To Time a Policy Bottom in China, History Says Patience Pays

  • Some traders still cautious on policy-driven rebound this week
  • Rally after 2018 verbal support gave way to profit-taking

China investors with longer-term horizons may want to refrain from rushing in to buy this week’s bounce, as history shows the real bottom may still be a way off.

Encouraging commitments from the nation’s financial officials to bolster market stability have driven the Hang Seng Tech Index up about 30% in two days, while the mainland’s CSI 300 Index has gained about 7%. Based on recent experience, some traders are waiting to see whether or not this will be just a short-lived rebound.

The events of the past couple of days bring back memories of the bumpy road out of a bear market a bit more than three years ago, when confidence was shattered due by deleveraging and the U.S.-China trade rift.

Mirroring the market-soothing talk from regulators this week, coordinated verbal intervention in October 2018 gave the market a lift. That rally then got a second leg up from a surprise announcement by President Xi Jinping in November of a new trading venue that would allow relaxed listing requirements.

Profit-taking kicked in soon after, however, and the Shanghai Composite eventually reached its nadir in early 2019, a few points lower than its bottom a few months earlier.

“The market’s rhythm today is very similar to 2018, when officials made comments to boost confidence and mitigate risks,” Huaxin Securities analysts including Tan Qian write in a note. “Investors should keep in mind that a rebound is not equal to a turnaround, and that a bottom does not materialize in one stroke.”

Source: Bloomberg

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