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China Stocks Sink Despite Big Drop in Inflation

Excellent news on Chinese inflation Friday failed to rescue China stocks from a substantial loss for the day and a down week. Next week the hope is that selected sectors will rally.Inflation has

Excellent news on Chinese inflation Friday failed to rescue China stocks from a substantial loss for the day and a down week. Next week the hope is that selected sectors will rally.

Inflation has been a big concern for China stocks investors all year, and that concern eased considerably when China announced consumer price rises in November fell to 4.2%. That is well under the 5.5% figure in October and below market expectations. Producer price increases dropped even more, from 5.0% in October to 2.7% in November.

Steep declines in inflation plus gradual slowing of economic growth – November industrial output growth fell slightly – give China room to loosen its tight money policies.

Still, the Hang Seng Index in Hong Kong sank 2.7% Friday to 18,586, and the index of Chinese companies plunged 3.2% to 10,067. For the week the Hang Seng fell 2.4%, and the Chinese companies index retreated 2.7%.

The decline Friday eroded huge gains from late last week and early this week based largely on optimism Europe was getting closer to resolving its debt crisis. Optimism took a hit the last two days as European financial and political institutions failed to take steps to meet the debt challenge.

There is a ray of hope for China stocks. Good news is likely to come out of the Chinese central government economic summit next Monday through Wednesday.

“We believe that the recent economic data (weak PMI and easning inflation pressure) would trigger government to do more on fiscal policy to boost the economy,” KGI Asia chief operating officer Ben Kwong told Equities in an email.

“We believe [the] market next week will shift to policy friendly plays.“

Overall monetary policy is not likely to change much in the short term, Kwong said, because of worry that Europe might loosen credit, which would boost inflation. But the Chinese government will probably target tax and other incentives to certain industries.

“Hence, we expect those policy friendly plays like consumption, agriculture, water treatment and clean energy plays to perform better next week,” Kwong said. End


Hong Kong Blue Chips: -522, -2.7%, to 18,586, 12-9-11, Hang Seng Index

Chinese Stocks in Hong Kong: -329, -3.2% to 10,067, 12-9-11, HSCE Index

Shanghai Stocks: -0.6%, 2,315, 12-9-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -9.3, to 370.7, 12-8-11, Bank of New York Mellon, ADR Index-China

Insight: China stocks in Hng Kong fell sharply after the European Central Bank failed to expand its sovereign debt purchase plan, despite encouraging news of large drop in Chinese inflation. Chinese banks slumped: ICBC (FXI) -4.1%. Auto producers fell after China announced declines in car production and sales in November: Great Wall Motors (GWLLY) -4.6%. KGI Research

Quotable: “Next week direction will hinge on the results of the EU summit.” BOCOM International. 12-9-11

Chinese Company to Watch: “With its comparative advantages over HK-listed gold mining peers and the better resilience of gold than base metals, we consider Zhaojin Mining (1818.HK) a good defensive play.” BOCOM International. 12-9-11

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