Plan for Europe Debt Solution Rallies China Stocks -- for Now

Gene Linn  |

Europe continues to rule China stock prices in Hong Kong and the U.S., and Thursday that was a good thing. Talks by European leaders to re-capitalize the region’s banks to protect them from Europe’s debt crisis helped fuel a powerful rebound.

Hong Kong’s Hang Seng Index shot up 5.7% to 17,173, and the index of Chinese companies jumped 5.8% to 8,571. Before closing for a holiday Wednesday, the Hang Seng plummeted 7.6% on Monday and Tuesday this week because of the growing prospect of a default by Greece.

The European recapitalization plan was the number one reason for Thursday’s sharp rally, according to Ben Kwong, chief operating officer for KGI Asia. In addition, commodity stocks rose due to a sharp rebound in commodity prices, and the market had been “substantially oversold,” Kwong told Equities in an email.

But he warned that news about European debt would continue to roil the market. “…(A)lthough we believe the re-capitaliz(ation) (of) the Europe banks is the right move to solve the issue, we expect that it still needs to take several steps to implement.”

As European countries wrangle over how or whether to take these steps, the stock market will continue to be whipsawed through October. In this setting investors will continue to avoid risk, and the short-term upside is limited, Kwong said.

On Thursday, Chinese commodity producers and Macau gambling plays were big winners. September figures showed Macau gaming revenue rose 39% year-on-year, sparking a sharp rebound in the sector. End

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Hong Kong Blue Chips: +922, +5.7%, to 17,173, 10-06-11, Hang Seng Index

Chinese Stocks in Hong Kong: +469, +5.8% to 8,571, 10-06-11, HSCE Index

Shanghai Stocks: Closed this week for a holiday 2,359, 10-06-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: +8.6 to 352.8, 10-05-11, Bank of New York Mellon, ADR Index-China

Insight: Healthy rebounds in European and U.S. markets and commodity prices ignited a sharp rally in Hong Kong amid increased turnover. However, heavy redemption pressure on mutual funds will make the rally hard to sustain. KGI Research

Quotable: "The trailing and forward P/E of Hang Seng Index traded at 7.49x and 8.66x, respectively; which are lower than the previous level of 7.76x and 8.79x during global financial crisis in 2008. However, there is no downward revision of corporate profits. Market is de-rating. We believe it is not a wise act to sell stock at this time." Haitong Securities. 10-6-11

Chinese Company to Watch: Shanghai Electric (OTC SELY; 2727) "Meanwhile, the Government of Singapore Investment Corp. (GIC) increased its shareholding in SE, along with Li Ning (2331 HK), Sinopec Shanghai Petrochemical (338 HK) and China Coal (1898 HK), from 4.98% to 5.10% by acquiring 3.6 mn shares at HK$3.011 per share on average, a vote of confidence for the conglomerate by one of its major shareholders which also bolster our positive view on the stock." Haitong Securities. 10-6-11

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

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