Hang Seng Slides on Poor China PMI & Country Garden Default Warning

HKG33 Analysis

Economic data out of China over the past several months have been disappointing, pointing to a failing recovery and the trend continued today. Factory activity contracted for the fifth straight month, but there are hopes of a bottom, since the 49.7 Manufacturing PMI print for August was better than expected and marked the third straight improvement.

This shows that the government's efforts to prop the post-pandemic recovery may be starting to gain traction. However, authorities appear reluctant to implement bolder measures, sustaining fears around the economy and the key real estate market.

Troubled property developer Country Garden posted a massive loss today, of RMB 51.461 billion (around USD 7 bln) for H1 2023, compared to a RMB 1.907 billion profit a year ago. What's more, it warned of a default if the financial performance continues to deteriorate and said it will consider "various debt management measures" ^[1]. Its stock will be removed for the main Hang Seng Index on September 4, as recently announced ^[2].

HKG33 runs its second profitable week as it tries to rebound on the back of Baidu's recent strong quarterly results and the latest efforts by authorities to support the economy. It tests the pivotal EMA200 and the 38.2% Fibonacci of the last leg down. Daily closes above this region could stop the downside risk, but the upside looks uninhabitable. The index does not inspire confidence at this point for sustained gains that would challenge the 200Days EMA (at around 19,500).

On the other hand, actions by Chinese officials are underwhelming so far and equity markets drop on today's poor PMI and Country Garden's results. HKG33 still runs a losing month and as long as the rebound is contained by the aforementioned critical region, bears are in control. As such, the index remains in risk of new 2023 lows (17,530), although steeper losses that would breach 16,977 have a higher degree of difficulty.