Year with an IG trading account.