The Chinese stock market was starting to see some value investors come in from overseas in the last few months. However, further fears for the property sector have dampened the outlook.
CH50 – Weekly Chart
The last CH50 outlook we shared followed a strong rally from support, and there was hope for a breakout above the downtrend resistance. The last two weeks have us looking at the other end with a potential break of support at 12,500, likely leading to more losses.
The S&P500 in the United States was lower by 0.76% on Wednesday and will offer no support to Asian equities on Thursday.
China’s largest private real estate developer Country Garden is delaying payment on offshore bonds for the first time. Further fears of contagion have been raised, adding to worries about contagion risk. Zhongrong International Trust Co has also missed repayments. The trust firm has typically had large exposure to real estate.
JPMorgan said Monday that rising trust defaults could drag down China’s economic growth by 0.3-0.4 percentage points and expects a “vicious cycle” of real estate financing issues.
“In addition to the apparent financial risks and their transmissions, the latest wave of defaults from wealth management firms on trust-related products is likely to cause some substantial ripple effects for the broader economy through wealth effects,” Nomura said.
According to Reuters’ estimates, Country Garden may need to repay more than 9 billion yuan ($1.25 billion) worth of onshore bonds in September.
“The problems in the sector have been brewing for a long time, it wiped off the wealth effect among investors and no one wanted to buy property now,” said Dickie Wong at Kingston Securities.
Recent underperformance in the Chinese economy has hurt the global economy, and a rate cut in China has rippled through other markets. This week could see Chinese stocks test the key support level, and how the index performs there will determine the following weeks.
