Is the Chinese stock rally over?

Investors' interest in risk assets has returned to the financial markets. This occurred after the news about the positive results of coronavirus vaccine tests by Moderna. The S&P500 added 1.3% on Tuesday, while futures on this index add another 0.8% by the start of the European session. In Asian markets, Japanese Nikkei225 reached a 5-week high and now trades only 1% below the starting levels of the year. The Chinese market is still breaking out of the general trend, keeping a moderately negative mood.

Shanghai and Hong Kong stock exchanges showed profit-taking after a strong rally earlier this month. China H-shares Index soared 12% in the first four trading sessions of the month, but since then it has corrected half of the move.

Local media reported that regulators are watching the boom on the stock exchanges with dissatisfaction and intend to cool investors' enthusiasm. This should be enough to stop the wave of purchases because many people still remember the very long and deep corrections of the past.

This time, the regulators have come onto the scene much earlier than in previous similar episodes. For example, in 2015, the Shanghai Stock Exchange Index soared by more than 25%, soared by more than 25% before the regulator took action. It turned out to be an almost two-fold drop in the market, which lasted for three quarters.

The index correction in 2007/08 depreciated stocks by 75%, although it was mostly caused by the global crisis and the painful deleveraging of the financial system.

The short-term technical picture for Chinese indices is also on the bears' side. H-Shares sank from the overbought area for RSI, which spurs short-term sales within the framework of profit-taking. Additionally, the pressure was amplified by the index retreating from the upper bound of the descending trade range, formed in early 2018 with the start of China-US trade disputes.

However, the situation with Chinese stocks should not be taken as unambiguously pessimistic. China A50 blue-chip index is in an upward channel, despite periodic large scale corrections. The rally since late June has strengthened it by 18%, after which it corrected by 5% and now receives some support. The overall positive sentiment of the global financial markets can support purchases of Chinese stocks, sending their rates up back after the correction setback of the last few days.

China can indeed be an early beneficiary of the global economic recovery, as demand for its imports promises to grow significantly. The main risk, in this case, is related to trade disputes. This is not a new factor, but it cannot be written off.