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.

China
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.

China A50
Click to enlarge

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.