The day after the new moon of Friday 24 January was the start of the Chinese Lunar New Year holiday (the year of the white metal rat, in case you’re interested, although the zodiac sign only kicked in on 4 February). This most important of holidays is responsible for the biggest annual migration of people anywhere, as workers in cities go home to their villages and towns in the countryside to catch up with their families. How long they’re off is something of a moveable feast, many taking up to 10 consecutive days.
This year’s break has been an unmitigated disaster because the coronavirus, which started in the huge city of Wuhan then spread through the province of Hubei, trapping citizens and their visitors inside, quarantined in good part in the region to prevent it spreading. In terms of financial markets, banks reopened for wholesale business on Monday 3 February, as did the Shenzhen stock exchange and Zhengzhou’s commodity exchange. Companies and factories in Zhejiang province reopened in stages from 10 February, and universities only last week. Things today are very far from normal and all agree that closures will seriously impact the economy this quarter.
The onshore yuan, which had strengthened steadily against the US dollar at the end of 2019, had already found an interim low point (with a bullish engulfing weekly candle) before the new moon. Reopening for business a week later, the yuan is currently trading at just over seven per greenback, a figure some consider important. Technically it isn’t, so we’d expect it to move steadily higher to match last year’s higher levels at 7.15 yuan. In other words, continuing a trend to weakness that started in earnest early in 2018.
In terms of mainland stock indices, the best performer is the ChiNext Composite, which has gained 21 per cent this year, despite a 3 per cent drop on 3 February. Other Chinese indices, which had lost up to 10 per cent of face value on that date, are still in marginally negative territory, although Shenzhen’s done well too, up 10 per cent this year. Look at the ChiNext chart and you can see that all shares listed on the Growth and Enterprise Board gapped dramatically lower after the holiday, but within the week had more than recovered all losses, helped up by rising trend-line support and soaring volumes. Back to where they were early in 2017, the index has plenty of room to rally towards 2015’s record high at 4449.
Like central banks all over the world, the People’s Bank of China stands ready to help where it can. Benchmark sovereign 10-year bond yields gapped lower over the holiday, keeping that gap intact, consolidating this month at some of the lower levels of the past two decades. We expect these to be inexorably drawn towards the psychological 2.5 per cent yield.
Another market that’s also kept its gap is Shanghai copper futures contracts (aluminium, steel and zinc too, for that matter). This suggests a permanent shift in demand dynamics and, though cheap by historical standards, a meaningful rally over the next six months is unlikely. This is also the case for copper futures in New York, which are struggling to hold above $2.5 per pound.
