China Stocks Rally Fades Out

Gene Linn  |

It was nice while it lasted. China stocks bounced from year-lows Monday to a solid gain Tuesday, and blue chips in Hong Kong rose past the 22,000 level in early trading Wednesday. But profit taking after the modest gains caused blue chips and China stocks in Hong Kong to end almost unchanged, according to KGI Asia.

Eric Yuen, head of research at Guoco Capital, told Equities there is a laundry list of negatives working against any sustained rebound. Near the top of the list is the expectation of a Chinese interest rate increase this weekend. Chinese authorities are probably waiting for the U.S. Federal Reserve to speak on U.S. interest rates and the economy on Wednesday before making their move in China, he said.

In addition, massive fund raising by Chinese banks will drain liquidity from the market, according to Yuen. He cited reports that Bank of America (BAC) would sell about HK$84 billion of its stake in the China Construction Bank (CCB). (US$1.00 equals HK$7.80.)  China Merchants Bank, pinched by China’s stricter capital reserve requirements, is to raise about HK$60 billion in a rights issue.

China’s national social security fund sold part of its holdings in the Bank of China last week. “Investors are quite sensitive to moves by the national social security fund because they think the fund has inside information,” Yuen said.

He pointed out that all the fund raising was one reason Chinese banking stocks slipped in Hong Kong Tuesday despite the market’s substantial gains.

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As if all that wasn’t enough to worry about, Yuen said, there are the old standbys – European debt and the end of the U.S. Fed’s second round of monetary easing this month.

“Investors are nervous about the global economy,” he said. “There won’t be any meaningful rally until maybe July, when we have a better picture of the economy.”

DAILY FIX --  Profit-taking erodes gains; housing, cement stocks higher

Hong Kong Blue Chips: +9, +0.04%, to 21,860, 06-22-11, Hang Seng Index

Chinese Stocks in Hong Kong: +0, +0.0% to 12,149, 06-22-11, HSCE Index

Shanghai Stocks: +0.1%, 2,649, 06-22-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +9.8 to 419.7, 06-21-11, Bank of New York Mellon, ADR Index-China

Insight: Gains overnight by local stocks listed in the U.S. pushed the blue-chip index above 22,000 in the morning, but profit-taking eroded almost all the rise. China will allow local governments to issue debt to issue debt to build social housing, boosting housing and cement stocks: CNBM (3323) +7.0%. KGI Research

Quotable: "Short-selling turnover decreased to HK$5.1bn (Tuesday) and accounted for 7.3% of total turnover. It showed that institutional investors were more reluctant to sell short the blue chips." Core Pacific Yamaichi. 6-22-2011

Chinese Company to Watch: Retailer, Department Store operator, 1212. "Lifestyle’s self-owned business model will continue to give it an advantage against rental increases. We have upgraded our target price to $21.31 based on a forward FY11 P/E of 24x." Haitong Securities. 6-21-2011

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

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