China Stocks Not Ready to Break Out -- Yet

Gene Linn  |

Wow. After week after week of boring movements and puny turnover, Chinese stocks broke out on Tuesday. Or did they?

In the last three weeks Hong Kong’s blue chip Hang Seng Index edged up 0.3% after slipping 0.3% and 0.5% and posted low volume figures that sometimes verged on somnolent. Then Tuesday the Hang Seng surged 2.5% and turnover leaped by 52% from the previous week’s average. In Shanghai the bellwether Composite Index jumped 1.3% after eight-straight days of losses.

But don’t get too excited. Eric Yuen, head of research at Guoco Capital, warned, “I consider the rebound in Hong Kong and Shanghai to be technical rather than a change in direction. The key is still Chinese inflation and the slowing (Chinese) economy.”

He noted that early today China announced bank lending in May plunged more than 30% from the previous month. That is the kind of inflation-fighting economic tightening that Yuen thinks will keep a lid on gains for Chinese stocks.

The lid most likely won’t completely come off until after Chinese inflation peaks. Market consensus now is that will be in June or July. Meanwhile, Yuen expects the Hang Seng Index to trade between 22,500 and 24,000 as it has for the last seven or eight months.


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Hong Kong Blue Chips: -58, -0.2%, to 23,626, 06-01-11, Hang Seng Index

Chinese Stocks in Hong Kong: -36, -0.3% to 13,232, 06-01-11, HSCE Index

Shanghai Stocks: +0.0%, 2,744, 06-01-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +9.5 to 4445.3, 05-31-11, Bank of New York Mellon, ADR Index-China

Insight: China stocks consolidated after Tuesday's huge gains, with turnover slipping from high levels. Worry that the Chinese government would curb bank loans pushed banks lower: Agricultural Bank of China (1288) -2.7%. KGI Research

Quotable: "US$ continued its correction with US$ index losing 0.55% as of the close of HK market, as concerns over Greece debt crisis alleviated. A better risk appetite brought back capital to equity and commodity markets." BOCOM International. 6-1-2011

Chinese Company to Watch: "...[S]ome power generators might increase production on higher electricity prices, adding further coal demand. Coal sector is expected to benefit. Share prices of China Shenhua (1088.HK), Yanzhou Coal (1171.HK) and China Coal (1898.HK) jumped 3.2%, 4.67% and 2.94%, respectively." BOCOM International. 6-1-11

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.

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