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Profit-taking Hits China Stocks after Big Rally

China stocks opened in Hong Kong as if they might extend last week’s powerful rally, but profit-taking quickly set in and stocks sank on substantially reduced turnover.After shooting up 11.1%

China stocks opened in Hong Kong as if they might extend last week’s powerful rally, but profit-taking quickly set in and stocks sank on substantially reduced turnover.

After shooting up 11.1% last week, Hong Kong’s Hang Seng Index fell 0.8% to 19,865. The Hang Seng surged 23.2% between October 4 and last Friday as optimism grew over a European debt solution. The index of Chinese companies, which soared 15.2% last week, fell back Monday 1.1% to 10,513.

While digesting last week’s good news about a plan to solve Europe’s debt crisis and a probable slight easing of China’s tight credit policy, this week investors will keep an eye on a scheduled speech by U.S. Federal Reserve Chairman Ben Bernanke and on a G20 meeting.

The Hang Seng will probably trade between 19,000 and 21,000 this week, according to Jackson Wong, vice president for sales at Tanrich Securities. The support level is at 18,700. “All in all, the markets had huge run up and returned to a more normal trading pattern,” he told Equities in an email.

The big gainers in the October rally were Macau gambling plays and Chinese building materials companies. They are now consolidating, and Wong advised investors to wait until they pulled back 5 – 10% before buying them again.

Stocks that should shine now include laggards such as red chips and energy stocks, according to Wong. Red chips are companies set up in Hong Kong by parent companies in China, like telecoms giant China Mobile (CHL) and oil producer CNOOC (CEO).

DAILY FIX  —  Banks, Railway Companies Retreat

Hong Kong Blue Chips: -154, -0.8%, to 19,865, 10-31-11, Hang Seng Index

Chinese Stocks in Hong Kong: -112, -1.1% to 10,513, 10-31-11, HSCE Index

Shanghai Stocks: -0.2%, 2,468, 10-31-11, Shanghai Composite Index.

Chinese Stocks in the U.S.: -6.7, to 391.7, 10-28-11, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong opened higher, but profit-taking after the recent major rally led to a broad-based retreat. However, lower turnover indicated selling pressure was not great. Chinese banks slipped after last week’s run-up: China Merchants Bank (CIHKY) dropped 5.4%. Railway plays also retreated, partly due to disappointing third quarter results. KGI Research

Quotable: “Looking ahead, the market will eye on the G20 submit held in France from 3rd November to 4th November about China’s contribution to the Eurozone’s bail-out fund. Supporting by expected positive outcome from the G20 submit, bullish sentiment is likely to persist in the near term, underpinning the Hang Seng Index to test 21,000 level in the coming week.” BEA Securities. 10-28-11

Chinese Company to Watch:KINGSOFT (03888.HK) Tencent acquired 15.7% stake of Kingsoft at HK$5 per share. It enables Kingsoft to further develop its online game business. Prospective P/E of 9x.” KGI Asia. 10-31-11

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.