Is the Chinese stock market finally going to get off the mat?
That's the hope of many investors after China's State Council announced plans for a wide range of financial market reforms that will make it easier for foreign investment and make the country's commodities markets more transparent. Traders cheered the news by pushing Chinese stocks higher. On Monday, both the Hang Seng and Shanghai All Ordinary indices were up about 2 percent.
So, will the moves have a more lasting effect on the Chinese economy?
That depends on things other than just capital market reforms, according to Laeeth Isharc, partner at advisory firm Kaleidic Associates and former co-head of Citadel's fixed income group in London. After growing credit at a rate of about 40 percent annually with heavy emphasis on infrastructure (such as the so-called "ghost cities" that were built over the past few years), China was hit with inflation and malinvestment, Isharc said.
"Chinese growth has slowed since 2011, and people today are quite gloomy," he added. "I think we need to avoid getting distracted by tracking every blip and keep the bigger picture in mind. China needs to change its formula for growth towards domestic consumption and away from exports and its economic reforms show it's on the right path."
David Seaburg, head of sales trading at Cowen and Company, sees the newly announced reforms as a positive step for the country's capital markets, particularly equities. Despite Monday's climb, the Shanghai All Ordinary and Hang Seng indices are down 3 and 4 percent respectively year-to-date. iShares FTSE/Xinhua China 25 Index ETF (FXI) which tracks the 25 largest Chinese companies is down 8 percent on the year.
"I think this could be a sign of a positive reversal for that," said Seaburg of China's latest market reforms. He sees U.S. investors who have been selling out of domestic growth stocks as searching for growth opportunities abroad in emerging markets, specifically China.
"I could see [China's] market actually performing very well based on these policy changes or the thought of these policy changes," Seaburg said.
However, the technicals for the FXI show little change, according to Richard Ross, global technical strategist at Auerbach Grayson.
China's "market remains uninspiring for me on both a long a short-term basis," said Ross, a "Talking Numbers" contributor. With the FXI down so far this year, it's "not just a disappointment on an absolute basis but also relative to its peers in the emerging markets which have recently been on fire…. Markets like India are at an all-time high, up 12 percent year-to-date; Brazil, 20 percent off the lows. And yet, China continues to struggle."
Since growth began slowing in China in 2011, the FXI remains mired in a $10-wide trading range, according to Ross' charts.
"There's no trend here," Ross said. "If there were one, it remains down in China for the foreseeable future. So, I would avoid China. I think there's much better bets in the emerging world and the developed world."
To see the full discussion on the FXI, with Seaburg on the fundamentals and Ross on the technicals, watch the above video.
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