China A50, Hang Seng, USD/CNH: Economic revival, state intervention creates ample trade opportunities

Chinese economic data is beating expectations at rates not seen since reopening to the world in 2023. And with the government and People’s Bank of China playing an active role in supporting mainland markets, it’s not surprising to see Chinese assets performing comparatively better than others across Asia right now.

China economic data is beating again

While it may not be growing at the pace seen either side of the global financial crisis, there’s been a noticeable improvement in Chinese economic data in recent months, a result not only seen in the March quarter GDP report this week but also purchasing managers’ indices covering both the manufacturing and services sector.

As seen in the chart below, the proportion of Chinese data beating market expectations, as tracked by Citigroup’s China economic surprise index, sits at the highest level since May 2023. While the economy still has its challenges, especially when it comes to unemployment among young Chinese and overcapacity in some industrial sectors, contrast its performance now to what was seen in July last year when data was undershooting expectations at levels not seen since the early stages of the pandemic.

Source: Refinitiv

State support underpinning stocks, yuan

With economic momentum starting to build, Chinese stocks are also benefitting from heavy government support, be it through instructing state-backed entities to lift allocations or ushering in reforms like those announced last week to strengthen supervision of company listings and improve access for algorithmic trading.

The Chinese yuan has also outperformed in 2024, weakening only slightly against the rampaging US dollar, seeing its trade-weighted valuation rise to levels not seen since 2022. Its resilience largely reflects measures from China’s central bank, the People’s Bank of China, to thwart market forces attempting to weaken the yuan, either by fixing the starting point for trade each day stronger-than-expected, implementing money market operations to drain yuan liquidity or direct selling of US dollars by state-backed banks.

Given the improvement in the economy and heavy government support, it makes Chinese markets an interesting destination for traders, even if the moves are not entirely organic in nature.

Golden cross looms for China A50

China A50 futures sprung back to life this week after suffering the longest losing streak since June, finding support from reforms mentioned above, technical support and possible buying from state-backed entities.

Right now, futures sit in an ascending triangle pattern, finding support from an uptrend established in February while being capped by resistance at 12400. While it briefly managed to hit 2024 highs on Thursday, the move was reversed, frustrating bulls for a second time in three weeks.

However, the elongated bullish candle on Monday, followed by further buying at 12075 on Tuesday and Wednesday, suggests the path of least resistance may be higher in the near-term. When you throw in the golden cross that’s about to be generated by the 50-day moving average crossing its 200-day equivalent, and MACD crossing over, evidence is building to suggest momentum is turning higher.

Should 12400 give way, there’s not a lot of visible resistance until 13060, a level where futures found support and resistance midway through last year. Traders could buy a clean break with a stop loss order below targeting 13060, providing decent risk reward.

While we favour upside ahead, if 12400 were to hold the trade could be reversed, allowing for a sell to be placed below the level with a stop loss order above. The initial target could be 12075 or uptrend support, whichever is hit first.

Hang Seng biased higher near-term

The technical picture is not dissimilar for Hong Kong’s Hang Seng, although it’s yet to break downtrend resistance dating back to early 2021.

While it is someway of the highs struck earlier in the year, futures continue to attract bids from 16170, a level the price has now tagged on nine separate occasions without a breaking definitively through, aided by the influential 50-day moving average. It’s between those to levels that futures now right sit, although the inability to break 16170 points to near-term directional risks being higher.

Traders could buy above 16170 with a stop below targeting a move back to resistance at 17200. If successful, traders could consider lifting their stops to allow for a possible extension of the move towards the 200-day moving average and key downtrend resistance.

Alternatively, a definitive move below 16170 also creates an opportunity, allowing for traders to sell the break with stop loss order above targeting support at 15475.

USD/CNH holding firm against US dollar strength

For those in the FX space, USD/CNH is another interesting market with widening yield differentials between China and the United States and geopolitical tensions being offset by actions from the PBOC to support the yuan.

On Thursday, the PBOC released a statement on social media warning it will “resolutely” put the yuan back on track during periods of lopsided market positioning and excessive volatility.

Right now, pops in USD/CNH are being thwarted above 7.2700, an intersection of horizontal and downtrend resistance. That creates a tempting level to sell in front of, allowing for a stop to be placed above for protection. An initial target could be 7.232, with uptrend support located just below. Should the latter give way, there’s not a long of visible support until 7.1730.

-- Written by David Scutt

Follow David on Twitter @scutty