Inflation Drop Extends China Stocks' Rally

Gene Linn  |

China stocks resumed their rally Thursday as China’s inflation rate fell to 1.8%. But the boost may be short-lived.

Hong Kong’s Hang Seng Index rose 1.0% to 20,269, and the index of Chinese companies climbed 1.0% to 9,962.

It may be tough to make further significant gains in the short run. One reason is the market might take a break as it approaches resistance at 20,300 after shooting up 7.4% since July 25.

In addition, according to one analyst, the drop in the consumer price index from 2.2% in June to 1.8% in July was widely expected and another warning that China’s economy is slowing rapidly.

“Watch the CPI figures for the coming two months, they are important indicators,” the analyst told Equities in an email. A stabilization of the inflation rate should be one sign China’s economy is beginning to recover.

Meanwhile, he said, falling inflation gives China more room to ease monetary policy, and “surely there will be more RRR (banks’ reserve requirement ratio) reduction and interest rate cut in 2012.”

Stocks with high debt levels, such as property developers and aviation plays, should benefit from monetary easing. However, the analyst thinks they will mainly be moved by broad market trends and specific news at the sector or company level. End

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Hong Kong Blue Chips: +204, +1.0%, to 20,269, 08-09-12, Hang Seng Index

Chinese Stocks in Hong Kong: +94, +1.0%, to 9,962, 08-09-12, HSCE Index

Shanghai Stocks: +13, +0.6% to 2,174, 08-09-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: -0.6, 379.1, 08-08-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong opened 83 points higher and continued to rise after China announced inflation in July fell to 1.8%, a 30-month low. Standard Chartered (2888, HK) rebounded from recent steep losses after its CEO strongly defended the bank against charges of money laundering. KGI Research

Quotable: "We maintain our positive view on Chinese banks due to cheap valuation and satisfactory interim earnings results." Guoco Capital. 8-9-12

Chinese Company to Watch: "Hengan remains the cheapest large-cap consumer staples stock, in our view. We think its above-consensus margin outlook should push up the share price. Our new TP is HK$91.00, equivalent to 24x 2013E EPS. Reaffirm BUY." BOCOM International. 8-9-12

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

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