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China’s new economic measures boosted China-based stocks
China’s government recently announced new economic measures aimed at boosting their struggling domestic economy, which, along with lower interest rates, caused China-based stocks to surge last week. The iShares China Large-Cap ETF (FXI) jumped 18% for its best week since its inception in 2004, and is now up over 20% in the past two weeks.
This week, I’m breaking down the potential effects of these short-term spikes in the Chinese stock market. I'll also explore how the FXI has performed in the past following similar surges, and how the U.S. stock market reacted.
The FXI and Outsized 2-Week Spikes
Just twice has the FXI gained 20% over a two-week period: last week and then in August 2007. After the 2007 signal, the FXI gained almost 25% over the next three months, but it proceeded to collapse and was down 16% one year later.
The table below shows all the two-week gains of 15% or more. Chinese stocks performed well in the short-term after these spikes, with an average three-month return of 8%.
The longer-term results aren’t as good, with the FXI gaining about 2% the next year after these signals. This, however, beats its typical 52-week return, which comes in just below breakeven. The FXI, in general, has performed poorly since 2007. These spikes have led to better-than-usual returns for the index.
The table below lists the same dates as above, but it shows the subsequent S&P 500 Index (SPX) returns instead of FXI. U.S. stocks have tended to underperform after these instances. The SPX has averaged a modest loss in the next six months, with just 38% of the returns positive. The 52-week returns average just a 1.7% gain and 50% positive.
Most of the FXI spikes, however, occurred in late 2007 to early 2009, when the Great Recession on China's economy was also unfolding. In a post-financial crisis era, there are only two signals. The SPX did not fare well after the signal in April 2015, declining about 2.5% in the next year. There was another occurrence in November 2022, which brought about a 1.5% loss over the next four weeks, but ended in a roughly 10% gain over the next year.
