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China Stocks Extend Their Retreat

China stocks continued to pull back Thursday, dragged down by concern over the European debt crisis and China’s economy and monetary policy.Hong Kong’s Hang Seng Index sank 1.8% to 17,983, and

China stocks continued to pull back Thursday, dragged down by concern over the European debt crisis and China’s economy and monetary policy.

Hong Kong’s Hang Seng Index sank 1.8% to 17,983, and the index of Chinese companies fell 2.7% to 9,197. The Hang Seng has dropped 4.6% since Monday. Turnover during the slide has been weak and fell further on Thursday, indicating many investors are staying on the sidelines.

The main reason for the retreat is worry that Europe might not reach a comprehensive agreement in the near term to solve its debt problems, according to Ben Kwong, chief operating officer of KGI Asia. Optimism about a solution was pushed back by comments by the German finance minister early this week.

The second biggest reason, Kwong told Equities in an email, was that China’s economic growth continues to slow, but there is little hope of a loosening of its tight credit policies in the near term. Recent economic figures showed reduced growth in China’s GDP and exports. Although inflation edged lower, it was still high at 6.1% for September.

Number three on Kwong’s list was profit taking. The Hang Seng surged 16% higher between October 4 and October 17. Thursday’s decline took the Index below its 10-day moving average of 18,000, but so far it remains above the mid-way point of the surge, about 17,600.

“…( B)uying interest turned back to defensive plays like telecom ( and) utilities in the past few trading days as investors prefer to lower … risk exposure with anticipated market retreat,” Kwong said.

It should be noted that all three reasons for the recent decline are short term concerns. News from European debt and the Chinese economy could get worse. But good news might come from Europe within a few weeks, and analysts expect substantial declines In Chinese inflation by the end of the year. In other words, with the likelihood of alternating good and bad news, buckle up for more volatility. End

DAILY FIX — Lower in Cautious Trading

Hong Kong Blue Chips: -326, -1.8%, to 17,983, 10-20-11, Hang Seng Index

Chinese Stocks in Hong Kong: -252, -2.7% to 9,197, 10-20-11, HSCE Index

Shanghai Stocks: -2.7%, 2,331, 10-20-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -7.9, to 363.6, 10-18-11, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong followed U.S. markets lower in very thin turnover, slipping below its 10-day moving average. A plunge in polysilicon prices drove GCL Poly Energy (GCLPY) down 6%. KGI Research

Quotable: “We are cautious about stock market outlook in coming two weeks and expect the Hang Seng Index to close below 18,000 by end-October.” Guoco Capital. 10-19-11

Chinese Company to Watch: Shanghai Electric (SIELY) “While the counter already registered 11% price gain since our latest in-depth report released on 27 September, we reiterate our Strong Buy rating and maintain our 12-month SOTP-based target price of HK$3.90, implying a 26% upside from the current level.” Haitong Secutities. 10-20-11

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

Copper, base metals, and industrial commodities face bearish technical trends, but the fundamentals remain bullish.