Last week, Hong Kong and China led the Asian rally with both indices finishing at their highest this year. Particularly, while the sudden burst of optimism in China was partially brought about by a 18-month high flash reading for HSBC China PMI in July last week (52.0 versus consensus’ 51.0) last week, what excited investors was potential monetary easing in China. Macquarie Equities Research (MER) released a report yesterday with their opinions on China and the HSI.

First, the media reported that the China Development Bank (CDB) had received Rmb1tn PSL (Pledged Supplementary Lending) from the PBoC to finance shanty town renovation projects, which was perceived as a targeted rate cut. MER’s China economist pointed out in his recent report that PSL is “a new channel for the central bank to inject mid-to-long-term liquidity to the interbank market in the wake of falling capital inflows and the upcoming interest liberalization”. MER thinks this view was supported by the falling forex purchases in June (Rmb-88.3bn, the 1st negative reading in the past 10 months). However, the PSL to CDB had been allocated by June and the impacts may have been factored in the June M2 growth.
 
Second, policy tailwinds continue to blow in the property market. In addition to news headlines on more cities loosening the HPR (incl. Suzhou, Haikou, Xian), there was chatter that the Big 4 banks would offer 0.95x mortgage rate for first time-home buyers in Shanghai (but only Agriculture Bank of China confirmed it would adjust mortgage rates from Aug 1st for selected individual borrowers). Mortgage loosening may also come in the form of residential mortgage-backed securities (RMBS) – the Postal Saving Bank successfully issued Rmb6.8bn of RMBS, the 1st issuance in the past 7 years in China.
 
After the central SASAC announcement, several local governments also moved one step forward on SOE reforms. Nanjing required local SOEs to exit traditional industrial & commercial sectors in addition to the real estate sector; in Shanghai, the next reform focus is to effectively launch the state-owned capital management platforms. Separately, the Communication Bank of China is reported to be waiting for approvals for its mixed ownership pilot program.

MER’s technical analysis
MSCI China Index (MXCN) surged last Tue, easily broke out a strong resistance at 63 and never looked back (+3.8% WoW). After four days’ rally on volume, Relative Strength Index (RSI) suggests the index has been overbought and a correction is needed. Near-term support is 64.5 (and then 63), while the resistance after 65 will be 66, the previous high recorded in early Dec’14.
 
HSI has broken out of the resistance at 24,000 and hit a 39-month high. The overbought index is set to correct - the resistance is at 24,500 and support 24,000 (and then 23,500).

CSI300 concluded 3 months’ sideway trade last week, and jumped above its 200-day moving average of 2,250. With bullish RSI and strong volume, the index could further climb up to retest 2,300 and then 2,400; however, it looks a bit overbought in the short term and may correct to 2,250 (200D MA) if not further to 2,200.

Source: Macquarie Research - 29 Jul 2014