From the April 01, 2011 issue of Futures Magazine • Subscribe!

Trading China: What you need to know

Those who understand the benefits of trading international companies likely are drawn to Chinese stocks because of the high growth rates of the Asian country. However, it’s a fallacy to assume the Chinese stock market moves in sync with GDP. To achieve the desired objective, investors need to understand more about China’s stock market.

Every market has its own cycles. American traders are aware of the cycles in the United States and the fundamental factors behind those cycles. It’s important to have similar knowledge about the Chinese market.

China’s stock market, which is extremely young compared to the U.S. market, has experienced six legs. The first leg ran 1990-1995, and the market was experimental during that period. The second leg was a bull market trend from January 1996 to June 2001. The third leg was a bear market from June 2001 to June 2005. The fourth and fifth legs are similar to the powerful run seen in the Nasdaq in 1998-2002. Currently, the Chinese stock market is working on a recovery.

Each leg in the cycles has its own features that reveal a unique personality.

The testing period (1991-1995) was characterized by an overwhelming demand for stocks. In those days, pioneering investors had to travel to Shenzhen and Shanghai to purchase stock certificates. The certificates were so undersupplied that investors had to borrow other people’s identification cards to buy the desired amount of stocks. Chaos reigned in August 1992 when thousands of investors were not able to buy forms for a draw for certificates. They surrounded banks and city government buildings of Shenzhen. The government (not investment banks) had to issue 500,000 more certificates.

Underlying the supply issue was the experimental nature of the market. The market did not have full governmental support. The issue of capitalist nature was secondary. The primary debate centered on whether the country should focus on real economy, such as international trade and domestic infrastructure, or virtual economy, like the stock market.

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