Money & Markets | opinion

Chinese stocks resemble a casino and that could mean a change in trend is coming

Aaron Tam / AFP / Getty Images
  • Intraday volatility in Chinese stocks is now the highest that it’s been since early 2016.
  • In the past, larger daily trading ranges have often signalled a change in market direction.
  • The benchmark Shanghai Composite Index has fallen around 30% since late January.

If you think Chinese stocks are looking more like a casino rather than a regulated market at present, this chart suggests you’re right.

It simply shows the daily trading range, expressed as a percentage of the prior session close, of the benchmark Shanghai Composite going back to the start of 2015.

We’ve picked a 10-day rolling average to help identify the broader trend in the data.

Right now, the swings in the Composite are back to levels last seen in early 2016, another period when concerns about the Chinese economy were elevated.

Back then, Chinese stocks were imploding following an enormous speculative boom in 2015. Such were the scale of the losses that policymakers went to extreme lengths to try and stop the rout, including arresting short-sellers.

While not to the same degree, yet, similar measures have been rolled out in recent weeks in an attempt to support stock prices following months of unrelenting selling.

At one point, the Composite briefly fell more than 30% from the highs struck in late January this year.

However, apart from another burst of selling on Tuesday, Chinese investors have responded positively to the steps taken by policymakers, buying stocks so aggressively that the index logged its largest two-day percentage gain since 2015 earlier this week.

That trend has continued today with the Composite up another 1.53% at the mid-session break on Wednesday.

While the surge in intraday volatility does, to an outsider, make Chinese stocks appear a bit like a casino, it’s noteworthy that in the past such periods have often occurred at at a turning point for the market.

It did in mid-2015, and in early 2016, and again in early January this year. We’ll find out soon enough whether it can go four from four.

Investing.comShanghai Composite Weekly Chart

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