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China Stocks Retreat from Strong Rally

The specter of stubbornly high Chinese inflation helped put a disappointing end to a promising rally this week.Strong gains through Thursday morning still allowed the Hang Seng Index to end the

The specter of stubbornly high Chinese inflation helped put a disappointing end to a promising rally this week.

Strong gains through Thursday morning still allowed the Hang Seng Index to end the week up 3.2%, 630 points, to 20,213. The index of Chinese companies gained 3.5%, 364 points, to 10,664.

The trigger for the late swoon was substantial profit-taking that emerged when the Hang Seng approached the formidable 21,000 resistance level Thursday morning. In addition, the usual suspects from both China and overseas started to weigh on the market.

Growing Chinese inflation has restrained the Hong Kong market all year. Most analysts expect some relief from rising Chinese prices: BOCOM International predicts August CPI will fall to 6.1% from 6.5% in July. But easing of inflation may not come as soon as expected.

Haitong Securities noted in its Thursday market review: “Premier Wen Jiabao stated yesterday that the country’s top priority is to stabilize consumer prices and the government doesn’t plan to alter the direction of economic policies. This implied that inflation is much higher than the government’s target; the monetary tightening measures will continue to be released.”

And BOCOM International reported Friday that China’s purchasing price index had rebounded 0.9 percentage points higher, “hinting that inflation may remain as the top priority for the government.”

Overseas, prospects of a weakening global economy continued to worry investors. On Thursday weak data from England, France and Italy increased the likelihood of a sagging economy in Europe. Much-anticipated U.S. employment figures to be released Friday as expected to be uninspiring at best.

Looking to next week, it would be a mistake to focus completely on this week’s late slump. The factors that drove the early rally are still around: robust Chinese corporate profits and low stock prices, continued good Chinese economic growth and the prospect of U.S. Federal Reserve monetary easing if the U.S. economy weakens.

If there’s a lull in the wave of bad news, China stocks could rebound to where they were before this week’s late swoon. End

DAILY FIX — Profit-taking Sinks Stocks

Hong Kong Blue Chips: -372, -1.8%, to 20,213, 09-02-11, Hang Seng Index

Chinese Stocks in Hong Kong: -258, -2.4% to 10,664923, 09-02-11, HSCE Index

Shanghai Stocks: -1.1%, 2,528, 09-02-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -4.4 to 404.0. 08-31-2011, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips opened 27 points lower and fell sharply throughout the day to close 372 points lower. Profit-taking after the recent rally and weak European economic statistics helped fuel the decline. Macau gambling plays dropped sharply. KGI Research

Quotable: “Since the market short-selling turnover and blue-chips short-selling turnover surged yesterday (Thursday), it might have implied that the resistance at 21,000 would be very strong, which drove the market to see a correction.” Core Pacific Yamaichi. 9-1-2011

Chinese Company to Watch: “We continue to favour diversified plays like Shanghai Electric (SELY), which remains undervalued in our view trading at FY12 P/E of 11x and P/B of 1.1x, or over 20% discounts to its 5-year historical averages, over power equipment peers with a single major business.” Haitong Securities. 9-1-11

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.

For a list of Chinese companies sold in the U.S. and information on each company go to

Copper, base metals, and industrial commodities face bearish technical trends, but the fundamentals remain bullish.