Action on Thursday by major central banks to add liquidity to aid struggling European banks helped push the Hang Seng Index of blue chip Hong Kong stocks 5.6% higher. The gain was only 0.2% Friday, but for the week the Hang Seng gained 7.6%, 1,351 points, to 19,040. Aided by a cut Chinese banks’ required reserve ratios, the index of Chinese companies surged 10.2%, 955 points, to 10,351.
China stocks in Hong Kong and the U.S., like other global counters, have been on a roller coaster with ups and downs largely determined by news about the European debt crisis. Optimism about an “ultimate solution” fueled a big rally in October. After pessimism returned, the Hang Seng dived 11.6% in the first three months of November.
There are two things different about this rally, according to Peter So, Managing Director and co-head of research at CCB International. For one thing, in addition to renewed optimism about Europe, China stocks are primed for an increase because they are oversold.
More important for the longer term is that the RRR cut on Thursday was most likely the first of a series of credit loosening measures.
“We expect in the short term there will be a consolidation after the sharp rise,” So told Equities, “but China’s action to increase liquidity will continue in coming months. For example, we expect in January there will be another RRR cut that will increase liquidity and drive stocks higher.”
Banks should be a major beneficiary of improved liquidity, So said. CCB International is the brokerage arm of big Chinese bank CCB (CICHY). He likes the Agricultural Bank of China (ACGBY). Oversold properties like China Resources Land (CRBJY) should also rally, he said, and brokerages such as CITIC Securities (6030.HK) will rise along with the Chinese stock market.
Hong Kong Blue Chips: +38, +0.2%, to 19,040, 12-2-11, Hang Seng Index
Chinese Stocks in Hong Kong: +69, +0.7% to 10,351, 12-2-11, HSCE Index
Shanghai Stocks: -1.1%, 2,361, 12-2-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +0.06, to 383.8, 12-1-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips consolidated at the 19,000 level after Thursday's whopping gain, and turnover fell. Hop Hing (0047.HK) surged 59% after it resumed trading on news it had acquired the restaurant chains in China of Dairy Queen and Yoshinoya. KGI Research
Quotable: "The valuation of Hong Kong market has been in line with the monetary policy in mainland since 2003. Due to this positive correlation, we expect that the monetary easing and the moderate increase in money supply will benefit the Hong Kong market and stimulate its valuation to rise." Haitong Securities. 12-2-11
Chinese Company to Watch: We maintain our overweight view on the cement sector, reiterating our “Strong Buy” ratings for China National Building Material Co (CBUMY), China Resources Cement Holdings (CARCY), and China Shanshui Cement Group (691 HK),..." Haitong Securities. 12-2-11
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN
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