What moves the Chinese stock market?

The second-largest stock market in the world, the Chinese stock market, had long been viewed as an elusive one with limited foreign participation. That said, growing access and importance had undeniably rendered this one to watch.

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.

Shanghai Stock Exchange (SSE)

The country’s main stock exchange had been the earliest to welcome stock trading. It is noted to be the fourth-largest stock exchange in the world in February 2018, comprising of stocks, bonds, funds and derivatives products for trade. Various key state-owned companies are found on this index including the likes of PetroChina, Industrial and Commercial Bank of China and Bank of China, among others.

Alongside the Shenzhen Stock Exchange, the Shanghai Stock Exchange is not fully accessible to foreign investors with the issuance of 'A-shares', which is denominated in the local currency. The exchange also has 'B-shares', denominated in US dollars, available to all. Reforms had gradually been put into place to open the Chinese market through programs such as the Qualified Foreign Institutional Investor (QFII) to increase the access to the A-share market for foreigners.

Shenzhen Stock Exchange (SZSE)

China’s second stock exchange is based in the Southern city of Shenzhen, which is also the eighth-largest stock exchange in the world. The SZSE is noted to support China’s multi-tiered capital system with the main board, the SME board and the ChiNext market. The latter focuses heavily on innovative growth companies and start-ups.

Similar to the Shanghai-Hong Kong stock launched in 2014, Shenzhen and Hong Kong have a stock connect that commenced operation in December 2016, allowing mutual stock-exchange access between the regions.

Hong Kong Exchanges and Clearing Limited (HKEX)

The HKEX is formed from the merger between the Hong Kong Stock Exchange, the Hong Kong Futures Exchange and the Hong Kong Securities Clearing Company into one unified stock exchange. The benchmark Hong Kong index is the Hang Seng Index (HSI).

Read more on how to trade the HSI

What moves Chinese stock market

Understanding the history of the Chinese market and the key exchanges to look at helps with learning about the characteristic of the Chinese stock market. However, what exactly are the factors that typically moves the market? The below lists some items which are not too different from those affecting most stock markets, though noting the final points of sentiment being a significant driver for the rather speculative Chinese stock market. A mixture of the factors below may serve as items driving the market at any point of time and these are not exhaustive. 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.

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.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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