How to trade China’s economic trouble

China faces economic challenges as it returns from a week-long holiday and prepares for the crucial fourth quarter.
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The signs are there

In a sign of global demand destruction, and perhaps the future of the export-dependent second-largest economy in the world, daily cross-pacific freight rates fell to $3,900 for a container. That's down from $19,000 last year. This is still above pre-covid levels and has been celebrated as a sign that logistics are improving. But it's also an indication that global trade is slowing down, as the WTO warned.

China is the largest consumer of commodities, in part driven by global manufacturing demand. But the weaker yuan has made it increasingly more expensive for Chinese firms to import raw materials. And if the external front is showing strain, Chinese domestic indicators show a lack of business and consumer confidence, with PMIs in contraction. Recently the World Bank cut its growth forecast for China to just 2.8% this year, down from 4.5% in the previous estimates.

Where to now?

Many point to China's zero-covid policy hurting domestic demand and investor confidence. The resulting uncertainty keeps investors and consumers alike from spending. The housing sector accounts for 30% of the country's GDP and is often seen as a way for Chinese people to store value. The sudden drop in house prices has shaken that perception, making consumers even more hesitant to spend.

The droughts from the summer have now been replaced by floods, contributing to power outages and temporary factory shutdowns. Q2's annualised growth rate of 0.4% naturally caught investor attention, the second-worst performance since 1976. But the three preceding quarters added up to a growth rate below the pre-pandemic level. While the PBOC continues to ease policy to prop up the economy, changing the trajectory for the world's largest commodity consumer would take a significant shift.

China A50 flirts with 50SMA

China's A50 stock index has recently reached the Apr-May low of 12600, offering bears an opportunity to cash out and bulls to buy the bounce. Now, the support has formed a triple bottom in close proximity to the 50SMA of 13300. Short-term resistance lies at 13600, and then the downtrend line a tad higher.

If bullish momentum increases, 14100 is the 200SMA. Moving past there, 15150 is major resistance. The support comes from the bottom diagonal trendline, the extension of which may be used to project a bearish target if 12600 succumbs.

Key takeaways

Cross-pacific freight rates suggest global demand for goods is slowing down, slowing Chinese GDP, which is now forecast to be just 2.8% as a weaker yuan makes it increasingly difficult to import.

China's zero-covid policy and unpredictable lockdowns have caused a drop in housing prices, deterring consumer spending, while floods led to factory shutdowns. This has contributed to poor growth, which caught investor attention even though PBOC continues to prop up the economy of the world's largest commodity consumer.