Lift for Chinese stocks with news of stimulus?

It looks like the Chinese central bank has started to be more aggressive in reviving the country’s economy, going by local news reports.

A man walks past the gate to China Pilot Free Trade Zone's, Shanghai
Source: Bloomberg

The People’s Bank of China has reportedly started to provide over $81 billion of liquidity to the country’s five largest banks, through standing lending facilities with three-month tenors.

The immediate impact will be similar to a required reserve ratio cut of 50 basis points, according to some estimates.

This is largely seen as a positive short-term move, though it should be noted that the banks will eventually have to pay back the money, which leaves the situation one to watch.

This follows another rather disappointing round of China data released yesterday, the print for August foreign direct investment showed that it had slumped to a four-year low.

That added to the recent series of signs of a slowing economy, with industrial production growth, retail sales and credit growth figures among the latest to miss expectations.

Is the PBOC injection the stimulus that the market has been hoping for? The news has since lifted investor sentiment in the US markets last night, with stocks and commodities edging up. The Dow Jones Industrial Average and S&P 500 both closed higher.

We could see some positive leads going into Asian markets. The MSCI Asia Pacific Index has kicked off the morning on a positive note and looks poised to break its 10-day losing streak.

Ahead of the Hong Kong open

Looking at the Hang Seng Index, there has been a bearish sentiment hanging over it, which closed in negative territory for the eighth straight day.

However, we’re seeing some signs of optimism on the Hong Kong HS50. It has bounced off a support around the 24,150 level and investors have bid up the price to push it above the 20 DMA.

That might signal a bounce in the interim and we will be watching out for the HS50 to test a resistance level of 24600. More conservative traders may want to wait for a clear break above this level for confirmation on a positive reversal.

Traders with open long positions can also consider this as a window to sell into the rally, as there are few signs of any other positive catalysts to sustain the momentum.

With the positive leads from Wall Street and optimism over the Chinese stimulus, we are calling for the Hang Seng Index to open 1.23% higher at 24,451 points.

Hong Kong HS50 Chart
Click to enlarge

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