FlowBank

Will Chinese Stocks be the Winners of 2023?

Both the Shanghai Composite and the Hang Seng (Hong Kong index but many Chinese companies) are up on the year, 5.7% and 13.5% respectively. Will this strength in China stocks be a theme across 2023?

The rally in global stock markets across the start of 2023 is drawing a huge amount of investor attention. On the back of the broad losses seen last year, traders are questioning whether the current moves are doomed to be short-lived, leading to fresh declines, or whether this is the start of a bigger recovery to come.

While much has been made of the moves we’ve seen in US and European assets, Chinese stocks are looking like some of the most interesting opportunities recently. With this in mind, traders are considering the factors driving Chinese stocks specifically with a view to determining whether the current rally has more to go. Let’s look at some of those factors below. 

Key Factors Driving Chinese Stocks 

  • China reopening 
  • Softer government approach to tech sector 
  • Weaker US dollar

Reopening Drives Bullish Outlook 

The biggest factor driving the current upside in Chinese stocks is the reopening of the Chinese economy. The government recently relaxed border controls for the first time since the pandemic began, marking a significant U-Turn for the country’s controversial ‘zero-covid’ policy.  While there has been plenty of negative news flows around the current covid situation in China (record numbers of infections and deaths), for now, markets appear to be tending towards the side of optimism, anticipating that gradually the situation will come under control. 

With this in mind, traders are instead focusing on the positive growth and demand implications of the economy reopening. With there being little sign currently that there is any risk of fresh lockdowns, the outlook appears favourable for Chinese stocks as we look out across the year. The covid situation is indeed likely to stabilise, with suggestions already that infections have peaked, leaving room for a bigger rally as activity starts to pick up and indicators begin to reflect better performance within the economy. 

China Relaxes on Tech Sector 

A further key driver of the overall performance in Chinese stocks has been the rally we’ve seen in the Chinese tech sector. News of the economy reopening has been a major boost for the company’s tech sector which had been ailing over the second half of 2022. Tech stocks were also suffering as a result of regulatory action taken against the sector by the Chinese government.  The Chinese government was engaged in a lengthy “crackdown’ against the tech sector through most of last year mainly riven by what it saw as anti-authoritarian stances from key tech leaders, including Alibaba’s Jack Ma. 

However, the government has eased many of the restrictions put in place across recent months including, recently approving a major financing deal for Alibaba’s ANT group. The approval of the deal, as well as the removal of stricter conditions for many internet companies has been taken as a green-light by investors who anticipate stronger gains from the sector moving forward. 

Weaker USD Lifts Stocks

Finally, the reversal in fortunes for the US Dollar in recent months is also helping lift sentiment in Chinese stocks. With US inflation seen cooling sharply over the last two months, traders have begun pricing in a slower pace of tightening from the Fed over 2023. In line with this view, USD has weakened materially and looks vulnerable to further downside in coming months if the Fed does indeed opt for smaller hikes moving forward. With USD therefore vulnerable to downside shocks if inflation falls quicker than expected, Chinese stocks clearly have some upside risk as we move through Q1. 

Upside Risks

Taking each of these factors into consideration then, the outlook for Chinese stocks looks mostly favourable over the first half of 2023. Provided there is no return to lockdown ( only foreseeable in the event of a severe acceleration in covid cases), the outlook should grow more encouraging towards Q2 with the covid situation likely to come under control, leading to a strong uptick in consumer activity. 

 

Shanghai Composite – Weekly Chart 

 

Source: FlowBank / TradingView 

 

The rally off the 2886.66 lows holds the potential to develop into a larger double bottom formation, suggesting room for a bigger bullish reversal. Price has broken above the bear channel top from last year’s highs and is now close to testing the 3289.34 level. This is a key resistance area for the market and should bulls break above here, 3714.64 is the next big upside target. To the downside, 2886.66 remains the key support to note. 

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