We thought it was all over, the fat lady sung, and the rats had left the sinking ship that is the Chinese stock market long ago. The real estate sector which historically contributed 25–30% of the country's GDP had imploded and drove the market down 45% from the highs made in 2021. Even worse, with an estimated 80 million homes left unsold and an aging population, there was little hope that things could turn around.
That is, until last week when the Chinese government threw the proverbial kitchen sink at the problem. A stimulus package that seemed to have included every monetary tool ever invented, led to a huge surge in the stock market of more than 20% from its lows. The question is, should investor wade back in and are these gains sustainable?
Well, it certainly wasn’t a short squeeze as the government had banned the practice some time ago. That’s good, as it means that there was real buying rather than people covering positions that had gone wrong. Bigger also begets bigger and with higher market valuations, index trackers will be buying larger amounts of Chinese stocks with any fresh money coming into the ETFs.
Even better, technically the market has now broken its downward trend and the likes of Alibaba and Tencent are still trading ridiculously cheap when compared to their US tech counterparts. The only problem is domestic consumption, and until we see signs that discretionary spending is picking up, it could still be a long road ahead before the Chinese dragon roars back to life.
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