Hang Seng Index dipping into bear territory as China’s PMI delivered a downside surprise

China’s May PMI data adds to the list of economic downside surprises witnessed so far

The release of China's official manufacturing purchasing managers' index (PMI) for the month of May has revealed another downside surprise, providing yet another validation for the more subdued growth picture in the world's second largest economy.

The National Bureau of Statistics (NBS) manufacturing PMI delivered a reading of 48.8 for May, which underperformed the consensus 49.4. This is a deeper contraction from a month ago and marked the second straight month of decline in the manufacturing sector. Non-manufacturing PMI disappointed as well, reflecting some tapering in growth momentum from the initial reopening boost at the start of the year. The reading came in at 54.5, underperforming the consensus 55.2 forecast.

The recent data adds to the list of economic downside surprises witnessed thus far, in line with the sharp decline in Citigroup economic surprise index for China since the start of the month. The Caixin Manufacturing PMI will be released on 1 June and given that it measures the state of smaller firms, which is less resilient to economic conditions, a deeper move into contractionary territory could be expected as well.

Overall, a lower-for-longer growth picture seems to be reflected. Further coupled with lingering geopolitical tensions and an uneven recovery in corporate earnings, the underlying obstacles have triggered a de-risking process from Chinese equities as reopening bets fade. It could seem that we will have to see more policy support coming from authorities in order to provide some reassurances, but even so, clearer signs of a concrete economic recovery may still be needed to provide the conviction for a more sustained upmove in Chinese equities.

Hang Seng Index – Entering into a bear market

The Hang Seng Index continued to pull away from its 200-day moving average (MA), down more than 2% at the time of writing. This indicates a dip into bear territory, with the index retracing more than 20% from its January 2023 peak. A bearish rejection off the support-turned-resistance 18,700 level and the formation of a new lower low provide testament to sellers in control, which could pave the way to retest the 17,700 level next, followed by the 16,500 level, where various Fibonacci retracement levels stand.

On the weekly chart, it seems that the index has struggled to move past the upper edge of the Ichimoku cloud since the start of the year, leaving it as a key resistance to overcome to put buyers in control. For now, a bearish centreline crossover on the weekly Moving Average Convergence/Divergence (MACD) provides a confirmation signal for the negative momentum in place. Technical conditions heading into oversold territory on the daily timeframe may provide some intermittent bounce attempts, but until the Ichimoku cloud resistance is overcome, the overall downward bias could remain.