Shanghai Composite Index prepares for a big move as risks remain

The Shanghai Composite Index pulled back after China published mixed economic numbers on Friday. The index, which tracks some of the top companies in the country, was trading at CNY 3,367, down by 8.32% from its highest level this year.

China retail sales and industrial production data

The Shanghai Composite Index retreated after data by the National Bureau of Statistics (NBS) showed that China’s retail sales boomed in October. Sales rose by 4.8% in October, higher than the median estimate of 3.8% and the previous quarter’s 3.2%.

They rose from 3.35% in September to 3.51%, a notable thing since consumer spending is one of the biggest parts of the Chinese economy.

Another positive was that China’s unemployment rate dropped from 5.1% in September to 5.0% in October. It has remained in this range in the past few months. 

On the negative side, China’s industrial production dropped from 5.4% in September to 5.3% in October, missing the analysts' estimate of 5.5%. Fixed asset investments also remained unchanged at 3.4%, missing the expected 3.5%.

These numbers mean that the economy is doing relatively well although it will struggle to hit the 5% target.

As a result, the Chinese government is working to stimulate the economy. Earlier this week, the government unveiled a $1.4 trillion stimulus package. Most of these funds will go to support cash-strapped states, which have struggled after the real estate industry crumbled.

The program will go on through 2028. A key criticism of the package is that it does not go directly to areas that will stimulate retail spending. One of the stimulus measures that targets consumers is taxes by the PBoC, which have remained low this year

China prepares for tariffs

The Shanghai Composite Index reacted to the upcoming tariffs from the United States. Donald Trump has pledged to impose more tariffs on Chinese goods as he works to reduce the trade deficit. He also hopes that these tariffs will help to pay for his tax cuts. 

China will also respond to these tariffs as it did last time. In this, it will likely target key American sectors like agriculture that are highly sensitive to US politics. 

Therefore, the Shanghai Composite and other indices like Hang Seng and China A50 are reacting to the threat of a trade war between the two countries. 

Most companies in the Shanghai Composite were little changed on Friday. Some of the most notable movers were firms like Shanghai Jiao Yun whose stock jumped by over 10% after the auto parts company published strong results. 

The other top performers were companies like Grinm Materials, Solareast Holdings, Daqian Ecology, and Shanghai Material Trading, which all jumped by over 10%. 

Read more: UBS cuts forecast for China stocks amid potential US tariffs and weak stimulus

Shanghai Composite analysis

The daily chart peaked at CNY 3,676 as investors focused on China’s stimulus package. At its peak, the index was up by over 36% from its lowest level in October. 

Recently, however, it has pulled back and was trading at CNY 3,367. It has remained above the 50-day and 200-day Exponential Moving Averages (EMA), which is a bullish sign. 

Meanwhile, the Relative Strength Index (RSI) and the MACD indicators have all pointed downwards. The RSI has dropped below the overbought level of 70, while the two lines of the MACD have formed a bearish crossover.

Therefore, the Shanghai Composite index will likely resume the uptrend in the near term. If this happens, the next point to watch will be the resistance point at CNY 3,511m, its highest level on November 8. A break above that level will point to more gains as bulls target the key resistance level at CNY 3,676.