China stocks continued to struggle Tuesday as European and U.S. leaders made no progress to solving their debt and economic problems. Those problems help make the export-oriented sector of China stocks one of the most vulnerable.
After a sharp drop Monday and two weeks of losses, Hong Kong’s Hang Seng Index ended volatile trading Tuesday with a slight gain, up 0.1% to 18,252. The Index of Chinese stocks edged 0.2% higher to 9,745.
China’s export sector faces a long-term decline, CCB International reported recently in a devastating look at the sector in a report titled, “The Party’s Over for Chinese Exporters.”
The same European debt woes weighing on the market as a whole are particularly tough on exporters, according to CCB International, the brokerage arm of the major Chinese Construction Bank. Europe is China’s biggest trading partner, accounting for 21.7% of total Chinese exports. The brokerage noted “it was a heavy blow when China export growth to Europe fell from 29.6% YoY [year-on-year] in January 2011 to 11.0% YoY in September 2011.”
And Chinese exporters face other serious problems. Sluggish U.S. economic growth is one, as is the gradual appreciation of China’s renminbi currency.
In addition, the small and medium-sized enterprises that make a major share of China’s exports are struggling. CCB International said a recent tour of SMEs in the export center of Wenzhou “reinforces our belief that export-oriented SMEs are hanging by their fingertips amid falling global orders and rising costs, a situation that is unlikely to change in 2012.”
Overall, CCB International expects growth of Chinese exports to slump from 19.5% in 2011 to 5.0% in 2012.
The solution, according for CCB International, is for investors to shun export-oriented stocks. Li & Fung (LFUGY) is particularly vulnerable because it has U.S. exposure of 65% and European exposure of 25%. Esprit (ESPGY) has even more European exposure: 79%.
The brokerage said, “A better investment in our view is Sinopec (SNP) and other Chinese oil refiners, importers of crude oil and thus beneficiaries of falling oil prices.”
Hong Kong Blue Chips: +26, +0.1%, to 18,252, 11-22-11, Hang Seng Index
Chinese Stocks in Hong Kong: +20, +0.2% to 9,745, 11-22-11, HSCE Index
Shanghai Stocks: -0.1%, 2,413, 11-22-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -10.0, to 365.0, 11-21-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong opened higher despite the sharp drop on Wall Street and ended a day of volatile trading with a slight gain. China Unicom reported record growth in new 3G subscribers in the third quarter, but fell 1.9%. KGI Research
Quotable: "However, the short-selling turnover ratio for the blue-chips increased to 20.3% (on Monday) to reflect that investors were pessimistic about the near future." Core Pacific Yamaichi. 11-22-11
Chinese Company to Watch: "...we believe China Mobile’s defensive stemming from its superior profitability and stable track dividend record should be valued amid recent weak market conditions." Guoco Capital. 11-22-11
Digital China (STV) information technology products and services "As we expect the Company’s profit to grow by nearly 20% this year, the current PEG (price/earnings to growth) ratio is far below 1, which indicated that a fair valuation. Investors are advised to bargain hunt for this stock when its price retreats to a lower level." CFSG. 11-18-11
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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
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