China Stocks Search for Support

Gene Linn  |

Support for China stocks is hard to find these days. Hong Kong’s blue chip Hang Seng Index held the 22,800 level Tuesday, which Core Pacific Yamaichi saw as a positive sign, but the index sank to 22,662 Wednesday.

Investors are wary ahead of China’s release of inflation and other economic statistics next week. The statistics will probably present the market with the worst of both worlds: higher inflation and slower economic growth. Yes, slower growth is good if it eventually tames China’s stubborn inflation problem, but it won’t make investors happy in the short term.

CCB International, a subsidiary of China Construction Bank, predicts inflation for May will rise to 5.5% from 5.3% in April and growth in fixed asset investment and industrial production will slow. The brokerage also expects another Chinese interest rate hike in June.

Economic news from the U.S. is not likely to be positive in the short run, especially after Fed Chairman Bernanke acknowledged Tuesday the U.S. was going through a rough patch. As for the European debt crisis, China stocks in Hong Kong have already taken into account a medium-term fix to Greece’s problem with a huge increase early last week.

It seems the last obvious line of defense for now is the attractive valuation of stocks in Hong Kong. P/E numbers are at levels lower than historical norms, and corporate earnings have been brisk. That may help make the eventual rally a strong one. But it may not stop the current bleeding without better news from China or the U.S.

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