Modest China Stocks Rally Fades

Gene Linn |

Shanghai Stock MarketRallies aren’t what they used to be for China stocks in Hong Kong as a modest week-long climb ended Thursday. And the negatives that caused the downturn will be with us as least for the short term.

The blue-chip Hang Seng Index had risen from an intraday low of 18,868 in last week’s selling following the U.S. debt downgrade to a high of 20,504 this week. Panic had subsided, KGI Asia chief operating officer Ben Kwong told Equities, and a drop in the U.S. dollar indicated investors were willing to take more risk by buying commodities and stocks.

Hong Kong also got a lift from measures announced by visiting Chinese Vice Premier to boost the city’s economy, including creation of a Hong Kong-index linked ETF to be sold in Mainland stock exchanges.

But the usual suspects rose up Thursday to end the rally as investors took their modest profits. The main worries, according to Kwong, were the possibility of an inflation-fighting interest rate rise in China and lack of a plan to tackle the European debt crisis. The stalled economic recovery in the U.S. was another enduring concern.

The Hang Seng Index sank 1.3% Thursday, and the index of Chinese company stocks tumbled 2.0%.

A big rally in China stocks in the second half of 2011 is still widely expected, but don’t look for it to start any time soon.
“We still need to see if there is any easing of monetary policy in the U.S. (the so-called QE3) and developments in the debt crisis in Europe,” Kwong said. “And investors will eye China to see if there is further economic tightening.” End

DAILY FIX -- Worry Emerges about Possible China Interest Rate Hike

Hong Kong Blue Chips: -273, -1.3%, to 20,016, 08-18-11, Hang Seng Index

Chinese Stocks in Hong Kong: -218, -2.0% to 10,718, 08-18-11, HSCE Index

Shanghai Stocks: -1.0%, 2,559, 08-18-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -0.5 to 398.0, 08-17-2011, Bank of New York Mellon, ADR Index-China

Insight: China stocks ended a week-long rally on concerns over a Chinese interest rate increase and lack of a plan to tackle European debt. Chinese cement plays retreated: Anhui Conch (914) lost more than 7%. But stocks of China Mobile (941) were stable after the telecom giant announced profits at the high end of expectations. KGI Research

Quotable: "The consolidation phase is expected to continue for a while longer." BOCOM International. 8-17-2011

We expected that HSI still have room to surge but the short-term outlook will turn into see-sawing. We expected that HSI can gain support at 20,000 in short-term. However, once if HSI break the support at 20,000, it will trigger stop-loss or profit-taking activities. We believe that HSI will range bounce between 19,800 and 20,500 in short-term." Core Pacific Yamaichi. 8-17-2011

Chinese Company to Watch: "Anhui Conch (914) is now trading at 11.0x 2011 PER and 9.9x 2012 PER. We reiterated our BUY rating on Anhui Conch with a 6-month price target at $42.5, based on 14x 2011 PER." Guoco Capital. 8-17-2011

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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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