Chinese Stocks: Government-Backed Rally Boosts New Year Optimism

As China ushers in the Year of the Wood Dragon this weekend, government-backed initiatives are breathing life into the country's struggling stock market.

The Fall: A Crisis of Confidence

In the lead-up to the Chinese New Year, Chinese stocks faced significant headwinds, prompting a decline that wiped out nearly $2 trillion in market value. Several factors contributed to this downturn, including a lack of confidence among global investors, concerns over economic growth, an unresolved property sector crisis, and diplomatic tensions between Beijing and Washington.

Investors, once enticed by China's rapid economic growth, found themselves grappling with three years of grinding losses. The benchmark MSCI China stock index has plummeted more than 60% from its early 2021 peak, reflecting the challenging environment faced by the Chinese stock market.

The Bounce: A Glimpse of Optimism Amidst Challenges

However, as the Year of the Wood Dragon dawns, there are signs of a potential turnaround. Recent market dynamics indicate a rebound, with small-cap and tech companies leading the charge. The China Securities Regulatory Commission's commitment to guide institutional investors and encourage share buybacks has injected a sense of optimism into the market.

Amidst the long-term downtrend reflected in the China 50 index, recent price action suggests the possibility of a more sustained bounce. The market has broken its pattern of lower swing highs and lower swing lows, establishing new higher swing lows and higher swing highs. Notably, the price has surged above the 50-day moving average for the first time in over four months, signalling a potential shift in momentum.

Technical indicators add weight to the argument for a potential market rebound. Bullish divergence on the Relative Strength Index (RSI), where the RSI forms higher swing lows while the market trended lower, hints at underlying strength. Furthermore, the Parabolic SAR has moved below the price due to a recent rally, suggesting a change in the short-term trend.

While traders should be mindful that established trends take considerable time and effort to change, the recent positive developments bring a glimmer of hope as the Chinese New Year festivities begin.

China CN50 Index: Daily Candle Chart
Past performance is not a reliable indicator of future results

Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.


The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.