Buy China Stocks Low, but When?

Gene Linn  |

Two common themes have emerged for struggling Chinese stocks: One, valuations are highly attractive. Secondly, even so there is little hope for a significant rally until China’s inflation problem is tamed or it is clear it will be tamed very soon. Many analysts think that will be in late June or after.

No one knows, though, how low the market will go before the eagerly anticipated rebound. Many, like Bank of East Asia Securities, think the Hong Kong blue-chip index, with its many large Chinese companies, will stay around 23,000. Haitong Securities is one that thinks it will test 21,000.

Trading strategies hinge on who is right. If stocks are going to be stable, investors might as well start selectively scooping up underpriced Chinese stocks. If they are going to fall another 5 to 10%, it’s better to hold off.

I’ve been in the “scooping up” camp (see my blog last Tuesday). But increasingly I’m wondering if good valuation by itself will support prices if there is no prospect of a rebound in the near future. Now, I would say, “Yes.” It just seems there are too many positives for China stocks for them to go into free-fall, even if the positives won’t show for at least a month or so.

Of course overseas developments, especially the worsening European debt crisis, are a wild card. On the China front, I still think it may take longer to quell Chinese inflation than some experts think. But cautious buying still seems like the way to go.

Tune in tomorrow for one expert’s take on what sectors will start heating up soon and why.  End


Hong Kong Blue Chips: +20, +0.1%, to 22,731, 05-24-11, Heng Seng Index

Chinese Stocks in Hong Kong: +57, +0.4% to 12,681, 05-24-11, HSCE Index

Chinese Stocks in the U.S.: -10.6 to 420.7, 05-23-11, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong managed small gains after Monday's steep losses, despite worries over European debt, slowing Chinese manufacturing growth and a drop on Wall Street. Turnover, already weak lately, fell even more due to investor caution. Chinese solar energy companies rebounded from recent losses.

Quotable: "Traded at a forward PER of 12.2x with EPS growth of 19%, current valuation of the Hang Seng Index is attractive for long-term investors." Guoco Capital. 5-24-2011

Chinese Company to Watch: Dongfeng Motor (489) "Current valuation has fully priced in slowdown in earnings but yet to reflect market leader premium. Dongfeng Motor (DMG, 489) is one of the largest automakers in China with market share of 10.8% in 2010 and has a comprehensive product range in both passenger and commercial vehicles." Guoco Capital. 5-24-2011

Brokerages and analysts cited have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don't endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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