China A50 Outlook: Multi-Year Downtrend Breaks on China Stimulus

China A50 Fundamental / Technical Outlook: China50 Weekly Trade Levels

• China announces largest stimulus package since pandemic in effort to achieve 5% growth target
• China A50 rips through multi-year downtrend- rally now approaching first major hurdle
• Resistance 15125/450 (key), 15798, 16861- Support 14313, 13287 (key), 12257

Monetary and fiscal authorities in China announced further steps to revive the economy as the State Council pursues a 5% rate of growth for 2024. The news fueled a massive rally in the China A50 with a breakout of a multi-year downtrend now poised to mark the largest two-week rally in nearly ten years. Battle lines drawn into the Q4 open.

Along with the 0.5 percentage point reduction in the required reserve ratio (RRR), the People’s Bank of China (PBOC) revealed its plan to ‘cut interest rates on existing home loans and unify the minimum down payment ratio,’ along with intentions of launching ‘new monetary policy tools to support stable development of the stock market.’

Notice of the People’s Bank of China and the National Financial Regulatory Administration on Optimizing the Policy on Minimum Down Payment Ratios for Personal Housing Loans

• ‘For households that borrow loans to buy homes, the minimum down payment ratios for commercial personal mortgage loans shall no longer be distinguished between first-home and second-home loans, but rather be set uniformly at no less than 15 percent.’

  Notice on Improving Central Bank Lending for Affordable Housing

• ‘For eligible loans issued by financial institutions, central bank lending issued by the PBOC to financial institutions will be increased from 60 percent of the loan principal to 100 percent.’

  Notice of the PBOC and NFRA (National Financial Regulatory Administration) on Extending the Term of Some Real Estate Financial Policies

• ‘The applicable period of the reasonable extension policy for outstanding loans such as property development loans and trust loans in the Notice of the People’s Bank of China and China Banking and Insurance Regulatory Commission on Providing Financial Support for the Stable and Healthy Development of the Real Estate Market (Yinfa No. 254 [2022]) is extended until December 31, 2026.’
• ‘If relevant policies in the Notice of the General Administration Department of the People’s Bank of China and the General Office of National Financial Regulatory Administration on Effectively Managing Commercial Property Loans (Yinbanfa No.8 [2024]) have an applicable period, the applicable period will be extended until December 31, 2026.’

Looking ahead, the PBOC may take further steps to encourage households and businesses to spend rather than save as the central bank warns that ‘we may further cut the RRR by 0.25 to 0.5 percentage points within the year,’ with fiscal authorities on a similar path as China plans to issue nearly 2 trillion yuan in sovereign bonds over the remainder of 2024.

In response to the efforts by monetary and fiscal authorities, the China A50 is poised to mark the largest two-week rally in nearly ten years with the index breaking out of a multi-year downtrend.

China A50 Index- China50 Weekly Chart

Chart Prepared by Michael Boutros, Sr. Technical Strategist; China50 on TradingView

Technical Outlook: ChinaA50 broke above a multi-year downtrend last week with the index now extending more than 37.2% off the September low. Last week’s advance marked the largest weekly average true range (ATR) since February of 2018 and the largest single-week rate of change (ROC) on record.

The rally exhausted into confluent resistance this week at 15125/450- a region defined by the July 2022 high and the 2022 high-week close. Note that the upper parallel of the proposed pitchfork also converges on this threshold and further highlights the technical significance of this range over the next few weeks.

Initial support rests with the 2023 high-close near 14313 with broader bullish invalidation now raised to the July 2023 high-week close (HWC) at 13287- losses below this threshold would suggest a more significant high is in place.

A topside breach / close above this pivot zone would likely fuel another bout of accelerated gains towards the 2022 swing high at 15798 and the 61.8% Fibonacci retracement of the 2021 decline at 16867- look for a larger reaction there IF reached.

Bottom line: The breakout is now approaching the first major resistance hurdle, and the immediate advance may be vulnerable while below 15450. From a trading standpoint, pullbacks should be limited to 13287 IF price is heading for a breakout with a close above 15798 ultimately needed to mark uptrend resumption and fuel the next leg of the advance.

- Written by David Song, Senior Strategist and Michael Boutros, Senior Technical Strategist