European debt plays such a powerful role in fueling current global market volatility, it’s almost easy to forget there are differences between stocks in companies in China and those in the U.S. or Europe. And those differences may make China stocks comparatively attractive in coming months.
That would be a turnaround from late 2010 and most of this year, when inflation-fighting credit tightening in China caused stocks in China and Hong Kong to underperform.
But CCB International, the brokerage arm of the huge China Construction Bank, sees better days ahead as China reacts to growing economic uncertainty in Europe and to falling inflation in China.
“China’s economic policies will be more accommodating in 2012 than they were in 2011…,” the brokerage said in its websites market comment last Friday. Accommodations include;
*Selective credit easing for troubled small and medium-sized enterprises and target sectors such as environmental protection companies.
*A general “macro loosening” starting with a reduction in banks’ reserve requirements in December after the release of November inflation figures.
*Fiscal stimulus to mitigate the drop in external demand, especially in Europe, which is China’s biggest market. CCB International says China has room to pump more money into the economy as its deficit as a percentage of GDP is under 3%, compared to 10% in the U.S. and 6% in Europe.
*More bank lending, especially for small and medium enterprises. We expect new bank loans to grow 15.7%, from RMB7.5t by end-2011 to RMB8.7t in 2012,” CCB International said.
And for good measure, the brokerage forecasts the RMB will continue to appreciate by about 3% in 2012.
It should be noted that these positive developments do not represent a massive stimulus program like the one in 2008 and 2009 during the global financial crisis. China has to be careful not to re-ignite inflation stoked by that stimulus package. And China stocks cannot escape the effects of Europe’s debt crisis and the weak economy in the U.S.
But a loosening of credit will probably support China stocks in late 2011 and in 2012. The index of Chinese companies in Hong Kong will likely outperform the broader Hang Seng Index, according to Peter So, managing director and co-head of research at CCB International.
He told Equities that among the sectors to watch are cement producers, railway plays, construction machinery companies and some “strategic” industries like new materials and information technology.
So mentioned two attractive companies: environmental protection play China Metal Recycling (0773.HK), and cement and new materials producer Anhui Conch (AHCHY). End
Hong Kong Blue Chips: -165, -0.8%, to 19,678, 11-07-11, Hang Seng Index
Chinese Stocks in Hong Kong: -59, -0.6% to 10,647, 11-07-11, HSCE Index
Shanghai Stocks: -0.7%, 2,510 11-07-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -0.2, to 392.4, 11-4-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong followed other Asian markets in opening lower partly due to a lack of positive news on European debt from the G20 meeting. Chinese Premier Wen Jiabao said credit tightening in the property market would continue, which pushed stocks in China and Hong Kong down. Turnover was very low, indicating many investors stayed on the sidelines. Chinese banks were mixed. CCB (CICHY) dropped 2.9% due to rumors the Bank of America would sell shares in CCB. KGI Research
Quotable: "For the coming week, investors may keep close eyes on whether global leaders from G20 would join hands to contain the European debt crisis from hurting the global economic recovery. Besides, investors will also look to the Chinese October CPI, which is due to be released on November 9. China’s consumer prices are expected to grow by 5.5% y-o-y in October, down from 6.1% in September on stabilising food prices."BEA Securities. 11-4-11
Chinese Company to Watch: "Sinopec Yizheng Chemical (1033.HK) manufactures a variety of polyester and fibers products. From the peak in February 2011, it has dropped by as much as 71% and is now still 57% below the peak." Guoco Capital. 11-7-11
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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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