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Weak Data Could Lead to Higher Chinese Stock Prices

David Becker
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The combination of structural reform and weaker than expected data could catapult Chinese stocks to resistance levels. Over the weekend, Beijing outlined a broad range of capital-market reforms. These include a more investor-driven system for IPOs and easier access for foreign capital. On Tuesday the government reported weaker than expected data would could lead to further stimulus lifting equity bourses.

China’s economic data came in softer than expected. This may have weighed on commodity prices after the recent advance, but is fueling ideas that the PBOC could ease monetary policy, and this appears to be lending support to emerging market stocks. China’s slew of data included softer-than-expected year over year growth in industrial output, retail sales and fixed asset investment. Fixed asset investment slowed to 17.3% from 17.6% in March. Retail sales slowed to 11.9% from 12.2%, and industrial output slipped to 8.7% from 8.8%.

Chinese leaders have suggested that investors and businesses need to come to grips with the fact that growth is slowing. While China is bringing forward some spending, it is not clear that officials really want to reflate, if such a term is meaningful for a country that still appears to be expanding by 7% or more.

On Monday, the Shanghai slice through trend line resistance and on Tuesday the market consolidated its gains. The next level of target resistance is a downward sloping trend line that connects the highs in January to the highs in April and comes in near 2125. Support on the Shanghai index is seen near the recent lows near 2000.

Momentum is turning and the MACD (moving average convergence divergence) index is poised to generate a buy signal. The RSI (relative strength index) is moving higher with price action reflecting accelerating positive momentum while printing at 51, which is in the middle of the neutral range.

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