China’s Year of the Dragon Proving Lucky: Bull Flag on CN50

The year of the dragon is proving lucky for Chinese stocks. Since mid-January, the FTSE China A50 Index, representing the top 50 companies in China's A-share market, has rallied more than 18%.

Let’s delve into the driving forces behind this resurgence in Chinese stocks and the emerging trend continuation pattern observed on the price chart of the China A50.

Exploring the Catalysts Behind China's Equity Market Rally

Here's a brief overview of the pivotal factors propelling the recovery in Chinese stocks this year:

Government Intervention: China's government is openly buying stocks to stabilise the market and influence indices. This public approach contrasts with past discreet actions. Entities like Central Huijin Investments are increasing their holdings in Mainland stocks, particularly mega-cap companies, which has boosted investor confidence.

Global Investors Returning: Despite previous concerns such as trade tensions and regulatory issues, investors are gradually reallocating to Chinese equities.

Supportive Policies: The State Council's issuance of "9 Key Points" to enhance China's capital markets has demonstrated a commitment to improving corporate governance and encouraging dividend payments.

Economic Recovery: China's GDP growth is improving, with Q1 2024 exceeding expectations. Consumer confidence is rising, evidenced by increased spending on services like travel, both domestically and internationally.

Bull Flag Forming on China A50 Index

Two indictors are all you need to analyse the China A50 index:

Keltner Channels: This indicator wraps 2.25 ATR’s around a 20 day exponential moving average (EMA). Having pressed into the upper band at the start of the month, prices have started reverting back to the mean. Price action during the pullback has seen the market form a series of tight range days – creating a small descending retracement channel also known as a ‘bull flag’.

200-Day Moving Average: This long-term moving average provides important context. Despite a sustained rally this year, the China A50 index has only recently moved above the 200-day MA. The 200-day MA is also sloping down – indicating that whilst Chinese stocks are recovering in the short-term, the longer-term trend in this market remains bearish.

China A50 Index (CN50) Daily Candle Chart

(Past performance is not a reliable indicator of future results)