China Stocks' Volatility Requires Long-Term View

Gene Linn  |

China stocks investors virtually took the day off Tuesday, but overall the market remains volatile and tough to read.

Hong Kong's Hang Seng Index slid 0.2% to 20,562 in some of the slowest trading of the year. The index of Chinese companies fell 0.5% to 10,795.

Slight losses in the first two trading days this week shaved a bit off the sharp 2.8% rally last Thursday and Friday, which followed big losses early in the week.

The market's volatility makes it necessary for traders to look beyond short-term ups and downs.

“Twenty twelve is a tricky year and do not rely on market movement to give you any information,” one veteran analyst told Equities in an email. “Study the fundamentals, devise an outcome, and make a conclusion. If the market moves against your view, and you believe you are right, then it is time to place your bet and pray. “
The market doesn't have a lot of upside in 2012 from this point, the analyst said, but has plenty of downside.
Some observers have pointed to Chinese banks as good bets in these uncertain conditions because of their low valuations and the prospect the government will lower their reserve requirement ratio to stimulate economic growth.

But the picture is not that simple, said the analyst. Banks have had low valuations for the last two years for good reasons: the risk of bad debts and the need for equity fund-raising.

And a cut in the RRR should give banks more money to loan, but the amount loaned out by big banks is determined by instructions for the central bank, PBOC.

“Having said that, I think banks have trading opportunities unless more bad news surfaces,” the analyst said.

Avoid ABC (ACGBY) and CQRC (3618.HK) because of their bad debt rises, he said. The strongest banks are ICBC (FXI) and CCB (CICHY) because of their size and Bank of China HK (0323.HK) because of the expected depreciation of the RMB.

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