Shanghai index pressured as China black swan events mount

By:
on Aug 17, 2023
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  • The Shanghai Composite index has underperformed its global peers.
  • There are concerns about the Chinese economic recovery as growth slows.
  • Country Garden and Zhongrong have recently missed payments.

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The Shanghai Composite index sell-off continued this week as concerns about the Chinese economy continued. It plunged to a low of CNY 3,120 on Thursday, the lowest level since January this year. Like the Hang Seng, the index has underperformed its global peers like the Nasdaq 100 and S&P 500.

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China economic woes

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The Shanghai Composite is an index that tracks the biggest companies in Mainland China. Most of its constituent companies are in the financial and industrial sectors. They include firms like ICBC, PetroChina, Agricultural Bank of China, and China Construction Bank among others.

The Shanghai index has lagged the broader market for two main reasons. First, the ongoing cold war between China and the United States has pulled more investors away from the Chinese market. There is even talk of grilling executives at Blackrock, Vanguard, and State Street about their investments in China. 

Second, investors are worried about the slowdown of the Chinese economy. As I wrote here, economic data from China missed expectations, pushing banks like Barclays and JP Morgan to reduce their annual forecast. Industrial production and fixed asset investments rose at a slower pace than expected. 

Analysts believe that the situation is actually worse than what the official stats say. For example, they cite the performance of commodities like crude oil and copper. Also, statistics from shipping companies like Maersk and ZIM Integrated show that global demand is waning.

The biggest issue, though, is the country’s real estate sector, which accounts for a quarter of the GDP. Country Garden, a leading developer with almost $200 billion in liabilities has missed payments. In a statement on Thursday, the firm warned about uncertainties about its ability to pay its yuan and dollar bonds.

Similarly, Zhongrong, a shadow bank missed payments this week. Other firms that have missed payments recently are Kaisen, Sunac, Fantasia, and KWG GRoup. Therefore, there are concerns about contagion in the sector.

Shanghai Composite index forecast

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The daily chart shows that the Shanghai index has been in a strong bearish trend in the past few months. It has crossed the important support at 3,145, the lowest level on June 26th. 

At the same time, the shares have plunged below the 50-day and 25-day moving averages, signaling that bears are in control. The index has also crashed below the 50% Fibonacci Retracement level.

Therefore, the outlook for the Shanghai index is bearish, with the next level to watch will be at 3,000.

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