Aug 07, 2023

The Chinese stock market has been under pressure this year as investors have been concerned about a slower economic recovery. However, the rally two weeks ago could be a sign that the market is breaking out of its current triangle pattern. A triangle pattern is a technical analysis formation that is characterised by converging trend lines. The breakout of a triangle pattern can be a bullish signal, as it suggests that the market is ready to move higher. However, it is important to note that a breakout does not guarantee a continued upward trend. The market could still pull back after the breakout, and it is important to monitor the price action closely.

CH50 – Weekly Chart

CH50: Weekly Chart

The China 50 index has recovered from the 12,400 support level and is currently consolidating. There is a possibility that the index will rise further to the 13,600 resistance level.

The current negativity from US analysts could be a factor in the rally in Asian stocks.

JPMorgan analysts have warned that China could become like Japan in the 1990s, with slow economic growth and financial stagnation, if it does not address its current economic challenges. They say the country is at risk of “Japanification” due to an unstable housing market, economic imbalances, and an ageing population.

The analysts argue that China’s housing market is overvalued and that a correction is likely. They also say that the country’s economy is too reliant on exports and that it needs to diversify. Additionally, they say that China’s population is ageing rapidly and that this will put a strain on the country’s economy.

The analysts conclude that China needs to take action to address these challenges if it wants to avoid a Japan-style economic slowdown.

The comparison is drawn to the early 1990s, when Japan experienced a period of economic stagnation, low inflation, a broad decline in asset prices, and a “balance sheet recession.”

The bank expressed concern that secondary home prices have begun to fall again in some cities in recent months after a tentative recovery in the first quarter of 2023. If secondary home prices fall below new home prices, it could be a major turning point, as a mutually reinforcing decline in new home prices and secondary home prices could be formed, intensifying both macro and financial risks. Therefore, it is critical to stabilise the housing market as a near-term policy priority, as emphasised by the July Politburo meeting.

Bloomberg also reported that Japan is currently in the lead in the race for US equity investment. According to Goldman Sachs Group, foreign investment in Japanese equities has surpassed that of China for the first time since 2017.

The current market conditions are propitious for Chinese and Hong Kong stocks to stage a surprise rally, and traders should carefully monitor the triangle pattern.

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