China Stocks Face Critical Support Levels Amid Extended Selloff

Date: 8th December 2023

Author: Emmanuel Baiden - Senior Research Analyst

Chinese stock benchmarks are facing a challenging situation as they approach crucial technical levels. The persistent selloff has raised concerns among investors, and breaching these key thresholds may signify further losses ahead.

Global Pessimism and Economic Challenges:

The ongoing downtrend in Chinese stocks is occurring against a backdrop of global investor pessimism regarding China's economic outlook. The nation's economy is grappling with a fragile recovery, compounded by the deepening real estate crisis.

Despite Beijing's efforts to stabilize sentiment, foreign outflows persist. Moody's Investors Service's recent broad-based outlook downgrade across China's sovereign and corporate ratings has only added to the headwinds.

Hong Kong's Hang Seng Index at Crossroads:

Hong Kong's Hang Seng Index (HSI) is at a pivotal juncture, approaching a long-term trend line dating back to the 1998 Asian financial crisis. This trend line has historically provided support during crises, including the 2008 global financial crisis.

In October of the previous year, the benchmark swiftly rebounded after breaching this threshold. However, concerns loom among traders that the index may see further losses if it tumbles below this critical support. With a year-to-date decline of more than 17%, the HSI currently holds the unenviable title of the worst-performing major stock index globally.

The HSI experienced a decline of up to 0.6% on Friday, heading towards its lowest close in a year, highlighting the severity of the current situation.

Shanghai Composite Index Facing Pressure:

The Shanghai Composite Index, marked by its significant "fate line," is also under scrutiny. This crucial line, which has historically offered support during crises over the past 18 years, has been repeatedly tested in the current year. The resilience of this index in the face of challenges is being closely monitored, and any breach could signal heightened market volatility and potentially further losses.

CSI 300 Index Near Historic Trendline:

Simultaneously, the CSI 300 Index, representing onshore shares, is teetering near its historic trend line. This index, after tumbling to its lowest levels since 2019 earlier this week, is experiencing fluctuations between gains and losses.

Outlook and Implications:

As Chinese stocks face these critical support levels, the broader market awaits cues on potential trends. The global investment community is closely observing how these benchmarks respond to the challenges at hand, and the outcomes may have broader implications for market dynamics.

Amid uncertainties, investors are advised to exercise caution and remain vigilant, adjusting their strategies in response to evolving market conditions. The delicate balance between global economic factors and localised challenges in China continues to shape the narrative for investors navigating these turbulent market waters.

Key events this week:

Friday - Germany?CPI

Friday - US?jobs report, University of Michigan consumer sentiment

The recent resolution of the United Auto Workers strike is anticipated to elevate November's non farm payrolls with US employment rates also set to edge higher.

However, analysts caution that challenges for job seekers and prolonged unemployment stints may signal future increases in the unemployment rate. This year has witnessed a slowdown in job creation, aligning with the return of employment rates for crucial working-age demographics to pre-pandemic levels. Simultaneously, wage growth has tempered amid receding inflationary pressures.

Wong and Paul suggest that the Federal Reserve holds the capacity to orchestrate a soft landing through timely rate cuts. However, they caution against delayed action, warning that a potential "nonlinear negative feedback loop" in the labour market could trigger a hard landing.

Find below some of our Buy/Sell Recommendations. Balfour Capital Group is a distinguished global boutique investment management firm with $300 million AUM and over 1000 Clients.

[Disclaimer: This newsletter provides financial insights for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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