China stocks rally above a key resistance line – but the party fizzles out

Zhang Shidong
China stocks rally above a key resistance line – but the party fizzles out

China’s stocks briefly crossed above a long-stubborn resistance line, but the excitement quickly fizzled out as traders grappled with mixed signals about how long this year’s rally can last.

The Shanghai Composite Index snapped a three-day winning streak on Thursday, ending the day 0.3 per cent lower, or 9.42 points, at 2,751.80, after giving up a gain of as much as 1.2 per cent. Meanwhile, Hong Kong’s Hang Seng Index added 0.4 per cent, or 115.87 points, to 28,629.92, with Lenovo Group surging on better-than-estimated earnings.

In intraday trading, the mainland’s Shanghai benchmark topped its 200-day moving average, a major resistance line that has been holding back stocks. But it failed to hold onto the positive ground at the close.

A successful breakthrough foreshadows more gains going forward, if history is any guide. The last time the Shanghai Composite crept above the line in 2017, the index rose as much as 13 per cent in the following six months.

Still, the Shanghai benchmark is among the world’s best performers this year with a 10.3 per cent gain, as the government ratchets up policy support and foreign investors plough in funds ahead of a decision soon by MSCI on whether to increase the weighting of Chinese equites in its indexes. Last year the index ranked last among the world’s worst performing among markets, recording a 25 per cent loss.

Foreign investors piling into mainland China stocks – and that’s expected to only grow

While the rally can find its ground fundamentally, the pace of the run-up has stoked some worries among technical analysts that a sell-off may be imminent. The 14-day relative strength index of the Shanghai Composite was already at 72.1 on Wednesday, well above the reading of 70 normally signalling stocks are overbought and bound to fall.

“It’s liquidity-driven, and it’s pretty ample after January’s new lending hit a record,” said Wei Wei, a trader with Huaxi Securities in Shanghai. “Any correction on stocks may be short and we can see the rally is sustainable.”

It is too early to make the call that the downtrend on Chinese equities that began with the painful burst of a bubble in 2015 is coming to an end, according to Haitong Securities. A reversal requires a combination of pickups in five leading economic indicators including credit growth, auto and home sales, infrastructure investment and purchasing managers’ indexes, said Xun Yugen, a strategist at the Shanghai-based brokerage. Only credit growth has seen an uptick up until now, he said.

Companies linked to the Greater Bay Area were among the worst performers, as traders adopted the “sell-on-fact” strategy after the blueprint for linking Hong Kong and Macau with cities in the Guangdong province was unveiled early in the week. Property developer Guangzhou Pearl River Industrial Development sank 5 per cent to 4.92 yuan after rising 28 per cent over the past nine days. Shenzhen Heungkong Holding retreated 3.1 per cent to 2.47 yuan and China Life Insurance shed 2.9 per cent to 24.45 yuan.

Trust companies bucked the decline. Anxin Trust jumped by the 10 per cent daily limit to 6.11 yuan and Shaanxi International Trust rallied 8.3 per cent to 3.66 yuan. They were buoyed by January’s data on aggregate financing, which showed a rebound in shadow banking, or non-traditional banking.

In Hong Kong, personal computer maker Lenovo Group soared 12 per cent to HK$6.67 after reporting quarterly profit that exceeded analysts’ estimates.

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