Traders with an international focus all have their eyes on China right now. The economic giant is beginning to show signs of having their economy stabilize a couple weeks their currency had a big win by being picked up as a basket fund currency by the International Monetary Fund. This is a small step for sure, but it’s a good one for the time being. This is a good thing for the Chinese economy and could point to the fact that prices are about to go back up.
While this is a good step forward, many analysts believe that although a price floor may have been achieved, more steps, including tighter policies, are needed to keep growth moving upward at the desired pace. There is a large amount of domestic debt in China, both at the personal level and at the corporate level. These things have the potential to harm the economy in the future if left unchecked. There’s also some issues with the property market, and this could slow growth, too. Needless to say, China may have found some stability right now, but there’s a chance that it could be short lived.
Trading international indices like the Shanghai Composite Index is risky if you do not have a firm grasp on some of the major corporations that entail it. It’s easy to look at the technical indicators of an index, but you need to realize that an index is completely dependent upon the companies that comprise it. Not understanding those will be very harmful for your trading over the long run. The major Chinese index is made up of the Shanghai Stock Exchange, although for most purposes, only the top 300 companies are used in calculations. Still, this is a huge number for someone who isn’t familiar with the Chinese economy. The point is, these all have fundamental issues going on–both good and bad–and not understanding any of them has the potential to lead to harmful results on your trading, even if you have a firm grip on the technical side of it. This is especially true of short term traders, like those that use binary options or other quick forms of trading. Watching charts is important, but without an understanding behind the charts, there’s potential for danger.
With all of the warnings aside, the stage is set for a rebound in the Chinese economy. The index has fallen by over 1,600 points since its high point in early June, but it is still up for the year by almost 500 points. It’s easy to guess that what happened was growth was far too quick, either through the too-easy access of funds, low interest rates, or consumer over-exuberance. Any or all of these could have played a factor. With stability underway, the Chinese regulators need to examine causes and implement safety measures of some sort. We see that happening in the U.S. right now with the Fed watching the economy and the stock market, attempting to create a stronger dollar all while not harming the economy. It’s a tough and slow process in many instances, but it is possible. What traders should really be looking at is whether or not the Chinese government will be able to do so successfully. With closer international monitoring from the IMF, they have a much better chance of doing so than ever before, and that should make us long term bulls on what the Shanghai Composite Index will do. Just be careful for the short term until the technical signs points to a more stabilized moving average. Every day it seems to be getting better, so there’s a strong chance that bull positions are warranted before the end of the year.