China A50: upside risks for earnings grow as stimulus ramps up

Chinese policymakers continue to roll out measures to boost economic activity, suggesting risks for corporate earnings risks may be skewing to the upside given the level of pessimism that already exists.

Upside risks building for Chinese stocks?

Latest media reports suggest China’s state-backed banks are preparing to cut interest rates for existing lending and deposit customers, adding to an increasingly lengthy list of measures designed to reboot confidence and encourage increased spending and investment. Cuts to wholesale funding costs, lower mortgage rates for new applicants, reducing stamp duty fees on stock market transactions and slowing the pace of new IPO listings are just some of the announcements seen over the past fortnight, adding to the sense of urgency to turning the flagging economy around.

While still not the stimulus “bazooka” many investors are waiting for, the greater the number of smaller policy measures, the greater the aggregate risk it may deliver meaningful benefits to corporate earnings and upside for Chinese stocks.

China A50 may benefit from latest support measures

Should the latest speculation on deposit and lending rates prove accurate, China’s A50 will be a market traders should be monitoring closely. Laden with massive financial and property-related names, any potential boost to lending volumes without hammering bank net interest margins any further makes it a prime candidate to benefit from a meaningful turnaround in investor sentiment.

China A50 remains rangebound for now

For all the bearish headlines and sentiment, China’s A50 has been rangebound for the past three months, meandering either side of two decent support and resistance zones starting around 12,400 and 13,400 respectively. There’s no imminent threat of the prevailing range being broken in the near-term, although risks may be skewing towards an upside test given the rapid rollout of supportive policy measures seen in recent days.

Source: Trading View. StoneX. 

The A50 ran into sellers at the 200-day SMA at 13,076 earlier this week, failing to sustain the bounce seen following the reduction on stamp duty on stock trades announced over the weekend. That’s something to watch. 12,800 – a level it has done a lot of work either side in the past – is another given that’s where Tuesday’s rally stalled. Should they be overcome, the downtrend from the start of 2022 is the next topside level to watch around 13,200 before we get to the bottom of the resistance zone at 13,400.

On the downside, the demand zone starting at 12,400 has repelled numerous attempts to push the index lower since the end of May.

-- Written by David Scutt

Follow David on Twitter @scutty