China GDP Beats Expectations; Hang Seng and Shanghai Composite Index To Extend Gains?

HANG SENG, SHANGHAI COMPOSITE – EXPECTATIONS:

• China’s GDP and retail sales beat expectations, but investment in fixed assets slowed.
• The Shanghai Composite rose above a key resistance level, while the Hang Seng Index is improving bullish momentum.
• What are the expectations and what are the key levels to watch?

China/Hong Kong stocks may be poised to rally again as the recovery in the world’s second largest economy gathers momentum.

Data released on Tuesday in Asia showed that China’s economy grew 4.5% year-on-year in the January-March quarter, well above the expected 4%, and 2.9% in the previous quarter. Industrial production rose 3.9% in March versus 4% expected, up from 2.4% in February, retail sales 10.6% last month versus 7.4% expected, and up from 3.5% in February, while investment in fixed assets grew 5.1% year-on-year. In the January – March period vs 5.7% expected.

Chinese Economic Surprise Index

Source data: Bloomberg; The graph is prepared in Excel

This follows a string of upbeat Chinese data in recent weeks – China’s economic surprise index this month hit at least the highest level since 2014 – reflecting the positive fallout from economic reopening. Moreover, hopes of a turnaround in the real estate cycle (new home prices rose in March at the fastest pace in 21 months) and hopes that the regulatory crackdown on businesses will end suggest the growth spurt may be more than temporary.

Daily chart of the Shanghai Composite Index

Chart by Manish Gradi using TradingView

The consensus expects annual growth of 5.3% for China for 2023, up sharply from around 4.3% in January. The update in the growth outlook bodes well for China/HK stocks – despite the rebound since late 2022, from a valuation perspective, Chinese stocks are trading below the average of the past 20 years.

Daily chart of the Hang Seng Index

Chart by Manish Gradi using TradingView

Shanghai Com: Rising over a major barrier

The Shanghai Composite broke above a major hurdle at the early March high of 3343, roughly coinciding with the 89-week moving average (the 2022 retracement of the Fibonacci moving average ran out of steam). The index looks set to retest the mid-2022 high at 3425. A break above 3425 would trigger a major double bottom (2022 lows), which could open the way for around 15% – above the 2021 high at 3730.

Weekly chart of the Shanghai Composite Index

Chart by Manish Gradi using TradingView

Hang Seng: Beginning to flex the muscle

The Hang Seng Index holding above vital support at the December 18,885 low confirms that the higher-up-high-lower sequence (i.e., uptrend) from the end of 2022 is still in place. The color-coded histograms indicate that the upward phase in the index has resumed (see chart).

The Hang Seng is now testing a crucial resistance on a horizontal trend line from early March at around 21,000, roughly coinciding with the upper edge of the Ichimoku Channel on the daily chart. A decisive break above the resistance could open the door towards the January high of 22,700.

Daily chart of the Hang Seng Index

Chart by Manish Gradi using TradingView

Note: In the above color-coded chart, the blue candlesticks represent a bullish stage. Red candles represent a bearish phase. Gray candlesticks act as consolidation phases (during a bullish or bearish phase), but they sometimes tend to form at the end of a trend. Note: Candle colors are not predictive – they only indicate the current trend. In fact, the color of the candle can change in the next bar. False patterns can occur around the 200-period moving average, around support/resistance and/or in a sideways/volatile market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.

– Posted by Manish Grady, Strategist for DailyFX.com

Connect with Jaradi and follow her on Twitter: @JaradiManish