A rebound in China stocks later this year is still in the cards despite Wednesday’s high inflation figure, according to a top analyst. “First the (Chinese) interest rate will increase …, then sentiment will improve when we see the CPI start to slow down, and investors will take this as positive news,” said Peter So, head of research at CCB International Securities.
For the short term, though, investor reaction to China’s latest inflation figure was less than inspiring. Hong Kong blue chips stocks initial 170-point gain reversed to a 44-point loss after the statistics came out. The Shanghai Composite Index fell 0.3% for the day because, according to Core Pacific Yamaichi Securities, “higher-than-expected inflation data renewed concerns about further tightening measures.”
But for the long term CCB International thinks China’s growth momentum is slowing, taking some steam out of inflation increases. The Hong Kong subsidiary of giant China Construction Bank points out growth in industrial output, domestic consumption and imports all slowed in the April statistics announced with the inflation figure.
Not that the rise in inflation is over. From the 5.3% figure for April, So expects inflation to peak at 6.2% to 6.3% before gradually declining.
The biggest worry overhanging China stocks now is the prospect of another interest rate hike. So expects a rate increase, but only one more in the fight on inflation. And he thinks it will be a relatively small increase of 25 basis points.
There will be no more need to raise rates, he said, “because inflation will peak and there is a lot of cumulative effect from previous actions to slow inflation.”
In the meantime, according to So, Chinese banks will do well. The consumer sector will also improve as people gain more confidence in the economy. End
Hong Kong Blue Chips: -218, -0.9%, to 23,074, 05-12-11, Heng Seng Index
Chinese Stocks in Hong Kong: -166, -1.3% to 12,796, 05-12-11, HSCE Index
Chinese Stocks in the U.S.: -7.7 to 438.2, 05-11-11, Bank of New York Mellon, ADR Index-China
Insight: Blue chips plunged more than 300 points after Wall Street's big drop, but found support at the day-low of 22,986. Chinese commodities producers tumbled due to lower commodity prices. KGI Research
Quotable: "While the HSI might report slight gains or losses in tandem with external markets, its shortterm resistance is at 24000pts. Therefore, we suggest investors to adopt wait-andsee attitude until the market could break away from the weak performance." BOCOM International. 5-9-2011
Chinese Company to Watch: "DCH HOLDINGS (01828) Auto revenue increase will lift its earnings growth. Prospective P/E of 12.7x. 9.50 8.00." KGI Asia. 5-12-2011
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