ChartWatch: China’s stocks and property sector are tanking, ASX resources co’s beware!

Each morning, I start my day by looking over the charts of the major global market indices, bonds, commodities, and forex. I find this process invaluable in helping me “frame the day” regarding what might happen to Aussie stocks.

This morning, a group of related charts caught my eye. In today’s ChartWatch, I draw your attention to this important group, discuss how you can keep track of them yourself, and investigate their likely impact on the Australian stock market. The group of charts are related to Chinese stocks, particularly property stocks.

Big trouble in not-so-little China

The slowdown in the Chinese economy is well documented. The world’s second-largest economy, accounting for around 18% of global GDP according to the World Bank, is expected to grow at around 4-5% this year. Whilst still commendable by developed country standards, this is a far cry from the double-digit pace experienced by the Chinese economy preceding the GFC.

China GDP growth last 30-years. Source: Macrotrends, Data from the World Bank

That period was a massive boon for Aussie resources companies, which have, for a generation now, been directly plugged into China’s growth miracle. Australian investors are well aware of the dependence of our economy and stock market on China’s economy. Put simply: If China grows, we grow.

Much of China’s growth over the last 20 years can be attributed to its massive property sector. It accounts for approximately 30% of the country’s GDP and is a massive employer, wealth generator, and consumer of raw materials like iron ore, copper, and nickel. A strike in any one of these three key pillars could have major ramifications for Aussie stocks – particularly those in our resources sector.

The troubles in China’s property sector are well documented and I can’t add any value by expanding on them here. My aim is to show you how you can track the developing situation in the Chinese economy and property sector via the best-known barometer of any country’s economy – its stock market. As you will see, the trends speak for themselves – the stock prices of Chinese stocks clearly reflect the challenges currently facing their country’s economy.

These are the major stock market indices I check each day to keep track of what’s happening in the Chinese economy:

• Shanghai Composite Index (000001)

• FTSE China A50 Index (CN1!)

• China Mainland Real Estate Index (000948)

• Hang Seng Mainland Properties Index (HSMPI)

• Hang Seng China A Properties Index (HSCAP)

The best way for your to play along at home is to find these charts in popular market data and the charting platform TradingView. I’ve included the TradingView search code for each index in brackets to make them easier for you to find. Let’s investigate each index in detail.

Shanghai Composite Index (000001)

SSE Composite Index daily chart. Source: TradingView

The Shanghai Stock Exchange (SSE) Composite Index contains all China-A and China-B stocks. Both classes of stocks contain mainland-based companies, but they differ in terms of local-versus-foreign ownership restrictions, as well as restrictions on which currency each class may be quoted in.

Ownership of A-stocks is restricted to Chinese citizens, companies, and Qualified Foreign Institutional Investors. A-stocks are quoted in Chinese currency only. B-stocks are unrestricted for foreign ownership but are generally restricted for domestic ownership. B-stocks may be quoted in any currency but are generally quoted in US dollars.

Given it encompasses both classes of Chinese stocks, the SSE Composite is the broadest measure of the Chinese stock market. If, like me, you believe a stock market is the best barometer of a country’s economic performance, then the SSE Composite is also the best barometer of the Chinese economy.

The daily chart of the SSE Composite shown above paints a disturbing picture of the Chinese economy. Stocks are being sold off at an increasing rate. The short and long-term trends are well-entrenched to the downside, and price action and candles indicate little in the way of excess demand to stave off further declines.

SSE Composite Index weekly chart. Source: TradingView

Zooming out to the weekly chart above, we can see the SSE Composite is nearing an important technical support level in the 2863 low set on 27 April 2022. A close below here could see the index probe lower support levels around the March 2020 low of 2643.

FTSE China A50 Index (CN1!)

The chart of the FTSE China A50 Index is the perfect case study in excess supply. Source: TradingView

As the name suggests, the FTSE China A50 Index contains 50 of the largest China A-stocks. It’s this distinction that I feel is important in terms of what the China A50 tells us about the Chinese stock market and economy.

China B-stocks are subject to the influence of international fund flows, which are subject to international economic growth, interest rate differentials, and currency fluctuations. China A-stocks are not.

For me, the China A50 represents how mainland Chinese feel about their stock market. They’re the closest to the ground with respect to what’s happening in the Chinese economy, so I feel the China A50 is an important piece of the puzzle when analysing Chinese stocks.

With this in mind, looking at the chart of the China A50 above, one must question the current health of the Chinese stock market and economy. This chart is a picture of excess supply. In fact, if you asked me to define excess supply, this is the chart I would use as a case study! There’s absolutely nothing in this chart to suggest the prevailing short and long-term downtrends are about to end any time soon. 

CSI China Mainland Real Estate Index (000948)

The CSI China Mainland Real Estate Index contains large-cap Chinese property stocks. Source: TradingView

The CSI China Mainland Real Estate Index contains large capitalisation China A and B-stocks whose main business is real estate development in China. It’s one of the key benchmark property-specific indices, so it’s definitely worth keeping an eye on.

While on the first pass, the short- and long-term trends look just as terrible as their counterparts in the China A50, you should note the scale on the Mainland Real Estate Index chart. Sure, Chinese stocks are falling, but Chinese property stocks are getting belted! Chinese property stocks are down 22% since their November peak (compared with general strength in most major global market stock indices over the same time), and they’re down 41% over the last 12 months.

Like the China A50, the Mainland Real Estate Index chart is a picture of excess supply with few clues the prevailing short and long-term trends are about to end any time soon. Even worse, when one considers the longer-term monthly chart below, we can see it is now trading in uncharted territory as it hobbles to its worst monthly close in over 12 years.

The CSI China Mainland Real Estate Index is trading at its worst level in over 12-years. Source: TradingView

Hang Seng Mainland Properties Index (HSMPI)

The Hang Seng Mainland Properties Index contains 10 of the largest Chinese property developers. Source: TradingView

The Hang Seng Mainland Properties Index is another widely followed Chinese property index. It is narrower than the Mainland Real Estate Index, only containing the 10 largest mainland property developers – all B-stocks.

I think you’re starting to get the message in terms of the techincals - they’re also terrible here. In terms of performance, we’re talking about a 52% drop in this index over the last 12 months, and looking at today’s candle, that number's still counting.

Hang Seng China A Properties Index (HSCAP)

The Hang Seng China A Properties Index contains only China A-stocks focussed on property development. Source: TradingView

Conceptually the same as Hang Seng Mainland Properties Index, but as the name suggests, the Hang Seng China A Properties Index contains only China A-stocks – 31 to be precise. This makes it a broader indicator of the Chinese property sector, as well as being more heavily influenced by local investors. 

TradingView has less data on this index, but I think you’ll agree there’s more than enough to get an idea of what’s going on with China-A property stocks.

Coming up…

In the next edition of ChartWatch, I’ll review the current technical indicators and outlook for major Australian resource companies, including BHP Group (BHP), Rio Tinto (RIO), Fortescue (FMG), IGO, Sandfire Resources (SFR) and more…so stay tuned!