China stocks slumped this week in Hong Kong, mainly because rising Italian bond prices threatened to exacerbate Europe’s debt crisis. Problems in Italy apparently receded after Hong Kong closed Friday, but recent history tells us it’s only a matter of time before the eurozone crisis flares up again.

When it does, investors should consider buying Chinese stocks on the downturn, according to Eric Yuen, head of research at Guoco Capital.

This week debt troubles in Italy helped push the Hang Seng Index down more than 1,000 points and 5% on Thursday. For the whole week, the Hang Seng lost 706 points, 3.6%, to close at 19,137. The index of Chinese companies sank 2.4%, 275 points, to 10,430.

It’s probably not by chance that the Chinese company index fared better than the Hang Seng Index, which includes local Hong Kong heavyweights in property and other sectors along with numerous large Chinese companies. Investors favor China stocks because they expect China will start loosening tight credit policies in coming weeks and months, Yuen told Equities.

One reason for the expectation is that China’s stubbornly high inflation is finally coming down. This week China announced inflation had fallen for the third-straight month to 5.5%. The market consensus is price increases will drop further to about 4.5% this month, giving China room to ease credit policies.

China may feel a need to ease those policies because export, retail and fixed investment growth figures released this week were not strong, Yuen said. “To ensure a soft landing the market expects to see some room for China to adjust monetary policy,” he said.

The combination of good prospects for Chinese credit easing and lower stock prices caused by Europe’s debt woes, opens opportunities for investors.

“We see 18,000 (for the Hang Seng) as a good entry point for long-term investors,” Yuen said.

Among the prime targets for investors are big Chinese banks, he said. Especially after substantial losses this week, bank stocks’ value is attractive, and they will certainly gain from looser credit.

Yuen favors the big players, ICBC (FXI) and CCB (CICHY). He said they have a larger deposit base and have less pressure to raise funds because they have stronger capital ratios. End

DAILY FIX

Hong Kong Blue Chips: +173, +0.9%, to 19,137, 11-11-11, Hang Seng Index

Chinese Stocks in Hong Kong: +130, +1.3% to 10,430, 11-11-11, HSCE Index

Shanghai Stocks: +0.06%, 2,481, 11-11-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: n/a, to 387.0, 11-10-11, Bank of New York Mellon, ADR Index-China

Insight: A rebound in U.S. markets helped Hong Kong bounce back from huge losses Thursday, although very thin turnover reflected a lack of momentum. Chinese banks rebounded after the four state-owned banks reported that a surge in lending the last two days of October lifted loan values for the month. KGI Research

Quotable: “We expect that the short-term HSI will be quite weak, and it is not easy to predict the direction of the market. HSI may retreat to the level at 50-day MA to stabilize.” Core Pacific Yamaichi. 11-11-11

Chinese Companies to Watch: China properties. “We reiterate our positive view on big defensive players including CR Land (1109.HK), but remain cautious on developers with high net gearing and high liquidity risk in the current price-cutting environment, especially Greentown China (3900.HK).” CCB International. 11-11-11

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