China’s stock market suffered a lot of pain in 2022, mainly due to the draconian zero-Covid policies imposed when foreign economies were up and running without any restrictions. This year started with high expectations as market participants forecasted strong recovery prospects following China’s permanent exit from Covid-19 curbs. However, as latest data suggests that the economy is losing steam, while monetary and fiscal stimulus remain below expectations, Chinese stocks seem to be under pressure.

Recovery hopes get shattered

In the beginning of 2023, the outlook for Chinese stocks turned from extremely pessimistic to cautiously bullish after the government finally announced its plans to scale back most of the tough Covid-19 restrictions. Moreover, the prolonged regulatory crackdown in the Chinese tech sector and the long-lasting trade wars between China and the US seemed to be waning, potentially allowing Chinese stocks to unlock their value.

Even though China’s much anticipated exit from zero-Covid policies coupled with increased stimulus initially put the domestic economy back on the rails, a series of downbeat data quickly raised concerns that the economy is struggling to find its footing. On that front, the Chinese PMIs due this Friday are expected to reflect more weakness, potentially dealing another blow to Chinese risky assets. The manufacturing sector is expected to contract for a third straight month and services are set to grow at their slowest pace in six months.

Besides that, China’s consumption and traveling figures during the dragon boat festival were lower than their pre-Covid levels, validating the recent slowdown in spending.

Insufficient stimulus

To counter the observed weakness and stimulate the economy, both the Chinese government and the People’s Bank of China rolled out accommodative policies. Their measures included tax breaks for manufacturers and minor interest rate cuts, but markets appear unconvinced on whether the magnitude of this stimulus will be sufficient to spur growth. Up until now, Chinese authorities have adopted a targeted aid package, which could be bolstered in the second half of the year if recession fears grow.

New trade wars in sight?

China managed to withstand the US trade wars in the 2017-2021 period, but Biden’s administration is trying to reshape the economic relationship between the two countries by launching a series of measures to stop China's chip industry from progressing. On Wednesday, news emerged that US officials are considering tightening exports of AI chips to China to reduce the country’s capacity and exposure to new technologies. Given that AI is the leading factor behind the latest market rally in the US, Chinese tech stocks could pay a heavy toll if these restrictions are applied.

Alibaba levels to watch

Taking a technical look at Alibaba, we can see that the stock exhibited a steep uptrend since November 2022, which was followed by a massive decline in 2023. In the short-term, the price has dived beneath both the 50- and 200-day simple moving averages (SMAs), further darkening the technical outlook.

In the negative scenario, the price could initially test the recent 2023 bottom of $78.00 before the attention shifts to last year’s low of $58.00.

Alternatively, bullish actions could propel the price towards the recent rejection region of $94.00 or higher to test the Match peak of $105.00.