The People’s Bank of China (PBOC) is taking steps to roll out hongbaos to support a more sustained market rally. The PBOC has announced cuts to the reserve requirement ratio (RRR) of financial institutions by 50 bps from Feb 5 although financial institutions with RRR at 5% are excluded.
In addition, starting from Jan 25, the PBOC will lower the interest rates of re-lending and rediscount supporting agriculture and small firms by 25 bps to 1.75%. After this reduction, the weighted average deposit reserve ratio of financial institutions will be lowered to around 7.0% from 7.4%.
The RRR cut is expected to release RMB1 trillion ($189 billion) of long-term liquidity in the banking system which is targeted to boost lending and ensure banks have sufficient liquidity to support larger government bond issuance.
“As with the cuts to interest rates and RRR last year, the recent easing measures are likely inadequate to address the current weak market confidence and the continuing downturn in the domestic real estate market,” says a report by UOB Global Economics & Markets Research. “We think that there remains room for a further reduction to banks’ RRR in 2Q2024 or 3Q2024 but that will become more limited given the PBOC’s floor at 5.0%.”
According to the UOB report, more support measures are probably in the pipeline to be proposed during the National People’s Congress (NPC) in early March when the key economic targets including the growth target for 2024 will be announced.
Reports that the Chinese government is planning a RMB2 trillion market stabilisation fund to purchase A-shares through the northbound Stock Connect triggered a rebound in the Hang Seng Index. Almost 70% of its component stocks are mainland-related companies.
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The market stabilisation fund should it materialise is meaningful as it is equivalent to 1.6% of China’s GDP and roughly 3% of the A-share free-float market capitalisation.
China has also expanded support to real estate developers by broadening the use of commercial property loans for developers while the PBOC plans to set up a new credit market department to guide financial institutions to support financing in five areas such as technology, green development and digital economy.
Markets are fickle and sentiment-driven. Rebalancing the economy is a long-term project. No surprise then should the Hang Seng Index retreat again.
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The chart of the Lion-OCBC Securities China Leaders ETF (in SGD) is more interesting than that of the Hang Seng Index. It shows a clear positive divergence between the stock price and its short-term RSI. Despite the short-term nature of the indicator, a series of positive divergences have developed since September, as the indicator remained below its equilibrium line. The China Leaders ETF is meant to replicate the performance of the Hang Seng Stock Connect China 80 Index
Despite these positive divergences, the signal for a breakout of the downtrend by the China Leaders ETF remains elusive as the indicator needs to move above the equilibrium line to indicate stronger price movements. In the meantime, resistance to the current rebound is likely to appear before prices reach $1.40. Immediate support is likely at the twice-tested January 2024 low of $1.266. This level is also the all-time low since the listing of the China Leaders ETF in 2021.
