Investors got a tantalizing view of the future and a large helping of the not-so-exciting present within the last week. After weeks of losses, last Friday the index of Chinese stocks in Hong Kong rocketed up 3.1% in heavy trading after Chinese Premier Wen Jiabao declared inflation would definitely come under control this year.
Since then Hong Kong gains have slumped and turnover has tanked. On Wednesday sinking China plays wiped out a gain of 160 points in the Hong Kong blue chip index on fears of an imminent Chinese inflation-fighting interest rate hike. The drop came despite solid gains in Chinese stocks traded in the U.S. overnight and a rally on Wall Street.
The return to weak stocks prices and puny turnover is a reminder of the overriding importance of a continuing rise in Chinese inflation and the on-going threat of more economic tightening.
Last Friday’s stunning rise most likely is a taste of the substantial and sustained rally China stocks will enjoy when it becomes clear inflation is under control. Premier Wen’s assertions got investors excited, but they want real evidence.
Just when that evidence will emerge is the multi-billion dollar question. One pretty sure bet is it won’t be right away.
Most analysts think China’s June inflation rate will rise, probably to about 6%. But there are indications it could be a bit higher. BOCOM International’s website noted that on Tuesday the issuance rate of one-year bills in China jumped 9.6 basis points, and have risen a total of 19.2 basis points recently.
The increases caused BOCOM to raise its estimate of June Chinese inflation to 6.4% and to predict an imminent increase in Chinese interest rates. End
DAILY FIX -- Interest Rate Hike Blues
Hong Kong Blue Chips: -0.6, -0.0%, to 22,062, 06-29-11, Hang Seng Index
Chinese Stocks in Hong Kong: -82, -0.7% to 12,405, 06-29-11, HSCE Index
Shanghai Stocks: -1.1%, 2,728, 06-29-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +5.3 to 425.9, 06-28-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips rose as much as 160 points in early trading following a rally on Wall Street overnight. But they last all gains when expectations of a Chinese interest rate hike pushed down A shares in China. Recently listed Prada continued to rise, lifting other handbag retailers such as Milan Station (1150). KGI Research
Quotable: Local government bonds to help fund security housing. "Key implications. The move also indicates that China may cease the issue of further tightening policies, unless unacceptable housing prices are recorded." CCB International. 6-27-2011
Chinese Company to Watch: Tele-media service company Vodone (0082) "We believe that the current valuation is attractive as the stock price has undergone a sufficient downward adjustment."
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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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