The recent weakness in Chinese stock ETFs is a warning signal on the global economy as the key market battles an important resistance level.
The Shanghai Composite is off 14% from the March high amid worries the economic slowdown is worsening, Bloomberg News reports.
“The market is mainly concerned about the economy, which is facing structural problems from shifting to consumption from over-investment,” said Wang Zheng, chief investment officer at Jingxi Investment Management Co., in the report.
Foreign investment in China fell to a two-year low, according to data released earlier this week.
“This follows a raft of softer economic indicators that appear to confirm an imminent downturn in growth. Markets have so far shrugged off policymakers’ hints of more monetary stimulus,” Reuters reports.
Technical analysts keep a close eye on China ETFs because the market is seen as a gauge for the health of the global economy.
China’s economy, the second-largest in the world, appears to be slowing. In response, the central bank has been cutting interest rates and reserve requirements for lenders.
“Considering China’s significant contribution to the global economy, this recent stock market action is most definitely a red flag,” according to Chart of the Day.
The iShares FTSE China 25 Index Fund (NYSEArca: FXI) has posted a total return of 1.8% year to date and is lagging U.S. stocks.
“Chinese stocks have endured what amounts to an extremely wild ride since 2005. The FXI trended upward at an ever accelerating rate (i.e. parabolic) from 2005 to Q4 2007. As the credit bubble began to unravel, so too did Chinese stocks with the FXI trending downward at an ever accelerating rate from Q4 2007 to Q4 2008,” the report said.
“Beginning in Q4 2008, the FXI surged — gaining over 155% trough to peak. Since that post-financial crisis peak back in Q4 2010, Chinese stocks initially treaded water but more recently have embarked on a steep downtrend. More recently, Chinese stocks did rally but just turned back down after hitting resistance,” it added.
iShares FTSE China 25 Index Fund