The 4 Ds affecting the China A50 and Shanghai index

The China A50 index sell-off gained steam as concerns about the Chinese economy continued. It plunged to a low of CNY 12,325 on Tuesday, the lowest level since June 1st this year. It has dropped by almost 10% from the highest point in July and by ~15% from the year-to-date high.

Four Ds affecting China

The China A50 and Shanghai indices have come under pressure in the past few months as investors worry about the Chinese economy. Broadly, the country’s challenges can be divided into four Ds.

First, there is a question of local and international demand slowed. External demand was evidenced by the slowdown in exports and imports. Internal demand slowed down as evidenced by the sharp decline in home prices and retail sales.

Second, China is going through a debt crisis that is spread across the corporate, local government, and household sector. As I wrote here, the economy has moved into a balance sheet recession, where these entities focus on reducing their debt.

China’s local governments are facing a debt crisis as the value of their land sales drop. At the same time, companies like Country Garden and Evergrande are at risk as their sales plunge and debt burden continues.

Third, there is the challenge of decoupling as tensions between China and the US continues. This decoupling is having some major consequences, including a major decline in foreign direct investments (FDI). Most American companies have also diversified their sources, which has seen Mexico become the biggest trading partner.

Finally, China is facing major demographic changes as its population slows. The most recent data shows that the country’s fertility rate plunged to the lowest level on record. The rate dropped to 1.09 from 1.30 in 2020. A falling and aging population poses a major challenge for the economy.

China A50 index forecast

The daily chart shows that the China A50 index has come under intense pressure in the past few months. Most recently, the stock dropped below the 50-day and 100-day moving averages.

The shares are hovering near the important support level at CNY 12,245, the lowest level in May, It has dropped below the descending trendline shown in black while the Relative Strength Index (RSI) has moved below the neutral level.

Therefore, the China A50 index will likely have a bearish breakout as sellers target the key support at CNY 12,000. The same outlook is the same for the Shanghai Composite index.

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