The Hang Seng Index (HSI) rose by 1,729 points between Jan 22 and Feb 27, representing a Lunar New Year rally of sorts. It has since eased. Will this rally have legs?
While Hong Kong’s interest rate regime is impacted by flow-throughs from the Federal Reserve because of its currency board, the HSI is weighted heavily in favour of China. Hong Kong. Based on data compiled by the Hong Kong Exchange, around 33% of the stocks in the index are Hong Kong companies. Even then, the likes of HSBC and AIA have businesses in China.
In Singapore, the easiest way to gain exposure to China is to buy into either the Lion-OCBC Securities China Leaders ETF, which represents the Hang Seng Stock Connect China 80 Index, or the Lion-OCBC Hang Seng Tech Index. Both indices comprise largely of mainland stocks. Last August, stocks such as Longfor, a developer, Midea Group, Energy Technology, and Zhifei Biological Products were replaced by SMIC, Sungrow Power Supply, China Three Gorges Renewables and Beijing Shanghai High Speed Railway in the China Stock Connect 80 Index.
In China, the authorities are injecting liquidity. The People’s Bank of China has been cutting the reserve requirement ratio (RRR) to ensure “ample liquidity”. In 2023, PBOC cut the RRR twice by 25 bps each time. In February, the RRR was cut by a further 50 bps.
According to CNBC, Pan Gongsheng, governor of the PBOC, said on March 6 that there was room to further cut banks’ reserve requirements and to use monetary policy to “mildly” prop up consumer prices. China has experienced some mild deflation this year.
Bank of America (BofA) reported that the government said monetary policy will be flexible, appropriate, targeted and effective. RMB stability will be maintained at a reasonable level, “indicating limited tolerance for currency depreciation in the near term” in BofA’s view.
See also: STI moves into consolidation phase but could Chinese equities rebound?
As a result of the central government’s determination to ensure a stable operating environment rather than a bazooka, the Lion OCBC Securities China Leaders ETF, which is facing resistance at the thrice-tested $1.40 level, is unlikely to break out. Nonetheless, it has greater relative strength than the Lion OCBC Hang Seng Tech ETF which has already retreated from its resistance. On the other hand, The Hang Seng Tech ETF is more liquid and easier to sell in the event of adverse developments. It may also be more sensitive to the Chips and Science Act of the US.
Foreign funds flow into China has slowed as evidenced by the chart of China’s Foreign Direct Investments (FDI). The blue bar represents the difference between inward-bound FDIs and the red bar outward-bound FDI over the past 10 years but there has been a rising trend of outward-bound FDIs as the blue bars shrink.
