China Stocks' Consolidation May Ease by Month's End

Gene Linn |

China Stock Market Trading FloorMonday’s wimpy performance by the Hong Kong market confirmed that China stocks are deep in consolidation. But there is some hope for a modest rebound in a couple of weeks.

Hong Kong blue chips slid 0.3% Monday in extremely light trading. The index of Chinese companies and the Shanghai Composite Index edged lower. Hong Kong’s RSI reading fell below 50%, indicating that some time will be needed for the market to regain upward momentum, according to Core Pacific Yamaichi’s market wrapup.

But that time period may not be very long. Two big drags on global stocks are uncertainties about the U.S. raising its debt ceiling and concerning the European debt crisis. It’s widely expected the U.S. debt drama will play out until near the August 2 deadline for default, but that in the end President Obama and the Republicans in Congress will raise the debt ceiling to avoid the unthinkable.

That means one big uncertainty should be lifted in about two weeks. Meanwhile, the fact that Italy passed austerity plans over the past weekend should ease worry about default in that country.

Certainly there will still be headwinds even if U.S. and European default pressures ease. Stubborn Chinese inflation and continued economic tightening is the strongest. But the market generally thinks inflation is at or near its peak and an end to tightening is insight. CCB International asserted in a research piece that aside from skyrocketing pork prices, China’s CPI is showing signs of stabilizing.

News late last week that China might extend property restrictions to second- and third-tier cities hit property stocks. But with the rate of growth of property prices slowing, the effect may be only for the short term.

Add the fact that Hong Kong and the U.S. may well soon enjoy a string of encouraging corporate results, and the stage would be set for a bit of a rally. Even at this point good news can boost individual stocks. The Agricultural Bank of China (1288), for example, gained almost 3% Monday when it was announced major investors would not reduce their holdings in the short term, according to KGI Research.  End

DAILY FIX --  China Property Restrictions Hit Home

Hong Kong Blue Chips: +71, -0.3%, to 21,805, 07-18-11, Hang Seng Index

Chinese Stocks in Hong Kong: -8, -0.06% to 12,258, 07-18-11, HSCE Index

Shanghai Stocks: -0.1%, 2,817, 07-18-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +5.2 to 435.1, 07-15-11, Bank of New York Mellon, ADR Index-China

Insight: Uncertainty over U.S. and European debt problems, along with tighening in the Chinese property market, pushed Hong Kong slightly lower in very weak turnover. Late last week China announced that property restrictions would remain in large cities and may spread to second- and third-tier cities. KGI Research

Quotable: "Looking ahead, market sentiment will very much depend on July HSBC Services Purchasing Managers Index for

China (June: 50.1) which will be due next Thursday and the development of European debt crisis and the US

debt ceiling argument. The Hang Seng Index is expected to find support at 21,500 mark in the near term." BEA Securities. 7-15-2011

Chinese Company to Watch: "Northeast Electric (00042) is one of the major suppliers of power transmission and HVDC equipments in China.... Currently, the Company covers more than 90% of the domestic market and actively expands to oversea markets. More, we believe that the coming “smart grid project” will serve as a new growth point for the Company’s business." CFSG. 7-15-2011

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
AVH Avianca Holdings S.A. American Depositary Shares ( 9.20 0.33 3.72 222,040

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