Hong Kong Buffered from U.S. Economic Worries

Growing worry the U.S. economic recovery is slowing or even in jeopardy weighs heavily on U.S. stocks. The China gateway market of Hong Kong must be suffering, too, right? Not so much. Trouble in the world’s biggest economy tends to pull Hong Kong stocks down, but not as much as in the past..

One sign of the previous close connection between the U.S. economy and the Hong Kong market, according to Guoco Capital head of research Eric Yuen, was the effect of the U.S. dollar movement on Hong Kong stocks.

Traditionally a weak dollar boosts stock in Hong Kong. However in the last six months the dollar has been down, but Hong Kong stocks have not gained, according to Yuen. “The Hong Kong market now relies more on the Chinese economy and stocks,” he said. (Chinese stocks account for about half of the capital value of the Hong Kong exchange.)

And the Chinese economy is perking along pretty well. First quarter GDP growth was a robust 9.7%. That is expected to fall slightly due to economic tightening associated with a determined fight against inflation. Many analysts expect the fight to be won in the second half of this year, sparking a strong rebound in Chinese and Hong Kong stocks.

Strong links to China will buffer the Hong Kong market if U.S. stocks suffer a steep drop, Yuen said. Attractive valuations in Hong Kong and prospects for further appreciation of the Chinese RMB will also buoy Hong Kong.

The relative strength of Hong Kong in a serious U.S. downturn might draw more investment from overseas, but Yuen is not sure about that. “Compared to the U.S. and Europe, Hong Kong and China have been laggards in the last six months, but whether investors with switch the funds flow to Hong Kong is uncertain,” he said.

He doesn’t expect a sustained rally in Hong Kong until Chinese inflation is tamed.  End

DAILY FIX

Hong Kong Blue Chips: +110, +0.5%, to 23,011, 05-18-11, Heng Seng Index

Chinese Stocks in Hong Kong: +138, +1.1% to 12,871, 05-18-11, HSCE Index

Chinese Stocks in the U.S.: -0.2 to 427.8, 05-17-11, Bank of New York Mellon, ADR Index-China

Insight: Gains in Asian markets helped drive Hong Kong blue chips back above 23,000. However, lack of fresh incentives limited the rally, and turnover remained thin. Commodity prices stabilized, spurring a rebound in Chinese commodity producers. Oil company CNOOC (0883) rose 1.5%, and coal producer China Shenhua (1088) put on 1.7%. KGI Research

Quotable: “With the state striving to rein in property prices in high-tier cities, we reiterate our cautious view on developers with exposure to high-tier cities, including Sino-Ocean Land (3377 HK, Underperform) and Greentown China (3900 HK, Underperform).” CCB International. 5-17-2011

Chinese Company to Watch: Agile Property (3383) “We are positive about its outperforming sales in 2011, and expect that benefiting from stable revenue and financial status, Agile will achieve higher valuation than peers.” Phillip Securities. 5-17-2011

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