The Hong Kong HSI Index has rallied almost 1,000 points, or 4.4% in the last seven trading sessions, far outperforming the rest of Asia which is up 1% over the same period. The recent rally in Hong Kong has been led by technology stocks, as the tech industry rebounds in the US. Nonetheless, a Bloomberg article published yesterday claims that many investors may still be on the sidelines as they await Chinese data to see if that will prompt the central bank to take more steps to stimulate the economy.

In the meantime, the Chinese central bank has been announcing new policies. On 12 May 2014, for the first time this year and one day ahead of soft industrial production data for the month of April, it called for the 15 largest banks in China to ease their mortgage policies, especially to prioritize and accelerate mortgages to first-time home buyers.

This week, Macquarie Equities Research (MER) published a research report on 19 May 2014 that not only addressed these Chinese policies, but also their views on the Chinese and HSI stock markets. Read on for excerpts from the report...

The Week’s Highlights
Right ahead of China’s release of another set of soft growth data for April, last Mon China’s central bank for the first time this year called for the 15 largest China banks to ease their mortgage policies, especially to prioritize and accelerate mortgages to 1st time home buyers.
This surprising change in the People’s Bank of China (PBOC)’s rhetoric suggests the deterioration in the property market (esp. buyers’ sentiment) turned out be worse than the leaders’ expectations. This created some room to imagine that China’s policymakers may turn to monetary loosening while the previous mini-stimulus fiscal policies fail to offset downward pressure from real estate. Speculation on Reserve Requirement Ratio (RRR) cuts or lower interest rates resurfaced and may linger for a while.
 
However, the willingness of banks to follow the PBOC’s instructions is questionable, as banks presumably prefer NOT to provide lower-return mortgages to first time buyers. MER also believes that monetary RRR cuts or rate cuts are too strong stimulus signals, especially given President Xi’s recent call to “adapt to the new norm” of China’s economy.
 

Last Saturday on 17 May 2014, the National Development and Reform Commission (NDRC) identified nine prioritized reform tasks to be completed in 2014 – nothing seems new except that power, oil & gas, and salt industries are where to see accelerating state-owned enterprises (SOE) reforms. Meanwhile, a second round of the anti-graft campaign in the energy space seems to have kicked in, with several senior officials at the National Energy Administration reported to be under investigation, and the scope seems to have expanded from oil & gas and power to the coal industry.

 
Outside of China,the anti-China riots in Vietnam were among the most eye-catching headlines. While only a few Hong Kong-listed companies have disclosed (potential) impacts on their assets/production and the protests have not spread to northern regions, closer monitoring of the situation is worthwhile as production interruptions and investments delays could affect long-term operations of some textile, home appliance and paper companies, etc.

What the technicals are saying
The MXCN China Core Index rallied hard on 12 May 2014, followed by three straight up sessions, which confirmed a higher low at 57 vs. 56 in mid-March. The Relative Strength Index (RSI) has entered a bullish zone but weak volume seems an overhang. The index still needs to break out the previous high at 62 to confirm an upward channel. Resistance is around 61 and support around 59. The HSI looks more bullish, breaking out both 50-day and 200-day moving averages last week. If HSI further strengthens to surpass its previous high around 23,250, it may retest the 24,000 peak in last Dec. Near-term support at around 22,250 to 22,500.

The Shanghai Shenzhen CSI300 Index quickly gave up the gains from the rally on 12 May and is sitting at a key support level at 2,150. Its RSI is struggling at neutral levels with extremely weak  volume. Further weakness may bring the index to retest its 2,100 low; 2,200 will continue to be a strong resistance even if the index jumps from where it is.