Chinese A shares staged a strong rebound on the first trading day after the Lunar New Year break, supported by a stronger renminbi exchange rate.
Also, stocks benefited from an injection of liquidity from the central bank.
The stock market is bottoming out but investors think the medium to long-term outlook remains bleak.
It will take a while before long-term support measures will be reflected in the trading numbers.
In addition, the end of easy money in the United States is causing turbulence in global financial markets.
Also, the Japanese central bank recently launched a negative interest rate but its effectiveness remains doubtful based on what we have seen so far.
In China, new renminbi loans hit a record 2.51 trillion yuan (US$383.5 billion) in January and M2 was up 14 percent.
A negative interest rate will only influence the economy in the short term.
Amid a sluggish macro environment, banks are worried about mounting bad loans, making them less willing to lend even when interest rates are below zero.
Many Hong Kong-listed banks are trading cheaply but they have yet to recover to pre-2007 levels, or valuations before the Asian financial crisis.
The low valuation of banking counters in the first half may offer a buying opportunity for investors looking to profit from a more certain trading environment in the second half.
Still, there are likely to be jitters around the US presidential election in November and some uncertainty over the future direction of US interest rates.
China’s economy is likely to hit bottom in the second half.
Meanwhile, oil prices may stabilize if the Organization of Petroleum Exporting Countries agrees to cut output.
Investors should adopt a flexible strategy or wait for the “ultimate plunge” before taking any long-term positions.
China’s tracking funds are among the worst performing asset classes this year.
Some have lost 20 percent of their value since the beginning of the year.
Risk-averse investors have been flocking to safe havens such as gold, making it the best performing asset class.
This article appeared in the Hong Kong Economic Journal on Feb. 18.
Translation by Myssie You
[Chinese version 中文版]
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