Telecom rally signals broader China tech shares surge

China’s telecom stocks, a proxy for the value of industrial automation, turned in the best performance in China’s CSI 300 Index of mainland large-cap stocks during February. The telecom subindex of the CSI 300 rose by nearly 20% as of Feb. 20 from its January 17 low.

Although the telecom index has gained about 20% since January 2019, the recovery looks like a dead cat bounce on the chart. Closer analysis, though, indicates that the telecom rally just before and after the Lunar New Year holiday is significant.

Telecom companies in the West are a consumer business. In China, they provide key infrastructure for industrial automation, in the form of dedicated broadband networks for industry, mining and logistics. 5G networks offer high data capacity as well as low latency (very rapid response to signals), and support a wide range of artificial intelligence applications.

High-speed cameras upload thousands of photos per minute of industrial machines or components on a conveyor belt, automating preventive maintenance, quality control and other functions. Machine learning algorithms analyze the uploaded data and identify defective parts, machines in need of maintenance, foreign objects in mining output and other functions.

Wireless communication among industrial robots, moreover, speeds the optimization of automated production and supports quality control.

A statistical technique called principal components decomposition drills down in to the factors that move markets. The first factor is the overall movement of the market. This explains 64% of the daily variation of the sectoral indices of the large-cap A-shares market.

The second most important factor is the relative movement of telecom stocks against the rest of the market.