How bad is the recent drawdown in the China market in terms of statistics?

If you have been investing in the China market in the recent months, you must have been taken aback by the never ending regulatory news which sent your Chinese stocks on a descending spiral. Some regulatory news comes out, the stocks tank- this cycle has been on a repeat in the past few months and things are actually still not looking any better. We thought some of the Chinese stocks like Alibaba are cheap enough to only find ourselves staring at an even cheaper price in a day or two.

I have written quite a few pieces on my take in the Chinese market. You can find the latest one here. That was written just last month. I usually do not cover the same topic so quickly, but I guess the speed of the descent in the prices prompt me to want to write another article on it.

The difference in this article is that I like to cover more on the technical stuff such as statistics to highlight how bad this recent drawdown in the China market is as compared to the available data.

Let's start off with ranking how bad these recent drawdowns are compared to all the other drawdowns in the Chinese market. I will use MCHI (iShares MSCI China ETF) as a representation of the China market here.

After running through the data on MCHI from Jan 2020 to July 2021, here's a chart on all the drawdowns that happened in this duration.

(Source: Portfolio Visualizer)

As seen from the chart, the current drawdown that we are facing in the China market is third on the list. If we include the Month-To-Date data, we should be seeing somewhere around -23% drawdown (approaching the second on the list). While the second highest drawdown took 11 months, the current one we are facing took only 7 months (if we include Aug) and is already on the verge of taking over the second place. I certainly do not hope that it overtook the first position (drawdown of -37%). A key thing to note here is the long underwater period for the top two drawdowns in this list. Both require a period of more than 2 years before it recovers back to the ATH value. If history was to repeat, we might have to wait till 2023 before the China market eventually recovers (and that's assuming we do not get any worse in this current drawdown).

If your investment period is 1-2 years, then the China market is definitely not the right one for you. If you are a long-term investor, then it's a different story.

Besides running through the data on Portfolio Visualizer, I also ran through 2000 Monte Carlo Simulations to see how "unexpected" the current value of MCHI is. If you have not read my previous article on Monte Carlo Simulations, do check it out here.

In this exercise, I used historical data from Jan 2011 to Dec 2020 as the database. With the values such as daily volatility derived from these historical data, I did a little "time-travel" and attempted to predict the current value of MCHI (20th Aug 2020).

Here's the results.

The current value of MCHI is 66.13 USD (as of 20th Aug 2020). This value is between 40th percentile and 50th percentile predicted price based on the simulations. While that's slightly on the lower side of the graph, it's not exactly too much of an anomaly as it is still within one standard deviation of the mean value. I will certainly be alarmed if the value of MCHI continues to drop to a value less than 54 USD.

Hope these analysis give you a good idea on how bad the current drawdown in the China market is.

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