The Shanghai Composite dropped 1.4% overnight as the Chinese
) digested news that the country may consider tightening monetary
policy in order to stem inflation and economic news from overseas
The Chinese indices in Shenzhen, Shanghai, and Hong Kong (
) all got off to a slow start Monday morning after poor equity
performance around the world hindered Chinese stocks. With the
Dow down more than 200 points on Monday, it's of little surprise
that Chinese markets were adversely affected.
While the initial drop can be blamed on a change in global
sentiment towards the economy, the steep drop in afternoon
trading in Shanghai was very much China-specific as news leaked
from a state-owned newspaper that authorities in Beijing might
start to tighten monetary conditions.
A move away from recent loose conditions could negatively
impact Chinese banking stocks, institutions whose
performance is correlated to liquidity
. As well, Chinese housing developers slipped given their
exposure to credit conditions.
The combination of these factors drove the Shanghai Composite
down to its lowest levels in more than a month. Current levels
are technically important for the exchange; this most recent drop
has seen the Shanghai Composite move back towards its 50-day
The Shanghai Composite has remained above the 50-day moving
average since it began its huge run higher in mid-December; a
breach of the 50-day moving average could see a technical
breakdown in the Shanghai Composite and a concomitant drop
towards the 100 and 200-day averages.
After PMI came in somewhat disappointing last
, the Chinese economy needs some good news to see the rally in
the Shanghai Composite continue. This could potentially come from
the housing market; while developers may be hindered by new
credit conditions, given the importance of housing to Chinese
GDP, if the secondhand market remains strong, positive sentiment
could pervade the Chinese economy as a whole.