Chinese equities on strong rally

One of the key trading themes at present is the slowdown in China. However, rather than causing the Chinese equity markets to fall, as one might expect given stock markets are expected to reflect economics, the Chinese equity markets have seen a strong rally of late.

Source: Bloomberg

Clearly the perception of central bank easing is the predominate driver. As we saw recently, the People's Bank of China (PBoC) cut both the benchmark landing and deposit rate in a bid to make refinancing more affordable. However, if we look at moves recently in some of the Chinese lenders, there seems to be view that the reserve ratio requirement (RRR) will also be cut. These ratios are perhaps the most positive for equities as it allows the banks to issue more credit to the system, which the Chinese authorities have been trying to restrict.

Valuation has also been a factor with the Chinese markets some of the cheapest globally and trading on a single multiple.

The China A50 is an index of the top 50 Chinese mainland companies, where the futures are settled in Singapore. This index is flying at present and, as you can see from the daily chart, is in a strong uptrend. It’s easily closing through previous market peaks.

Pullbacks look like good buying opportunities and the upside looks limited given the stretched nature of both the RSI and stochastic. Still, the trend is strong and therefore pullbacks could be fairly limited.

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