How does Chinese New Year affect markets?

The popularity of overseas trips has also continued to grow. About 6.2 million Chinese tourists went abroad last year, rising 7% from the year before. Cross-border transactions through UnionPay, the largest card-payment firm in the world by card volume, soared 40% from the year before – with overseas transactions surging in Asia-Pacific, Europe and North America, which are among the most popular travel destinations for Chinese people. Overseas retailers, especially those in the luxury segment, get a boost, and often cater marketing campaigns before the event.

According to the British Tourist Authority, Visit Britain, Chinese visitors stay longer and travel more widely across Britain than other international visitors, averaging fifteen nights, compared to eight for other visitors, with more than half of this time spent outside London. They are some of the highest spending visitors to the UK, spending, on average, £2174 during each visit, more than three times the average visitor.

Every twenty two additional Chinese visitors that Britain attract supports an additional job in tourism in the UK, demonstrating the importance of Chinese tourists. Not only that, the yuan is about 3.9% stronger against the pound at present compared to last year, which should help entice Chinese tourists this year.

The stock market turned cash machine

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

The Chinese government issued a notice in early December stressing the need for local authorities to ensure migrant workers were paid-up before the end of 2017. 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.

The pressure on payrolls has a knock-on effect, with Chinese firms often keen to close all upcoming invoices with their customers in advance.

In late December, China’s central bank set up a temporary liquidity facility to supply more cash to commercial banks ahead of the holiday, allowing them to lower their reserves with the People’s Bank of China in an attempt to steady activity in money markets. Banks have been able to use up to 2% of their cash reserves for 30 days to cover the short-term liquidity issues over the period.

Is now the right time to be investing in China?

When are the markets closed?

1. Shanghai/Shenzen – closed from 15 February and reopens on 22 February
2. Hong Kong – closed for a half-day on 15 February and reopens on 20 February
3. Singapore – closed for one day on 16 February
4. Malaysia – closed for a half-day on 16 February

Looking at the Shanghai Stock Exchange over last year’s holiday season (when markets closed on 27January and reopened on 3 February), 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.

The world’s manufacturing hub shuts down

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.

Genimex’s rough timeline for Chinese New Year 2018 also demonstrates how long the effects of the holiday can last:

1. February 2: some suppliers and subcontractors stop production, causing disruption in the supply chain.
2. February 9: many workers have already left the factories. Sales reps, engineers and management may still be around for a couple of days more.
3. February 13: all personnel have left the factory.
4. February 16: Chinese New Year’s Eve.
5. March 6: employees, mostly sales reps and some engineers, start to come back. Some may have extended holidays.
6. March 13: most employees, including assembly line workers, are back in the factories.
7. March 28: operations are getting back to normal after the post Chinese New Year disruption

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.

Don’t trust the economic data

The irregular date of Chinese New Year each year causes China’s economic data to become skewed, and many economists opt to wait until data from March onwards is released, in order to avoid misinterpreting the figures.

China reported a trade deficit with the US in February 2017, when markets had been expecting a healthy surplus. But, as China’s first joint venture investment bank China International Capital Corporation (CICC) flagged, Chinese New Year occurred earlier than it did in 2016. That, combined with an additional working day compared to the prior year and one fewer calendar day as 2016 was a leap year, meant the data was highly uncertain. Prior to February 2017, the last time China reported a trade deficit was in February 2014, which was also the month after Chinese New Year.

The Chinese government can also seem opportunistic during the holiday season. The central bank, for example, has raised interest rates at the backend of festivities on several occasions, most recently on the first day back from Chinese New Year in 2017.

Commodity-hungry China loses appetite

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.

Spot gold price

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.

Commodities trading

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.

Precious metals trading

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’.