Red Dragon Moving Towards a New Journey? Chinese Stock Market Bounces Back in 2019

All we have been hearing about China in the past few months pertains to its economic growth concerns and trade disputes with the US. While the recent signing of the Phase One trade deal has shown signs of a relief in the prolonged trade war, economic growth remains to be a concern.

China’s Economy Today

The China (People's Republic of China) economy was initially a centrally planned system but presently is the world’s second biggest economy and a market-oriented one. Tech companies based in China are famous for becoming market leaders- Alibaba Group, Baidu and Xiaomi are examples of the same. Growth in the economy is driving China to be a world economic leader.

The National Bureau of Statistics of China, in its report on the preliminary accounting results of GDP for the fourth quarter of 2019, depicted that the economy expanded by 6.4 per cent, 6.2 per cent, 6 per cent and 6 per cent, respectively, in the past four quarters. These are being regarded as normal quarterly GDP fluctuations.

The Chinese economy is currently vulnerable and exposed to downward pressure from micro and macro-economic events. However, efforts to keep employment, finance, trade and other fields stable seem to be working in its favour, given no drastic change or negative turn in the GDP figures.

China’s Economy Outlook

Before diving into the outlook, it will be interesting to note that according to the International Monetary Fund (IMF), China is responsible for approximately 39 per cent of global growth (as reported in 2019).

The IMF, in a recent report, highlighted that there are signs, though tentative that global growth may finally be stabilising, though at subdued levels. The organisation revised China’s growth metric and stated that the country’s growth will be at 6 per cent for 2020, a lift of approximately 0.2 per cent.

For emerging market and developing economies, the IMF forecasts a pickup in growth from 3.7 per cent in 2019 to 4.4 per cent in 2020 and further 4.6 per cent in 2021, a downward revision of 0.2 per centage point for all the years.

So, what’s propelling this growth in China? Apart from being the technology hub that it is, the economy’s settling trade dispute with the world’s biggest economy, US, post signing of the Phase One trade deal is the biggest driver of this forecast.

Moreover, being the market leader in commodities side (aluminium and steel in particular) will support growth. Another factor that cannot be missed when discussing the Chinese economy’s outlook is its growing population (the country accounts for about 20 per cent of the world's population!).

Chinese Stock Market

Let’s move towards the stocks and trading realm of the world’s second biggest economy. The Chinese stock market is one of the largest across the globe, after that of the US.

There are two major stock exchanges that operate autonomously in the People's Republic of China - the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). The CSI 300 is the capitalisation-weighted market index that imitates the functioning of the top 300 stocks traded collectively in both the exchanges.

Shrugging off the country’s slowing economy and bruising trade war with the US, the Chinese stock market performed well in 2019. The equity market was up by more than 30 per cent in 2019, at the back of retail investors viewing shares as undervalued, an easing trade war and the government’s concerted effort to pool in economic strength.

However, in the prior year, the CSI 300 had fallen by almost by 25 per cent, as it was the year when the trade war had intensified along with the deleveraging campaign that strengthened domestic liquidity.

The contrasting trend of the past two years proves the vulnerability and dynamicity of the share market to economic concerns.

Confidence Regaining in Chinese Share Market

China’s stock market is back making headlines, with consensus that the property sector is showing signs of better times, at least in the short-term. This is driven by the steady easing in China’s monetary policy and soft housing measures that consequently boost buying sentiment. The liquidity support and government stimulus are among the factors that are leading to a brighter earnings outlook for China-listed players.

Furthermore, China's capital market has accomplished significant results in its efforts to open to the world, portraying the growing confidence of global investors in it. This is driven by attractive valuations of A-shares (the stock shares of mainland China-based companies trading on SSE and SZSE), continuing expansion and opening up of China's financial markets and increasingly stable investments.

The ramping up of the Chinese stock market in 2019 comes on the back of over 5 years of underperformance as compared to the global peers.

Are the aforementioned positive factors, investor sentiment now reinforced by signing of the phase one trade deal and a stabilising economy - the signs of green shoots? Interesting time ahead for the Chinese market players.