Wandering in London’s Soho Chinatown last Saturday I noticed businesses were extending the Lunar New Year holiday through another weekend; and it was booming, queues outside eateries, trinket shops groaning with dog, red and jade-related good-luck charms, everyone apparently enjoying themselves. American friends were surprised that a cultural quarter like this existed in Britain; in fact, the Chinese community is one of the oldest in London. Trade between the two nations started in the 17th century and by 1782 sailors from the East India Company spent their shore leave in Limehouse, near the docks. A community of more than 500 lived there permanently by the end of the 19th century.
Monday 5 March is an important date for China because the National People’s Congress (all 2,924 members) hold their annual meeting. It is reliably rumoured that President Xi Jinping will not only be elected to serve a second five-year term, but the cap on serving two consecutive ones will be lifted. Coinciding with this Zhou Xiaochuan, 70, head of the People's Bank of China since 2002, is expected to retire; Harvard educated Xi confidant Liu He, 66, is the front-runner to replace him.
How will these political and monetary policy changes affect Chinese markets? In terms of the currency, both onshore and offshore yuan have appreciated by 10 per cent since Donald Trump’s election – in line with other majors. Currently we don’t think there is much room to strengthen, rather the authorities would probably prefer it to weaken a little – slowly. Similarly benchmark 10-year sovereign bond yields, which have backed up from 2.65 per cent to 4.00 per cent over the past 15 months, should turn down and retreat to 3.30 per cent.
Shanghai’s index of A shares, one of Asia’s worst-performing indices last year, slumped in line with the rest in February and is back to where it started a year ago. We expect observed volatility to drop significantly from current levels, reflecting subdued price action that has dominated since mid-2016. If the index can hold above 3100 we would pencil in a rally this year to 3800.
Shenzhen’s A share index is a laggard and has been for a while, dominated by smaller, privately owned companies as opposed to its cousin, which predominantly lists large state-owned enterprises. For most of last year it traded in the red, ending 5.5 per cent lower. February’s hit was hefty, sending it reeling to lose up to 15 per cent. However, important chart support around 1730 held, and it is therefore expected to recover slowly to 2100.
The ChiNext index, also traded in Shenzhen, is often labelled China’s version of Nasdaq, or the Growth Enterprise Market. It aims to attract young, up-and-coming start-up high-tech firms. Unfortunately for all those involved, the index has been on a gently-sloping downward trajectory for two whole years; it also tends to be more volatile than the other two. However, it does look cheap.
Finally, let’s not forget Hong Kong’s well-established (1964) Hang Seng index. Treated as, and reacting like, an emerging market play in the early 1980s, it’s now considered mainstream Asia (despite the ‘one country, two systems’ issue). Up almost 50 per cent in 2017, it has recovered as quickly as US ones from February’s half-year low. It still has bullish momentum on its side.
