Hang Seng Finds Support as China Slashes Key Rate to Help the Property Sector
Property Sector Support
China's real estate market is in a bad shape as years of overbuilding were followed by the pandemic and the government's effort to limit the sector's excessive borrowing. The poster child of the property crisis, Evergrande, was forced into a liquidation by court order earlier this year [1]. The International Monetary Fund expects the problems to persist and projects "fundamental demand for new housing is expected to decline by almost 50 percent over the next 10 years". [2]
Authorities have taken various measures to support the ailing real estate market and the central bank (PBoC) took further action today. It slashed the five-year Loan Prime Rate (LPR) by 25 basis points, to 3.95%. This is the biggest cut ever, in the rate that affects mortgage prices.
The historic move could be a signal of Beijing's intention to become more forceful in boosting sentiment in the property market and propping demand. On the other hand, this may be too little, too late. The lower rate will take time to filter through to mortgages and the one-year LPR that impacts most loans, was kept unchanged.
Piecemeal Approach
China's post pandemic recovery has been uneven, with sluggish growth, weak factory activity, deflation and high youth unemployment. Authorities have been trying to revitalize economic activity, but have refrained from big stimulus, opting for targeted measures. Perhaps for good reason. Bold fiscal stimulus could threaten the country's credit ratings, while deeper rate cuts intensify pressures on the ailing currency.
In any case, the piecemeal approach has failed to inspire markets, with Hong Kong's Hang Seng Index shedding more than 10% last year. Today's move to support the property sector is definitely significant, but likely not enough and some fiscal injection will likely need to follow and generally bolder measures. Furthermore, the LPR cut will put pressure on the profitability of banks. Financials is the largest sector of the index, which finds limited support today.
HKG33 Analysis
Having reclaimed the EMA200, HKG33 has the opportunity to tackle 16,826, which would bring the 38.2% Fibonacci in its crosshairs, but we remain cautious around the ascending prospects and the upside is unfriendly. There is risk for renewed pressure to 15,247 and the 2022 multi-year lows remain in the spotlight.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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