China A50 Outlook: PMI bounce and steady uptrend keep buyers in play

• S&P Global PMI jumps to 52.6, highest since May 2024
• Weak NBS PMI keeps recovery doubts in play
• 13812 is the key level for fresh bullish setups

Summary

China’s services PMI jumped in July, driven by firmer demand and a rebound in export orders. Inflation stayed muted, but with the official NBS survey showing stagnation, any recovery still looks tentative. For now, the mix favours a mildly bullish bias for China A50.

China’s Services Sector Picks Up  

China’s services sector started Q3 on the front foot, with the S&P Global PMI jumping to 52.6 from 50.6 in June, its strongest reading since May 2024. Activity was driven by the fastest lift in new business in a year, helped by firmer domestic demand and the first increase in export orders in three months. Business confidence also hit a four-month high.

Source: S&P Global

Firms responded to firmer demand by adding staff at the quickest pace in a year, reversing June’s losses. Sentiment was buoyed by hopes that better economic conditions and steadier trade flows will keep the recovery intact. Input costs and selling prices both edged higher. However, July saw the first increase in output charges since January, hinting that deflationary pressures may be easing. 

While one decent report doesn’t make a recovery, if sustained, the combination of firmer activity and higher prices may boost corporate earnings, supporting upside for broader Chinese equity indices. However, calling this the start of a bullish trend feels premature, especially with the government’s own services PMI showing the weakest expansion since November. While the latter skews towards larger, state-owned firms, including in construction, it underlines why caution remains warranted.

China A50 Technical Analysis

Source: TradingView

From a technical perspective, the China A50 index is providing moderately positive price and momentum signals, favouring a mildly bullish bias overall. It sits in an obvious uptrend characterised by a string of higher lows. It’s also bounced strongly from the 50-day moving average the last three times of testing, including earlier this week. With both the 50 and 200-day moving averages trending higher, it reinforces the preference to play the index from the buy side.

13812 should be on the radar near term, not only because it was the low set on July 23 but also because the index struggled above 13800 earlier this year. If we were to see the price break and hold above 13812, it would create a bullish setup where longs could be established with a stop beneath for protection.

13900 looms as an initial hurdle for longs given it provided support last week. That may flip to resistance, so keep an eye on the price action should it get there. Beyond, 14000 saw a lot of work either side in July, putting it on the radar, before June 24 swing high of 14185 comes into view. The latter screens as a possible trade target, depending on desired risk-reward of the individual. If it were to be broken cleanly, the December 2024 swing high of 14409 looms as the next topside target.

If the price is unable to hold above 13812, it would allow for the setup to be flipped, targeting the 50-day moving average initially. Given recent price action, anything beyond comes across as a lower probability setup.