China Stocks Gain from Lower Inflation

Gene Linn  |

Encouraging news on Chinese inflation helped China stocks post solid gains in Hong Kong Wednesday. However, weak turnover suggested the push from falling inflation is limited, especially with uncertainty still looming over the European debt crisis.

On Wednesday news the Italian prime minister would step down was considered positive, and helped raise the Hang Seng Index 1.7% to 20,014. The index of Chinese companies rose even more, 2.2% to 10,918.

The big news was that China’s consumer price index growth fell from 6.1% in September to 5.5% in October, the third-straight month inflation has dropped from a three-year high in July. The decline was in line with market expectations. The producer price index dropped to a 12-month low of 5.0%, which was slightly better than expected, said BOCOM International head of research Benny Wong. The PPI generally gives an indication of the direction of consumer price movements.

“This gives more leeway to Chinese leaders to ease monetary policy,” Wong said. “We’re still bearish in the longer term, but we think China stocks may stabilize in the next two months and maybe go up a little.”

The biggest winners among China stocks will be those aided by changes in government policies, he told Equities. Banks, insurance companies and steel producers will probably be in that group, according to Wong, and energy companies could gain from possible relaxation of price controls in China. End


Hong Kong Blue Chips: +336, +1.7%, to 20,014, 11-09-11, Hang Seng Index

Chinese Stocks in Hong Kong: +232, +2.2% to 10,918, 11-09-11, HSCE Index

Shanghai Stocks: +0.8%, 2,525 11-09-11, Shanghai Composite Index.

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Chinese Stocks in the U.S.: +2.9, to 399.2, 11-08-11, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips rose to a high of 20,173 on the improved political situation in debt-ridden Italy and on gains in the U.S., but fell back from the 100-day moving average to end at 20,014. The rising price of oil helped oil producers: CNOOC (CEO) gained 4.0%.KGI Research

Quotable: "China’s central bank issued RMB10bn 1-year notes yesterday at interest rate of 3.5733% that declined for the first time in 28 months reflecting a sign of credit loosening." Guoco International. 11-9-11

As investors became more cautious on the market outlook, HK market became see-sawing. When HSI traded near 20,000, the steam for breaking resistance had gone and it closed near the day’s low to form a “dark candle” yesterday. The “dark candle” is technically bearish." Core Pacific Yamaichi. 11-08-11

Chinese Company to Watch: Guangdong Investment (0270.HK) "Being its earnings mainstay and cash cow, the water distribution business accounts for three-fifth of the company’s recurring earnings, among which water sales to Hong Kong accounts for a lion share 80% of the division’s revenue. Given nearly half of the operating cost for the business is amortization expense,...we expect the tariff hike will further boast the profitability of this highly profitable business, which boasts a lucrative perating margin of about 60%. Regent Manner (1997.HK) "We currently maintain our forecast unchanged. We still like RMIH on its high dividend yield, ROE, competitive advantages and strong market position." BOCOM International. 11-8-11

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