Shanghai Composite index outlook amid rising stimulus hopes

The Shanghai Composite index rose by over 1.5% on Tuesday as investors cheered Beijing’s stimulus pledge. It also rose after the rising speculation that the People’s Bank of China (PBoC) will continue cutting interest rates in 2025. The index was trading at CNY 3,456, 28% above the lowest point in September.

China trade surplus rises

The Shanghai Composite Index rose after the latest China trade data. According to the statistics agency, China’s exports rose by 6.7% in November, a big drop from the previous month’s 12.7%. This growth was also much lower than the median estimate of 8.5%. 

China’s imports also dropped sharply in November. They dropped by 3.9% in November after falling by 2.3% in the previous month. This decline was much lower than the median estimate of 0.3%.

Therefore, an increase in exports and a drop in imports led to a sharp increase in the trade surplus. The trade surplus rose from $95.2 billion in October to $97.4 billion last month. The year-to-date trade surplus stood at over $692 billion.

These numbers came as Beijing signaled that it will broaden its stimulus to support the economy as Donald Trump returns. In a statement on Monday, Xi Jinping’s Politburo vowed to maintain a moderately loose monetary policy in 2025. 

It also pledged a more proactive fiscal policy, meaning that Beijing may decide to rise the budget deficit to about 3% of GDP. 

The statement came as analysts raised their odds of more PBoC interest rate cuts in 2025. Top Wall Street banks like Goldman Sachs and Morgan Stanley have predicted that the bank will cut rates by 40 basis points in 2025. 

If that happens, it will be the biggest rate cut since 2015 and will bring interest rates to 1.1%.

Beijing has unveiled a series of stimulus measures to help the economy hit its 5% target, which seems unachievable for now.

Risks remain as Trump returns

The Shanghai Composite index is bracing for more volatility as Donald Trump returns to the White House.

He has already hinted that he will restart his trade war on the first day of his administration. He will impose a 25% tariff on Chinese goods in a bid to lower the large trade deficit.

The reality, however, is that tariffs are taxes that are passed to consumers. They often do little to reduce the deficit. Besides, China’s trade surplus with the US has widened after the last round of tariffs. 

A trade deficit is calculated by subtracting a country’s imports from exports. To a large extent, the problem is not that China is selling too much goods to the US. Instead, it is that the US is not selling more goods to China. Officials have also put in place trade restrictions that have reduced the high-tech goods to China. 

Most companies in the Shanghai Composite Index have done well this year. The most notable ones are Bank of China, which has jumped by 30% this year. Hua Xia Bank, China Merchants Bank, Industrial Bank, Bank of Beijing, and Agricultural Bank of China have soared by over 30% this year.

Shanghai Composite index analysis

The weekly chart shows that the Shanghai Composite index has recovered modestly in the past few weeks. It has risen from the double-bottom point at CNY 2,692 and then flipped the neckline at CNY 3,175. A double-bottom is one of the most bullish patterns in the market.

The Shanghai index has moved above the 50-week and 25-week Exponential Moving Averages (EMA). It has also risen above the key resistance level at CNY 3,417, its highest level in 2023.

Therefore, the outlook for the index is bullish as hopes of more stimulus rise. If this happens, the next point to watch being at CNY 3,675, the highest level this year. A drop below the support at CNY 3,350 will invalidate the bullish view.