How will Chinese Shanghai Composite Index perform after three years lockdown?

 

The Chinese stock market has been underperforming global stock markets, especially the US stock market since 2015 as shown in the chart1 below.

Chart 1. Dow Jones Index VS Chinese Shanghai Composite Index

This is mainly because after the 2008 GFC the US Fed kept injecting money into its economy, subsequently pulling them out of the recession. With the government’s support, the US economy recovered quickly and strongly, therefore, global investors were confident to invest in the US stock market.
Unlike the Hong Kong stock market, the Chinese government has always been very restrictive with global money flowing into Chinese A Shares. With the Chinese economy’s growth reaching a peak in 2007 at 14.23%, it has since slowed down sharply to only 4% in 2019. Therefore, these two reasons are a large factor behind why the Chinese stock market has not been doing well since 2007.


                                         Chart 2: Chinese GDP Growth from 2000 to 2019

As shown in the Chart1 above, in 2015 the Chinese government tried to encourage citizens to invest in the stock market and started using the leverage first time as well,  however then quickly failed and thus lots of people ended up with big losses because of using aforementioned leverage. This implies the Chinese stock market is still young and thus still not yet well monitored. 

It is well known that the Chinese government applied a ‘zero-covid’ policy since the COVID-19 pandemic in 2019, and has tried to contain the virus from spreading, just like other countries’ governments have tried to do so too. However, what has happened to other countries has demonstrated that this policy is not feasible. The only solution is achieving herd immunity with the majority of people vaccinated; otherwise, people’s life quality, as well as the economy will be deeply affected.

After three years of applying this ‘zero-covid’ policy, the Chinese government has also realized that it is incapable of working and thus released 20 new key parameters to the policy rules in early November 2022.  With this loosening of the policy, it can be hoped that the Chinese economy will be sharply bouncing back from its 2019 low level.

With people’s life come back to normal gradually and potential sharp economy recovery after the lockdown, I believe there will have a short term rally in the Chinese stock market. However, as shown in the Chart3 below because the Shanghai Composite Index has been trading in a large consolidation triangle since 2008, the rally will have very limited upside.  Even though, the 3400 level as marked in the chart3 is very achievable.


Chart 3. Chinese Shanghai Composite Index since launched