Hope Remains for Sustained Rally in China Stocks

Gene Linn  |

Wednesday’s strong rebound by China stocks in Hong Kong was only a small interruption the recent powerful rush downward caused mainly by fears over European and U.S. debt and the slowing global economy. However, investors maintain hope that easing of economic policies by China will spark a sustained rally later in the year.

That hope rests on China’s success in bringing inflation down. So far, though, Chinese inflation has not exactly followed its script in the turnaround story. Both June and July inflation edged a couple tenths of a percent higher than expected. The just-announced July rate was 6.5%, a 37-month high.

But some analysts note that the month-to-month rise in inflation fell from 0.9 percentage points in June to 0.1 in July. Just maybe inflation has finally peaked and may start lower in August.

CCB International, an arm of the China Construction Bank, thinks inflation will sink to 6.2% in August, according to one of its analysts, Eliza Liu. She also told Equities in an email that she does not expect China to raise interest rates or banks’ reserve ratio requirements in August. The reasons: weakening of major Chinese economic indicators and turmoil in international financial markets.

But she said China should still achieve strong 9.4% GDP growth in 2011. “(W)hen investors realize that China will be able to sustain sound growth, overall valuation of Chinese stocks will recover,” Liu said.

The main beneficiaries of the recovery will be stocks with higher earnings growth visibility like cement, building machinery, railway equipment, according to Liu. End

DAILY FIX -- Following Wall Street Higher

Hong Kong Blue Chips: +453, +2.3%, to 19,784, 08-10-11, Hang Seng Index

Chinese Stocks in Hong Kong: +154, +1.5% to 10,580, 08-10-11, HSCE Index

Shanghai Stocks: +0.9%, 2,549, 08-10-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +17.5 to 391.2, 08-09-2011, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong rebounded strongly from Tuesday's massive decline, following U.S. markets higher. Blue chips broke back above the 20,000 level at one point but fell back on profit-taking. Chinese resources stocks helped lead the rally: Oil producer CNOOC (0883) surged 6.0%. KGI Research

Quotable: "We used the “golden ratio” for analyzing the market after it broke the support at 250-day MA. Once this bearish signal is confirmed, we might see a 50% correction for the total advance during the bull market. Under this situation, 18,200 will be the major support." Core Pacific Yamaichi. 8-10-11

Chinese Company to Watch: "Unlike most of the mainland developers, SOHO China, which is in a net cash position, will continue to benefit from the current credit-tightened environment in the mainland by capitalizing on the emerging bargaining opportunities." Haitong Securities. 8-11-2011

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

Stock price data is provided by IEX Cloud on a 15-minute delayed basis. Chart price data is provided by TradingView on a 15-minute delayed basis.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily 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.

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