Chinese stocks are expected to experience a significant increase of at least 10% in the coming days, according to Marko Papic, partner and chief strategist at Clocktower Group. The Chinese securities regulator has been making efforts to bolster investor confidence through various public statements, including state-backed purchases. A recent report from Bloomberg revealed that Chinese President Xi Jinping was set to receive a briefing from financial regulators about the current stock market sell-off. These signals of concerted support efforts from authorities are likely to contribute to a potential rally in the market.
Despite the current challenges faced by the Chinese economy, such as tensions with the U.S., a slower-than-anticipated recovery from the pandemic, and a decline in the real estate market, Beijing has refrained from implementing large-scale stimulus measures. However, the government’s focus on stabilizing equities suggests that they acknowledge the importance of addressing the fundamental macroeconomy along with the stock market. According to Papic, it would be unusual for the Chinese government to solely concentrate on stabilizing equities without considering the broader economic situation.
Following the recent gains, Papic expressed optimism regarding a potential bottom in investor sentiment. He predicted a 10% to 15% rally in Chinese equities in the coming trading days, which may present tactical opportunities for investors. This represents a shift in Clocktower’s previous view, as they had advised investors to refrain from bottom fishing just a week ago. However, Papic also cautioned that this rally could be a temporary recovery known as a “dead cat bounce,” emphasizing the unpredictability of the market.
Papic acknowledged that his bearish stance on Chinese stocks over the past year may have been influenced by a lack of confidence in the government’s commitment to market stability. However, he believes that the current efforts to prop up stocks and stimulate economic growth through fiscal policy indicate a positive shift in the government’s approach. Clocktower, an alternative asset management platform that facilitates foreign capital investment in China, shares this sentiment.
Although signs of government intervention in the stock market are encouraging, it remains unclear to what extent Chinese authorities are able and willing to fully support the market. Jeremy Stevens, Asia economist at Standard Bank, noted that similar interventions in 2015 did not achieve their intended goals. In August of that year, a sharp decline in mainland Chinese stocks raised concerns that the government might retract its support strategies. While the current circumstances may differ, the memory of past market turmoil serves as a reminder of the uncertainties that persist in the Chinese stock market.
The Chinese stock market shows potential for a rally in the near future. The government’s signaled support efforts, coupled with improved investor sentiment, contribute to a more optimistic outlook. However, the market’s volatility and the uncertainties surrounding the government’s commitment to long-term stability highlight the need for caution when investing in Chinese equities. As mainland Chinese stock markets prepare to close for the Lunar New Year, market participants eagerly await the reopening and closely monitor any further developments that may impact the stock market’s trajectory.
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