Shanghai Composite index analysis: slips as China risks remains

The Shanghai Composite index has severely come under intense pressure in the past few months even as global peers like the Dow Jones, DAX index, and Nasdaq 100 have surged. The index, which tracks some of the biggest companies in China, has dropped from the year-to-date high of CNY 3,418 to CNY 2,966. 

China economic weakness

The Shanghai Composite index has been under pressure as concerns about the Chinese economy continued. The most recent data showed that there are signs that the economy has bottomed in the past few months.

On Thursday, data revealed that China’s imports dropped by 0.6% in November after growing by 3% in October. The imports were lower than the median estimate of 3.3%. Exports, on the other hand, rose by 0.5% in November. They rose to over $1.7 billion in the first positive month in six months.

There have been other positive signs in the economy. Data showed that the Chinese services PMI rose from 50.4 in October to 51.5, higher than the expected 50.7. The composite PMI, which incorporates the manufacturing sector, rose to 51.6. 

Additional data revealed that Chinese industrial production and retail sales continued rising in October. At the same time, Beijing is working to solve the real estate sector by propping the financial sector to fund projects.

However, there are risks to the Chinese economy. For example, Moody’s, the giant credit rating company, slashed China’s credit outlook to negative, citing the country’s real estate sector. It also warned that the use of fiscal stimulus to support local governments and the real estate industry was risky. The statement added:

“Still, maintaining financial market stability while avoiding moral hazard and containing fiscal costs of support is very challenging.”

There are risks to the Chinese stocks. For one, foreign buyers are exiting their positions as tensions between China and US rise. Many wealthy people in China have also started to shift their wealth to countries like Singapore and Abu Dhabi.

Shanghai Composite index forecast

In my last article on the Shanghai Composite index, I warned that it would continue falling. This view was accurate as it has dropped from CNY 3,100 to CNY 2,966. It has formed a downward channel and below the 50-day and 100-day moving averages. The index has dropped below the Ichimoku cloud indicator.

The outlook for the Shanghai index is bearish, with the next point to watch being at CNY 2,924, the lowest point in October. A break below that price will help to invalidate the double-bottom pattern as sellers target the support at CNY 2,900. 

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