WHAT happens to the Hang Seng Index this week depends on liquidity. Turnover of less than $6 billion would indicate sideways trading in index stocks. Market activity pushing above $8 billion, and especially above $9 billion, would indicate a significant rise in the index on the back of a lot of overseas cash. Another stall in Sino-British relations might not have the bad impact it did this time last year. The only danger would come if Beijing began issuing aggressively anti-British and anti-Hong Kong statements - as it did this time last year - which took the index to 4,978 on December 3. A stalling in relations would only re-affirm the status quo and would be of little concern to investors, either in Hong Kong or abroad. At worst, Sino-British relations might provide an excuse for a profit-taking consolidation. Good news from the summit of the Asia-Pacific Economic Co-operation group in Seattle and news on China's trade relations with the United States following the Sino-US summit at the APEC meeting could help positive market sentiment along. Good news from the Chinese Communist Party plenum could have a similar effect. However, in the longer term, many economists see the relaxation of the mainland austerity programme as cause for concern. They fear for the central policy-makers' ability to control money supply and the economy in general. The heavy trading in index futures last week indicates there is further buying due in stocks towards the end of the month, should the December contract rise to a premium to the November contract. Since the beginning of the year, the Hang Seng has risen 76 per cent. In valuation terms, the historic price-earnings multiple is 19.2. On current-year earnings, the market's PE is 17.6 and on 1994 prospective earnings it is 14.69. On 1995 prospective earnings, the PE is 12.5. Although the valuations are high in comparison with the stock market's recent trading levels, Hong Kong's position relative to that of its regional counterparts in the Association of Southeast Asian Nations remains unchanged. This is because these markets are also experiencing their own bull-runs and are seeing PE expansion as well. In the absence of records on the index, second-and third-line stocks will come back into vogue as local investors seek value among companies that have been left behind in the rush by overseas investors for local blue chips. China plays and quality manufacturers with good track records will probably do well in the smaller company buying spree. Last week utilities did well, conglomerates were mixed, property developers saw buying, but financial counters lagged. Should the rotational buying pattern seen last week continue, banks are overdue for a run against other local sectors.