HKG33 Rallies on New Chinese Stimulus

HKG33 Analysis

Beijing has been stepping up its efforts to support the sputtering economy, with a series of rate cuts and fiscal action over the summer. Today the central bank doubled down with wide-ranging measures. Among them are incoming cuts the amount of reserves banks must hold ^[1], lower mortgage rates on existing home loans ^[2] and a 500 billion yuan ($71 billion) liquidity scheme for stocks ^[3].

These measures are in the right direction and there is room for more, especially after the jumbo cut by the US Fed. The greenback's demise due to the pivot has led to a substantial appreciation of the ailing Yuan in the last three months, alleviating a source of concern for the PBoC.

Markets reacted positively with HKG33 rallying nearly 4% in one of its best days of the year. It now eyes the 2024 peak form May (19,794), but we are cautious around further gains.

On the other hand, the new plans are likely not the bazooka many participants are hoping for and the recent shift towards supporting consumption needs to be enhanced. Furthermore, bolder action risks creating renewed pressure to the Yuan and capital outflows, further stressing the financials of local governments and undermining the country's credit ratings.

On the technical front, the RSI points to highly oversold conditions creating scope for a pullback below the 18,500 region. Deeper decline though past the EMA200 (black line) that would negate the bullish bias, does not look easy under current conditions.