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​​Is the low in for the Hang Seng after recent heavy losses?​

​​​Chinese equity markets face uphill battle

​The Chinese stock market is grappling with significant challenges in 2024, as evidenced by the performance of the Hang Seng index. After slumping to its lowest level since November 2021 in January, the index then recovered, before beginning a huge rally in April that took it to a ten-month high in May.

​Since then, however, the price has fallen sharply, though it has begun to show signs of stabilisation.

​Underperformance compared to Asian peers

​While Chinese stocks falter, other Asian markets are thriving. Japan, India, South Korea, Taiwan, and Singapore have seen their stock markets either break new highs or reach multi-year peaks. This stark contrast underscores the unique challenges facing the Chinese market and raises questions about its ability to keep pace with regional competitors.

​Hopes pinned on third plenum reforms

​Investors and analysts are looking to the upcoming Third Plenum of the Chinese Communist Party for potential solutions. This important political meeting is expected to introduce crucial economic reforms and growth-supporting policies. Of particular interest are measures aimed at revitalising the weak property sector, which has been a significant drag on the overall economy.

​Fiscal policy lags behind expectations

​Despite the need for strong fiscal support, government spending has been lacklustre in 2024. In the first five months of the year, only 25% of the planned budget was utilised. This slow pace of fiscal deployment has left many wondering whether the government’s economic stimulus efforts are sufficient to address the current challenges.

​Bond market benefits from economic uncertainty

​As equity markets struggle, Chinese government bonds have seen strong performance. This trend is largely attributed to anaemic economic growth and investors seeking safe-haven assets. While policymakers are attempting to curb this bond rally through measures like reverse repos, these actions may inadvertently send negative signals about the broader economic outlook.

​Attractive valuations await improved growth prospects

​Despite the current downturn, Chinese equities present attractive valuations for potential investors. However, to capitalise on these opportunities, the market requires a tangible improvement in the country’s growth trajectory. Without clear signs of economic recovery, even appealing valuations may not be enough to lure cautious investors back into Chinese stocks.

​Need for comprehensive policy support

​As the Chinese equity market continues to struggle, the need for robust policy support becomes increasingly apparent. This is particularly crucial for the housing sector, which shows no signs of bottoming out. While recent measures to crack down on short selling may provide some short-term relief, they address only the symptoms of the market’s challenges. Comprehensive and decisive policy actions are needed to restore investor confidence and put Chinese equities back on a path to sustainable growth.

​Hang Seng price – technical analysis

​As investors await the latest Plenum, the Hang Seng has managed a strong rebound from the two-and-a-half month lows it hit earlier this week.

​While it has moved back above the 100-day simple moving average (SMA) once more, it remains below trendline resistance from the 28 May high. This has stymied two rallies over the last month.

​​A close above trendline resistance and above 18,000 would help to reinforce a bullish view, and might suggest that a sustainable low has been formed. We have seen several of these since late May, and each has fizzled out, so traders will need to be wary of a renewed drop.

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