Have China Stocks Bottomed?

Regulatory issues with the US, and underlying concern over the economic situation in China, were blamed for the sell-off in Chinese equities this year but did we just witness the first signs of the recovery?

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Will Chinese authorities help?

Stocks in China ended trading on Monday on the backfoot after the Chinese Loan Prime Rate (LPR) was left unchanged. Some analysts and investors had been hoping that authorities would cut the rate to help support the markets. Now, attention is shifting to April, with increasing bets that a rate cut there could help stimulate the economy.

Why does China need stimulus?

Last week Chinese authorities vowed to continue the policy of targeted containment as the omicron variant of covid spreads in the world's most populous country. Two regions were forced into lockdown to slow the spread: one of the key wheat producers in the country and the other next to Hong Kong.

This week the tech hub of Shenzhen has reopened, but Shanghai is facing record covid cases. Disney has suspended operations there. This comes on top of a still-shaky situation in the housing market, as Chinese building firms report double-digit drops in contracted sales compared to this time last year.

What about Chinese stocks?

In the first quarter, foreign investors sold a record CNY40B in Chinese equities. A portion of that followed worries that Chinese firms could be delisted from the US due to regulatory issues. China committed to the foreign listing of its firms, but that didn't do much to reassure markets. Alibaba is down 64%, JD.com 27%, and Tencent 18% from the highs.

With the LPR in the rear-view mirror, the expectation has shifted to a potential move by the PBOC to lower the RRR again. This can happen at any time, though usually happens after the Asian market close on Fridays. There is also the chance for further fiscal stimulus, perhaps directed towards the housing market.

It appears Chinese equities are in a holding pattern; if PBOC support materializes, it could be a bottom. But if the support doesn't come by Friday and the covid situation worsens, this could just be a pause in the downward trajectory.

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The China A50, like other China-related indices including the Hong Kong 50 put in a major weekly reversal last week, potentially signalling a bottom. The China A50 almost entirely erased its rally off the March 2020 lows.

The big weekly gains can partly be explained by short-covering ahead of these levels. Last week’s big candle closed back over the breakout area of April 2020. Another close back under this level would undermine the bullish thesis. If the bounce can continue, next major resistance is former support of around 14,500.

Source: Spreadex trading platform

Key takeaways

After PBOC's decision to keep LPR unchanged investors will have to wait for April's decision now. While the omicron variant spreads widely, the rhetoric of government support could help lift the CSI off its lows but some action will be needed to come to back up the rhetoric, else focus could turn back to the housing market challenge and regulatory issues.