Does China Need More Easing?

• The surge in uncertainty combined with the downward revision in growth expectations and renewed crackdown fears have left China equities vulnerable in recent weeks.
• The Hang Send index fell below its March 2020 low this week and found support slightly above the 20,000 level on Wednesday overnight session, its lowest level since June 2016 (top chart).
• Hang Seng index is now down over 20% since its February high when it found resistance at 24,976.10 , which corresponds to the 61.8% Fibo retracement of the 21,139.30 – 31,183.40 range (2020/2021 low high).
• Investors have recently been questioning what could eventually levitate equities in the medium term as the current environment has ‘erased’ China officials’ ‘easing effort’.
• Even though ‘liquidity’ in China (TSF 12M Sum) has also started to rise in recent months, the easing policy from the PBoC may just be enough to offset the significant economic losses coming from the ‘Zero-Covid Policy’.
• The bottom chart shows that tech stocks have continued to reach new lows despite the ‘v-turn in liquidity’.
• A reversal in liquidity has historically been associated with a positive rebound in stocks prices, especially tech equities.
• It will be interesting to see if the China officials will accelerate their easing policy (either more liquidity or rate cuts) in the near term.
  • Aggregate financing is expected to increase by 2.2tr CNY in February (released this week), down from 6.17tr CNY in January.

Source: Bloomberg/MNI