Tests of strength on Asian stock markets. On the one hand, the Japanese Nikkei continues to convince and this morning returned to its highest price levels since the 1990s. On the other hand, in the last few sessions, there has been something new, namely the rebound of the Chinese stock market Csi 300. In particular, the index representing the 300 main companies listed on the Shanghai and Shenzhen stock exchanges has shown a performance of over 6% since Monday, thus rebounding from the recent lows of 2019.
And so, 2 days before the start of the Chinese Lunar New Year, China’s rebound gives hope to investors who believed in the Dragon, a country that in the last three years has lagged far behind other geographical areas (Europe and the United States). We remind you, in fact, that from tomorrow the Chinese markets will be closed for the celebration of the Lunar New Year (they will reopen on February 19th).
From this point of view, we keep in mind that despite this week’s rebound, the Csi 300, from the historical highs achieved in 2021 it has lost approximately 43% of its value. But the abandonment of investors after more than a decade and the collapse of the Chinese market is not the only challenge that Xi Jinping’s government is facing, which is also facing a worrying economic situationalso aggravated by the failures in the real estate sector driven by the collapse of the giant Evergrande.
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Chinese inflation at lowest level since 2009
Meanwhile, this morning the consumer prices in China for the month of January, data showing a sharpest decline for 14 years (since 2009). In this sense, i consumer prices in China they stood in decline of 0.8% year-on-yeara figure significantly worse than analysts’ expectations who expected a drop of 0.5% (against the previous drop of 0.3%).
As we see from the graph below which represents Chinese inflation, this is the fourth consecutive month of deflation for the Land of the Dragon, a decline substantially driven by the reduction record food prices which fell by almost 6% (against the previous -3.7%).
Inflation trend in China from 2014 to today. Source: Bloomberg
“The main drag on inflation continues to be food prices, which fell 5.9% year-on-year, the lowest level on record,” said Lynn Song, chief economist at ING.
However, on a monthly basis, prices rose by 0.3%.but with market expectations of +0.4% and this after the essentially flat growth (0.1%) achieved in the previous survey in December.
But not only that, the persistent deflationary pressures of the world‘s second largest economy are also highlighted and aggravated by the latest data on producer prices which fell on a year-on-year basis by 2.5% in January, the sixteenth consecutive decline.
Objective of recovery in 2024?
Here these critical issues come together heavy crisis in the real estate sector in the country, as well as the still weak recovery prospects for the coming months. From this point of view, recently the International Monetary Fund (IMF) has once again expressed its opinion on the Chinese situation, stating that “it is China’s economic growth is likely to slow down in the coming years” further, weakened as we were saying by the real estate crisis but also by the delicate international context.
As for the estimates, for the current year the IMF expects the country’s GDP to stand at 4.6%then falling to 4% in 2025 and beyond +3.5% by 2028. Let’s take into account that in 2023, Chinese GDP rose by 5.3%, just above the targets set by the Beijing government, but the real challenge for recovery is expected this year.
Precisely for 2024, it will be essential for China to fix the unrest in the vast real estate sector which for over a decade was the engine of economic growth while now it is one of the main brakes.
Precisely on the real estate front, according to the analyses Jasmine Kang, fund manager of Comgest Growth China, “there is no immediate risk of the asset bubble bursting. China’s national household income multiple of 6.3 times is lower than that of most developed countries (for example, 9.5 times in the United States)[1]which suggests that house prices are already fair. We also take into consideration that “the contribution of the real estate sector to GDP has already fallen from just over 30% in 2020 to the current 20%”.
But not only that, “the wealth effect due to the weakness of the Chinese real estate market has spilled over onto internal consumption, which remains low“, but nevertheless the sales of electric vehicles new to China have just recorded another successful year, with growth of 38% in 2023″ and the prospects for this are good.
Other strengths of China are the continuous increase of demand for automation in automotive, robotics and manufacturing processes industrial, but also the travel demandwith analysts at Comgest warning that “weighted average seat capacity on flights out of the country is above 300% year-on-year”.
A further trend that could benefit the Chinese economy is undoubtedly the rapid acceleration towards carbon neutrality, with the solar energy sector which according to Comgest analyzes “will suffer fewer upheavals on a technological level, as well as being less exposed on a geopolitical level compared to other sectors”.
Technical analysis of the CSI 300
But now, after 3 years of profound weakness, this week’s vigorous rebound brings some optimism among investors who have bet on China’s recovery and therefore on a change of course in its stock markets. We will see in the coming weeks whether this rebound will continue or if on the contrary it will deflate as soon as it started.
Since the beginning of the week, the CSI 300 has already gained over 6%, all while the Chinese Lunar New Year on February 10th, the day on which the entry into the Year of the Dragon will be celebrated, is getting ever closer. Here, according to the Chinese zodiac, this mythological creature represents power, prosperity and happiness for the new year and consequently traditionally in this period people tend to get married, buy a house or have children.
Who knows if Chinese stock markets will also raise their heads in the Year of the Dragon, but in the meantime let’s take a look at the price levels to monitor on the CSI 300 index:
as we see from the graph on the weekly time frame (below), despite the rebound in the last trading sessions, the CSI 300 index which on the daily time frame achieved the bullish breakout of the resistance at 3,340 points, a price area through which the 50-day moving average also passes (blue line on the daily chart). Now the Asian price list is targeting the achievement of the next static resistance area, first at 3,400 points and then towards 3,434 points.
On the contrary, in the event of a return of sales, the most important support area (in the event of a failure of 3,300 points) is in the 3,200 point area.
Performance of the Chinese CSI 300 index from 2014 to today. Source: Bloomberg
On a weekly time frame, if the index were to manage to archive the week above 3,340 points, then a bullish reversal chart pattern called Bullish Engufing would be achieved, which would be a sign of strength for the Chinese stock market.
In any case, despite the recent technical rebound, if we analyze the performance of the CSI 300 index on a weekly time frame, the weakness of the last 3 years is evident, with only a return of the index again above the resistance at 3,500 points could favor a recovery of the price list.
With the likelihood of a lower interest rate environment for the dollar and the Chinese real estate market bottoming, accompanied by continued development of innovation and energy consumption, a rotation towards the Far East could be a good portfolio strategy. With the Year of the Rabbit coming to an end and the Dragon unleashing, we believe the time has come to look to China for quality, long-term growth.