25 November 2022

Insights

Why is western media so positive about the Chinese stock market?

Premium news sites in the US and Europe are now saying that everything is suddenly going right for China’s stock market. Headlines announced Hong Kong stocks jumped by more than 7%. According to the Financial Times, foreigners are joining the speculative China stock frenzy. Is China on the road to recovery? Is now the time to trade Chinese stocks?

The Chinese economy in 2022

The Chinese economy is expected to soon become the world’s largest, overtaking the United States. The country’s economic growth has been driven by a number of factors, including a rapidly growing population, cheap labor costs, and strong government support.

China’s vast manufacturing sector has helped to make it a global export powerhouse, and its growing middle class is increasingly spending money on consumer goods.

Investors who are bullish on the Chinese economy believe it still has plenty of room for growth, despite the recent slowdown. They point to the country’s large population and increasing affluence as key drivers of future growth.

Chinese stock market downtrend in 2022

The Hong Kong Exchange (HK50) or Hang Seng Index is based on free float market capitalization and frequently used to assess the health of the Chinese stock market.

HK50 has experienced a very volatile free fall since 2021, taking a 52% dive from $30,674 to $14,841. Global media jumped on the downtrend early with tales of doom and gloom for a nation that was overextended and facing massive debt.

But, the rally this month gave everyone pause as HK50 passed $18,000, and world media started singing a different tune.

Tariffs and sanctions on China

In August 2019, the US Treasury labeled China a currency manipulator, which led to China's exclusion from US federal procurement contracts. After China agreed to lower the cost of exports to foreign nations, the designation was withdrawn in January 2020.

But then, reacting to allegations of a genocide against Xinjiang, and human rights violations in Hong Kong and Tibet, the US began imposing penalties and restrictions against several Chinese companies, and the modern East vs West trade war began. So why the easing of tariffs now? 

People jokingly say that everything is made in China these days. When it comes to components for electronics, that’s not far from the truth. Tariffs and sanctions played a big part in the chip shortages over the last two years, and many western companies suffered. Interestingly, there was very little impact on the Chinese economy due to the western defensive actions.

Did China win the trade war? You may not hear that said explicitly, but it does seem like the world is getting ready to welcome China back into the fold. 

While it is probably a coincidence that the recession fears only started after China was locked out, inviting China back could bring economic stability to the west. Former US ambassador David Adelman believes lifting China tariffs could slash US inflation. The Australian prime minister seeks an end to China's trade sanctions, and Biden admits that actions on Chinese import tariffs are being discussed.

All this sounds like good news for China, and will have a noticeable affect on China’s stock market.

Should you trade HK50 and Chinese stocks?

Since China began to open up its economy to the world, it has been on a remarkable growth trajectory. In the last three decades, China has averaged almost 10% annual GDP growth, making it the fastest-growing (major) economy in the world. This has lifted hundreds of millions of Chinese citizens out of poverty and transformed the country into a global economic powerhouse.

China's stellar growth has been driven by a number of factors. A rapidly expanding workforce, low labor costs, strong government support for domestic businesses, and an increasingly open economy are perhaps the major contributors.

Some analysts believe that now is a good time to start trading Chinese stocks. Buying low is the aim of every trader, and we could see some nice gains if China's economy starts to pick up again.

Of course, there's no guarantee that it will happen soon, and there are always risks involved in any kind of investing – but it's something to consider if you're looking for opportunities outside of the western financial ecosystem.

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