Thank heavens stock markets avoided a catastrophe this week. After the U.S. raised its debt ceiling to avoid an unthinkable default, China stocks surged in relief. Oh wait, they actually plummeted in line with global markets due to fears about a slumping U.S. economy and concern the debt deal would make things worse.
But in the midst of all the drama coming from the U.S., it’s useful to remind ourselves that the big factor for Chinese stocks is China. And on that front prospects for the next few months are not so gloomy.
True, bad news about the U.S. economy this week weighed heavily on China stocks in Hong Kong. Tuesday and Wednesday the blue-chip Hang Seng Index slumped 3.0% and the index of Chinese companies sank 3.5%. For good measure, turnover rose sharply in Wednesday’s big decline, reflecting heavy selling pressure.
But in the background, for now, news from China was at least a bit hopeful. In particular China’s July figure for manufacturing PMI of 50.7 was slightly higher than expected and only marginally lower than the number for June’s 50.9. Haitong Securities said on its website that improvement in new orders in July “indicates that demand driven by domestic growth has begun, an important sign of economic recovery.”
“We believe that July was the trough and a U-turn for the PMI is in the pipeline,” Haitong said.
Another likely positive for China stocks in Hong Kong is the prospect that economic weakness and possible Federal Reserve easing will push the U.S. dollar lower. A weaker greenback is high-octane fuel for the Hong Kong market because it steers investment away from the U.S. and into higher growth overseas markets.
Certainly there are some speed bumps on the way for China stocks (in addition to slowing economic growth in the U.S.). The People’s Bank of China recently stated it would continue to use monetary tightening measures when necessary to fight stubborn inflation. In fact, Chinese inflation has been tougher to quell than many analyst thought. Some said it would peak in June, but that has been pushed back to July or August, maybe even September.
Still there is little dispute that inflation, and monetary tightening, will begin to recede by the end of 2011. Add to that the fact that July’s PMI figure and strong Chinese GDP and retail growth in the second quarter offer comfort that the fight against inflation will not lead to a hard economic landing. End
DAILY FIX -- U.S. Sell-off Batters Hong Kong Market
Hong Kong Blue Chips: -429, -1.9%, to 21,993, 08-03-11, Hang Seng Index
Chinese Stocks in Hong Kong: -272, -2.2% to 12,007, 08-03-11, HSCE Index
Shanghai Stocks: -0.03%, 2,678, 08-03-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -11.7 to 430.2, 08-02-2011, Bank of New York Mellon, ADR Index-China
Insight: Battered by the steep drop on U.S. markets, Hong Kong blue chips fell below the 22,000 level in heavier turnover. Chinese banks slumped, with CCB (0939) and ICBC (1398) falling about 2%. KGI Research
Quotable: "As we discussed earlier, 22,800 was a major technical resistance. So, if we cannot see a breakthrough in near term, we may see a deep correction." Core acific Yamaichi. 8-2-2011
Chinese Company to Watch: "PING AN (02318) Its non-life insurance business perform well. Share price dropped to recent low level." KGI Asia. 8-2-2011
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN
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