CHN50 declines as property sector poses potential risk

  • CHN50
    (${instrument.percentChange}%)

Further to our previous article, a big Chinese trust company, Zhongrong International Trust Co., is causing concerns because they have not been making payments on their investments lately. This company is typically involved in real estate and has been having trouble with payments on many of their investment products. This, along with home prices going down, is making people worried that the ongoing property crisis in China is making the economy's slow growth even worse.

China's shadow banking sector is about as big as the entire economy of Britain. People have become increasingly worried over the last year because this sector is heavily linked to the property market and poses risks to the overall economy.

If there are defaults in this shadow banking sector, it could have a broad negative impact. This is because a lot of regular people have invested in high-yielding trust products tied to it. If those investments start missing payments, it could make people even less sure about the economy, especially if the government does not step in with stronger measures to help.
Until now, China has been somewhat successful in preventing the troubles from the property sector's debt issues from spreading to the much larger $57 trillion financial industry in the country. Property developers are having trouble paying back what they owe, but this hasn't yet caused major problems for the wider financial system.

Even though China has made many changes to its financial system over the years, the government still has significant control over the banks and the financial markets within the country. However, the recent reports of new defaults have raised concerns that these problems might lead to contagion.

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FXCM's CHN50 basket has declined over the last three weeks. It is pulling back to support around the 12,360 level (green shaded horizontal). Of concern, the weekly RSI has dipped below 50 (black ellipse). This is the bearish side of the oscillator. If it maintains on this side, the momentum will be regarded as bearish and the support level may not be able to hold the index's declining prices.

References:
www.reuters.com

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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