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Global Macro: Government Reforms Boost Chinese Equities

NEW YORK ( TheStreet) -- Chinese equities have broken higher this week as the government plans to implement bold reforms over the next decade.

This past week, the Chinese government came out with plans for broad social and economic change over the next decade. Markets have viewed this decision in a positive light, which has allowed the iShares China Large-Cap (FXI) to break higher out of a multiyear consolidation.

The government plans to make the economy more market-based and less restrictive, thus causing the yuan to appreciate against the dollar. The government has artificially suppressed yuan strength for many years in an effort to keep exports competitive.
[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/12119749/1/gaps-3q-beats-but-holidays-could-be-tough.html"><em>Gap's 3Q Beats But Holidays Could Be Tough</em></a>]

Now that economic goals center more on domestic consumers and less on exports, monetary policy is more accepting of currency appreciation.

The social reforms aim to improve the structure of Chinese demographics. The current one-child policy has hurt the population in unforeseen ways, as male heirs have been favored under the existing rules.

The social reforms should ultimately lead to a larger and healthier base for labor and overall well being.

Investors have taken the news in a positive manner, bidding the index higher out of a multiyear consolidation.

The chart below shows a reverse head and shoulders that was broken by this week's trading action.
[Read: <a target="blank" data-add-tracking="true" href="http://www.mainstreet.com/article/money/investing/should-you-let-rookie-advisor-manage-your-money"><em>Should You Let a Rookie Advisor Manage Your Money?</em></a>]

Although many equity investors around the globe think markets are about to roll over, the Chinese equity index is telling a different story. Look for the index to move higher once they break through January resistance levels.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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