What’s next for the Hang Seng Index with recent raft of China’s stimulus?

Hang Seng Index extending its gains in today’s session

An onslaught of easing measures from China has taken Chinese equities to their multi-month high yesterday, with bullish sentiments looking set to extend into today’s session. While market participants have been expecting more intervention from Chinese authorities for some time, the scale of recent measures has surprised on the upside, reflecting a stronger resolve among authorities in meeting their 5% growth target for the year.

Its rare multi-pronged approach includes a 20 basis point (bp) reduction in its seven-day policy rate, a 50 bp reserve requirement ratio (RRR) cut and a 50 bp cut on existing mortgage rates, which may seem to put cash more directly to households for spending. In a bid to support the stock market, a swap facility was also announced to offer a lifeline, basically allowing securities, funds and insurance companies to tap on the People's Bank of China (PBOC) to buy stocks, with liquidity support projected to be at least 500 billion yuan.

The timing of the announcement has been well-planned, coming before the National Day Golden Week, which may mark an attempt to uplift consumer confidence and amplify spending during the festive season.

What’s next for the Hang Seng Index?

The Hang Seng Index (HSI) has jumped 4.1% in yesterday’s session, with a further gap up of close to 3% today at the time of writing. We believe there may be more room for upside in the HSI over the coming weeks based on the following:

• Slew of stronger-than-expected measures reflect greater resolve among authorities in meeting its 5% gross domestic product (GDP) target. Almost all analysts’ GDP projections thus far have been below its target, with room for upward revisions ahead offering a potential catalyst.

• Sentiments may be less sensitive to weaker economic data out of China for now, given that market attention will be shifted towards monitoring for any positive impact from recent policy roll-out, which may be expected to come with some lag.

• Increasing traction for value stocks with the Federal Reserve (Fed)’s policy pivot may leave China’s discounted valuation on investors’ radar, which is likely to be revisited with recent stimulus measures.

• The PBOC has room for policy flexibility ahead, amid a Fed's policy pivot and a stronger yuan against the dollar. Authorities have opened the door for more support to come, mentioning about further RRR cuts. That said, we believe a wait-and-see will likely be retained for now, as authorities will need time to gauge the policy success of recent roll-out.

• Sentiments in Chinese equities thus far have been bearish, with exuberance around policy support potentially offering room for some unwinding, along with a revival in foreign inflows.

• On the technical front, the HSI has marked a decisive upward break of its weekly Ichimoku Cloud for the first time since November 2020. A series of higher lows were also formed since the start of the year, with its weekly relative strength index (RSI) defending its key 50 level.

Overall view: At the least, recent stimulus measures may offer an adrenaline boost to China’s economic conditions in the likes of what we have seen in April this year. Of course, whether recovery can be sustained over the longer term will remain a topic of debate, given that China’s economic woes may still revolve around an issue of confidence rather than liquidity. However, we believe that this will be a question for later.

Currently, the index is retesting its May 2024 high at the 19,800 level. With the current exuberance, loading up positions in phases may be more ideal, with signals to watch potentially being a return in near-term technical conditions back to neutral or a period of consolidation along its resistance to suggest buyers holding up. Any break above its 19,800 level may reinforce a higher high and may pave the way for a move to the 21,000 level next.