Shanghai index retests support as China-US tensions rise

The Shanghai index started the week well even as China and US relations took a turn for the worse during the weekend. It rose to 3,248 yuan on Monday, a few points above last week’s low of 3,225. Other Chinese indices like the Hang Seng, China A50, and DJ Shanghai also drifted upwards.

China-US relations worsen

The US and China were looking to thaw their relations during the weekend as their senior foreign policy officials met. They didn’t. Instead, relations between the two countries worsened after a meeting between Antony Blinken and Wang Yi in Germany.

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The two sides failed to reach agreements on key geopolitical issues like the recent balloons in the US. China accused the US of overreacting and for downing balloons that it insisted were for civilian use. At the same time, China vowed that Taiwan will never be a country. China also accused the US of protectionism because of the CHIPS and IRA acts.

Meanwhile, the US accused China of planning to arm Russia in the ongoing crisis in Ukraine. China has taken a relatively neutral tone on the crisis but tilted towards Russia. An analyst at the American Enterprise said:

“If China mirrors to Russia the assistance the West is providing Ukraine, it will cement the Russo-Chinese alliance and also Western perceptions of China as a malevolent international force.”

US and China relations have an impact on Chinese stocks, including the Shanghai index. In most cases, the index tends to do well when the relations because of the volume of trade between the two countries. 

The main driver for the Shanghai Composite index in 2023 is the ongoing Chinese recovery as the country moves ahead from the Covid-zero strategy.

Outlook for the Shanghai index

The Shanghai Composite index managed to retest the key support level at 3,223 last week. This was a notable support level since it was the peak in December last year. As such, this performance can be seen as a break and retest pattern. 

It has also formed a golden cross as the 50-day and 200-day moving averages have made a bullish crossover. Looking behind, it seems like the index has formed an inverted head and shoulders pattern. 

Therefore, the Shanghai index will likely maintain a bullish trend if bulls are able to remain above the support at 3,223. A break below that support will signal that bears have prevailed and drag it lower.