Banks and telecoms could lead China stocks higher after two weeks of staggering losses, but any gains aren’t likely to be nearly as dramatic as the wild ride down.

“Hong Kong is in an oversold situation, and that could lead to a rebound,” said Castor Pang, head of research at Core Pacific Yamaichi. He sees an upside of less than 5% to 20,500 for the blue-chip Hang Seng Index.

Chinese banks should lead the way, he said. One reason is that after recent losses, their valuation is attractive. In addition, investors are not as worried now that overseas strategic shareholders in the banks will unload huge amounts of shares on the open market. That is because of news this week that Bank of America would sell stock in China Construction Bank (CCB) to Middle East interests. “There is no fear now the shares will go directly to the market,” Pang said.

He favors the big banks: CCB, ICBC, BOC and the Agricultural Bank of China (ABC). One reason is that they have healthy capital adequacy ratios and probably will not have to raise funds on the market.

Telecoms is another good-looking sector, according to Pang. It has outperformed the market recently, and giant China Mobile is rising on rumors it will get distribution rights in China for the iPhone.

But even gains for banks and telecoms won’t make up for recent huge losses.

The blue-chip Hang Seng Index closed this week with a loss of 6.3%, 1,326 points, at 19,620. That is after dropping 6.7% the previous week. The index of Chinese companies ended off 6.8%, 782 points, at 10,453 on the heels of a 7.6% loss.

China stocks have lurched downward with gut-wrenching volatility as global markets reacted to U.S. and European debt and economic woes. Friday was one of the few recent days that ended little changed, but trading still went through a hugh swing: The Hang Seng opened 361 points higher but finished up only 25.

Volatility won’t disappear next week but if Pang is right, China stocks are likely to end the run of steep losses. End

DAILY FIX — Gains Erode

Hong Kong Blue Chips: +25, +0.1%, to 19,620, 08-12-11, Hang Seng Index

Chinese Stocks in Hong Kong: -50, -0.5% to 10,453, 08-12-11, HSCE Index

Shanghai Stocks: +0.4%, 2,593, 08-12-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +18,3 to 394.9, 08-11-2011, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips opened 361 points higher following big gains in the U.S. but finshed up only 25 points. China aviation stocks rose 2-3% due to appreciation of the Chinese currency. KGI Research

Quotable: “We believe CPI peaked in 2011 and will begin to taper off in August given that all the major food drivers, including pork and egg prices growth, have decelerated.” CCB International. 8-11-2011

Chinese Company to Watch: Gold and copper producer Zijin Mining (2899). “Upgrade to BUY on cheap valuation and in-line interim results.” Guoco Capital. 8-11-2011

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 http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN