Struggling Chinese Economy Weighs on China Stocks

China stocks continued their decline this week with a substantial drop Tuesday under the weight of concern over a weak Chinese economy.

Hong Kong’s Hang Seng Index fell 1.1% to 20,088. It has declined 2.0% already this week. The index of Chinese companies slumped 1.5% to 10,871. With many investors on the sidelines, turnover was light.

“The Hang Seng has dropped through the 21,000 support level and the next resistance is the 250-day moving average, 20,600,” according to Dickie Wong, executive director of research at Kingston Securities.

The fall is partly due to a worry China would continue tightening policies even as property prices fall, he said.

He added that a closer look at recent Chinese economic data is discouraging. For example, weakness in the key export sector indicates a slowing economy.

And although most blue chips are reporting results in line with predictions, there are some weak points. Ping An Insurance (PNGAY) is testing a key support level in the wake a recent profit warning from China Life (LFC), Wong told Equities.

One sign of weakness of the market is a drop in the Hong Kong dollar due to a slowing of the inflow of foreign funds, he said.

But some sectors will outperform the market, according to Wong, including consumer-oriented stocks. Producers and retailers for luxury goods such as Prada (PRDSY) will do well, he said. End

DAILY FIX

Hong Kong Blue Chips: -227, -1.1%, to 20,888, 03-20-12, Hang Seng Index

Chinese Stocks in Hong Kong: -165, -1.5%, to 10,871, 03-20-12, HSCE Index

Shanghai Stocks: -1.4% to 2,377, 03-20-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: -2.0, 408.8, 03-19-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong opened slightly higher but turned south due to weakness on Mainland markets. Chongqing Rural Commercial Bank (3618) reported good results and gained 2.8%. China raised the price of gasoline and diesel, but oil plays were soft. KGI Research

Quotable: “the market would target at 250-hour MA at 20,954. This implied that the downside would not be much at this moment. If HSI opens at the level below 21,000, it might trigger a technical rebound once it hits the 250-hour MA.” Core Pacific Yamaichi. 3-20-12

Chinese Company to Watch: “With the sustainable growth of air traffic in China, the capacity of BEIJING AIRPORT (BJCHY) is getting saturated. In order to expand the total capacity, the Group will expand the capacity of Terminal Two as well as the fourth runway.” Kingston Securities. 3-19-12

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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