China Stocks Take a Step Back from the 'Equity Cliff'

Gene Linn |

China stocks took a step back from the “equity cliff” Wednesday with a late rally – but it was only a step.

The Hang Seng index in Hong Kong surged 1.4% to 21, 524 in increased turnover, and the index of Chinese companies jumped 1.7% to 10,398. The increases were spurred by a sharp rise in Shanghai, 1.1% to 2,030.

The U.S. has its fiscal cliff, and China has an equity cliff. The precipice in America is the prospect of an abrupt rise in taxes and cut in spending due next year. In China it is a drop below 2,000 by the Shanghai Composite Index for A-shares.

The Mainland market and China stocks in Hong Kong and abroad do not generally move in lock step. A-shares in Shanghai and Shenzhen are denominated in the restricted renminbi and the stocks are not available to most foreign investors.

But the 2,000 level of the bellwether Shanghai Composite Index bulks larger than life in technical and psychological terms.

The index has relentlessly slumped 67% from January 18, 2008, and 17% from May 4 this year to 2,030 Wednesday. The prospect of slipping below 2,000 frightens investors.

“Two days ago Shanghai went below 2,000 just briefly, and there was panic in the market,” said Francis Lun, managing director at Lyncean Securities.

He calls 2,000 the “policy bottom” for the Mainland market. When the index drops below that level, Chinese authorities step in to increase credit for margin lending, decrease the stamp duty or take other measures to goose A-shares back above 2,000.

The equity cliff scares investors largely because it reflects stubbornly weak Chinese economic growth. And investors don’t expect China’s new leaders to institute strong reform and stimulus steps until at least mid-December at a major economic policy meeting.

Until then, even attractive valuations and an inflow of foreign funds are not likely to cause a sustained rally. And every trip to the edge of the cliff will undermine China stocks in Hong Kong and abroad. End

DAILY FIX

Hong Kong Blue Chips: +296, +1.4, to 21,524, 11-21-12, Hang Seng Index

Chinese Stocks in Hong Kong: +170, +1.7%, to 10,398, 11-21-12, HSCE Index

Shanghai Stocks: +21, +1.1% to 2,030, 11-21-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: -3.1, 371.5, 11-20-12, Bank of New York Mellon, ADR Index-China - closed by storm

Insight: Hong Kong opened higher after Chinese ADRs rose in the U.S. and gains expanded when the Shanghai Composite Index rallied. Chinese banks led the Hong Kong market: CCB (CICHY) +3.4%. KGI Research

Quotable: "HK$ rose again yesterday which may indicate inflow of hot money." BOCOM International. 11-21-12

Chinese Company to Watch: "MENGNIU DAIRY (CIADY) Will continue to improve its product mix with higher gross margin product sales portion increased. Mengniu gross margin maintained stable, together with sales growth at 15-20% CAGR, suggest to buy during weakness." KGI Asia. 11-21-12

Brokerages and analysts cited here 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 http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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Symbol Name Price Change % Volume
NRF.P.E Northstar Realty Finance Corp. Preferred Stock Ser 25.76 0.04 0.16 7,776

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