Hang Seng index recoils as China stocks face multiple headwinds

The Hang Seng index came under intense selling pressure, becoming one of the worst-performing major indices globally. The index plunged to a low of H$18,574 on Monday, down from this month’s high of H$20,381.

Multiple headwinds

The Hang Seng index is facing multiple headwinds. First, the Chinese economy is slowing dramatically, as evidenced by the latest macro data by the National Statistics Bureau. The unemployment rate remained unchanged at 5.3% in July even as the youth unemployment rose. As a result, the agency will pause publishing the youth number, signaling that things are not going on well.

Meanwhile, industrial production rose by 3.7%, lower than the median estimate of 4.4%. This is an important figure since China is a leading industrial country. Fixed asset investments rose by 3.4%, lower than the median estimate of 3.8%. 

These numbers mean that the recovery has faltered, with some analysts questioning whether it will hit Beijing’s target of 5%. China’s central bank decided to slash interest rates again in response to these numbers.

China’s data is important for the Hang Seng because most constituents do a lot of business in the country.

Second, the Hang Seng index retreated as more trouble emerged in the real estate sector. Country Garden, a key constituent, has missed paying its debt this month, putting it at risk of collapse. As a result, its stock has dropped by 30% in the past week. 

Other real estate stocks like Link Real Estate, Wharf Real Estate, and Hang Lung have also retreated amid rising contagion risks. Similarly, companies exposed to China’s real estate like HSBC, China Merchants Bank, and Ping An have retreated.

Hang Seng index forecast

The Hang Seng index has been one of the worst-performing indices in the world this year. On the four-hour chart, we see that attempts to its recovery have faced substantial resistance at several levels like H$20,398 and H$22,677. 

Most recently, the index has formed a descending channel that is shown in black. It has now moved slightly below the middle of this channel. Also, the shares moved slightly below the 25-period and 50-period moving averages.

Therefore, the outlook for the index is bearish, with the next support level to watch being at H$18,000, the lower side of the channel. The alternative is where it rebounds and retests the upper line of the channel at H$19,500.