China’s recovery loses steam, how are the related markets?

Earlier this year there was significant buzz surrounding China's reopening and the potential opportunities it could bring. Considering the extensive damage COVID inflicted upon the world's second-largest economy in the past three years, many believed the prospects for a substantial economic rebound seemed promising.

Now that nearly half a year has passed, how have the China-related markets performed? And what can we expect for the months ahead?

China’s economic recovery in sight

The concern for China's economic recovery journey was first sparked in March when China's top policymaker presented a lower-than-anticipated GDP target for 2023 at 5%. Since then, despite a better-than-expected GDP growth for Q1, the disappointment over China's economic recovery deepened in April and May as most reported data fell short of expectations. Key indicators such as CPI, PPI, and retail sales highlighted the slow recovery of domestic demand and the beleaguered manufacturing sector.

• Insufficient domestic demand

China’s CPI fell to a two-year-low in April, suggesting a potential easing of inflationary pressures. While this might seem positive for China’s consumers, the weakened CPI also raised concerns about the strength of China's domestic market and its ability to drive an economic recovery.

Furthermore, China’s lacklustre retail sales and import figures reflect a slowdown in consumer spending, indicating potential challenges in stimulating domestic consumption. As the country’s top policy makers admitted in the recent Politburo meeting, “Internal drivers still aren’t strong, and demand is still insufficient.”

• Persisting challenges

China's Producer Price Index (PPI) dropped to -0.5% in April, reaching its lowest level for the year so far. In addition, Industrial Production grew at an annual rate of 5.6% in April, falling short of a projected 9.8%. These disappointing figures underscore the persisting challenges within the manufacturing sector, as subdued global and local demand hindered the progress of China's industrial recovery.

China-related markets

China-related markets have not shown significant performance thus far in the year 2023.

At time of writing, the US stock market index – the S&P500 – demonstrated a notable year-to-date increase of +9.8%. In comparison, the MSCI APAC experienced a moderate gain of +3.81%. In contrast, the MSCI China declined -1.3% during this period.

Hang Seng Index

The Hang Seng index is currently finding support around the bottom levels observed in April and May, near 19440. If it climbs up it will face a potential challenge at the 20-day moving average, although the long-term trend still leans bearish. A significant breakout from the current descending trend line would be required to signal a potential bullish price reversal, with the possibility of returning to levels above 20000.

Hang Seng Tech Index

The Hang Seng Tech Index has been trading within a narrow band between 3780 to 3928 for the past four weeks with the notable source of pressure from the 200-day MA. Its imminent challenge could be the 20-day MA while support could be found at 3776 if it fails to break that level.

USD/CNH

USD/CNH rallied to a six-month-high this week. According to the daily chart, the strong momentum for the pair since May 4th lead to major breakouts, including surpassing the peaks seen in February and March, as well as breaking through the ceiling of the previous ascending trend line and the November bottom. Looking ahead, the resistance level to watch is at 7.0853, while support can be observed at 7.0479.