Stubborn Chinese Inflation Weighs on Stocks

Gene Linn  |

Sinking prices for stocks of Chinese commodities producers and worry about inflation in China drove the Hong Kong market sharply lower this week. There is hope for improvements next week, Conita Hung, head of equities at Delta Asia Financial, told the Weekly Report, but it is slight.

Hong Kong’s blue chip Hang Seng Index, which includes numerous large Chinese companies, fell for the third-straight week, dropping 2.4%, 562 points, to 23,159. The index of Chinese companies slumped 2.7%, 360 points, to 12,849.

Commodity prices worldwide sagged in line with a rise in the U.S. dollar. “This hurt Chinese producers like ChinaPetro” Hung said. Stubborn Chinese inflation continued to weigh on Hong Kong and Mainland markets because it forces China to launch restrictive measures to cool off its economy.

Perhaps the strongest measure is an increase in interest rates. China did not raise interest rates ahead of this week’s Labor Day holiday as expected. But instead of being relieved, investors fretted about uncertainty over an imminent increase in rates, according to Hung.

Chinese inflation is a problem for the medium or long term. However, Hung said a rise in China’s interest rates ahead of release of April inflation figures on Wednesday might ease uncertainty and spark a rebound.

The U.S. dollar’s rise is probably only temporary, she said, but it’s not likely to retreat next week. Overall, she sees support for the blue chip index at 22,800 with resistance at 23,400.  End

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Hong Kong Blue Chips: -102, -0.4%, to 23,159, 05-06-11, Heng Seng Index

Chinese Stocks in Hong Kong: +41, +0.3% to 12,849, 05-06-11, HSCE Index

Chinese Stocks in the U.S.: -4.7 to 435.6, 05-05-11, Bank of New York Mellon, ADR Index-China

Insight: Persistant worries about Chinese inflation along with continuing declines in commodities dragged Hong Kong down again Friday. The market now worries about an inflation-fighting Chinese interest rate hike over the weekend. Lower commodity prices pushed Chinese producers down, oil company CNOOC (0883) fell 2.3%, but aviation plays rose 5% - 7% due to lower fuel costs. Chinese spotwear companies rebounded. KGI Research

Quotable: "We expect China’s credit tightening cycle to end in late 2Q. Acceleration of the process of renminbi internationalization together with the low interest rate environment will add fuel to the Hong Kong market as global liquidity hits its shores drawn by the relative valuations of Chinese stocks, which have become attractive after several quarters of underperformance." CCB Securities. 5-4-2011

Chinese Company to Watch: "We expect 361 Degrees (1361) to enjoy a 20% top line and 18% bottom-line CAGR during FY11-13 (Y/E: 30/6) thanks to the strong sales and improving brand equity." Haitong Securities. 5-4-2011

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