The Shanghai Composite Index rebounded 0.85%, to close at 3,563.74 on Tuesday, after tumbling 2.18% the previous trading day over concerns about Chinese industrial profits and a new initial public offering (IPO) system. The National Bureau of Statistics of China (NBS) said late Sunday that profits earned by Chinese industrial companies in November fell 1.4% from a year earlier, compared to a 4.6% drop in October. The November figures, which represented a sixth-straight month of declines, were slightly better than market expectations, said Zhou Hao, a China economist at Commerzbank in Singapore.

According to Reuters, China National People’s Congress approved the State Council’s proposal on Sunday to shift China's current IPO system to a U.S.-style IPO registration system in which the market decides who gets to list and for how much. As stated by the China Securities Regulatory Commission (CSRC), the current system, which contributes to distortion in the IPO market and may encourage corruption of officials, has been blamed for causing an IPO glut and, in part, the crash of the Chinese stock market that occurred in mid-June.

The Wall Street Journal reports that around 345 companies went public in about 18 months before the Shanghai Composite Index crash, while nearly 600 companies are waiting for CSRC approval to list. The CSRC suspended new listings to stabilize the market in July and began lifting the ban in early November, as the regulator believes the stock market has largely recovered to a normal state. Some investors are concerned that the new IPO system, which will be implemented in March, could result in a flood of IPOs that will drag stocks down again.

In November, MSCI announced that their index was adding 14 of China's heavyweight American depositary receipts (ADRs) to its China Index and Emerging Markets Index after the close of trading on November 30. In the first half of 2016, we could see the funds that mimic the MSCI index rebalance their portfolios to match the new weightings. Company shares from countries in the MSCI Emerging Markets index, including South Korea, Taiwan and India, could get hit in order to make space for the incoming Chinese ADRs.

The Chinese economy is slowly transitioning from export-oriented to a consumer-driven economy. The National Bureau of Statistics of China reported earlier in the month that China’s total retail sales of consumer goods rose a better-than-expected 11.2% year-over-year, to 2.8 trillion yuan in November, and an improvement from October’s rise of 11.0%.

Chinese government officials announced last week, at the close of a key meeting of China's Communist leadership, a series of reforms to steer the country’s economy away from a hard-landing scenario, including plans to make China's monetary policy more flexible and to expand the government's budget deficit next year. Analysts believe that the raft of measures will provide support to a slowdown in the home building sector in China.

Technically, the Shanghai Composite Index is trading slightly below the 50% Fibonacci retracement. The breakout point is 3,913, or the eight-year trendline resistance of the symmetrical triangle chart pattern. The trendline resistance was broken before, in early-2015, so it should not be difficult to break again this time.

Related Ticker: iShares MSCI China ETF [NYSEARCA:MCHI]