Hang Seng and China A50 index prices reverse course as covid restrictions ease

As more cities in China relax lockdown curbs, Asian equity markets have started to rally once again. Investors are now assessing whether the recent move is an extended rebound from oversold territory or perhaps the start of more meaningful gains to follow. Pandemic lockdowns in China, an ailing property sector and regulatory uncertainty have been key concerns in the region, impacting growth and demand as well as providing some of the inflationary headwinds in the global marketplace.

China likely to ease zero-tolerance covid policy, while regulatory and property concerns remain

Recent protests in China have prompted commentary from Vice Premier, Sun Chunlan, reinforcing speculation that zero-tolerance covid policy could be softened in the near term. The Vice Premier recognised that the virus had weakened and that the pandemic situation had changed, inferring that policy should change as well. The announcement marks a pivot in the political viewpoint and communication around the subject.

The relaxation of policy would suggest a reopening of the world’s second largest economy and boost demand. It would suggest some easing of supply bottlenecks and hopefully softening some of the inflation inputs.
While Asian equity markets are showing early signs of a trend reversal, regulatory risks remain and the region’s property sector is still a weight on China’s Gross Domestic Product (GDP).

Chinese authorities have moved to try rescue the property sector which has historically accounted for nearly 30% of the country’s GDP. China’s largest property developer, Evergrande has seen liquidity constraints leading to the stalling of development projects, mortgage issues and protests from homebuyers. Smaller development firms have displayed similar issues and concerns of contagion into the banking sector have been mounting. The People’s Bank of China (PBOC) has moved to support housing developers to try ensure project completions indicating the potential for further support helping ease short term sentiment.

Hang Seng – Technical View

The Hang Seng Index has provided some technical indications to suggest that trends are starting to change. The 20 day (red line) simple moving average (MA) recently crossed above the 50MA (green line). This suggests that the short to medium term trend is now up (previously down). Further support to the short to medium term trend reversal is the inverse head and shoulder price pattern (formation below the 18170 level).

The price has now also moved to close above the 200MA (blue line). This suggests that the longer-term downtrend has been broken, although does not yet confirm that the long-term trend is up. There is also an overbought indication by the stochastic oscillator at current levels.

With the long-term downtrend broken and the short to medium term trends considered up, traders might prefer to keep a long bias to positions on the index. The overbought signal suggests that we could see a near term pullback before gains are continued. Should this scenario occur traders might consider a long entry opportunity with 20660 the next upside resistance target. The bullish indications would be deemed to have failed should the price instead correct to below the 16800 low.

China A50

The China A50 Index has also suggested a short to medium term trend reversal with the 20MA crossing above the 50MA. The price has not however managed to push back above the 200MA. The Index is currently in overbought territory.

The technical indications for the China A50 are more ambiguous than those evident on the Hang Seng Index. While the short to medium trends look to have reversed from down to up, the long-term trend remains down, and the index overbought. For renewed faith in the upside, we would like to see at least a break of the 200MA before looking for long positions on pullbacks from overbought territory.