- New Science in old markets -

China – sharp divergence and an extension

After the downgrade of China's credit rating yesterday, there was brisk rally in Chinese stocks but with very divergent results between the '88' index of the most liquid 'A' shares that are reserved for domestic investors and the broader indices.

The broad market has been declining since early April, as credit conditions were seen to worsen, while the 88 index merely 'marked time' seemingly unaffected by growing worries. After the downgrade had occurred, both could rally, as is normal when an expected event occurs but the rally in the 88 index was more dramatic than the broader market - it was big enough to generate an extension:

Chin88 top ext, brd mkt too

The authorities are always willing to try to intervene when market developments are inconvenient in China and credit is one of the aspects of the economy that they aim to keep tightly under control. This provides another explanation for the rally as government support (even if can be a bit unsubtle) would be expected if credit dries up.  We do not see a trade to do here as this divergence is too great for us to be able to read the market clearly.