The recent rally in China’s equity markets, as evidenced by the CSI 300 index rising 15.7% last week (you were warned), signals the strongest weekly performance since 2008. This surge comes on the heels of the central bank and financial regulators announcing multiple stimulative measures, with the Politburo calling for additional support. The rapid rise continued with an 8.5% gain on the following Monday, driven by expectations of further fiscal stimulus. The index’s performance suggests a significant bullish sentiment in the market, supported by both fiscal and monetary interventions.
Historical Market Behavior and Comparisons
China’s stock markets have historically shown a pattern of significant rallies followed by downturns. Since the CSI 300 index was launched in 2005, five major rallies have occurred. The first one lasted nearly two years, while the others ranged from 8 to 13 months in duration. In total, rising markets have dominated for about five out of the last twenty years, while declines were prevalent in the other fifteen years. Investors have found that the only consistent way to profit in Chinese equities is by entering during one of these major rallies.
Of the five mega-rallies, two were driven by strong organic growth and profitability in 2006-07 and 2017. The other three, occurring in 2008-09, 2014-15, and 2020-21, were stimulus-driven, characterized by trough-to-peak gains of 50-100%. The current situation appears to be following a similar stimulus-driven pattern, which suggests that if policymakers continue to follow through on their promises, there could still be considerable upside for equities, despite the recent gains.
Current Economic Challenges
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