China A50, Shanghai index retreats after a shocking industrial data

The China A50 and Shanghai index retreated by over 1% on Monday after the relatively weak industrial production data from China. Shanghai, the blue-chip index, dropped by 1.10% while the China A50 pulled back by 1%. Other Chinese indices like the SZSE Component and DJ Shanghai were also in the red.

China industrial profits retreat

China’s indices dropped after closely-watched economic data sent shivers about the economy. According to the country’s statistics agency, profits at industrial firms dropped in the first two months of the year, signaling that the economy is having serious challenges.

Industrial profits fell by a whopping 222.9% from a year earlier. This was a bigger drop than the 4% that profits fell a year earlier. The biggest challenge for China’s industries is that international demand has thinned in the past few months.

Sadly, the situation could continue if the US dollar strength and shortage in many countries continue. Many countries, especially in the developed countries, are struggling to find dollars, which are essential for imports.

At the same time, many industrial companies are moving from China to other countries like Vietnam as tensions between China and the US rise. In a note, analysts at Bloomberg wrote:

“We expected China’s industrial profits to post a smaller drop in the first two months of 2023 compared with 2022. Turns out, they cratered, with a 22.9% plunge. Clearly, the reopening lift to activity hasn’t yet done much for the bottom line. It will take more time for demand and confidence to strengthen.”

The report came a day after the Financial Times detailed how China’s richest county was struggling. Most manufacturers in Kunshan have become idled, pushing headcounts and wages sharply lower. As we wrote here, some analysts are questioning whether China will grow its economy by 3.5% this year.

Most Shanghai index constituents were in the red on Monday. The biggest laggard was China National Chemicals, whose stock cratered by 8.55%. The other top laggards were Hengdian Tospo Lighting, Daqian Ecology, China Everbright Bank, and Hunan Huasheng.

Shanghai index forecast

The daily chart shows that the Shanghai index has pulled back in the past few days. It is trading slightly above the key support at 3,217 CNY.  The index also sits slightly above the 50-day and 100-day exponential moving averages. It has formed a head and shoulders pattern.

Therefore, the index will likely have a bearish breakout as sellers target the psychological level at 3,200 CNY.  A move above the key resistance point at 3,280 will invalidate the bearish view.