China Stocks Face Headwinds in Short Term

Gene Linn  |

Good news on the European debt- front helped China stocks close higher Tuesday, although they still face some medium-term headwinds.

After Monday’s decline the Hang Seng Index in Hong Kong opened strongly on a rebound in Shanghai and Shenzhen and after Wall Street stabilized to erase most of its early losses. The Hang Seng struggled in the early afternoon but recovered most early gains on news Greece was making progress in negotiations with debt-holders.

The Index added 1.1% to close at 20,390, and the index of Chinese companies gained 1.4% to 11,299. Turnover rose to near the year-high.

But further short-term gains may be hard to come by. For one thing most analysts say that the sharp early 2012 rally pushed the market into overbought territory.

And then there’s the prospect of a continued decline in China’s growth rate. A lower-than expected drop in Chinese GDP growth from 9.1% in the third quarter of 2011 to 8.9% in the final quarter actually gave Chinese stocks a substantial boost in mid-January.

But many observers think a bigger decline is coming in this quarter, as weakness in the European economy hurts Chinese exports and China’s tight money policy of most of 2011 continues to bite. CCB International, the brokerage arm of the huge China Construction Bank, predicts first quarter 2012 growth will fall to 7.5%.

The question for China stocks is whether the good news of  new credit-loosening measures will overcome news of falling GDP growth. Peter So, managing director and co-head of research at CCB International, told Equities he expects a cut in Chinese banks’ required reserve ratio in February.

For the longer term, So thinks new loose-money policies will lift China’s 2012 GDP growth to 8.5%. Because of this rebound, he predicts the Hang Seng will hit a high of 25,000 in 2012.

That would be a significant rise of 22.6% from Tuesday’s close. But So said the 25,000 goal is conservative, based on a 2012 PE of 12 compared to the historical level of about 15. End


Hong Kong Blue Chips: +230, +1.1%, to 20,390, 1-31-12, Hang Seng Index

Chinese Stocks in Hong Kong: +153, +1.4%, to 11,299, 1-31-12, HSCE Index

Shanghai Stocks: +0.3% to 2,293, 01-31-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: -6.2, 396.5, 01-30-12, Bank of New York Mellon, ADR Index-China

Insight: China stocks made up much of Monday's decline as Mainland and foreign markets showed some strength and good news emerged about the debt crisis in Greece.

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Quotable: "Short-selling turnover for blue-chips also climbed to HK$3.1bn, accounting for 12.3% of blue-chips turnover. The figures for short-selling activities showed that the market rebound was likely the end. Investors’ confidence turned weak towards the current market sentiment." Core Pacific Yamaichi. 1-31-12

Chinese Company to Watch: ICBC (FXI) "After 9-day RSI has hit over 80, share price declined yesterday.... SELL with half of the normal position size." Guoco Capital. 1-31-12

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

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of 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:

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