In the olden days, Chinese stock markets did not exist. Incremental reforms since President Nixon’s 1972 visit to Beijing – the first one to do so since the Republic was founded in 1949 – mean today the giant nation is unrecognisable from those days. It is once again one of the very biggest global economies, a status it held from 1500 BC to 1000 AD.
Shanghai had always been the commercial hub and, not surprisingly, the first shares were listed and traded there in December 1990. Known as 'A' shares, they are denominated in renminbi while 'B' shares are denominated in foreign currency. These two make up the Shanghai Composite index, which is the one most Westerners follow. The companies in the index are predominately export oriented.
Another stock market was simultaneously set up right next to Hong Kong island in Shenzhen, which also trades in 'A' and 'B' shares, although companies are mainland facing. China-based investors tend to focus on the 'A' shares of both exchanges. Linked to these is the China Securities Index of top 300 'A' shares (CSI300) launched in 2005, which has subsets of the top 100 and 200 stocks. Chi Next, launched in 2009, is the index of all equities listed on the Growth Enterprise Board; think of it as China’s answer to Nasdaq.
All these suffered price drops starting in January 2018, being the first to take on board the implications of President Trump’s trade wars, and were among the very worst performing indices last year. Lengthy basing attempts started mid-summer and continued roughly through to Christmas. Following the Lunar New Year holiday in February, they’re back with a vengeance, pre-dating Donald Trump’s tweet this week about a deal being on the cards. Timing is, in my opinion, one of technical analysis’ greatest strengths.
As is so often the case, last year’s biggest losers are recovering faster and further than their more sedate compatriots. Shanghai A shares are up 19 per cent this year, three phenomenal, consecutive weekly rallies (a bullish chart pattern known as 'three white soldiers') in February doing the heavy lifting and retracing half of 2018’s losses. Clearly a new important interim low is in place and further, though slower rallies should be pencilled in.
Shenzhen 'A' shares are up 23 per cent this year, but this represents just a Fibonacci 38 per cent retracement to the losses since late 2017. October’s low was at the sort of levels seen a decade ago and a fraction of the 3300 record high set in June 2015. This index is therefore, in our opinion, still cheap and should rally towards the psychological 2000 this year.
The CSI300 is China’s top performer so far, up 24 per cent in 2019. Kicking off with a weekly hammer candle, we have seen eight consecutive strong weekly rallies, becoming overbought in the process. The Rule of 8-10 suggests that any market that moves in one direction only for this many periods has seen a move that is mature and due a correction.
The Hang Seng China Enterprises Index is listed on the Hong Kong Stock Exchange and are 'H' shares of companies incorporated in China but whose shares are only traded offshore. Launched in 1994, its constituent stocks are reviewed quarterly. It’s rallied 17 per cent from a broadening base pattern.
