21 September 2019
Chinese stocks have tumbled recently as margin traders unwound positions amid concerns over the domestic economy and the situation in Greece. Photo: Bloomberg
Chinese stocks have tumbled recently as margin traders unwound positions amid concerns over the domestic economy and the situation in Greece. Photo: Bloomberg

Why it may be premature to call an end to China bull market

China’s A-shares have suffered big falls due to concerns over Greece’s worsening financial woes and unwinding of positions by domestic margin traders.

The Shanghai Composite Index has fallen below the 3,900-points level after posting the biggest three-day slide in more than 18 years. Given the situation, it is a good time to ponder whether the bull market cycle may be winding up.

There are four benchmarks to consider in evaluating the market.

First, the shares must have tumbled over 20 percent within three months to make the case for an end of the bull cycle.

The maximum drawdown in A-shares in three months has never exceeded 20 percent during its historical bull cycles. However, the deleveraging pressure now is more substantial than the bull cycles in 2007 and 2009. 

The Shanghai market had plunged by 21.5 percent as of Monday, but the loss quickly eased to 17.2 percent the following day. Therefore, A-shares have yet to touch the 20 percent loss threshold.

Second, the government’s stimulus measures have had subdued impact on the market. The recent monetary easing measures by the Chinese central bank have clearly shown Beijing’s intention to support the equity market. However, the moves had limited impact on the market, due in part to deepening worries about the Greek crisis.

Now, it is too early to judge whether the government measures have failed to do the job despite four interest rate cuts since last November. We’ve seen similar situation in Japan during the 1990s and days before the 2008 financial crisis.

Three, as many as 75 percent of the stocks must fall below their 200-day moving averages for us to call the end of the bull cycle. During a bull market cycle, around 90 percent stocks will hover above their 200-day moving averages for most of the time, and the ratio rarely dips below 75 percent.

The market has come close to the end of the bull cycle when the ratio hit 75 percent in October 2007 and September 2009.

But right now, A-shares remain in a bull cycle from this perspective.

And lastly, the question is whether the external financial uncertainties will lead to tight market liquidity and pose the risk of a new round of financial crisis. In this regard, the market is closely watching the Greece situation at the moment.

That said, we should note that the Greek debt crisis has been in market focus for quite a long time. The European central bank should be able to engineer the best possible outcome, given its previous experience in handling the Greek situation.

Even if Greece leaves the eurozone, the short-term impact may not be very dramatic. In fact, the euro has been fairly strong recently, and there is no sign of massive fund flow into government bonds for safe-haven.

Taking into account all the external and internal factors, we can say that the bull cycle of A-shares has yet to wind up. But the situation could change once all the above-mentioned boxes get ticked.

This article appeared in the Hong Kong Economic Journal on July 2.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist