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China Stocks: Time to Get Defensive

China Stocks stayed weak Wednesday after big losses Monday and Tuesday, and there may be no substantial relief in sight – at least in the short term.The Hang Seng Index in Hong Kong slipped 0.1%

China Stocks stayed weak Wednesday after big losses Monday and Tuesday, and there may be no substantial relief in sight – at least in the short term.

The Hang Seng Index in Hong Kong slipped 0.1% to 18,877, and the index of Chinese companies inched up 0.02% to 9,219.

The Hang Seng has lost 3.9% this week after deterioration of the European debt crisis spooked investors. China stocks had already been undermined by slowing economic growth and falling corporate profits in the first half of the year.

But there is some daylight on the horizon, according to Steven Leung, director of institutional sales at UOB Kay Hian Holding. Recent Chinese interest rate cuts and the likelihood of more stimulus should bolster economic growth in the third and fourth quarter, he told Equities.

On Wednesday the HSBC preliminary PMI for China rose to its highest point in five months. While the number still reflects a drop in output, Leung said, the increase could be an early sign of the turnaround.

But don’t expect a significant stocks rally anytime soon. “The market is dominated by short-term traders,” Leung said. For the time being it will probably trade between the support level of 18,500 and resistance at the 250-day moving average, about 19,700.

There may be a brief technical rebound after recent sharp losses, he said, with Chinese insurers and raw material producers the main beneficiaries.

But with a significant upturn weeks or months away, Leung recommends that investors go for defensive plays like utilities or healthcare stocks. He likes Huaneng Power (HNP) and SinoPharm (1099.HK). End


Hong Kong Blue Chips: -26, -0.1%, to 18,877, 07-25-12, Hang Seng Index

Chinese Stocks in Hong Kong: +2, +0.02%, to 9,219, 07-25-12, HSCE Index

Shanghai Stocks: -10, -0.5% to 2,136, 07-25-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: +0.9, 358.7, 07-24-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips sank 195 points in early trading on fears of deterioration in the European debt crisis, but losses narrowed to 26 points at the close. Chinese telecoms rose: China Unicom (CHU) +5.6%. Electrical appliance retailer GOME (GMELY) warned it would suffer a loss in the first half of the year, and fell 14%. KGI Research

Quotable: “We expect Hang Seng Index to trend downward in near term with a technical support at 18,000.” Guoco Capital. 7-25-12

Chinese Company to Watch: “Our top pick in the automobile sector is Dongfeng Motor (DNFGY) with target price of (HK)$15.6 as a lot of negatives have been priced into its cheap valuation.” Guoco Capital. 7-25-12

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

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