Further Property Market Tightening Derails China Stock Rally

Gene Linn |

China Central Bank People'sChina stocks started strong Wednesday but fell into negative territory after China announced it would continue to tighten in the property sector.

The move underlined that Chinese leaders’ penchant for fighting inflation seemed to lead them to tighten credit too much last year and might cause them to hold back on market-boosting loosening this year.

The Hang Seng Index in the gateway city of Hong Kong rose almost 300 points in the morning but ended down 0.15% to 21,308 in heavier turnover. The index of Chinese companies fell 0.5% to 11,300.

Despite the small losses, the Hang Seng has climbed back to the level it had before a cut in China’s target for its 2012 GDP caused a swoon the first three days of last week. Since then China’s economy got another dose of bad news when the key export sector slumped more than expected.

Taken with other signs of economic weakness and a steep drop in February’s inflation, it looks like Chinese leaders overshot in their efforts to reduce inflation.

“Yes, one may say that China has been tightening credit for too long and too strong but there is no easy way out,” said Benny Wong, head of research at BOCOM International, the brokerage arm of China’s Bank of Communications.

You can make a good case that Chinese leaders are spooked by the threat of high inflation. Historically, soaring inflation has led to social and political instability.

Most recently, according to Wong, “Many leaders believe that 1989 Tiananmen incident was instigated by high inflation.”

Faced with a choice between slowing the economy more than expected to fight inflation and allowing inflation to get out of control by going easy on credit tightening, Wong said, communist leaders would choose strong credit tightening.

Wong didn’t address the issue, but fear of inflation could cause China to take a cautious approach to credit loosening this year. Continued weakening of economic growth combined with tepid efforts to stimulate the economy will not help stocks.

Wong said China’s economy will slow the next two or three years, but it’s difficult to say by how much.

Companies likely to be hurt the most are those most affected by China’s slowdown in areas that drove economic expansion in the previous five years, Wong told Equities in an email. They include real estate, railway, basic materials and mining stocks. End

DAILY FIX

Hong Kong Blue Chips: -32, -0.15%, to 21,308, 03-14-12, Hang Seng Index

Chinese Stocks in Hong Kong: -56, -0.5%, to 11,300, 03-14-12, HSCE Index

Shanghai Stocks: -2.6% to 2,391, 03-14-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: +8.7, 421.9, 03-13-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong surged in early trading in line with gains in the U.S. but retreated sharply after China announced it would continue its tightening policies in the property sector. Turnover rose substantially. KGI Research

Quotable: "Hang Seng Index climbed more than 700 points in four days but market turnover was trending downward. We recommend short-term investors to take profit." Guoco Capital. 3-14-12

Chinese Company to watch: China Rare Earth (0769, HK) "Yesterday (Tuesday), share price surged 9.0% with turnover volume equals 3.6x 3-month daily average, rising above sma250." Guoca Capital. 3-14-12

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 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
WBK Westpac Banking Corporation 24.14 0.03 0.12 97,179

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