• China Big Tech is leading the current momentum-driven rally in China stock market.
• Supported by a weaker USD/CNH that broke below key near-term support of 7.2160.
• Further hints from China’s top policymakers that the prior 3-year of stringent regulatory crackdowns on China’s leading technology companies have ended.
• Current momentum-driven rally of China Big Tech may still see a bumpy ride due to a weak external demand environment.

Prior to yesterday’s release of the key US consumer inflation data for June that came out cooler than expected, China’s proxies stock indices have crept up higher since the start of this week; from Monday, 10 July to Wednesday, 12 July, the Hang Seng Index recorded a gain of 2.06%, Hang Seng Tech Index (+3.45%), Hang Seng China Enterprises Index (+2.3%).

A higher positive momentum intensity is being seen in the Hang Seng TECH Index which comprises China’s Big Tech firms that reintegrated back above its 50 and 200-day moving averages.

Also, a significant price action development in terms of relative momentum has taken shape on China’s Big Tech equities listed in the US stock exchanges (the ADRs) that have continued their outperformance over its peers, the US Big Tech since last week.

Relative positive momentum seen in China Big Tech

The KraneShares CSI China Internet exchange-traded fund (ETF) has recorded an accumulated gain of 8% since the week of 3 July 2023 till yesterday, 12 July over a return of +0.86% seen in the Nasdaq 100 over the same period.

Fig 1:  Relative momentum trends of KraneShares CSI China Internet ETF & other China equities ETFs as of 12 Jul 2023 (Source: TradingView, click to enlarge chart)

Also, positive relative momentum can also be seen against global equities, the ratio of the KranShares CSI China Internet ETF over the MSCI All Country World Index ETF has notched up four consecutive sessions of positive momentum readings based on a five-day rolling basis.

Inter-market and sentiment are likely the factors that are the key catalysts for the ongoing short-term outperformance since in China Big Tech that is driving the momentum-induced rally in the Hang Seng benchmark stock indices.

USD/CNH broke below 7.2160 support triggering a positive feedback loop into China equities

Fig 2:  USD/CNH short & medium-term trends as of 13 Jul 2023 (Source: TradingView, click to enlarge chart)

Fig 3:  USD/CNH correlation with HSCEI & HSCTECH as of 13 Jul 2023 (Source: TradingView, click to enlarge chart)

The USD/CNH (offshore yuan) foreign exchange rate has a high degree of inverse correlation with the Hang Seng benchmark stock indices and China Big Tech theme play ETF; a rise in the USD/CNH (a weaker yuan) tends to see a fall the above-mentioned indices and ETF, and vice versa.

In the past five days, the USD/CNH has inched lower since its seven-month high of 7.2745 printed on 6 July and broke below key near-term support of 7.2160 (also the 20-day moving average that price actions have traded above it since 19 April 2023) on the onset of yesterday’s US CPI data release.

Also, reinforced by the narrowing of the premium of the US Treasury 2-year yield over China’s 2-year sovereign bond yield. These observations suggest a potential short-term downtrend phase is in progress for USD/CNH which triggers a positive feedback loop into the Hang Seng bench stock indices and China Big Tech equities.