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May 24, 2016

Why All Eyes Are on China's Stock Market

It would be a bit of an understatement to say that there has been a fair amount of economical and cultural progress in China in recent years.

No doubt http://moneymorning.com/tag/stocks-to-buy-now/ has featured a number of stocks directly linked or at least influenced by the economic growth that has been witnessed in China, and while some economies have to contend with a stagnant economy in comparison, the China dragon has been roaring loudly.

Looking for direction

After a spectacular period of double-digit growth, China’s stock market suffered a sobering and sharp u-turn on prices and by the time we saw the start of 2016, a relentless sell-off had taken place across the markets.

The People’s Bank of China assumed a similar role to what we had already seen with the Fed in the U.S, and took action to arrest the slide of mainland indices in China which had basically halved in a tumultuous six-month period where sell was the only thing investors seemed to want to do.

Monetary policy stimulus measures in China are certainly more opaque than in the U.S it is fair to say, and a suspected buying spree from a team of state-backed investors to support prices and try to kick-start the markets, is just one example of the Chinese authorities perceived attempts to give the financial markets and the economy a positive sense of direction.

Difference of opinion

You can certainly find a diverse range of opinions as to what China’s stock market is likely to do over the next six months and beyond, with opinions ranging from extreme positivity about the prospects to dire warnings of an imminent collapse in prices and confidence.

The question that is worth asking about the stock market in China is what can you class as normal in terms of performance?

The benchmark Shanghai Composite Index managed to rally by as much as 16% in the space of just four weeks recently, but even then, some analysts suggest that this is a precursor to a spectacular fall, while others consider it to be just the start of something big with plenty more upside to come.

Investors differing opinions on what is happening in Chinese financial markets is driven to an extent by how much faith you put in the fundamentals that are underpinning the recent rally. If you think that state intervention is creating a house of cards scenario, you would not be investing, but if you think that the moves will stimulate a sustained growth in stock prices, you will be looking to get involved in a sustained upward move in the markets.

Access to China’s new economy

If you are an international investor and looking to get involved directly, you will be eagerly anticipating the launch of the Shenzhen-Hong Kong Stock Connect.

This initiative is designed to build on the existing link between the Hong Kong and Shanghai Markets and open up the opportunity for foreign investors to buy shares in a selection of small, private companies.

These small companies are considered to be at the heart of what is considered to be China’s new economy and is considered to be the start of an opening up of markets in general to overseas investors, in order to boost inflows.

The suggestion from the most optimistic long-term outlook projections, is that the market capitalization of A-shares could grow to somewhere between $10-$20 trillion by the time we reach 2020.

That is a more than double their current levels, so if you believe these projections, the opportunity to invest in some of these shares through loosening of investment restrictions, could be very welcome indeed.

Why a slowdown in China’s economy matters

A sense of perspective about China’s economy is never a bad thing when evaluating where we are at right now.

For the best part of three decades their economy grew by an impressive rate of about 10% per year, but the slowdown in the economy has resulted in a fall to 7.4% growth. Even this level of growth is enviable in comparison to the rest of the world’s economic growth rates, so perhaps we shouldn’t be that disappointed.

You might be surprised to learn that China is a prominent and important importer, so any sort of slowdown in their economy does matter to other countries, as it has the ability to affect their economic figures as a result.

As with so many investment scenarios, how you perceive the economic outlook and data related to the Chinese economy and financial markets, will influence your decision to invest or take a rain check until things become clearer.

About the Author: Emma Miah works in the finance world and enjoys writing articles on the stock market whilst keeping herself up to date with the worldwide economy. Her articles appear on finance, investment and news related blogs.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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