'Rare Event' in China Markets Grabs Attention

Gene Linn  |

As China stocks marked time Tuesday ahead of a key Federal Reserve Board meeting, the future of the market could take a dramatic turn based on events last Friday, according to one brokerage.

There wasn’t much to see Tuesday as Hong Kong’s Hang Seng Index edged 0.2% higher to 19,858 in reduced turnover. The index of Chinese companies slid 0.2% to 9,377. Most investors sat on their trades waiting to see if the Fed would launch a new round of quantitative easing in meetings Wednesday and Thursday.

By contrast, according to a China Market Strategy Report from BOCOM International, “Last Friday’s trading was spectacular – Shanghai and Hong Kong surged almost 4% and Shenzhen over 5%, with almost three times as much volume as the average trading volume in previous weeks.”

The huge rally was a “rare event in China’s stock market history,” the brokerage arm of China’s Bank of Communications stated. It ranked among the top five surges in the last 15 years. A similar day on June 8, 2005 marked the start of a monumental runup from 998 to 6,214 in Shanghai.

BOCOM cautioned there is no certainty September 7, 2012, is the beginning of a similar rally. “It is still too early to draw close parallels between these two days. After all, China reformed its stock market and exchange rate regime in 2005,” it said.

There are some positives, BOCOM said. Many investors hope the change in Chinese leadership slated for this autumn will usher in significant and needed economic changes. There is a chance that one or all of the major central banks will further ease monetary policies. It also notes a bullish rise in margin lending activities compared to the volume of short selling and an increase in investment in cyclical sectors such as financials and industrials.

For now, the brokerage’s advice is “sit tight.” End

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