The Chinese stock market has been under pressure this year, with investors concerned about a slower economic recovery. But the rally two weeks ago could be setting up a breakout from the current triangle pattern.
CH50 – Weekly Chart
The China 50 index has rallied from the 12,400 support and paused. There is now potential for the index to push higher to the 13,600 resistance level.
One of the drivers of a rally in Asian stocks could be the current negativity from U.S. analysts.
According to JPMorgan, China could soon be similar to the slow-growth, financially stagnant Japan of the 1990s if it doesn’t address its current economic challenges. Analysts said an unstable housing market, economic imbalances, and an ageing population could create the country’s “Japanification” risk.
The comparison is based on the early 1990s when Japan suffered weak economic growth, low inflation, a broad decline in asset prices, and a “balance sheet recession.”
“An alarming signal is that secondary home prices have started to fall again in some cities in recent months, after a tentative recovery in 1Q23,” the bank said. “If secondary home prices fall below new home prices, it could be a game-changer in that a mutually reinforcing decline in new home prices and secondary home prices may be formed, intensifying both macro and financial risks. Hence, it is critical to stabilize the housing market as a near-term policy priority, as emphasized by the July Politburo meeting.”
Bloomberg also reported that Japan is leading the chase for U.S. equity money. According to a Goldman Sachs Group, foreign buying of Japanese equities has exceeded that of China for the first time since 2017.
It is the perfect environment for Chinese, and Hong Kong stocks, to mount a surprise rally, and traders should watch the triangle pattern closely.
