CHN50 Price Action Hints at Contrarian Outlook

The economic news out of China has been challenging. Its growth has slowed with the manufacturing PMI, showing stalled economic activity at 49.7. Moreover, the country is showing deflationary tendencies with CPI at -0.3% yoy and factory-gate prices falling 4.4% yoy in July.

Moreover, the country is experiencing property woes. Country Garden is struggling to survive with many others in a similar situation. The company recorded a loss of 51.5bn yuan for the first half and will struggle to meet debt repayments.

Real estate makes up a considerable portion of China's GDP and there is a threat of contagion.

In response, China has rolled out several stimulus measures. For example, minimum downpayments for mortgages will be cut to 20% for first-time buyers and 30% for second-time buyers. Also, interest rates are being reduced by around 40 bps after the PBoC set a lower minimum premium to its benchmark loan prime rate.

FXCM's CHN50 basket offers some suggestion of contrarian price action.

The index charted a series of lower peaks followed by lower troughs from February 2021 to October 2022. This was a defined downtrend whose momentum was demarcated by the green downtrend line.

In January 2023, the CHN50 attempted to break above the down sloping green trend line (blue arrow). This hinted at a waning of the index's downside momentum. Then, in May, the CHN50 charted a potential higher trough (HT* - red arrow). We would be more comfortable labelling this as a higher trough if the index can close above 13,590 (black horizontal line) and confirm the higher trough, HT*.

There is certainly more work to be done to allay fears. For example, more volume heading into the CHN50 will be a distinct positive. However, that the index has not taken out the October 2022 is regarded positively, until proven otherwise.