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China Stocks Face Bleak Near-Term Prospects

China stocks floundered this week in reaction to increased uncertainty over European debt and worry about Chinese monetary policies. And one analyst forecasts more of the same for the next few

China stocks floundered this week in reaction to increased uncertainty over European debt and worry about Chinese monetary policies. And one analyst forecasts more of the same for the next few weeks and possibly into 2012.

Hong Kong’s Hang Seng Index plunged 4.2% Tuesday when optimism over a solution to Europe’s debt crisis faded and the market digested discouraging Chinese economic statistics. For the week the Index sank 2.6%, 476 points, to 18,026. The index of Chinese companies fell 2.8%, 268 points, to 9,220.

Turnover was thin the whole week reflecting investor caution. Volume fell to its lowest level this week on Friday as the market awaited results from a weekend European summit on the debt crisis.

Short-term prospects remain bleak, according to Eric Yuen, head of research at Guoco Capital. He pointed out that late this week short selling accounted for 9-10% of market turnover, well over the historical average of 6-7%. “High short selling indicates poor market sentiment and more downside risk in the near term,” he told Equities.

Adding to the problems for China stocks, Yuen said, is the likelihood big Chinese companies will be announcing relatively weak third quarter results in the coming weeks.

Yuen said a turnaround in the dismal market depends on Chinese macro economic policy, namely a loosening of inflation-fighting tight money measures.

For most of this year, many analysts have predicted falling inflation would allow China to ease interest rates and other tightening policies near the end of this year, sparking a big rally. Yuen, however, thinks the measures may persist into 2012, when a week global economy may compel China to ease credit to support its own economy.

“In the coming two months there’s no point for China to change its macro policy, so the market will continue to feel the effects of the European problems with no positive factors from China,” he said.

The Hang Seng will probably not go below its low of 16,250 on October 4, and will range trade between 17,000 and 20,000, according to Yuen.

The main victims of the weak market will be cyclicals like cement producers, auto makers and port operators, he said. Investors will favor defensive plays like telecoms and utilities.  End

DAILY FIX — Awaiting Direction from European Summit

Hong Kong Blue Chips: +43, +0.2%, to 18,026, 10-21-11, Hang Seng Index

Chinese Stocks in Hong Kong: +23, +0.2% to 9,220, 10-21-11, HSCE Index

Shanghai Stocks: -0.6%, 2,317, 10-21-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -5.7, to 357.7, 10-20-11, Bank of New York Mellon, ADR Index-China

Insight: The Hong Kong market lacked direction and turnover slumped as investors awaited results of a weekend European summit on the region’s debt crisis. China Mobile (CHL) fell 0.9% after announcing that profits fell from the second quarter to the third. Chinese banks rose as authorities allowed some local governments to issue bonds, which should reduce banks’ risks of bad debts. Minsheng Bank (MAKY) gained 3.2%. KGI Research

Quotable: “The first resistance (for the Hang Seng Index) would be 10DMA (18,239), while next resistance would be gap level of 18,676. For support, the first support would be 17,500, while next support would be seen at 6th October gap level of 17,180.” KGI Asia

Chinese Company to Watch: China Resources Gas (1193.HK) “We believe CRG deserves a premium rating due to its strong pipeline of acquisition/asset injections. According to the consensus, the counter is trading at 2011 PER of 16.6x which is similar to sector average. We believe analysts will upgrade earnings forecast and the market has not factored in sufficient premium or future M&A pipeline.” Guoco Capital. 10-20-11

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