The Hang Seng Is Back To Its Covid Crash Low

The Hang Seng Index surged 18.31% in September, in what can only be described as a monthly “God candle”. The Hang Seng (HSI) currently tracks the biggest 82 companies listed on the Hong Kong Stock Exchange, including Chinese tech giants like Tencent and Alibaba. At the end of September, the Hang Seng finished at 21,134 points (blue) – just five points shy of its March 2020 Covid crash low (gold). 

The People’s Bank of China (PBOC) went big in September

There are two types of companies in the Hang Seng Index: about 30% are Hong-Kong-based, with the other 70% from mainland China. While both are part of China, they run on different systems. Hong Kong is capitalist (free markets) and mainland China is socialist (the state owns a bigger slice of the pie). For the most part, the state of mainland China is responsible for the Hang Seng’s September surge.

The People’s Bank of China (PBOC) – aka the Chinese central bank – went big on economic stimulus in September: 

First, the PBOC reduced the reserve requirement ratio (RRR) for regular banks by 0.5%. Now, Chinese banks need to keep a smaller percentage of customer deposits as reserves, and can lend out the rest to earn interest. All that lending creates more money for the Chinese economy – and that increased liquidity can be good for stock prices.

Second, the PBOC lowered the 7-day reverse repo rate from 1.7% to 1.5%. This makes it cheaper for regular Chinese banks to borrow money from the central bank. That means they can lend more money to businesses and consumers – another check mark for stock market liquidity.

Third, the PBOC set up a swap and re-lending facility, unlocking $113 billion USD (800 billion yuan) in investor liquidity. Basically, they created a way for big institutions – like funds and insurance companies – to borrow money from the central bank to pump even more cash into the stock market. 

The Chinese government went big, too

The Chinese government also added some briquettes to the braai (I’m South African, we don’t say “barbeque”). To heat up the cooling real estate market, it cut mortgage rates and lowered down-payment requirements for second-home buyers. That could free up more spending for home owners and make their property values go up as well. 

The Hang Seng chart looks like it’s forming a long-term low

There’ll be more stimulus from China, no doubt, which could help drive the Hang Seng higher over time. And to be fair, the chart looks to be forming a giant double bottom pattern. 

That said, the Hang Seng is now sitting at a huge resistance level – and a Covid resistance at that. It failed to break that ceiling in the first quarter of 2023 (gray, in the chart). So the question is, will it break it now? 

That remains to be seen. But in the meantime, you could check out our guide to learn how to trade price resistance. 

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