The Charts That Tell China's CICC the Stock Panic May Be Over

(Bloomberg) -- The selloff in Chinese shares traded in Hong Kong should peter out as signs the market has been oversold emerge, according to China International Capital Corp.

The Hang Seng China Enterprises Index, which tracks mainland Chinese companies listed in the city, sank to a three-month low last week as angst over Beijing's campaign to cleanse risk and debt from the financial system spread, spurring a jump in Hong Kong money-market rates. But CICC analysts led by Managing Director Hanfeng Wang aren't worried.

“We have observed signs of panic overselling, which would hint for limited further downsides,” the analysts at CICC -- China's first joint-venture investment bank -- wrote in a note Monday. “From a longer perspective, we are less concerned about the prospects of the H-share market,” they said, referring to Hong Kong-listed stocks.

Last week's slump wiped out about a third of the H-stock index's gains for 2017. A flurry of regulation over the past month also helped pushed benchmark money-market rates on the mainland to the highest level in two years, and led to a jump in government bond yields.

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China's improving economic fundamentals and expectations that investors on the mainland will pivot to H shares given losses in onshore markets underpin CICC's optimism. The Beijing-based investment bank is also taking solace in technical indicators.

Short-sell turnover as a percentage of total transactions in the Hong Kong equity market climbed to 14 percent last Thursday, the highest level since August. CICC says that ratio is an “absolutely high level” and so it could be followed by a reversal of the downward trend.

CICC also cited the Hang Seng China Enterprises gauge's 14-day relative strength index, which reached just over 35 on Friday, approaching the threshold of 30 that indicates to some traders that losses have gone too far.

About 18 percent of shares on the H-share index had an RSI of less than 30 on Friday, the highest ratio since Dec. 29 when the measure began a two-month climb that saw it gain about 11 percent.

Hong Kong shares got off to a good start on Monday, with the Hang Seng China Enterprises Index up 0.8 percent as of 1:36 p.m. local time, while the 50-stock Hang Seng Index added 0.5 percent. On the mainland, the Shanghai Composite Index extended losses, wiping out its advance for the year as utilities and industrial shares drove declines.

“We suggest investors stick with quality names supported by solid earnings growth,” such as companies in health care, airlines and financial shares, CICC said.

--With assistance from Kana Nishizawa

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Christopher Anstey at canstey@bloomberg.net, Emma O'Brien

With assistance from Tian Chen