(How) Does The Chinese New Year Affect the Economy, Markets and… Investors?

One might be tempted to think that, finally, we have a common denominator when it comes to China and the proverbial West, one pertaining to how disruptive the “holiday” season(s) can be. However, as frustrating as it may seem, things are once again different in China, as this article will hopefully make clear.

On the one hand, yes, we can start with the basic assumption that holiday seasons are disruptive in China as well as the West. But when it comes to the sheer “size” of the disruptive phenomenon, China has the upper hand… to put it mildly.

Before continuing, it makes sense to mention that the Chinese New Year (also known as the Lunar New Year due to being based on the lunar calendar rather than the Gregorian calendar Westerners use) doesn’t have a date that is set in stone. A good general guideline is that is usually takes place in the 21 January to 20 February interval.

The “culmination” of the Chinese New Year occurs on the 15th day and it is worth noting that despite there only being seven days of “public” holiday, people tend to take most of their annual leave around this period, with it being common to do so from as early as two weeks prior to the Chinese New Year to as late as a couple of weeks after it.

Needless to say, this tends to disrupt the economy of China and ultimately the entire world in a meaningful manner. As mentioned previously, the Chinese New Year dwarfs similar events of the Western world in terms of economic effects for a wide range of reasons:

1. Holiday “migration” is perhaps the most representative one, in that it illustrates how far apart China and the West are in terms of holiday season effects. During the Chinese New Year, almost 3 billion trips were completed, as people travel back and forth to meet up with family members and celebrate. In contrast, only approximately 50 million trips are completed during Thanksgiving season or 2 million when it comes to the Haji Mecca pilgrimage
2. A lot of sectors of China’s economy end up being shut down completely due to the Chinese New Year, with effects reverberating worldwide. When China sneezes, the entire world catches a cold and the same way, when China puts its let’s say industrial capacity on hold, the entire world tends to experience bottleneck issues. As such, industry upon industry has to engage in Chinese New Year-specific planning. How much should be ordered prior to the Chinese New Year given the fact that production will stop? How will this year’s Chinese New Year affect Chinese sales volumes? The list of questions can go on and on
3. Other sectors, however, thrive. For example, the transport industry, with over 400 million trips being finalized during the 7-day official holiday alone. The same way, the tourism industry thrives, with over $60 billion being generated during the previously-mentioned 7-day period alone. Please note that the foreign counterparts of these sectors also thrive during the Chinese New Year, especially when it comes to regions with a significant Chinese population such as the Philippines, South Korea, Malaysia, Indonesia and Singapore
4. Trading on pretty much all markets is affected as well, with volumes even going down significantly in anticipation of the Chinese New Year and picking up slowly afterward. Now, of course, this doesn’t mean potential black swan events such as panics or other financial calamities cannot alter this behavior. However, generally speaking, Chinese market participants tend to for the most part have other things on their mind during the Chinese New Year. Needless to say, aside from volumes going down in anticipation of the Chinese New Year and creeping up afterward, the even more pronounced effect is represented by the fact that (just like in the West) markets are closed altogether over a certain period of time (for a considerably smaller period of time in Singapore and Malaysia, significantly more in Shanghai and Hong Kong)
5. Even commodities themselves such as oil or precious metals end up being affected in one way or another, this time indirectly. For example, as various manufacturing companies and ultimately industries prepare for the Chinese New Year, demand for the commodities used during the production process swings accordingly

At the beginning of the article, you might have wondered why a topic as “peculiar” as the Chinese New Year would warrant let’s say the attention of a Western investor who is interested in gaining exposure to Chinese assets. It should now be hopefully clear that the Chinese New Year represents yet another textbook example of the fact that a thorough China-oriented analysis needs to revolve around a lot more than the blatantly obvious.

Investors who believe the Chinese New Year variable is simply something one can afford to ignore most likely have a few painful lessons ahead of them. But do not be discouraged: “getting” China from a cultural perspective is indeed crucial but it doesn’t have to be difficult. Here at ChinaFund.com, we do our best to provide everything you need in terms of information to do just that and, of course, those who wish to dig deeper or outsource the entire process to us can get in touch by visiting the Consulting or Contact section of ChinaFund.com.