China Stocks' Big Gain Not Likely to Continue

Gene Linn |

hong kong china stocksChinese stocks enjoyed a sharp, unexpected rise Tuesday as the A-share market ended an eight-day losing streak with a vigorous rally.  Long-term prospects, after inflation is quelled, still look bright. However, gains in the next couple of months may be limited.

That is partly because China stocks appear to be in a lose-lose trap. A retreat in Chinese economic growth is essential to subdue inflation and pave the way for a stocks rally. But instead of being an encouraging sign, slowing growth batters stocks.

Of course one reason is that lower expansion generally hurts the bottom line of listed companies. There is also nagging worry that reduced economic growth will not cure inflation. That would leave China with a case of the dreaded disease, stagflation.

Thus success of interest rate cuts and other inflation-fighting measures does not seem like a success to investors. In China, A shares fell eight-straight days through Monday, including last week’s 5.2% drop, the largest weekly decline in 11 months. The fall came because “investors remained concerned that tightening measures are slowing the world's second-biggest economy,” according to Core Pacific Yamaichi.

Some analysts, such as those at CCB International, tout the retreating growth in Chinese manufacturing and other areas as necessary to bring an end to inflation closer. But it looks like the market won’t find good news on inflation until the actual index turns decisively lower.

That will not be for a couple of months, maybe longer. Meanwhile, despite Tuesday big gains, Chinese stocks sold in Hong Kong and the U.S. will mostly continue to trade in a narrow range in anemic turnover.

DAILY FIX

Hong Kong Blue Chips: +500, +2.2%, to 23,684, 05-31-11, Heng Seng Index

Chinese Stocks in Hong Kong: +264, +2.0% to 13,268, 05-31-11, HSCE Index

Chinese Stocks in the U.S.: +6.8 to 435.8, 05-27-11, Bank of New York Mellon, ADR Index-China

Insight: China's A-shares ended an 8-day losing streak with a strong rally, helping drive Hong Kong stocks sharply higher as turnover soared. China's announcement it would allow electricity rates to rise boosted coal and power companies: Yanzhou (1171) +4.7%. KGI Research

Quotable: "After HSI hitting the bottom last Wednesday, there were several technical signals in the market including single-day reversal, rising gap and improving turnover. So, it is possible to end the correction at 22,520 last Wednesday. However, the overall turnover is not large enough to keep the market momentum and there are quite a lot of uncertainties in the market. So, we expect that the market may rebound to 23,500." Core Pacific Yamaichi. 5-30-2011

Chinese Company to Watch: China Oversea. property developer (688). "Technical support on HK$15 is very strong as MAs cross together; valuation at this level is relative attractive." Core Pacific Yamaichi. 5-30-2011

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

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. 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: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SHI SINOPEC Shangai Petrochemical Company Ltd. 50.93 0.35 0.69 5,532

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