Yesterday, China’s CSI 1000 index briefly fell 8.7%, attracting rare attention. I would not consider this an indicator of a crash, as it is an index that is hardly talked about and is primarily driven by small-cap derivatives.
That said, this certainly indicates that the broader pain in Chinese stocks is nearing breaking point.
China’s main stock market index fell about 1%, but it had fallen by twice that before strong bidding late in the day, which could be evidence of Beijing’s intervention on the second day.
Let’s zoom out and see how bad it got.
Hangsen index:
hong kong han sen
It would take another 5.8% fall to break through October’s lows, below which it would fall into financial crisis-era levels. Hong Kong has been hit triple-whammy by the coronavirus, China’s takeover of Hong Kong, and the recent defeat. It’s a perfect storm, and the index is now trading at the same levels it was when we first traded the index in 1997.
Shanghai General:
Shanghai General Monthly
For me, this is the best measure of “Chinese stocks”, and while it’s not as good as Hong Kong, it’s certainly not a good situation. This week, they set a new low for 2020, which appears to have earned them a spot on the national team. A breakout of the 2646 level would pave the way for a 9.6% fall from here on a journey to the 2018 lows. On the upside, a messy uptrend from the 2005 lows could indicate some support near here. Would you do that? Absolutely not.
CSI300:
CSI 300 per month
The index has been trending downward for seven consecutive months, a reminder of how bad things are in China. If there’s a silver lining, it’s that the lows of 2016 and 2019 started off 8.2% lower, which could provide a durable base. If not, the 2014 lows would put him nearly 40% lower.
When you add it all up
The best technical bet for bulls at this point is for the national team to keep the Shanghai Composite stock price from falling below its 2020 lows. But I don’t see how that would be a sustainable solution. What these three markets really need is a concerted effort by the Chinese government to boost the economy through interest rate cuts, fiscal stimulus, and some cleanup of the financial sector. This is inevitable as China’s inflation rate has hit zero and the economy is in a slump, but these indexes can still fall significantly (and quickly) here, so this is It’s more like a case of “I’ll believe it when I see it.”
Keep in mind that time is running out as your week-long vacation begins this weekend (or Friday, if you’re being realistic). One particular stock that’s getting a lot of buzz is Alibaba, which will report its earnings on February 7th. If the stock can bottom out, then perhaps the rest of the market can too? If you look at the P/E ratio (net of cash) and free cash flow yield, the numbers are compelling.
But it’s better not to be this kind of guy.