Why China's Rally Won't Have Legs

By Dhaval Joshi, chief strategist at BCA Research

• Absent the multi-decade housing and construction boom, China will be unable to generate the monster credit impulses that it did through 2000-20.

• Hence, the recent melt-up in Chinese stocks and China plays may last a few weeks more but is unlikely to be a rerun of the 2015 episode either in magnitude or in duration.

• Close the tactical overweight in global materials (MXI) at its time limit on October 3, and long copper versus gold at its time limit on October 12.

When a positive market catalyst meets a deeply oversold market, you get a market melt-up. That in a nutshell explains the recent sugar rush in Chinese stocks and China plays. The positive catalyst was the unveiling of a new stimulus cycle. And the collapsed complexity of the preceding price downtrend screamed that China plays were ripe for a melt-up (Chart 1).