China’s Mixed Indicators Test Sentiment but Medium-Term Bias Holds

Mainland China and Hong Kong equity markets faced a three-day losing streak on Thursday, December 4, as traders reacted to incoming Chinese economic data.

Chinese economic indicators sent mixed signals this week, intensifying market focus on central bank policy decisions. Crucially, China’s manufacturing sector contracted midway through the fourth quarter, dampening hopes of a US-China trade truce boosting sector activity.

Meanwhile, services sector PMI numbers pointed to a loss of momentum. The PMIs raised concerns about sentiment, the labor market, and the domestic demand outlook.

Beijing remained silent on stimulus plans despite the mixed data, waning expectations of near-term rate cuts.

Despite this week’s pullback, the medium-term outlook remains bullish in my view, given potential rotation into Chinese stocks and expectations of further policy support from Beijing.

Below, I will explore the key drivers behind recent gains, the medium-term (3-6 months) outlook, and the key technical levels traders should watch.

USD/CNY Slides as Margin Pressures Build

The November data clashed with rising bets on multiple Fed rate cuts, weakening the US dollar. USD/CNY has fallen sharply since an April calendar year high of $7.3504. Year-to-date, the pair has plunged 3.15%. A stronger yuan and US tariffs are likely to further weaken demand for Chinese goods, squeezing profit margins.

Fed Rate Cut Bets Deepen USD Weakness

Beijing’s silence on stimulus or policy easing plans and rising expectations of Fed rate cuts in December and March have sent USD/CNY to its lowest level since October 2024.

According to the CME FedWatch Tool, the probability of a December Fed rate cut stood at 89.0% on December 3, up from the previous day’s 88.0%. Meanwhile, the chances of a March Fed rate cut increased from 45.6% on December 2 to 52.9% on December 3.

The weaker USD/CNY will likely ease US-China trade tensions in the near term.

Economists Outline PBoC’s Likely New Year Actions

However, economists expect the People’s Bank of China to swing into action in the New Year. This week, the CN Wire reported two key predictions on PBoC action:

• Reserve Requirement Ratio (RRR): 25-50 bps reduction (Morgan Stanley); 50 bps (China Galaxy).
• PBoC rate cuts: 10-20 basis points (Morgan Stanley, China Galaxy).

Economists also expect Beijing to drive relending in selected sectors and focus on stabilizing growth and, crucially, full employment.

Margin Squeezes and Weak Demand Pressure Firms

Margin squeezes and a weaker demand backdrop forced firms to cut jobs. Industrial profits increased 1.9% year-to-date, year-on-year, in October, down from 3.2% in September.

The RatingDog China General Services PMI fell from 52.6 in October to 52.1 in November, while the Manufacturing PMI dropped from 50.6 to 49.9 in November. Notably, average input prices rose for the fifth month in a row in November, while output charges fell, leading to job cuts.

Labor Market Stress Weighs on Consumption

Rising unemployment and the ongoing housing crisis have impacted consumer sentiment, sinking domestic consumption. For context, retail sales rose 2.9% year-on-year in October, down from 3.0% in August. Retail sales rose 6.4% in May, highlighting the domestic demand slump.

Lower borrowing costs and addressing labor market conditions would likely boost consumer sentiment, lift domestic demand, and bolster the economy. Crucially, improving domestic and external demand would widen margins and fuel demand for Hong Kong and Mainland China-listed stocks.

In my view, the prospect of monetary policy easing, coupled with improving US-China trade ties, supports a bullish short- to medium-term outlook for Mainland and Hong Kong equity markets.

Medium-Term Structure Remains Constructively Bullish

Despite the fourth-quarter pullback, Mainland China equity markets and Hong Kong’s Hang Seng Index hold on to solid gains for 2025. The ongoing housing crisis and US-China trade tensions failed to trigger a market sell-off, building investor confidence.

The CSI 300 has rallied 15.3% year-to-date, while the Hang Seng Index has soared 28.5%, leading the way.

These market dynamics have raised expectations of a rotation into Hong Kong and Mainland China equity markets, supporting a bullish short- to medium-term outlook.

Key Downside Risks to Monitor

Several downside risks to the bullish outlook remain, including:

• Beijing stays silent on policy support.
• A re-escalation in the US-China trade war.
• Intensifying margin squeezes, rising unemployment, and weakening demand
• China Vanke debt crisis spreads.

Given these downside risks, the medium-term bullish structure would be invalidated if the CSI 300 and the Hang Seng Index were to breach their June closing prices of 3,936 and 24,072.

Technical Signals Favor Higher CSI 300 Levels

Looking at the daily chart, the CSI 300 broke below the 50-day EMA, but remained above the 200-day EMA. The EMAs signal a bearish near-term, but a bullish longer-term outlook.

A break above the 50-day EMA would pave the way to last week’s high of 4,625. A sustained move through 4,625 would open the door to testing the 2025 high of 4,762. Crucially, fresh stimulus measures and lower borrowing costs are likely to bring the 2021 all-time high of 5,932 into play.

Conclusion: Cautiously Bullish Heading into 2026

In summary, the short-term outlook looks cautiously bullish, while the medium-term remains constructive.

Policy support from Beijing and improving US-China trade developments will be crucial for sentiment. Addressing deflationary issues, bolstering the labor market, and addressing the housing crisis will likely be key for 2026. Meanwhile, the AI race will likely intensify, another consideration that sets the stage for a bullish outlook for Mainland and Hong Kong equity markets.

Discover strategies to navigate this week’s market trends here.