China A50 Forecast: How Today’s Surge Mirrors 2014, and What That May Mean Moving Forward

A50 Key Points

• China’s A50 index is mirroring the 2014-2015 surge, the last time policymakers enacted coordinated fiscal/monetary/macroprudential stimulus measures.
• Back then, the A50 went on to double within nine months before sharply reversing and retracing most of the gains over the next couple months.
• For now, the A50’s near-term technical bias will remain bullish as long as the index holds above the January 2023 highs at 14,430

“History doesn’t repeat but it does rhyme” is something you say when you want to sound smart…

…but maybe history really just repeats?

In trying to put the bullish surge in Chinese indices into context, I discovered that this isn’t the first time that China’s A50 index saw a 25%+ surge in just 10 trading days. Back in November and December of 2014, the index rocketed higher, driven primarily by these factors:

• Monetary Easing by the People's Bank of China (PBoC): The PBoC cut interest rates in November 2014 for the first time in over two years, signaling a shift toward monetary easing to support growth and raised expectations of further policy support in the coming months.
• Economic Stimulus and Infrastructure Investment: To counter slowing economic growth, the Chinese government introduced fiscal stimulus measures, focusing on infrastructure projects and urbanization efforts.
• Stock Connect Program: The Shanghai-Hong Kong Stock Connect program, launched in November 2014, allowed investors in Hong Kong and Mainland China to trade shares in each other's markets for the first time, opening up China’s markets to more foreign capital.
• Attractive Valuations: China’s A-share market was deeply undervalued relative to global peers, leading to significant buying pressure, particularly from retail investors, who play a major role in the Chinese equity market.
• Reform Momentum: The Chinese government continued pushing structural reforms, including SOE (State-Owned Enterprise) reform and financial market liberalization, which were seen as long-term drivers of growth.

With the exception of the one-off “Stock Connect” Program, you could argue each of the other four drivers from a decade ago are in place once again for The Middle Kingdom: In a coordinated announcement last week, Chinese authorities cut interest rates, put new reforms in place, and promised additional fiscal stimulus, all at a time when broader Chinese stocks trade at a discount to the rest of the developed world.

Ultimately, the Q4 2014 rally carried over through the first quarter of 2015, ultimately leading Chinese A-shares to more than double on the back of the coordinated policy support before new curbs on margin trading and an economic slowdown pricked the bubble and drove the A50 down by more than -45% from May-August.

Rather than automatically pencil in another 50%+ rally from here, readers should consider that history may merely “rhyme” and not repeat exactly this time around, but looking at the historical context can help traders understand the potential range of outcomes – in this case, everything from an extended one-way rally to substantially higher prices to a sharp drop if China’s economy slows meaningfully despite the policy support.

China A50 Technical Analysis – Daily Chart

Source: TradingView, StoneX

From a technical perspective, the A50 has clearly broken its long-term trend of lower lows and lower highs after setting a higher low last month and rocketing to 2+ year highs as of writing. Given the strong bullish momentum, the near-term technical bias will remain bullish as long as the index holds above the January 2023 highs at 14,430, with potential for a continuation toward the 50% Fibonacci retracement at 15,860 next. A break back below 14,430 would suggest that traders are skeptical of the stimulus’ efficacy and could point to a bout of profit-taking back toward 13,000 next.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX