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Will Chinese luck change with the Year of the Dragon?

February 13, 2024 – 17:49

Analysts are closely monitoring the evolution of the Chinese economy in an attempt to see some glimmer of recovery, which will also wake up the Asian giant’s stock markets. There are those who say that the dragon usually benefits bags.

Travels through China have intensified in recent days, with millions of people boarding trains and planes and traveling on congested roads, as the government of Xi Jinping estimated as a record 9,000 million trips around the Lunar New Year from last Saturday. This would be equivalent to the largest migration in the world. In the run-up to the holiday, major Chinese state media focused on a speech given by President Xi at a recent political meeting, in which he called on the Chinese people to move forward during the Lunar New Year. But will this be enough to save the Chinese economy? analysts ask.

Last Saturday the Year of the Dragon began in China and from the economic-stock market perspective there are several aspects that should not be ignored: a fragile and deflating economy, and with a real estate sector that cannot recover, with official stimuli to reactivate growth and Bags that have been falling for several years. Added to this is that donald trump seems to be walking steadily towards the White House, which means a revival of the trade war between the two main world economic powers.

What do the analysts think? Some believe that coming from a complicated economic and stock market situation for many months and even years, 2024 could be the time for China’s recovery, especially its stock markets. However, there are a number of objections.

For example, Ben Laidler (eToro) notes that the dragon, the fifth in the 12-year cycle of the Chinese zodiac, is a symbol of power and strength and traditionally benefits stocks. He explains that historically, it was favorable for the stock market since of the four Years of the Dragon in recent history, in 1976, 1988, 2000 and 2012, the Hong Kong Hang Seng Index rose in three of them with an average return of more of 15%. According to The Economistthe Year of the Dragon is historically a great year for equities: since 1900, the Dow Jones has averaged real returns of almost 8% during this period.

For the market it could be the year of recovery

But in addition to the statistics and history, the market seems more convinced that 2024 will be the year for the Chinese stock markets because they are betting that after being the worst in 2023 in the world and accumulating more than three years of falls, it is now the turn of recovery, and because the Government is also determined to reactivate them based on stimuli.

In this regard, even today there are doubts about whether the stimulus measures They will be able to solve the structural problems that the stock markets are facing, such as the lack of leverage and the drop in profitability. That’s why Mali Chivakul (J.Safra Sarasin) warns that short-term attractiveness is unlikely to translate into long-term outperformance in stock markets.

Although the fall of the Chinese stock markets has made them one of the most attractive markets, due to their cheapness, in the world with a price-earnings ratio estimated at 8 times, less than half the level of the S&P 500, the people at Julius Baer believes that the stock market rebound will only be sustained if the stimulus measures go further. That’s why, From the beginning of 2024, the Government was more willing to support the economy: it cut the banks’ reserve requirements by 50 basis points and the People’s Bank of China (PBoC) injected more liquidity into the banking system. In addition, they allowed state entities to buy shares and ETFs. The market believes that all this will not be enough to reactivate the economy and therefore the stock markets would have no arguments to recover and set a trend.

Hard data on the Chinese economy

Empirical evidence shows unflattering data. In January, the retail inflation index (0.3%) showed greater deflation of 8 tenths per year, above expectations and marking the fourth consecutive month of declines and the largest decline in 15 years. While the latest GDP data was not triumphant either given that in the fourth quarter of 2023 it only grew by 5.2%, and the manufacturing index (PMI) contracted for the fourth consecutive month in January. A cocktail that is enhanced by the real estate crisis. For Citigroup experts, the official attitude is more important than the weak data showing the economy. While UBS strategists believe that the reactivation could come from the manufacturing sector as seen in South Korea, Japan and Taiwan in recent months, they usually anticipate similar movements in China.

There is another issue that comes into play in the global and especially Chinese panorama: the geopolitical factor and the risk that trump return to the US presidency and with it a deja vu of the trade war and geopolitical tensions.

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