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China Stocks Rally on Shaky Ground

It really has been a new year for China stocks – so far. After tumbling 20 percent in 2011, the Hang Seng Index at the gateway Hong Kong market has already added 8.2 percent.The Hang Seng rose

It really has been a new year for China stocks – so far. After tumbling 20 percent in 2011, the Hang Seng Index at the gateway Hong Kong market has already added 8.2 percent.

The Hang Seng rose 1.3 percent Thursday to 19,943, and the index of Chinese companies climbed 1.7 percent to 11,138. Turnover the last two days almost doubled the anemic levels in late 2011.

China stocks may go higher Friday as fund managers buy ahead of the long Chinese New Year holiday, according to Benny Wong, head of research at BOCOM International. The holiday itself is next Monday: Hong Kong will close Monday through Wednesday, and Shanghai will shut down all of next week.

But after the holiday the market should be flat or slightly down, he said. One reason the 2012 rally might stall is that optimism about a Chinese monetary loosening looks overdone, Wong told Equities in an email.

The bank analyst for BOCOM International, the brokerage arm of the Chinese Bank of Communications, recently returned from a visit with China’s Central Bank with the prediction that new bank loans in 2012 would rise but significantly less than the general expectation.

Retrained credit loosening would be good long-term strategy to clear economic bubbles, Wong said, but would be bad for the market in the medium term.

Another potential barrier to continuation of the 2012 rally sounds familiar – the European debt crisis. There is uncertainty that long-term European bonds will be as well supported as recent auctions of short-term bonds.

Wong also said that Greece may default as early as late February. He said that this is “already expected by the market but if it turns out to be a disorderly default, the whole world will be in trouble.”

The current rally has not changed Wong’s sobering view of 2012: It will be hard to get a bull market started; the market will range-trade; and if there is unexpected bad news, the market could plunge substantially. End


Hong Kong Blue Chips: +256, +1.3%, to 19,994, 1-19-12, Hang Seng Index

Chinese Stocks in Hong Kong: +186, +1.7% to 11,138, 1-19-12, HSCE Index

Shanghai Stocks: -+1.3%, 2,298, 01-19-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: +4.8, 391.5, 01-18-12, Bank of New York Mellon, ADR Index-China

Insight: Strength in U.S. and Chinese markets helped Hong Kong post solid increases in active trading. Oil producer CNOOC (CEO) dropped 1.9 percent after revealing its operation plan for 2012. KGI Asia. 1-19-12

Quotable: “We reiterate our view that Hong Kong’s stock market will face a great challenge in February and March given a huge debt refinancing pressure for euro zone countries. Short-term investors should consider taking profit on large caps when the Hang Seng Index is close to 20,000.” Guoco Capital. 1-19-12

Chinese Company to Watch: “Coupled with strong oil price and resumption of production for Penglai 19-3 in 3Q12, we maintain our target price of $17.20, based on 9x 2012 PER which represents a discount of 20% to the long term average PER of 11.8X.” Guoco Capita. 1-19-12

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

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.