Shanghai Index Forecast: China Central Bank to the Rescue?

Summary:
• The Shanghai index has moved sideways in the past few days as investors continue worrying about the Chinese economy.

The Shanghai index has moved sideways in the past few days as investors continue worrying about the Chinese economy. The index is trading at 3,258 yuan, which is still lower than the YTD high of 3,425. The Hang Seng also dropped by 0.75%, while the Nikkei 225 fell by about 0.25%. Meanwhile, in the United States, futures tied to the Dow Jones and Nasdaq 100 rose.

PBoC to the rescue?

The Shanghai index is made up of some of the biggest companies in China. However, unlike its global peers like Hang Seng and Nasdaq 100, it mostly comprises companies in traditional industries. The biggest constituents in the index are companies in the banking, insurance, properties, and industrial sectors.

Therefore, the Shanghai index came to the spotlight when the PBOC unveiled a strategy to rescue the ailing real estate industry. The sector, which accounts for about a third of China’s economy, has come under pressure. Recently, blue-chip developers like Country Garden and Evergrande are all struggling.

The PBOC is now mobilizing resources to rescue the sector. The bank aims to raise these funds and use them to ease a downturn that threatens the sector. It will provide initial capital to banks and then hope that they will use five-time leverage to fill the funding gap needed to complete stalled projects. Still, analysts believe that the central bank may struggle to raise the required capital.

Many companies in the Shanghai index were in the red on Friday. The best performers were firms like Guodian Nanjin, Camel Group, Beijing Tricolor, and Hunan New WellFul. All these shares rose by more than 10%. On the other hand, companies like Appotronics, Air China, Cinda Real Estate, and BTG Hotels lagged.

Shanghai index forecast

The daily chart shows that the Shanghai composite index rose to a high of 3,427 this year. Since then, the shares have fallen to the current level of 3,258. It has moved below the ascending channel along the 25-day and 50-day moving averages. 

The Average True Range (ATR) has moved lower, signalling limited volatility. Therefore, the Shanghai index will likely have a bearish breakout as sellers target the key support level at 3,175.