Can China ndustrial production and retails sales derail the bull run in China stock market

On Thursday, 14 September 2017, we will see the release of two key China economic data for August; industrial production and retail sales out at 0200 GMT.

In the previous data release for July, industrial production expanded at 6.4% y/y which was below June growth rate of 7.6% y/y. In additional, July’s figure came in below expectation of 7.2% and slide to a five month low that reflected a slower growth in manufacturing output. 

Retail sales growth for July had also slowed marginally to 10.4% y/y after a rise of 11% seen in June and below expectation of 10.8%. Despite the recent slow-down, it was still above the central government annual retail sales growth target set at 10% for 2017.

The recent slide seen in industrial production and retail sales are the “by-product” created by the on-going regulatory campaign directed by the central government to reduce overcapacity in the manufacturing industry (especially the steel sector) and curb excessive financial risks that are derived from banks’ off-balance sheet activities as well as non-bank institutions such as trust and insurance companies.

In light of such regulatory tightening, expectations have been lower for the upcoming industrial production and retail sales for August where consensus forecasts are set at 6.6% y/y and 10.5% y/y respectively. On the positive side, the latest set of Caixin Manufacturing and Services PMI data for August had managed to post robust growth numbers where both managed to beat expectations (Manufacturing-51.6 vs 50.9 & Services-52.7 vs 51.8). Thus, we do not expect any major surprises for the upcoming industrial production and retails sales data for August as they are likely to come in within expectations.

The China stock market is one of the star performer  in the equities space so far in 2017 as one of its benchmark indexes, the China A50 had soared by 18% year to date that outperformed the U.S S&P 500 (10% year to date).

Hence, we do not expect a trend reversal in the on-going medium-term uptrend of the China A50 that is in place since 05 May 2017 as long as industrial production and retail sales do not surprise on the downside.

Now, let’s us take a look at the China A50 from a technical analysis perspective.

Medium-term technical outlook on China A50

Key technical elements

• The Index has continued to evolve within a medium-term ascending channel in place since 05 May 2017 (depicted in green).
• The key medium-term support rests at 11980/800 which is defined by the lower boundary of the aforementioned ascending channel, the former 01 August 2017 swing high area and the 23.6% Fibonacci retracement of the up move from 05 May 2017 low to 28 August 2017 high.
• The daily RSI oscillator has tested and staged a rebound from its first corresponding support at the 54% level. This observation suggests that medium-term upside momentum of price action remains intact.
• The next significant medium-term resistance stands at 12700 which is defined by the upper boundary of the aforementioned medium-term ascending channel and the a Fibonacci projection cluster.

Key Levels (1 to 3 weeks)

Pivot (key support): 11980/800

Resistances: 12320 & 12700

Next support: 11470

Conclusion

The recent 3% pull-back from its 28 August 2017 swing high area of 12320 has now reached its key medium-term pivotal support of 11980/800 with positive technical elements. These observations suggest that the China A50 may see the start of another potential bullish impulsive upleg at this juncture within its medium-term uptrend in place since 05 May 2017 low to retest 12320 before targeting the next resistance at 12700.

On the other hand, failure to hold above 11980/800 should invalidate the bullish upleg scenario to open up scope for an extension of the current corrective decline towards the next support at 11470.

Chart is from City Index Advantage TraderPro

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