Hang Seng Index could be at risk of a crash: here’s why

The Hang Seng Index has wavered in the past few months as concerns about the Chinese economy and the housing market have remained. HSI was trading at H$25,800, down by 5.4% from its highest point this year. 

Hang Seng Index pressured by trouble in the real estate sector

One main reason why the Hang Seng Index has pulled back recently is that the problems in the real estate sector have resumed. 

For example, New World, a top Hang Seng constituent, is having liquidity problems even after raising $1.2 billion in debt. This raise was much less than the planned $1.9 billion raise, leaving the company with $6.8 billion in debt to manage.

Other Chinese property developers are in turmoil, two years after cracks in the sector emerged, leading to the collapse of Evergrande. Some of the companies in trouble are big names Vanke and Link Real Estate. 

Vanke, a highly indebted company, has sought a one-year payment extension on a payment note. This extra time is meant to give it breathing room before it considers restructuring. Some bondholders have signaled that they will oppose the plan. 

China economic slowdown

The Hang Seng Index has also lagged behind its peers as macro data points to a deteriorating economic environment. Data released this week showed that China’s manufacturing activity contracted in November. 

The manufacturing PMI dropped to 49.9 in November as demand remained weak despite of a truce with the USA. Another PMI report by a government agency said that the PMI remained below 50 for he eighth consecutive month.

As a result, analysts now expect the economy to record a slow growth rate in the third quarter. In a note, a Bloomberg analyst said:

On the positive side, the slowing economy may push the government to implement more stimulus. Beijing has already injected $141 billion in stimulus in the last few months. A Bloomberg analyst said:

Link Real Estate stock has been the top laggard in the index in the last 30 days as it dropped by 14.65%. Li Auto, a top EV company, dropped by 14% in this period as its growth decelerated.

The other top laggards in the Hang Seng are WuXi Biologics, Lenovo, New Oriental, Xinyi Solar, JD, and Xiaomi. 

On the other hand, some of the top gainers in the Hang Seng Index in this period were companies like Hansoh Pharmaceutical, ZTO Express, Midea Group, CK Hutchison, and Haier Smart Home. 

Hang Seng Index technical analysis

The daily chart shows that the Hang Seng Index has remained under pressure in the past few months. It recently formed a double-top pattern at H$27,190 and a neckline at H$25,190, its lowest level on October 17.

The index has also formed a bearish divergence pattern. This pattern happened as the Relative Strength Index (RSI) formed a descending channel. The MACD indicator has also continued failing this month.

Therefore, the most likely Hang Seng Index forecast is bearish as long as it remains below the double-top point at $27,190. A drop below the neckline may lead to more downside, potentially to $24,000.