The Chinese market has accumulated upside potential

The Chinese market is lagging behind Wall Street and European indices due to the ongoing regulatory pressure. Investor sentiment in the region is also under pressure from worsening macroeconomic indicators.

The latest initiatives by the Chinese government include a strict restriction on online gaming for teenagers, limiting them to just one hour daily on Fridays and weekends.

The manufacturing PMI fell in August from 50.4 to 50.1, and the non-manufacturing indicator collapsed from 53.3 to 47.5, reflecting a tight lockdown to quell the coronavirus outbreak.

Nevertheless, markets have managed to digest this negative sentiment during Asian trading. There are emerging signs that investors found Chinese equities attractive enough to buy, even given the risks involved.

The Shanghai China A50 blue-chip index gained support on the decline to 14500, an area of highs set in 2015 and early 2017 and 2020. The former resistance area now acts as a major support line.

Technically, there is sufficient room on the bearish side for a decline into the area of 13300 by the end of the year, where the lower boundary of the long-term uptrend channel passes.

Similar potential remains in the Hang Seng, whose long-term uptrend channel support passes through about 22,000 by the end of the year against the current 25700.

The Hong Kong-listed mainland equity index, H-shares, is close to a long-term support level of around 9000.

In all three cases, on the weekly charts, we can see attempts to move out of the oversold area and signs of RSI and index level divergence, with new price lows corresponding to higher indicator levels.

On the daily charts, the divergence between the RSI and the price is even more visible, making the Chinese market interesting for long-term investors who believe in the potential of the second world economy.

It is worth cautioning against aggressive buying of these indices or individual stocks right now. So far, there are no signs that China intends to stop the overhaul of regulations for technology and online companies. The People’s Bank of China has not yet gone for a loosening of monetary policy, although many market observers expect this move later this year.

Perhaps the more cautious speculators should not look for an entry point at the lowest price but join the buying after signs confirming a change in the regulator’s mood. It could be the easing of PBC policy or signals that no new restrictions for technology companies are planned.

The FxPro Analyst Team