China’s CSI 1000 index grabbed some rare attention yesterday as it briefly plunged 8.7%. It’s a rarely-talked-about index that’s largely driven by derivatives on small stocks so I wouldn’t take it as an indicator of a crash.
That said, it is certainly indicative of the broader pain in Chinese equities, which may be near a breaking point.
The main China stock market indexes fell around 1% but had earlier fallen by double that before some strong late bids that may have been evidence that Beijing stepped in for the second day.
Let’s zoom out to see just how bad it has gotten.
Hang Seng Index:
Hong Kong Hang Seng
It would take a further 5.8% decline to break the October low but below that we’re into financial crisis-era levels. Hong Kong has been triply hit by covid, China’s takeover of Hong Kong and the latest rout. It’s truly a perfect storm and it has the index trading where it first did in 1997.
Shanghai Composite:
Shanghai Composite monthly
This to me is the best measure of ‘China stocks’ and it’s not as bad as Hong Kong but it’s certainly not a pretty picture. The 2020 lows broke this week and it appears that’s what brought the National Team into the mix. If the 2646 level is broken, that clears the way to a trip to 2018 lows, which is a 9.6% decline from here. On the upside, you could draw a messy uptrend from the 2005 lows to indicate some support near here. Would I do that? Absolutely not.
CSI 300:
CSI 300 monthly
This index is on track for a seventh straight month of losses, in a reminder of just how bad it’s gotten in China. If there’s a silver lining, the 2016 and 2019 lows start 8.2% lower and could prove to be a durable base. If not, the 2014 lows are nearly 40% lower.
Adding it all up
The best technical bet for the bulls right now is that the National Team won’t let the Shanghai Composite close below the 2020 lows. But I don’t see how that’s a sustainable solution. What these three markets really need is for a concerted effort from Beijing to boost the economy via rate cuts, fiscal stimulus and some kind of clean-up in the financial sector. That’s inevitably coming with inflation zeroed out in China and the economy sagging but this is more of a case of ‘I’ll believe it when I see it” because these indexes could still fall deeply form here (and quickly).
Note that a week of holidays starts this weekend (Friday if we’re being realistic) so time is running out. One specific stock that’s getting plenty of chatter is Alibaba, which reports earnings on February 7. If that stock can bottom, perhaps the rest of the market can too? If you look at its P/E net of cash or its free cashflow yield, it’s compelling.
But it’s best not to be this guy.