China Stocks' Top (and Bottom) Three

Gene Linn |

Shanghai Stock MarketFactors moving China stocks maintain a fast-shifting balance. Something supporting prices can become a drag with one piece of bad news. Here’s my assessment of the factors working on China stocks in Hong Kong, and the overall balance.

Top Three China Support Factors

Corporate profits. The market expects China-related stocks to start announcing lavish results next week. Underlying this push is a perennial: attractive valuations. At its current level, according to BOCOM International, the blue-chip Hang Seng Index trades at a P/E of about 11.5X, way under the historical average of 15X. This is why many analysts predict a substantial rally later this year.

  1. China’s inflation and economic tightening are nearing a peak and will start to ease. A distant second. This is a powerful force, but probably won’t boost stocks very much for a month or two, maybe more. This delayed effect is the reason a rally is not expected until later in the year.
  2. Easing of the European debt crisis. Emergence of a plan to tackle Greece’s debts led a strong surge last Friday and increased investors’ appetite for risk. However, bad news from other shakey European economies could turn this positive into a negative.

Wild Card: Raising the U.S. debt ceiling – which will probably happen in the next few days  -- could drive the market higher briefly.

Three Factors Slowing China

China’s inflation and economic tightening. Yes, this is also in the Top Three, but that is as a longer-term effect. For now, Chinese inflation is proving more stubborn than some analysts expected. Late last week reports said the Chinese leadership will continue to focus on fighting inflation in the second half of 2011, with more tightening on the way.

  1. Fear of an economic hard landing for the Chinese economy. The worst case would be if tightening did not effectively rein in inflation and sent the economy into a nose dive. Strong June GDP and retail figures were reassuring, but the preliminary PMI July report last week indicated Chinese manufacturing was slumping significantly. The final report is due August 1.
  2. Weakening global economy. Worries about a Chinese hard landing contribute to this factor. The U.S. and European economies are struggling.

Wild Card: Not raising the U.S. debt ceiling. This could shoot No. 3 to No. 1 and ensure No. 2 is a major worry.

Overall: There’s nothing like big corporate profits to cheer investors, and that gives the edge to the Top Three. But it looks like the Bottom Three are weighty enough to keep a lid on any short-term rally. The market could turn on August 1 with the report of final July China PMI figures or on or before the August 2 deadline for raising the U.S. debt ceiling to avoid default.  End

DAILY FIX --  Banks Lead Rebound

Hong Kong Blue Chips: +279, +1.2%, to 22,572, 07-26-11, Hang Seng Index

Chinese Stocks in Hong Kong: +164, +1.3% to 12,605, 07-26-11, HSCE Index

Shanghai Stocks: +0.5%, 2,703, 07-26-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -2.8 to 442.0, 07-25-11, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong rebounded, with financial stocks leading the way. However, volume was light, reflecting a lack of strong momentum.

Quotable: "HSI dropped yesterday (Monday) and RSI pulled back to lever near 50. However, RSI was still trading above 50. It showed that the overall momentum did not change and HSI may rebound soon." Core Pacific Yamaichi. 7-26-2011

Chinese Company to Watch: "Chu Kong Pipe (1938) is currently the largest producer of LSAW steel pipes in China but it continues to expand its production capacity.... We are bullish on its development potential in the mid to long term. Reiterate “Buy” with TP of HK$4.5, representing 2011 P/E of 16x." BOCOM International. 7-26-2011

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 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

Companies

Symbol Name Price Change % Volume
GILT Gilat Satellite Networks Ltd. 5.08 0.00 0.00 0

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