In brief, China stock markets have five characteristics which affect the trends:

Driven by Government Policies

China stock markets are highly influenced by government policies. The recent tightening measures to curb inflation and property speculations have demonstrated this. Investors follow the government’s directions to make money by making their bets on relevant sectors. For example, the auto and home appliances sectors rose sharply for months last year when the government announced subsidies on those sectors. Betting against government policies is unwise. When the government firstly spoke out its concerns about property speculations, speculators defied it and kept pushing up property prices. Step by step, the government took measures to tighten its control on property speculations and the property sector is now the worst performer on the mainland China stock markets. In Hong Kong, the local government is not as strong as the central government and very often it lacks determination.  However, it only takes a longer while and more actions to fulfill its policies,e.g., its recent moves to cool down home prices.

Sheep Flock Behavior

The mainland China stock markets are  not sophisticated. Most of the time small investors buy and sell like a flock of sheep. They follow comments from peers, newspapers, radio and the Internet to make their decisions. Rarely do they make independent analyses themselves, but rather they would like to follow the trends to make profits. This explains to a large extent the high volatility of the mainland China stock markets. When the stock markets are up, especially due to a government policy, investors jump into the market and push up stocks, and vice versa when the markets are down. It is like playing music chair and everyone thinks he or she will be the lucky one. If you read the trend charts of mainland China stocks, you will find very often there are few minor corrections. Instead, it often keeps the up or down trend  for days till the music stops and reverse direction.

In Hong Kong, the stock market is supposed to be more sophisticated. Hong Kong has suffered a stock crash in 1973, which was a repeat of the Wall Street crash in 1929. The market has then behaved more matured since then.  However, after the announcement of Hong Kong Stock Through Train in 2007, funds and investors from China poured into the city and had then changed its behavior. Unproved statistics says one-tenth of the Hong Kong stock market’s daily turnover is done by investors from mainland China. Hence, the Hong Kong stock market behaves more and more like  mainland China stock markets, though it is not so immature as them.

 

Small Investors Are Inactive in Short Selling Activities

Short selling was prohibited until April 2010 in mainland China. For big players who are resourceful, they actually have been able to short stocks for years by borrowing stocks. Though it is now legal to short stocks by borrowing, it does not mean that small investors are active in this respective. Take Hong Kong as an example, short selling has been legal for a log time but small investors are not active in short selling. A main reason is that they are not used to it. Chinese investors tend to long rather than short. In addition, the procedures in short selling is not as simple as buying on margin. Investors have to have the broker to lend the stocks to short and this is not feasible to do on Internet trading via a bank without prior arrangements. On the other hand, short selling is a major activity by big players. The Hong Kong Stock Exchange announces the records on short selling everyday. The volumes are big, but only a tiny part comes from small investors.

Influenced by Foreign Funds

Foreign funds like Morgan Stanley and Goldman Sachs have offices in mainland China and Hong Kong. They are very active in the stock markets. They participate in setting up IPOs for companies and they are big players in trading. They always publish their reviews and comments publicly, which  are influential. Very often the stocks react to their comments because investors buy their ideas.

From One Extreme to Another

Owing to sheep flock behavior and lack of short selling, the trends tend to go from one extreme to another. Very often the reactions are overdone. For instance, the recent sluggish performance of the Chnia stock markets is going to continue till it is overdone. Possibly a subsequent announcement by the government to relieve the battered property sector will reverse the trend and then the SSEC Index will go up to another extreme.

Conclusions

The China stock markets are still immature, but this actually gives great opportunies to sophisticated investors and big players to make big profits. One thing is for sure – you ought to react to government policies swiftly and you must not defy its wills.