Crunch time before party congress

Editorial | 9 Oct 2017

Investors will probably be holding their breath as trading resumes in the mainland today.

The burning question they're asking is whether the "big time" will return to bless the market here and across the border, following a short but rather eventful week in Hong Kong.

Will A-shares blast off like a rocket and the Hang Seng Index maintain its momentum to gain more?

Ahead of the all-important 19th plenary conference of the Chinese Communist Party later this month, the People's Bank of China announced it will lower the reserve requirement ratios for banks - effective from 2018 - to render support to small businesses.

The signal is clear. If policy had been to keep market stable, it would now put greater emphasis on economic stimulation.

The past week should have been quiet for trading since, due to the National Day and Mid-Autumn public holidays, the SAR bourse was only opened for three days.

But instead, the HSI roared past the 2015 peak, up nearly 900 points, amid substantial daily turnover. Moods were buoyant with talks of the market's return to the "big time."

The central bank announcement wasn't totally unexpected because the market had been anticipating some initiatives prior to the party conference.

The statement said that come January, the amount of reserves banks are required to hold at the central bank will be lowered by 0.5 to 1 percentage point.

The first cut since March 2016, the reduction will apply to banks whose outstanding loans to small enterprises account for 1.5 percent or more of total loans.

Don't be misled by the seemingly small figures. The People's Bank said about 90 percent of commercial banks meet the requirement for a 50 basis point cut.

All in all, it means an additional liquidity of 750 billion yuan (HK$880 billion), will be released into the market - which is like a mini-quantitative easing.

The Stock Connect through-trains were suspended last week due to the holidays. Turnover was robust, unaffected by the suspension, though.

This was proof the stock-connect suspension had not stopped mainland capital from flowing into the Hong Kong market via alternative conduits to snap up mainland banking and financial stocks before the mainland market opens today.

Across the globe in the United States, President Donald Trump's tax cut proposal was well received by the financial markets, despite criticisms the plan was short of details as to where to tap extra revenues to fill the gap left by the tax cuts.

Since the "Trump Tax," Wall Street indexes have surged to new highs. Will the tax cut revive the "Trump Trade" that began to pale amid scandals and his apparent inability to cut deals in Congress?

SAR stocks are always influenced by the mainland and America. Now flanked by both, it would be risky to bet against the trend.

If there is a risk factor, it would be investors opting to lock in profits here to go after mainland stocks that are left behind the curve due to the week-long holidays.

Then, Hong Kong stocks may come under pressure, but it would be unlikely for them to buck the trend.

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