The Hang Seng index moved to a correction phase this week, falling by over 11% from its highest point this year. It was trading at H$20.440, much lower than the year-to-date high of H$23,230.
Other Chinese indices have slipped this week. The closely-watched CSI 100 index has plunged to CNY 3,675, down by over 14% from its highest point this year. Similarly, the China A50 and Shanghai Composite indices have retreated by over 10%.
China stimulus hopes fade
The Hang Seng, CSI 100, and other Chinese indices continued soaring in September after Beijing started talking about stimulus packages.
In the past few weeks, the government and the central bank have announced a series of policy measures to reboot an ailing economy.
For example, data released on Sunday showed that China’s Consumer Price Index (CPI) retreated from 0.4% in August to 0.0% in September. The figure also retreated from 0.6% to 0.45 in September.
Most importantly, another report showed that the producer price index (PPI) crashed by 2.8% in September after falling by 1.8% in the previous month. The decline was lower than the median estimate of 2.5%.
These numbers mean that the Chinese economy is going through a period of deflation, which can be risky for an economy. While low prices are preferred, they could hurt the economy by lowering spending as consumers wait for them to fall further.
Another report released on Monday showed that the country’s trade numbers remained on edge in September. Exports rose by 2.4% in September after rising by 8.7% in the previous month. This increase was lower than the median estimate of 6.0%.
Imports rose by just 0.3% in September, missing the analyst estimate of 0.9%. As a result, the total trade surplus narrowed to over $81.7 billion last month.
Therefore, the recent stimulus measures make sense if the government wants to achieve its 5% growth target. In a note this week, analysts at Goldman Sachs boosted their estimate for China’s GDP data from 4.7% to 4.9%.
The next key catalyst for the Hang Seng and CSI 100 index will be a statement by the housing ministry on more stimulus measures. This explains why housing stocks were among the top Hang Seng index gainers. China Resources Land, Longfor Properties, and Henderson Land shares jumped by over 4%.
Read more: China’s CSI 300 Index faces volatility as investor concern over stimulus grows
Profit-taking continues
Therefore, the Hang Seng and other Chinese indices are dropping because of profit-taking as the recent rally takes a breather.
In most periods, an asset in a strong parabolic move pulls back or stalls after making a big parabolic move as investors start taking profit.
The retreat is also happening as investors watch how the recently announced tariffs, which will cost billions of dollars evolve.
A key concern among many investors is that the real estate sector needs more money than what has been offered by the government.
While the number is not yet clear, it is estimated that China has over 48 million unbuilt homes, which have already been sold, and whose companies are struggling. Some of the most notable developers that have collapsed are Evergrande and Country Garden.
Read more: As Evergrande faces liquidation, is Country Garden next?
CSI 100 index analysis
CSI 100 index chart by TradingView
The daily chart shows that the CSI 100 index bottomed at CNY 2,940 earlier this year and then soared to CNY 4,281 earlier this month. Its highest point this month was also the highest point in July 2022.
The index has now erased some of those gains and dropped below the 50% Fibonacci Retracement point.
Most notably, it has formed a golden cross as the 200-day and 50-day Exponential Moving Averages (EMA).
Therefore, there is a high likelihood that the index, which tracks the biggest companies listed in Shanghai and Shenzhen, will bounce back. If this happens, it will rise and retest the year-to-date high of CNY 4,281, which is about 17% above the current level.
Hang Seng index forecast
Hang Seng index chart by TradingView
The daily chart shows that the Hang Seng index peaked at H$ 23,230 on October 7, and has pulled back to H$ 20,420.
Like the CSI 100 index, it has also formed a golden cross pattern. The RSI and the MACD indicators have tilted downwards, meaning that the drop is part of the profit-taking process.
Therefore, the index seems to be eying the key support at H$19,710, its highest swing on May 20th. This is a break-and-retest pattern, where an asset breaks a key level, retests it, and then resumes the initial trend.
If this happens, the Hang Seng index will rebound and retest the year-to-date high of H$23,230, which is about 13.3% above the current level.
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