[MarketING] Stock Market More Aligned with China than the US

Domestic Stock Market Shows Synchronization with Recent Chinese Market Trends
Focus on COVID-19 Spread in China After Lunar New Year Holiday

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] Recently, the domestic stock market has been showing a trend of synchronization more with the Chinese stock market than with the U.S. stock market. This is interpreted as a similar movement due to the inflow of foreign funds into emerging market stocks. Considering the effects of China's reopening (resumption of economic activities), attention should be paid to the situation of COVID-19 cases in China after the Lunar New Year holiday.

Synchronization Trend with Chinese Stock Market Due to Foreign Inflows into Emerging Markets

As of 10:30 a.m. on the 20th, the KOSPI recorded 2,380.94, up 0.60 points (0.03%) from the previous day. The KOSDAQ rose 2.36 points (0.33%) to 715.25. On this day, the KOSPI initially started down, then turned upward, fell again, and as the Chinese stock market opening approached, it rose again, fluctuating within a narrow range in the early trading hours.

Recently, the stock market has shown more synchronization with the Chinese stock market than with the U.S. stock market. Despite the U.S. stock market falling for two consecutive days, the domestic market succeeded in rebounding the previous day. The Shanghai Composite Index has risen for two consecutive days recently. Except for three trading days this month, the Shanghai Composite Index has shown an upward trend. The KOSPI has also shown strength except for four trading days this year, showing a similar trend to the Shanghai Composite Index.

Seo Sangyoung, a researcher at Mirae Asset Securities, said, "The meeting between U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier Liu He, additional visits by Yellen to China, and the easing of U.S.-China conflicts have led to gains in Chinese companies in the U.S. stock market the previous day, and the expected firmness of the Chinese stock market today is favorable for the domestic stock market," adding, "The direction of the Korean stock market will be determined by the movements of the Chinese stock market and the foreign investors' supply and demand that led the market the previous day."

Choi Yujun, a researcher at Shinhan Investment Corp., explained, "The domestic stock market started down the previous day but turned upward after the opening of the Chinese stock market due to expectations of China's stimulus measures following the Lunar New Year (Chunjeol)," and added, "The influence of the U.S. Federal Reserve (Fed) on the domestic stock market has diminished, which is judged to be based on differences in monetary policy stances between Korea and the U.S. and the impact of China's reopening."

The synchronization of the Korean stock market with the Chinese stock market is related to the flow of foreign funds. Recently, foreign funds have continuously flowed into emerging market stocks. Foreign investors have recorded net purchases in the Chinese stock market for 12 consecutive days. In the KOSPI, they have maintained a net buying streak for seven consecutive days until the previous day. On this day as well, there was a buying dominance of around 80 billion won.

Kim Jihyun, a researcher at Kiwoom Securities, analyzed, "The domestic stock market has shown strength in January, relatively free from concerns about a U.S. recession and the Fed's policy influence," adding, "The foreign net buying intensity, which had slightly slowed this week, expanded again centered on large-cap stocks the previous day. This is due to the earlier-than-expected timing of China's reopening, leading to an increase in the proportion of emerging market stocks including China and the inflow of global passive demand."

Attention Needed on China's Situation After Lunar New Year Holiday

As the domestic stock market shows synchronization with China, attention should be paid to China's situation after the Lunar New Year holiday. Especially considering that the recent stock market strength was driven by expectations of China's reopening, it is necessary to focus on the spread of COVID-19 in China after the holiday.

Kang Daeseok, a researcher at Yuanta Securities, said, "After the Lunar New Year holiday, the stock market is expected to focus on the spread of COVID-19 during China's Chunjeol holiday," adding, "Since China has stopped counting mainland confirmed cases, reliance on announcements from local governments or news has increased, so volatility in related stocks may expand depending on media reports."

Recent announcements from Hong Kong and some regions in China suggest that primary infections in urban areas have subsided for now. Kang said, "Considering the vaccination and booster shot status of the elderly population in mainland China, there is a concern that COVID-19 may rapidly spread to rural areas during the Chinese Lunar New Year," adding, "Especially after the Lunar New Year holiday, stock prices related to China's reopening may fluctuate significantly depending on the news, so it is important to pay attention to using price fluctuations as buying opportunities."

Park Suhyun, a researcher at KB Securities, said, "The market will focus on Lunar New Year consumption data that can alleviate doubts about consumption capacity before China's Two Sessions (National People's Congress and Chinese People's Political Consultative Conference) in March," adding, "According to conservative estimates by Chinese media, this year's Lunar New Year consumption is expected to reach 7.9 trillion yuan (approximately 1,439 trillion won). Considering that the movement of people in major cities has continued to rebound since December last year, there is a possibility that the estimate will be exceeded."