Fears of Quick Chinese Interest Rate Hike Recede

Gene Linn  |

As analysts digest Chinese economic data released this week, some of them are finding the figures were downright tasty. The inflation rate was high, but other data indicate the chance of an imminent Chinese inflation rate hike is now lower, Eric Yuen, head of research at Guoco Capital, told Equities.

Initial reaction to the April inflation rate of 5.3% drove blue chips down in China and Hong Kong. For the week, Hong Kong’s indexes posted slight rises after nice gains Friday. The blue chip Hang Sent Index rose 0.5%, 117 points, to 23,276. The index for Chinese companies edged up 0.4%, 45 points, to 12,849. Turnover remained meager.

Yuen noted that China’s PMI and rate of growth for imports and industrial output fell. “All these three point to a slowing economy,” he said. Although inflation is still on the upturn, according to Yuen, the slowdown will likely delay the next rise in interest rates.

China has raised interest rates basically every two months since last October, making the next hike due in June. “A week ago there was concern China would speed up implementation of a rise in interest rates, but the (April) data eliminated this chance,” Yuen said.

Reduced worry about a quick rise in rates might give the market breathing space, but Yuen does not see any significant rally until after inflation peaks, probably in June or July. Meanwhile blue chips should trade between 22,500 and 24,500 as they have for the last six months.

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Using the tried-and-true “buy low, sell high” maxim, Yuen says buying opportunities will emerge in the next two months when the Hang Seng sinks to around 22,500. Some of the most attractive targets will be companies benefitting from Chinese industrial policies, such as new energy companies. Yuen likes solar energy standout Poly GCL Energy (3800).  End

Hong Kong Blue Chips: +206, +0.9%, to 23,276, 05-13-11, Heng Seng Index

Chinese Stocks in Hong Kong: +98, +0.8% to 12,894, 05-13-11, HSCE Index

Chinese Stocks in the U.S.: +1.7 to 440.0, 05-12-11, Bank of New York Mellon, ADR Index-China

Insight: Despite a rise in Chinese banks' reserve requirements, Hong Kong stocks posted gains in the afternoon, although turnover remained meager. Chinese banks edged higher. KCI Research

Quotable: "We recommend long-term investors to accumulate stocks if the Hang Seng Index dips below 23,000." Guoco Capital. 5-12-2011

Chinese Company to Watch: Minth (425) auto parts maker: "Historically (ex-2008), Minth mainly traded at 10x-25x PER range. Trading at 10.5x 2011 PER, we believe counter is cheap given its solid growth outlook and superior quality." Guoco Capital. 5-11-2011

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

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