The index of China’s top shares flashed a potentially bearish signal by moving back into a recent trading range.
CHINA 50 – Daily Chart
The CHINA 50 index slipped back into the trading range that started in late August. There is a risk of a pullback toward the support level of 14,548 if weak economic data or negative sentiment emerges.
The weakness at the tail end of last week comes just as foreign investors are starting to pile into the market. Foreign interest in Chinese stocks contributed to a combined US$3 trillion in value for onshore and offshore equities.
A boom in AI technologies has supported the broader tech sector as China-US tensions de-escalated. Global investment inflows from hedge funds into the A-share market also reached their highest level in a few years.
It is not all roses for companies, especially in the EV sector, with Tesla sales continuing to slide and domestic rival BYD reporting a 30% drop in profit. That was the company’s first sales dip in three years after a government crackdown on price cuts.
Recent efforts by the government to slow the pace of the recent share price rally could ultimately have a similar effect. Data at the start of the month showed China’s investors borrowed a record $322 billion to buy stocks this year. That led to increased regulatory efforts by the government as it sought to create measured gains.
Outstanding margin financing hit a record 2.3 trillion yuan ($321.55 billion) with some speculators diverting consumer loans into stocks. Leverage is often a key factor at market turns, and China-U.S. trade talks are still ongoing.
The trade standoff between the world’s two largest economies has a potential headwind with the latest 90-day truce set to expire in early November. Following the coming week, there will be only 30 days to make significant advances.
Another key issue is the purchase of Russian oil, which led the U.S. to add tariffs on Indian goods. Donald Trump’s administration has been pressing its allies to impose steep tariffs on China and India in a bid to pressure Russia.
“China has a strong control, and even grip, over Russia, and these powerful Tariffs will break that grip,” Trump said.
Any attempt to implement tariffs on China could see the trade talks abandoned, and that would likely hurt the recent market rally.
Investors could use any weakness in the CHINA 50 this week to take some profits from the recent price surge.
