As if it didn’t have enough problems, the Hong Kong market is undermined by a stronger U.S. dollar. China and its inflation struggle are the biggest drags on the stalled Hong Kong stocks, but a stronger U.S. dollar is also a big problem.
That means that a robust rally may have to wait for both a taming of inflation and a retreat in the U.S. dollar.
The Greenback jumped from about 72 to 76 on the dollar exchange index in less than two weeks after the European debt crisis flared up early this month. “This has triggered an unwinding of carry trades and an outflow of funds from the Hong Kong stock market,” Haitong Securities analyst Edward Huang said on the company’s website. In the past, carry trades brought funds into Hong Kong as investors fled the weak dollar.
Ben Kwong, chief operating officer at KGI Asia, pointed out another way a rising U.S. dollar hurts the Hong Kong market: A strong dollar depresses commodity prices, which drives down stocks of big Chinese oil, coal and metal producers listed in Hong Kong.
Kwong said the U.S. currency might fall back in next month as the Euro rallies with the prospect of European interest rate increases. On the other hand, he said, it’s very unlikely the U.S. will raise rates anytime soon.
As for a drop in Chinese inflation, that probably won’t occur until after inflation peaks in July or August, according to Kwong. A number of analysts think the market will rebound later this year on good news on the inflation front.
But Kwong said investors might return in June as it becomes more clear inflation and economic tightening will end soon. That would put both ingredients of a rally together. End
Hong Kong Blue Chips: +152, +0.7%, to 23,163, 05-19-11, Heng Seng Index
Chinese Stocks in Hong Kong: +65, +0.5% to 12,936, 05-19-11, HSCE Index
Chinese Stocks in the U.S.: +5.2 to 432.9, 05-18-11, Bank of New York Mellon, ADR Index-China
Insight: Gains in Chinese stocks in the U.S. lifted the Hong Kong market, but momentum was weak in light trading. Chinese airlines fell due to higher oil prices: China East Air (670) -3.2%. KGI Research
Quotable: "We expect the Hang Seng Index to be well supported at 22,500." Guoco Capital. 5-18-2011
Chinese Companies to Watch: "A broker house issued bullish investment rating on power equipment companies due to the power shortage in China. Dongfang Electric (1072) surged 5.7% and Shanghai Electric (2727) rose 0.9%." Core Pacific Yamaichi. 5-18-2011
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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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