The Chinese Property Market is Making Chinese Stocks Vulnerable as Property Market Concerns Swirl

Market Update: FXI down 8.78% month-to-date

• The data and news flow out of China this week have not been good.
• Renewed concerns over the Chinese property market, coupled with signs of weakening domestic demand, are dragging down stocks like BABA and BIDU.
• After outperforming U.S. equities since early July, the Chinese large-cap ETF, FXI, has struggled meaningfully in August.

Efforts to stimulate the Chinese economy have struggled thus far, as the government attempts to resuscitate the world’s second largest economy following draconian lockdown measures in 2022.

But hope sprung eternal starting in July, when Chinese stocks outperformed their U.S. counterparts handily. The iShares China Large-Cap Exchange Traded Fund (FXI) rallied 11.88% while the S&P 500 (SPY) rallied 3.27%. But a funny thing happened on the way to Chinese equities’ continued outperformance over their U.S. counterparts in August: the data and news flow out of China turned sour.

This week, Chinese trade figures for July showed a meaningful decline in imports, suggesting domestic demand is weakening (never mind the equally poor export figures which portend a more significant global slowdown). Property market concerns are springing up again as Country Garden (CTRYF), China’s largest private-sector developer, announced that it missed $22.5 million worth of payments on two of its international bonds.

For now, a scare like the fall of 2021 may be making its way through markets. Chinese junk bonds hit a fresh 2023 low this week, while FXI has lost 6.06% relative to SPY thus far in August. Not only is FXI facing a more meaningful breakdown, but two individual companies that account for approximately 14% of the ETF–Alibaba (BABA) and Baidu (BIDU)–are showcasing increased technical weakness as well.

FXI price technical analysis: daily chart (October 2022 to August 2023)

Momentum is quickly souring in FXI. Last seen at 27.76, the Chinese large-cap ETF is now testing former triangle resistance, from the January and June swing highs, as support. MACD (moving average convergence/divergence) is now trending lower (albeit above its signal line) while slow stochastics have crossed below their median line and are nearing oversold territory for the first time since early July. A drop below 27.00 in the coming sessions opens up the possibility of a return to the late May low near 25.96.

BABA price technical analysis: daily chart (August 2022 to August 2023)

BABA has struggled in recent months to gain traction above 100 even since losing the price level in February; resistance has been found in the 101.85/105 region in February, March, April, July and now August. The uptrend from the July and earl August swing lows has been breached as well. The technical picture is just starting to erode, with MACD trending lower above its signal line and slow stochastics moving below their median line (but not yet in oversold territory).

Any pullback may be limited; but the prevailing range between the May lows near 77.77 and multi-month resistance around 101.85/105 appears to be on course to be maintained in the coming weeks.

BIDU Price Technical Analysis: Daily Chart (August 2022 to August 2023)

BIDU’s technical structure is eroding faster than either BABA or FXI. Having been rejected once more by the area around 160—which has been firm resistance for over a year now–BIDU has quickly sold off on approach to the rising trendline from the October 2022 and May 2023 swing lows, coming in closer to 133 in the coming days.

Momentum is increasingly negative, with MACD nearing a drop below its signal line and slow stochastics already having entered oversold territory for the first time since early May; both of the momentum indicators are behaving in a manner inconsistent with the rally that began in early June. Failure to hold the trendline would open the path to a drop below 120 in the coming weeks.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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