Chinese Inflation Numbers Scare Off Foreign Investors

Gene Linn  |

Foreign investors, who have been staying away from Chinese stocks in Hong Kong in droves, are likely to remain mostly absent after China announced April economic statistics Wednesday. China’s worrying inflation rate came in a little higher than many expected at 5.3%, and growth in industrial output and retail sales fell more than forecast.

Turnover in Hong Kong was unimpressive at HK$75 billion (HK$7.8 = US$1). That is in line with the HK$60 to 70 billion in the last few weeks and well below the HK$93 billion level the week large foreign fund inflows pushed blue chips to their year-high on April 8.

The next week, China announced higher inflation numbers, and stocks, turnover and foreign investors went into retreat.

Overseas investment is crucial for the China gateway market of Hong Kong, Howard Gorges, vice chairman of South China Brokerage, told Equities. He estimated foreign money makes up more than half of Hong Kong’s turnover. “I don’t think there could be a big rally without foreign funds,” he said.

Much of the overseas investment goes into big Chinese stocks, according to Gorges. Major targets are commodity producers, especially in oil and coal, and the big banks. Conduits for foreign funds are the usual suspects: giant banks like Goldman Sachs and Morgan Stanley. The trend in Hong Kong is for relatively more money to come from institutions and less from individuals.

Chinese brokerages are playing an increasingly large role, Gorges said. Giant Chinese brokerage CITIC Securities will be coming to Hong Kong later this year.

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Foreign investors will likely return in numbers when Chinese inflation is tamed. Some analysts predict that will be in the second half this year. Another lure, according to Gorges, will be large, attractive IPOs coming up this year. Meanwhile, there is not a lot of upside for Hong Kong stocks or turnover.  End

Hong Kong Blue Chips: -44, -0.2%, to 23,292, 05-11-11, Heng Seng Index

Chinese Stocks in Hong Kong: +28, +0.2% to 12,962, 05-11-11, HSCE Index

Chinese Stocks in the U.S.: +3.8 to 445.9, 05-10-11, Bank of New York Mellon, ADR Index-China
Insight: China's closely watched inflation rate came in roughly within expections, although still high at 5.3% for April. Growth in industrial output and retail sales slowed more than forecast, helping turn around early gains in blue chips. However, Chinese commodity producers such as oil company CNOOC (1818) gained. KGI Research

Quotable: "We recommend long-term investors to accumulate stocks if the Hang Seng Index dips below 23,000." Guoco Capital. 5-9-2011

Chinese Company to Watch: Xtep (1368), sportswear manufacturer."The company is cash rich with net cash of Rmb2.45b as at end-2010 that will be used for brand acquisitions. Xtep-brand sales have remained strong with healthy inventory and retail discount levels." Haitong Securities. 5-9-2011

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

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